-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L2EVjQ55XAWpRTmw+HCW0hhRizk4x4oH09+9qKwmftNP6+q2CE9OQh3Jss2DP/n0 tE8twheMm5kSPsEmHj/I1A== 0000940180-97-000746.txt : 19970826 0000940180-97-000746.hdr.sgml : 19970826 ACCESSION NUMBER: 0000940180-97-000746 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19970825 SROS: NASD SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: FORTRESS GROUP INC CENTRAL INDEX KEY: 0001010607 STANDARD INDUSTRIAL CLASSIFICATION: GEN BUILDING CONTRACTORS - RESIDENTIAL BUILDINGS [1520] IRS NUMBER: 541774997 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: 1934 Act SEC FILE NUMBER: 005-50213 FILM NUMBER: 97669444 BUSINESS ADDRESS: STREET 1: 1921 GALLOWS STREET 2: SUITE 730 CITY: VIENNA STATE: VA ZIP: 22182 BUSINESS PHONE: 7034424545 MAIL ADDRESS: STREET 1: 1921 GALLOWS STREET 2: SUITE 730 CITY: VIENNA STATE: VA ZIP: 22182 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: PROMETHEUS HOMEBUILDERS FUNDING CORP CENTRAL INDEX KEY: 0001044852 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 30 ROCKEFELLER PLAZA 63RD FLOOR CITY: NEW YORK STATE: NY ZIP: 10020 SC 13D 1 SCHEDULE 13D ----------------------------- OMB APPROVAL ----------------------------- OMB NUMBER: 3235-0145 EXPIRES: OCTOBER 31, 1997 ESTIMATED AVERAGE BURDEN HOURS PER RESPONSE...14.90 ----------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 13D UNDER THE SECURITIES EXCHANGE ACT OF 1934 THE FORTRESS GROUP, INC. - ------------------------------------------------------------------------------ (NAME OF ISSUER) Common Stock, par value $0.01 per share - ------------------------------------------------------------------------------ (TITLE OF CLASS OF SECURITIES) 34956K108 -------------------------------------- (CUSIP NUMBER) Murry N. Gunty Prometheus Homebuilders LLC Prometheus Homebuilders Funding Corp. 30 Rockefeller Plaza, 63rd Floor New York, NY 10020 (212) 632-6000 with a copy to: R. Ronald Hopkinson, Esq. Latham & Watkins 885 Third Avenue New York, New York 10022 (212) 906-1200 - ------------------------------------------------------------------------------ (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) August 14, 1997 ----------------------------- (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ]. Check the following box if a fee is being paid with the statement [ ]. (A fee is not required only if the reporting person: (1) has a previous statement on file reporting beneficial ownership of more than five percent of the class of securities described in Item 1; and (2) has filed no amendment subsequent thereto reporting beneficial ownership of five percent or less of such class.) (See Rule 13d-7.) Note: Six copies of this statement, including all exhibits, should be filed with the Commission. See Rule 13d-1(a) for other parties to whom copies are to be sent. *The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).
SCHEDULE 13D - ------------------------------------ ------------------------- CUSIP NO. 34956K108 PAGE __2__ OF __12_ - ------------------------------------ ------------------------- - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Prometheus Homebuilders LLC - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS AF (See Item 3) - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION Delaware - -------------------------------------------------------------------------------- 7 SOLE VOTING POWER NUMBER OF 9,733,333/1/ SHARES --------------------------------------------------------------- BENEFICIALLY 8 SHARED VOTING POWER OWNED BY EACH None REPORTING --------------------------------------------------------------- PERSON 9 SOLE DISPOSITIVE POWER WITH 9,733,333/1/ --------------------------------------------------------------- 10 SHARED DISPOSITIVE POWER None --------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 9,733,333/1/ - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [X] - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 45.0% - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON* CO (limited liability corporation) - --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT! INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 (INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION. - ---------- /1/ Includes 9,733,333 shares of Common Stock receivable upon conversion of the Series AA and Series ABI Preferred Stock (as defined in the Preamble) (See Item 5).
SCHEDULE 13D - ------------------------------------ ------------------------- CUSIP NO. 34956K108 PAGE __3__ OF __12_ - ------------------------------------ ------------------------- - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Prometheus Homebuilders Funding Corp. - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS AF (See Item 3) - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION Delaware - -------------------------------------------------------------------------------- 7 SOLE VOTING POWER NUMBER OF 9,733,333/1/ SHARES --------------------------------------------------------------- BENEFICIALLY 8 SHARED VOTING POWER OWNED BY EACH None REPORTING --------------------------------------------------------------- PERSON 9 SOLE DISPOSITIVE POWER WITH 9,733,333/1/ --------------------------------------------------------------- 10 SHARED DISPOSITIVE POWER None --------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 9,733,333/1/ - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [X] - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 45.0% - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON* CO - --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT! INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 (INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION. - ---------- /1/ Includes 9,733,333 shares of Common Stock receivable upon conversion of the Series AA and Series ABI Preferred Stock (as defined in the Preamble) (See Item 5). Page 4 of 12 This Statement on Schedule 13D, dated August 25, 1997 of the Reporting Persons (as defined below) is filed to reflect information required pursuant to Rule 13d-1 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, relating to the purchase by Prometheus (as defined below) of (i) an aggregate of 35,000 shares of Class AA Convertible Preferred Stock, $0.01 par value per share (the "Class AA Preferred Stock"), (ii) an aggregate of 40,000 shares of Class AB Preferred Stock apportioned between Class ABI Convertible Redeemable Preferred Stock, $0.01 par value per share (the "Class ABI Preferred Stock") and Class ABII Preferred Stock, par value $0.01 per share (the "Class ABII Preferred Stock," and together with the Class AA Preferred Stockand Class ABI Preferred Stock, the "Preferred Stock") and (iii) an aggregate of 1,000,000 Warrants (the "Warrants"), each to purchase initially one share of common stock, par value $0.01 per share ("Common Stock") of The Fortress Group, Inc., a Delaware corporation (the "Issuer" or the "Company"). ITEM 1. SECURITY AND ISSUER. This statement relates to the Reporting Persons deemed beneficial ownership of Common Stock existing by virtue of the execution of the Stock Purchase Agreement (as defined in Item 4), whereby Prometheus has agreed to purchase (i) the Class AA Preferred Stock and (ii) the Class ABI Preferred Stock, each convertible into shares of Common Stock and each having voting rights with the Common Stock. The Issuer's principal executive offices are located at 1921 Gallows Road, Suite 730, Vienna, Virginia, 22182. ITEM 2. IDENTITY AND BACKGROUND. (a) This statement is filed by Prometheus Homebuilders LLC, a Delaware limited liability company ("Prometheus") and Prometheus Homebuilders Funding Corp., a Delaware corporation ("Funding Corp." and, together with Prometheus, the "Reporting Persons"). (b) Each of the Reporting Persons is a special purpose investment vehicle formed to acquire the Preferred Stock and Warrants as contemplated by the Stock Purchase Agreement. The principal business offices of the Reporting Persons are c/o Lazard Freres Real Estate Investors, LLC ("LFREI"), 30 Rockefeller Plaza, 63rd Floor, New York, New York, 10020. (c) The sole owner of Prometheus is Funding Corp., and Funding Corp. is an affiliate of LFREI. LFREI's activities consist principally of acting as general partner of several real estate investment partnerships that are affiliated with Lazard Freres & Co. LLC. ("Lazard"). Lazard disclaims beneficial ownership of any of the shares of Common Stock reported in this Statement. The name, business address and principal occupation or employment of the executive officers of LFREI are set forth on Schedule 1 hereto and incorporated by reference herein. (d) and (e) During the last five years, neither the Reporting Persons nor, to the best knowledge of the Reporting Persons, any of the persons listed in Schedule 1 hereto (i) has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) nor (ii) has been a party to any civil proceeding of a judicial or administrative body of competent jurisdiction, and is or was, as a result of such proceeding, subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws, or finding any violation with respect to such laws. (f) Each person listed on such Schedule 1 is a citizen of the United States. Page 5 of 12 ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. The consummation of the transactions contemplated by the Stock Purchase Agreement would require aggregate funds of approximately $75.0 million. The funds for this transaction are to be made available to the Reporting Persons through LFREI. LFREI will obtain funds from capital subscriptions from investors and from borrowing, in each case, from sources yet to be determined. ITEM 4. PURPOSE OF TRANSACTION. The beneficial ownership of the shares of Common Stock that are the subject of this Statement are to be acquired from the Issuer pursuant to the Stock Purchase Agreement, dated August 14, 1997, between the Issuer and Prometheus (the "Stock Purchase Agreement"). While Prometheus has not obtained actual, record ownership of the shares of Common Stock reported by this Statement, Prometheus may be deemed to have acquired beneficial ownership of the shares of Common Stock reported herein upon the signing of the Stock Purchase Agreement as a result of Prometheus' binding commitment to acquire the shares of Preferred Stock and Warrants, each convertible into or exchangeable for Common Stock, in accordance with the Stock Purchase Agreement, subject to only limited conditions. Subject to the terms and conditions of the Stock Purchase Agreement, the Issuer shall sell to Prometheus (i) an aggregate of 35,000 shares of Class AA Preferred Stock, (ii) an aggregate of 40,000 shares of Class AB Preferred Stock apportioned between Class ABI Convertible Redeemable Preferred Stock and Class ABII Preferred Stock as described below and (iii) an aggregate of 1,000,000 Warrants. Upon completion of the transactions contemplated by the Stock Purchase Agreement (the "Transaction"), Prometheus shall beneficially own 35,000 shares of Class AA Preferred Stock with an aggregate liquidation value of $35,000,000. Holders of the Class AA Preferred Stock are entitled to vote on all matters voted on by holders of Common Stock, voting together with the Common Stock as a single class (together with all other classes and series of stock of the Company that are entitled to vote as a single class with the Common Stock) at all meetings of the stockholders of the Company and each share of Class AA Preferred Stock shall entitle the holder thereof to cast the number of votes equal to the number of votes which could be cast in such vote by a holder of the number of shares of Common Stock into which such share of Class AA Preferred Stock is convertible based on the Mandatory Conversion Price (as defined in the Class AA Certificate of Designations attached hereto as Exhibit 6 and incorporated herein by reference) (with such vote to remain constant, even though the conversion rate changes pursuant to the terms thereunder). Dividends shall accrue cumulatively at 6% per annum and compound quarterly on the aggregate liquidation value of the Class AA Preferred Stock then outstanding, payable quarterly in arrears. Class AA Preferred Stock is convertible at any time after the date of its issuance, at the holder's option, into shares of Common Stock at a conversion price of $6.00 per share, subject to certain adjustments, as set forth in the Class AA Certificate of Designations. Notwithstanding the above, the Class AA Preferred Stock may be converted, at the Company's option, into Common Stock at a conversion price of $6.00 per share when the average of the closing prices of the Common Stock, for the 90 days preceding conversion, is equal to or exceeds $12.00 per share. Prometheus also shall beneficially own 40,000 shares of Class AB Preferred Stock, consisting of Series ABI Preferred Stock and ABII Preferred Stock, with an aggregate liquidation value of $40,000,000. Holders of the Class ABI Preferred Stock are entitled to vote on all matters voted on by the holders of Common Stock, voting together with the Common Stock as a single class (together with all Page 6 of 12 other classes and series of stock of the Company that are entitled to vote as a single class with the Common Stock) at all meetings of the stockholders of the Company and each share of Class ABI Preferred Stock shall entitle the holder thereof to cast the number of votes equal to the number of votes which could be cast in such vote by a holder of the number of shares of Common Stock into which such shares of Class ABI Preferred Stock is convertible based on the closing trading price of the Common Stock on the date immediately preceding the Initial Issue Date (as defined in the Class ABI Certificate of Designations) (with such vote to remain constant, even though the conversion rate changes pursuant to the terms thereunder). Holders of Class ABII Preferred Stock are entitled to vote on all matters voted on by the holders of Common Stock, voting together with the Common Stock as a single class (together with all other classes and series of stock of the Company that are entitled to vote as a single class with the Common Stock) at all meetings of the stockholders of the Company other than in respect of the election of Directors (provided that the Class ABII shall vote in the election of Directors if (i) the price of the Common Stock (as measured by the Current Market Price (as defined in the Class ABII Certificate of Designations)) is less than $3.00 per share (such amount to be adjusted for stock splits and recombinations as appropriate) and (ii) the holder provides notice to the Company that it elects to obtain such voting right) and each share of Class ABII Preferred Stock shall entitle the holder thereof to cast the number of votes equal to the number of votes which could be cast in such vote by a holder of the number of shares of Common Stock into which such share of Class ABII Preferred Stock is convertible based on the closing trading price of the Common Stock on the immediately preceding Initial Issue Date (as defined in the Class ABII Certificate of Designations) (with such vote to remain constant, even though the conversion rate changes pursuant to the terms thereunder). Dividends shall accrue cumulatively at 12% per annum and compound quarterly on the aggregate liquidation value of the Class AB Preferred Stock then outstanding, payable quarterly in arrears. Class ABI Preferred Stock and Class ABII Preferred Stock are convertible at any time on or after the fourth anniversary after the Approval Date (as defined in the Class ABI and Class ABII Certificates of Designations), at the option of the holder, into shares of Common Stock at a price equal to 95% of the average of the closing prices of the Company's Common Stock for the thirty consecutive trading days commencing forty-five consecutive trading days before the applicable conversion date (the "Conversion Price"), as set forth in the Class ABI and Class ABII Certificates of Designations attached hereto as Exhibits 7 and 8, respectively, and incorporated herein by reference. At the option of the Issuer on or after the fifth anniversary of the Approval Date, the Issuer, at its option, may convert all, but not less than all, of the aggregate shares of Class ABI Preferred Stock and Class ABII Preferred Stock into Common Stock at the Conversion Price. The Class AB Preferred Stock may be redeemed, in whole, but not in part, at any time after five years from the Initial Issue Date, at the option of the Company. Prometheus shall receive an aggregate of 1,000,000 Warrants exercisable for shares of Common Stock at an exercise price per share equal to $7.00. At any time following the fourth anniversary of the Approval Date but prior to the sixth anniversary of the Approval Date, the holder shall have the option to adjust the exercise price per share and the number of shares for which the Warrants are exercisable as set forth in the Warrant Agreement attached as Exhibit 5 hereto and incorporated herein by reference. All Warrants are exercisable between the second and seventh anniversary of the execution of the Warrant Agreement. At the option of the holder, the Warrants may be exercised by applying the value of shares of Common Stock otherwise receivable by the holder upon exercise in payment of the exercise price. The Transaction will be consummated in three or more stages. On September 30, 1997, Prometheus will purchase from the Issuer (i) such number of shares of Class ABI Preferred Stock, up to 15,000 shares, as may be issued by the Issuer without resulting in Prometheus having more than 19.9% of the outstanding voting power of the Issuer's capital stock and (ii) 375,000 Warrants (the "First Closing"). On December 30, 1997, Prometheus shall purchase from the Issuer (i) 16,333 shares of Class AA Preferred Stock, (ii) the number of shares of Class AB Preferred Stock equal to 18,667 less the number of shares of Class AB Preferred Stock issued in the first closing, apportioned between the Class ABI Preferred Stock and the Class ABII Preferred Stock such that Prometheus has no more than 45% of the total voting power of the Issuer but so that the Issuer shall issue the maximum amount of Class ABI Preferred Stock it is permitted to issue before issuing any Class ABII Preferred Stock and (iii) 625,000 Warrants (the "Second Closing"). Following the Second Closing, the Issuer shall be obligated to sell to Prometheus at one or more subsequent closings (the "Subsequent Purchases") an aggregate of 18,667 shares of Class AA Preferred Stock and 21,333 shares of Class AB Preferred Stock apportioned between the Class ABI Preferred Stock and the Class ABII Preferred Stock as set forth above. The Issuer shall give Prometheus notice of at least twenty business days of any subsequent closing and shall require Prometheus to purchase no fewer than Page 7 of 12 10,000 shares of Preferred Stock. The Issuer shall require Prometheus to make all of the Subsequent Purchases on or before December 31, 1998. The First Closing is subject to various conditions, including (i) the option of Prometheus to terminate the Transaction within five business days of the satisfaction by the Issuer of its disclosure obligations set forth in the Stock Purchase Agreement, (ii) the taking of all actions necessary to accomplish the election of Directors as described in the Stockholders Agreement, (iii) the entering into by the Issuer of the other Ancillary Documents, and (iv) the satisfaction of various other customary closing conditions. The Second Closing and the closings of all Subsequent Purchases will be subject to the above conditions as well as stockholder approval of all items necessary to effectuate the transactions as contemplated by the Stock Purchase Agreement and Ancillary Documents. If such stockholder approval for the Second Closing has not been obtained by December 30, 1997, the Issuer may, at its option, extend the date of the Second Closing until January 31, 1998. The Issuer may agree to sell to Prometheus, on the same terms as the previous sales, up to an additional (i) 11,667 shares of Class AA Preferred Stock, (ii) 13,333 shares of Class AB Preferred Stock and (iii) 333,250 Warrants (collectively, the "Additional Securities"). In addition, certain existing Shareholders (the "Shareholders") of the Company may agree to sell to Prometheus approximately 900,000 shares of Common Stock for approximately $4.9 million. Because neither the Issuer, the Shareholders, nor Prometheus are under any obligation to engage in the purchase or sale of additional securities, the Reporting Persons disclaim beneficial ownership of such additional shares of Common Stock subject to such future transactions. Moreover, the Warrants to be issued pursuant to the Stock Purchase Agreement are not exercisable until 1999 and the Series ABII Preferred Stock does not vote in the election of directors and is not convertible into Common Stock until 2001. Therefore, the Reporting Persons disclaim beneficial ownership of any Common Stock into which the Warrants are exercisable or the Series ABII Preferred Stock are convertible subject to future transactions. The foregoing discussion of the Stock Purchase Agreement is qualified in its entirety to the full text of such agreement, a copy of which is attached as Exhibit 1 and is incorporated herein by reference. See also Item 6. ITEM 5. INTEREST IN SECURITIES OF THE ISSUER. (a) Assuming consummation of the sale by the Company of all shares issuable pursuant to the Stock Purchase Agreement, the conversion of the 35,000 shares Class AA Preferred Stock into Common Stock at a conversion price of $6.00 per share for 5,833,333 shares of Common Stock and the conversion of approximately 19,500 shares of the Class ABI Preferred Stock into Common Stock at an assumed conversion price equal to $5.00 per share for approximately 3,900,000 shares of Common Stock, such 9,733,333 shares would represent approximately 45.0% of the approximately 21,578,608 issued and outstanding shares of the Issuer, based on the number of shares of Common Stock outstanding as of June 30, 1997, as disclosed in the Company's most recent filing on Form 10-Q/A (assuming further, based on a conversion price of $6.00 per share for the Series AA Preferred Stock and an assumed conversion price of $5.00 per share for the Series AB Preferred Stock, (i) the consummation of the sale to Prometheus of the Additional Securities for 4,944,350 shares of Common Stock, (ii) the purchase of approximately 900,000 shares of Common Stock from the Shareholders, (iii) the conversion of the remaining 20,500 shares of Series ABII Preferred Stock for 4,100,000 shares of Common Stock and (iv) the exercise of the Warrants for 1,000,000 shares of Common Stock, each of which the Reporting Persons disclaim beneficial ownership in Item 4, such 20,677,833 shares would represent approximately 63.6% of the approximately 32,522,958 issued and outstanding shares of the Issuer). The calculations of the interest in securities are based on assumed conversion and exercise prices and do not take into consideration any adjustments to such conversions and exercise prices. Please see Item 4 and the terms set forth in the Series AA, Series ABI and Series ABII Certificates of Designations attached hereto as Exhibits 6 through 8, respectively, and incorporated herein by reference and the Warrant Agreement attached hereto as Exhibit 5 and incorporated herein by reference. (b) Prometheus has the sole power to vote or to direct the vote of all shares of Common Stock covered by this Statement, subject to the terms of the Stockholders Agreement described in Item 6. Page 8 of 12 (c) Neither the Reporting Persons nor, to the knowledge of the Reporting Persons, any of the parties listed on Schedule 1 hereto have acquired any shares of Common Stock of the Company during the past sixty days, other than the purchases reported herein. (d) Prometheus has the sole right to receive or the power to direct the receipt of dividends from, or the proceeds of sale of, the shares of Common Stock covered by this Statement. (e) Not applicable. ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS, OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER. Concurrently with the execution of the Stock Purchase Agreement, Prometheus and certain individuals (named below) entered into a stockholders' voting agreement (the "Stockholders' Voting Agreement"). Pursuant to the Stock Purchase Agreement, on September 30, 1997 (the date of the First Closing), Prometheus and the Issuer shall enter into a warrant agreement (the "Warrant Agreement"); Prometheus, the Issuer and the stockholders named therein shall enter into a stockholders agreement (the "Stockholders Agreement"); and Prometheus and the Issuer shall enter into a registration rights agreement (the "Registration Rights Agreement;" and, collectively with the Stockholders' Voting Agreement, the Warrant Agreement and the Stockholders Agreement, the "Ancillary Documents"). The Stockholders Agreement contemplates that the Issuer will take all action necessary to cause (i) the Board to be structured to consist of fifteen members (subject to increase in the case of an Adverse Event (as defined in the Stockholders Agreement)), (ii) the holders of Preferred Stock, voting separately as a single class, to have the exclusive right to elect a minimum of three Directors (each such Director, a "Preferred Stock Director"), (iii) any increases in the size of the Board to result in an increase in the number of Preferred Stock Directors such that they represent at least 20% of the votes exercisable by the Board and (iv) at least a proportionate number of Preferred Stock Directors to serve on each committee of the Board (provided that the Executive Committee shall consist of five members of which two members shall be Preferred Stock Directors) and at least one Preferred Stock Director to serve on the governing body of each of the Issuer's subsidiaries and affiliates, other than operational home building companies. Pursuant to the Stockholders Agreement, under certain circumstances Prometheus will have the right to participate in the issuance or sale by the Company of any shares of its capital stock so that Prometheus can maintain its proportionate share of outstanding capital stock of the Company. In addition, Prometheus will have certain tag- along rights if the Executive Shareholders (as defined in the Stockholders Agreement) sell their beneficial interest in the Common Stock. In the event of an Adverse Event, the holders of Class AA Preferred Stock and Class AB Preferred Stock, voting separately as a single class, shall have the exclusive right to elect sufficient Preferred Stock Directors to constitute a majority of the Board of Directors and all committees of the Board of Directors. The size of the Board of Directors and all committees of the Board of Directors shall be automatically increased in order to effect any such additional directors. This right shall continue until such time as the conditions giving rise to the Adverse Effect are no longer in effect for two consecutive quarters, as further described in the Certificates of Designations of the Preferred Stock. Neither the Issuer nor its subsidiaries shall take certain actions without the affirmative vote of over eighty-one percent of either (i) the Directors or (ii) the members of a five member executive committee established under the Stockholders Agreement. The Certificate of Incorporation and Bylaws Page 9 of 12 of the Issuer and its subsidiaries shall be amended to give effect to the terms of the Stockholders Agreement. Pursuant to the Registration Rights Agreement, the Issuer has granted Prometheus demand registration rights to facilitate the resale of the Common Stock owned by it and has also granted Prometheus certain piggyback rights to sell a portion of its shares in connection with offerings of securities by the Issuer for its own account. Pursuant to the Warrant Agreement, the Company will grant to Prometheus warrants to purchase up to an aggregate of one million shares of Common Stock, subject to adjustment. The warrants will be exercisable commencing on the second anniversary and ending on the seventh anniversary of the Warrant Agreement, at the exercise prices set forth therein. Pursuant to the Stockholders' Voting Agreement, the following stockholders of the Company have agreed to vote their voting shares of Capital Stock for the Transactions as contemplated by the Stock Purchase Agreement: J. Marshall Coleman, James J. Martell, Jr., Robert R. Short, J. Christopher Stuhmer, Thomas Buffington, Lawrence J. Witek, Lanold W. Caldwell, James M. Gidden, Edward A. Kirkpatrick and Patricia A. Donnelly. This Agreement shall terminate at the Second Closing. Each Stockholder agrees not to sell or otherwise transfer any of its voting shares of capital stock of the Issuer until the Second Closing. All references to the Ancillary Documents are qualified in their entirety by the full text of such agreements and amendments, copies of which are attached as Exhibits hereto and are incorporated by reference herein. See also Item 4. Page 10 of 12 ITEM 7. MATERIAL TO BE FILED AS EXHIBITS. Exhibit 1. Stock Purchase Agreement dated as of August 14, 1997 among the Issuer and Prometheus Exhibit 2. Stockholders Voting Agreement dated as of August 14, 1997 among the Issuer and Prometheus Exhibit 3. Form of Registration Rights Agreement between the Company and Prometheus Exhibit 4. Form of Stockholders Agreement between Prometheus, the Issuer and certain stockholders listed therein Exhibit 5. Form of Warrant Agreement between Prometheus and the Issuer Exhibit 6. Form of Class AA Certificate of Designations Exhibit 7. Form of Class ABI Certificate of Designations Exhibit 8. Form of Class ABII Certificate of Designations Exhibit 9. Joint Filing Agreement Page 11 of 12 SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. PROMETHEUS HOMEBUILDERS LLC by Prometheus Homebuilders Funding Corp., as sole member by /s/ Murry N. Gunty -------------------------- Name: Murry N. Gunty Title: Secretary and Treasurer PROMETHEUS HOMEBUILDERS FUNDING CORP. by /s/ Murry N. Gunty -------------------------- Name: Murry N. Gunty Title: Secretary and Treasurer Dated: August 25, 1997 Page 12 of 12 SCHEDULE I EXECUTIVE OFFICERS OF PROMETHEUS, FUNDING CORP. AND LFREI The business address for each of the following persons is 30 Rockefeller Plaza, 63rd Floor, New York, NY 10020.
NAME OF OFFICER PRESENT AND PRINCIPAL OCCUPATION - ---------------- -------------------------------- Arthur P. Solomon Chairman and Managing Director of LFREI Anthony E. Meyer Chief Investment Officer and Managing Director of LFREI Robert P. Freeman President and Managing Director of LFREI; President of Funding Corp. Klaus P. Kretschmann Senior Vice President of LFREI Murry N. Gunty Vice President of LFREI; Secretary and Treasurer of Funding Corp. Thomas M. Mulroy Vice President of LFREI Lorenzo L. Lorenzotti Secretary of LFREI Kevin J. Reardon Comptroller of LFREI
EX-99.1 2 STOCK PURCHASE AGREEMENT DATED 8/14/1997 EXHIBIT 99.1 STOCK PURCHASE AGREEMENT by and between THE FORTRESS GROUP, INC. and PROMETHEUS HOMEBUILDERS LLC Dated as of August 14, 1997 TABLE OF CONTENTS
PAGE ---- ARTICLE I.................................................................... 1 Section 1.1. DEFINITIONS........................................... 1 ARTICLE II. PURCHASE AND SALE OF SECURITIES................................. 12 Section 2.1. Purchase and Sale of Securities.................... 12 Section 2.2. Consideration...................................... 12 Section 2.3. Right to Assign.................................... 12 ARTICLE III. CLOSING........................................................ 13 Section 3.1. Location of Closings............................... 13 Section 3.2. First and Second Closings.......................... 13 Section 3.3. Subsequent Purchases and Sales..................... 13 Section 3.4. Deliveries by the Company at Closing............... 14 Section 3.5. Deliveries by the Purchaser at Closing............. 14 Section 3.6. Certificates; Opinions............................. 14 Section 3.7. Ancillary Agreements............................... 14 Section 3.8. Form of Documents and Instruments.................. 14 Section 3.9. Further Purchases.................................. 15 Section 3.10. Redelivery and Cancellation of Warrants............ 15 ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY................... 15 Section 4.1. Organization of the Company........................ 15 Section 4.2. Capitalization of the Company...................... 15 Section 4.3. Authorization of Issuance.......................... 17 Section 4.4. Authorization...................................... 17 Section 4.5. Noncontravention................................... 18 Section 4.6. Consents and Approvals............................. 18 Section 4.7. Subsidiaries....................................... 18 Section 4.8. Employee Benefit Plans and Other Agreements........ 19 Section 4.9. SEC Filings........................................ 24 Section 4.10. Absence of Undisclosed Liabilities; Guarantees..... 24 Section 4.11. Absence of Certain Changes......................... 25 Section 4.12. Compliance With Laws............................... 25 Section 4.13. Litigation......................................... 26 Section 4.14. True and Complete Disclosure....................... 26 Section 4.15. Taxes.............................................. 26 Section 4.16. Properties......................................... 28 Section 4.17. Environmental Matters.............................. 30 Section 4.18. Insurance.......................................... 32 Section 4.19. Condition of Tangible Assets....................... 32 Section 4.20. Contracts and Commitments.......................... 32
i
Section 4.21. Books and Records.................................. 33 Section 4.22. Labor Matters...................................... 33 Section 4.23. Payments........................................... 33 Section 4.24. Information........................................ 33 Section 4.25. Board Recommendations.............................. 34 Section 4.26. Intellectual Property.............................. 34 Section 4.27. Securities Offerings............................... 34 Section 4.28. No Agreements to Sell the Assets or the Company.... 35 Section 4.29. No Brokers......................................... 35 Section 4.30. Transactions with Certain Persons.................. 35 ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PURCHASER...................... 35 Section 5.1. Organization of the Purchaser...................... 35 Section 5.2. Authorization...................................... 36 Section 5.3. Noncontravention................................... 36 Section 5.4. Consents and Appeals............................... 36 Section 5.5. Purchase for Investment............................ 36 Section 5.6. Disclosure Documents............................... 37 Section 5.7. No Brokers......................................... 37 ARTICLE VI. ACTIONS BY THE COMPANY AND THE PURCHASER PRIOR TO THE CLOSING... 37 Section 6.1. Meeting of Stockholders; Proxy Statement; Certificate Amendments............................................ 37 Section 6.2. Stock Exchange Approval............................ 39 Section 6.3. Continuing Operations.............................. 39 Section 6.4. Press Releases..................................... 41 Section 6.5. Additional Financial Statements.................... 41 Section 6.6. Investigations and Access.......................... 41 Section 6.7. Notification of Certain Matters.................... 42 Section 6.8. No Solicitation.................................... 42 Section 6.9. Further Assurances................................. 43 Section 6.10. HSR Act Notification............................... 43 Section 6.11. Employee Matters................................... 43 Section 6.12. Action by the Company.............................. 44 Section 6.13. Liability Insurance................................ 44 Section 6.14. Confidentiality.................................... 44 ARTICLE VII. CONDITIONS TO ALL CLOSINGS..................................... 44 Section 7.1. Conditions to Each Party's Obligations............. 44 Section 7.2. Conditions to the Company's Obligations............ 45 SECTION 7.3. CONDITIONS TO THE PURCHASER'S OBLIGATIONS....................... 46
ARTICLE VIII. SECOND CLOSING................................................ 47 Section 8.1. Conditions to Each Party's Obligations at the Second Closing.................................................... 47 ARTICLE IX. INDEMNIFICATION................................................. 47 Section 9.1. Survival of Representations, Etc................... 47 Section 9.2. Indemnification by the Company..................... 48 Section 9.3. Indemnification by the Purchaser................... 48 Section 9.4. Losses............................................. 48 Section 9.5. Defense of Claims.................................. 48 Section 9.6. Tax Treatment of Indemnity......................... 49 ARTICLE X. MISCELLANEOUS.................................................... 49 Section 10.1. Termination........................................ 50 Section 10.2. In the Event of Termination:....................... 50 Section 10.3. Fees and Expenses.................................. 51 Section 10.4. Injunctive Relief.................................. 51 Section 10.5. Independent Determination.......................... 51 Section 10.6. Brokers, etc....................................... 51 Section 10.7. Assignment......................................... 52 Section 10.8. Notices............................................ 52 Section 10.9. Choice of Law...................................... 53 Section 10.10. Entire Agreement; Amendments and Waivers........... 53 Section 10.11. Counterparts....................................... 54 Section 10.12. Invalidity......................................... 54 Section 10.13. Headings........................................... 54 Section 10.14. Limitation of Liability............................ 54 Section 10.15. Galloway Transaction............................... 54 Section 10.16. Mutual Agreement................................... 54 Section 10.17. Apportionment of Stock Between Class ABI Preferred Stock and Class ABII Preferred Stock.............................. 54
SCHEDULES Schedule 4.2 Schedule 4.5 Schedule 4.6 Schedule 4.7 Schedule 4.8 Schedule 4.9 Schedule 4.10 Schedule 4.11 Schedule 4.12 Schedule 4.13 Schedule 4.15 Schedule 4.16(a) Schedule 4.16(b) Schedule 4.16(c) Schedule 4.16(d) Schedule 4.16(e) Schedule 4.16(f) Schedule 4.16(j) Schedule 4.16(k) Schedule 4.16(s) Schedule 4.17 Schedule 4.18 Schedule 4.20 Schedule 4.26 Schedule 4.27 Schedule 6.3 Schedule 6.3(e) Schedule 6.3(i) EXHIBITS Exhibit A Form of Class AA Certificate of Designations Exhibit B Form of Class ABI Certificate of Designations Exhibit C Form of Class ABII Certificate of Designations Exhibit D Form of Registration Rights Agreement Exhibit E Form of Warrant Agreement Exhibit F Form of Stockholders Agreement Exhibit G Executed Stockholders Voting Agreement This STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of August 14, 1997, is made by and between (i) The Fortress Group, Inc., a Delaware (the "Company") and (ii) Prometheus Homebuilders LLC (the ------- "Purchaser"). --------- RECITAL ------- WHEREAS, the Company desires to issue and sell to the Purchaser, and the Purchaser desires to purchase from the Company, (i) an aggregate of 35,000 shares of its newly issued Class AA Convertible Preferred Stock, $0.01 par value per share (the "Class AA Preferred Stock"), having the rights, designations and ------------------------ preferences set forth in the Class AA Certificate of Designations (as defined herein) and (ii) an aggregate of 40,000 shares of its newly issued Class AB Preferred Stock apportioned between Class ABI Convertible Redeemable Preferred Stock, $0.01 par value per share (the "Class ABI Preferred Stock"), having the ------------------------- rights, designations and preferences set forth in the Class ABI Certificate of Designations (as defined herein) and Class ABII Convertible Redeemable Preferred Stock, $0.01 par value per share (the "Class ABII Preferred Stock" and together -------------------------- with the Class AA Preferred Stock, and the Class ABI Preferred Stock, the "Preferred Stock"), having the rights, designations and preferences set forth in --------------- the Class ABII Certificate of Designations (as defined herein), together with an aggregate of 1,000,000 Warrants (the "Warrants") to purchase initially one share -------- of Common Stock (as defined herein) at an initial exercise price of $7.00 per share as further described in the Warrant Agreement (as defined herein). AGREEMENT --------- NOW, THEREFORE, in consideration of the mutual covenants and premises contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I Section 1.1 DEFINITIONS ----------- Defined Terms. As used herein, the terms below shall have the ------------- following meanings: "Affiliate" shall mean any entity controlling, controlled by or under --------- common control with the Company. For the purposes of this definition, "control" shall have the meaning presently specified for that word in Rule 405 promulgated by the Commission under the Securities Act. "Agreement" shall mean this Stock Purchase Agreement, together with --------- all schedules and exhibits referenced herein. "Alternative Transaction" shall have the meaning set forth in Section ------------------------ 6.8. "Ancillary Agreements" means the Warrant Agreement, the Stockholders ---------------------- Agreement and the Registration Rights Agreement. "Applicable Law" means any statute, law, rule, or regulation or any ---------------- judgment, order, writ, injunction or decree of any Governmental Entity to which a specified person or property is subject. "Benefit Arrangement" means any employment, consulting, severance or ------------------- other similar contract, arrangement or policy and each plan, arrangement (written or oral), program, agreement or commitment providing for insurance coverage (including without limitation any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, life, health or accident benefits (including without limitation any "voluntary employees' beneficiary association" as defined in Section 501(c)(9) of the Code providing for the same or other benefits) or for deferred compensation, profit-sharing bonuses, stock options, stock appreciation rights, stock purchases or other forms of incentive compensation or post-retirement insurance, compensation or benefits which (A) is not a Welfare Plan, Pension Plan or Multiemployer Plan, (B) is entered into, maintained, contributed to or required to be contributed to, as the case may be, by the Company or an ERISA Affiliate or under which the Company or any ERISA Affiliate may incur any liability, and (C) covers any present or former employees, directors or consultants of the Company (with respect to their relationship with such entities). "Board of Directors" means the Board of Directors of the Company. -------------------- "Business" means the business of the Company as described more fully ---------- in the "Business" section of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. "Business Day" shall mean any day other than a Saturday, a Sunday or a -------------- bank holiday in New York, New York. "Bylaws" means the Bylaws of the Company as in effect on the date -------- hereof and as may be amended from time to time. "Bylaws Amendments" means any amendments to the bylaws of the Company ------------------- and any of its Subsidiaries reasonably necessary in connection with the transactions contemplated under this Agreement and the Ancillary Agreements (including amendments required to give effect to the Supermajority provisions of the Stockholders Agreement). "Certificate Amendments" means any amendments to the Certificate of ------------------------ Incorporation or the certificates of incorporation of the Company's Subsidiaries reasonably necessary in connection with the transactions contemplated under this Agreement and the Ancillary Agreements, including, without limitation, (a) an increase to the authorized number of shares of Common Stock of the Company if necessary, (b) the terms and conditions of the designations, rights and preference of the Preferred Stock set forth in the Preferred Stock Certificates of Designations, and (c) such other changes to the Certificate of Incorporation as are 2 reasonably necessary to give effect to the rights, preferences and designations of the Preferred Stock contained in the Preferred Stock Certificates of Designations and the provisions of this Agreement and the Ancillary Agreements (including the voting provisions set forth in the Stockholders Agreement, if requested by the Purchaser). "Certificate of Incorporation" means the Certificate of Incorporation ------------------------------ of the Company as amended or restated and as in effect on the date hereof. "Claim" shall have the meaning set forth in Section 9.5. ------- "Claim Notice" shall have the meaning set forth in Section 9.5. -------------- "Class AA Certificate of Designations" means the Certificate of -------------------------------------- Designations, Preferences and Relative, Participating, Optional and Other Special Rights and Qualifications, Limitations and Restrictions thereof of the Class AA Convertible Preferred Stock, $0.01 par value per share, of the Company, substantially in the form attached hereto as Exhibit A. --------- "Class ABI Certificate of Designations" means the Certificate of -------------------------------------- Designations, Preferences and Relative, Participating, Optional and Other Special Rights and Qualifications, Limitations and Restrictions thereof of the Class AB Convertible Redeemable Preferred Stock, $0.01 par value per share, of the Company, substantially in the form attached thereto as Exhibit B. --------- "Class ABII Certificate of Designations" means the Certificate of ---------------------------------------- Designations, Preferences and Relative, Participating, Optional and Other Special Rights and Qualifications, Limitations and Restrictions thereof of the Class ABII Convertible Redeemable Preferred Stock, $0.01 par value per share, of the Company, substantially in the form attached thereto as Exhibit C. --------- "Class AA Per Share Purchase Price" shall mean the price of $1000 per ----------------------------------- share for the Class AA Preferred Stock. "Class ABI Per Share Purchase Price" shall mean the price of $1000 per ------------------------------------ share for the Class ABI Preferred Stock. "Class ABII Per Share Purchase Price" shall mean the price of $1000 ------------------------------------- per share for the Class ABII Preferred Stock. "Class AA Preferred Stock" means the 6% Class AA Convertible Preferred ------------------------- Stock, $0.01 par value per share, of the Company. "Class AB Preferred Stock" means the Class ABI Preferred Stock and the -------------------------- Class ABII Preferred Stock. "Class ABI Preferred Stock" means the 12% Class ABI Convertible --------------------------- Redeemable Preferred Stock, $0.01 par value per share, of the Company. 3 "Class ABII Preferred Stock" means the 12% Class ABII Convertible ---------------------------- Redeemable Preferred Stock, $0.01 par value per share, of the Company. "Closing" shall mean the consummation of any Preferred Stock Purchase. --------- "Closing Date" means, with respect to the consummation of any -------------- Preferred Stock Purchase, the third Business Day following the date on which the conditions set forth herein with respect thereto shall be satisfied or duly or if the Company and the Purchaser mutually agree on a different date, the date upon which they have mutually agreed. "Code" means the Internal Revenue Code of 1986, as it may be amended ------ from time to time. "Commission" means the United States Securities and Exchange ------------ Commission. "Commitment" shall have the meaning set forth in Section 4.11. ------------ "Common Stock" means the common stock, par value $0.01 per share, of -------------- the Company. "Company" shall have the meaning set forth in the first paragraph --------- hereof. "Company Employee Plan" shall have the meaning set forth in Section ----------------------- 4.8(a). "Company Indemnified Parties" shall have the meaning set forth in ----------------------------- Section 9.3. "Company Pension Plan" shall have the meaning set forth in Section ---------------------- 4.8(a). "Contract" shall mean any written or oral agreement, contract, lease, ---------- commitment, understanding, instrument or obligation to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of their respective properties may be bound. "Conversion Shares" means the shares of Common Stock issuable upon the ------------------- conversion of the Preferred Stock. "Employee Plans" means all Benefit Arrangements, Multiemployer Plans, ---------------- Pension Plans and Welfare Plans. "Encumbrance" means any claim, lien, mortgage, deed of trust, deed to ------------- secure debt, pledge, option, charge, easement, security interest, right-of-way, encumbrance or other rights of third parties of any nature, and, with respect to any securities, any agreements, understandings or restrictions affecting the voting rights or other incidents of record or beneficial ownership pertaining to such securities. "Environmental Conditions" means (1) the Release or threatened Release -------------------------- of any Hazardous Material (whether or not upon a Facility or any former Facility or the Real Property or 4 other property and whether or not such Release constituted at the time thereof a violation of any Environmental Law), or (2) the state of the environment, including natural resources (e.g., flora and fauna) soil, surface water, ground water, wetlands or ambient air, as a result of which the Company has or may become liable under any Environmental Laws or by reason of which any Facility, any former Facility or any of the Real Property or the other assets of the Company may suffer or be subjected to any Encumbrances. "Environmental Laws" means any and all applicable Federal, state, -------------------- local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, legally binding decrees, or other requirement of any Governmental Entity (including, without limitation, common law) regulating, relating to or imposing liability or standards of conduct concerning protection of the environment or of human health or relating to exposure of any kind to Hazardous Materials, as has been, is now, or may at any time hereafter be, in effect. "Environmental Permits" means any and all permits, licenses, ----------------------- registrations, notifications, exemptions and any other authorization required under any Environmental Law. "ERISA" means the Employee Retirement Income Security Act of 1974, as ------- amended. "ERISA Affiliate" means any entity which is (or at any relevant time ----------------- was) a member of a "controlled group of corporations" with, under "common control" with, a member of an "affiliated service group" with, or otherwise required to be aggregated with the Company, as set forth in Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1) of ERISA. "Exchange Act" means the Securities Exchange Act of 1934, as amended. -------------- "Executive Committee" shall have the meaning set forth in Section --------------------- 7.3(f). "Existing Preferred Stock" means the Series A Preferred Stock, the ------------------------- Series B Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock of the Company. "Existing Preferred Stock Certificates of Designation" means the ------------------------------------------------------ Company's (i) Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights and Qualifications, Limitations and Restrictions thereof of the Series A 11% Cumulative Convertible Preferred Stock, $0.01 par value per share, (ii) Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights and Qualifications, Limitations and Restrictions thereof of the Series B Convertible Preferred Stock, $0.01 par value per share, (iii) Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights and Qualifications, Limitations and Restrictions thereof of the Series C Convertible Preferred Stock, $0.01 par value per share, and (iv) Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights and Qualifications, Limitations and Restrictions thereof of the Series D 6% Convertible Redeemable Preferred Stock, $0.01 par value per share. 5 "Existing Stockholders Agreement" shall mean that certain Stockholders --------------------------------- Agreement, dated as of April 15, 1996, by and among Charles F. Smith, Jr., James J. Martell, Jr., Patricia Donnelly, Michael P. Kahn and Pepi Kahn, Co-Trustees of the Kahn Grantor Trust of 1993, James F. McEneany, Jr., James M. Pirrello, Brian McGregor, Brian Buchanan, Thomas B. Buffington, Edward A. Kirkpatrick, James M. Giddens, J. Christopher Stuhmer, Robert Short, Lanold W. Caldwell and Lawrence J. Witek. "Facilities" means the offices, buildings and other improvements and ------------ all other real property and related facilities, including the Real Property, which are owned, leased or operated by the Company or any of its Subsidiaries. "Financial Product Agreement" shall mean any (a) interest rate, ----------------------------- currency, commodity or other swap, cap, floor, collar, insurance or similar agreement or arrangement, (b) put, call, futures or forward contract, straddle, commodities contract, option or warrant other than outstanding options or warrants for Common Stock, (c) repurchase or reverse repurchase or similar agreement or arrangement or (d) any other financial, derivative, hedge, or speculative product, service or agreement, contract or arrangement. "First Closing" shall have the meaning set forth in Section 3.2(a). --------------- "Fixtures and Equipment" shall mean all of the furniture, fixtures, ------------------------ furnishings, machinery and equipment owned by the Company or any of its Subsidiaries. "Further Purchase" shall have the meaning set forth in Section 3.9. ------------------ "GAAP" shall have the meaning set forth in Section 4.9. ------ "Galloway Letter of Intent" shall mean that certain Letter of Intent, --------------------------- dated as of June 20, 1997, by and between the Company and Don Galloway Homes, Inc.. "Galloway Transaction" shall mean all transactions in connection with ---------------------- the purchase by the Company of the assets of Don Galloway Homes, Inc., as set forth in the Galloway Letter of Intent. "Governmental Entity" means any court or tribunal in any jurisdiction --------------------- (domestic or foreign) or any public, governmental, or regulatory body, agency, department, commission, board, bureau, or other authority or instrumentality (domestic or foreign). "Hazardous Materials" means any hazardous substance, gasoline or --------------------- petroleum (including crude oil or any fraction thereof) or petroleum products, polychlorinated biphenyls, ureaformaldehyde insulation, asbestos or asbestos- containing materials, pollutants, contaminants, radioactivity, and any other materials or substances of any kind, whether solid, liquid or gas, that is regulated pursuant to any Environmental Law or that gives rise to liability under any Environmental Law. 6 "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of --------- 1976, as amended. "Indemnified Parties" shall have the meaning set forth in Section 9.3. --------------------- "Indenture" shall mean that certain Indenture, dated as of May 21, ----------- 1996, by and between The Fortress Group, Inc. and IBJ Schroder Bank & Trust Company, as amended by that certain First Supplemental Indenture, dated as of May 21, 1996, and that certain Second Supplemental Indenture, dated as of May 27, 1997, between the same parties. "Liabilities" shall mean, as to any person, all debts, adverse claims, ------------- liabilities and obligations, direct, indirect, absolute or contingent of such person, whether known or unknown, accrued, vested or otherwise, whether in contract, tort, strict liability or otherwise and whether or not actually reflected, or required by GAAP to be reflected, in such person's or entity's balance sheets or other books and records, including without limitation (i) obligations arising from non-compliance with any law, rule or regulation of any Government Entity or imposed by any court or any arbitrator of any kind, (ii) all indebtedness or liability of such person for borrowed money, or for the purchase price of property or services (including trade obligations), (iii) all obligations of such person as lessee under leases, capital or other, (iv) liabilities of such person in respect of plans covered by Title IV of ERISA, or otherwise arising in respect of plans for the Company's employees or former employees or their respective families or beneficiaries, (v) reimbursement obligations of such person in respect of letters of credit, (vi) all obligations of such person arising under acceptance facilities, (vii) all liabilities of other persons or entities, directly or indirectly, guaranteed, endorsed (other than for collection or deposit in the ordinary course of business) or discounted with recourse by such person or with respect to which the person in question is otherwise directly or indirectly liable, (viii) all obligations secured by any Encumbrance on property of such person, whether or not the obligations have been assumed, and (ix) all other items which have been, or in accordance with GAAP would be, included in determining total liabilities on the liability side of the balance sheet. "Losses" shall have the meaning set forth in Section 9.2. -------- "Material Adverse Effect" with respect to any person or entity shall ------------------------- mean an event, occurrence or condition that has had or reasonably would be expected to have a material adverse effect on the business, condition (financial or otherwise), assets, liabilities, working capital, operations or prospects of such person or entity and its Subsidiaries (if any), taken as a whole. "Material Agreements" shall mean all of the following Contracts to --------------------- which the Company or any of its Subsidiaries is a party: (a) all Contracts which (i) involve payments by or to any Person, of more than $50,000 in cash or other property or services, or (ii) extend for a term of more than thirty (30) days from the date hereof (unless the same is (y) cancelable on not more than thirty (30) days' notice without fee, premium or penalty or (z) motor vehicle or equipment leases not involving payments in excess of $50,000, (b) all loan agreements and commitments, credit agreements, indentures, promissory notes, mortgages, deeds of trust, pledge or security agreements, factoring agreements, conditional sales Contracts, letters of credit or other 7 agreements or instruments evidencing, securing or issued in connection with any Liability, (c) all operating leases or capital leases for equipment to which the Company is a party, involving annual payments in excess of $50,000 per lease, (d) all union, labor or collective bargaining Contracts, (e) all consulting, management, development, leasing brokerage or similar agreements with total obligations in excess of $50,000, (f) any guarantee of any Liability or other obligations of any Person other than guarantees by the Company of the obligations of its wholly owned Subsidiaries, (g) each joint venture, partnership, operating or similar agreement, (h) each agreement relating to any outstanding commitment for capital expenditures involving future payments which, together with future payments under all other agreements, Contracts or commitments relating to the same capital project, exceed $50,000, (i) any agreement, Contract or commitment relating to a disposition or an acquisition of the assets (except in respect of the disposition or acquisition of assets with a fair market value of less than $50,000) or securities of, or any interest in, any Person or other business enterprise, (j) any agreement, Contract or commitment in respect of any Liability of whatever nature (including, without limitation, open account indebtedness) to any Affiliate of the Company, or any agreement, Contract or commitment with or to any Affiliate of the Company, (k) any agreement, Contract or commitment containing any covenant limiting the freedom of the Company to undertake, conduct or engage in any business or activity or to compete with any Person in any geographic area, (l) any Financial Product Agreement, (m) any construction, development, service, supply and maintenance agreement (unless the same is (y) cancelable on not more than thirty (30) days' notice without fee, premium or penalty or (z) does not involve payments in excess of $50,000), (n) all leases of Real Property and (o) all agreements not entered into in the ordinary course of business; "Multiemployer Plan" means any "multiemployer plan," as defined in -------------------- Section 4001(a)(3) or 3(37) of ERISA, which (A) the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, after September 25, 1980, maintained, administered, contributed to or was required to contribute to, or under which the Company or any ERISA Affiliate may incur any liability and (B) covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with such entities). "PBGC" means the Pension Benefit Guaranty Corporation. ------ "Pension Plan" means any "employee pension benefit plan" as defined in -------------- Section 3(2) of ERISA (other than a Multiemployer Plan) which (A) the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, within the five years prior to the Closing Date, maintained, administered, contributed to or was required to contribute to, or under which the Company or any ERISA Affiliate may incur any liability and (B) covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with such entities). "Permits" shall mean all licenses, permits, orders, consents, --------- approvals, registrations, authorizations, qualifications and filings required by any federal, state, local or foreign laws or governmental or regulatory bodies and all industry or other non-governmental self-regulatory organizations. 8 "Permitted Encumbrances" means (i) any mechanic's or materialmen's ------------------------ lien or similar Encumbrances arising in the ordinary course of business with respect to amounts not yet due and payable or which are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established, (ii) Encumbrances for Taxes not yet due and payable or which are being contested in good faith by appropriate proceeding, for which appropriate reserves have been established, (iii) easements, licenses, covenants, rights of way and similar Encumbrances which, individually or in the aggregate, would not materially and adversely affect the marketability or value of the property encumbered thereby or materially interfere with the operations of the Company. "Person" means any individual, co-partner, association, partnership, -------- joint venture, limited liability company, trust, estate or other entity or organization. "Pre-Closing Environmental Conditions" means any Environmental -------------------------------------- Condition occurring or in existence on or prior to the Closing Date. "Preferred Stock" shall have the meaning set forth in the Recital ----------------- hereto. "Preferred Stock Liquidation Preference" shall mean $1,000 per share ---------------------------------------- of Preferred Stock, plus any accrued and unpaid dividends thereon. "Preferred Stock Certificates of Designations" shall mean the Class AA ---------------------------------------------- Certificate of Designations, the Class ABI Certificate of Designations and the Class ABII Certificate of Designations. "Proceeding" means any action, suit or proceeding, whether civil, ------------ criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding, and any inquiry or investigation that could reasonably be expected to lead to such an action, suit or proceeding. "Proprietary Rights" shall have the meaning set forth in Section -------------------- 4.26(a). "Proxy Materials" means the proxy statement and other proxy materials ----------------- (as amended and supplemented) to be used to solicit proxies on behalf of the board of directors of the Company in connection with the Stockholders Meeting. "Purchase Price" shall mean the Class AA Per Share Purchase Price ---------------- multiplied by the number of shares of Class AA Preferred Stock to be purchased and sold at a particular Closing plus the Class ABI Per Share Purchase Price multiplied by the number of shares of Class ABI Preferred Stock to be purchased and sold at a particular Closing plus the Class ABII Per Share Purchase Price multiplied by the number of shares of Class ABII Preferred Stock to be purchased and sold at a particular Closing. "Purchaser" shall have the meaning set forth in the first paragraph ----------- hereof. "Purchaser Indemnified Parties" shall have the meaning set forth in ------------------------------- Section 9.2. 9 "Registration Rights Agreement" means the Registration Rights ------------------------------- Agreement substantially in the form of Exhibit D attached hereto. --------- "Regulation D" shall have the meaning set forth in Section 4.27(b). -------------- "Regulations" means any laws, statutes, ordinances, regulations, ------------- rules, notice requirements, court decisions and orders of any foreign, federal, state or local government and any other governmental department or agency, including without limitation Environmental Laws, energy, motor vehicle safety, public utility, zoning, building and health codes, occupational safety and health laws and laws respecting employment practices, employee documentation, terms and conditions of employment and wages and hours. "Release" means and includes any spilling, leaking, pumping, pouring, --------- emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment or the workplace of any Hazardous Materials, and otherwise as defined in any Environmental Law. "Schedules" shall have the meaning set forth in Section 10.10. ----------- "SEC Filings" shall have the meaning set forth in Section 4.9. ------------- "Second Closing" shall have the meaning set forth in Section 3.2(b). ---------------- "Securities" means the Preferred Stock and the Warrants. ------------ "Securities Act" means the Securities Act of 1933, as amended. ---------------- "Series A Preferred Stock" means the shares of Series A 11% Cumulative -------------------------- Convertible Preferred Stock, $0.01 par value per share, of the Company outstanding on the date hereof. "Series B Preferred Stock" means the shares of Series B Convertible -------------------------- Preferred Stock, $0.01 par value per share, of the Company outstanding on the date hereof. "Series C Preferred Stock" means the shares of Series C Convertible -------------------------- Preferred Stock, $0.01 par value per share, of the Company to be issued in accordance with existing contractural provisions. "Series D Preferred Stock" means the shares of Series D 6% Convertible -------------------------- Redeemable Preferred Stock, $0.01 par value per share, of the Company to be issued in connection with the Galloway Transaction. "Shareholder Undertakings" means the undertakings delivered by the -------------------------- Company to the Purchaser on the date of this Agreement pursuant to the Stockholders Voting Agreement by all of the Company's executive officers and directors who own shares of Common Stock including the proxy of each such person to vote in favor of the Stockholder Approval. 10 "Stockholder Approval" shall have the meaning set forth in Section ---------------------- 8.1(a). "Stockholders Agreement" means the Stockholders Agreement ------------------------ substantially in the form of Exhibit F attached hereto. "Stockholders Meeting" shall have the meaning set forth in Section ---------------------- 6.1(a). "Stockholders Voting Agreement" shall mean that certain Stockholders ------------------------------- Voting Agreement, dated as of August 14, 1997, by and among the Company, the Purchaser and certain stockholders named therein, an executed version of which is attached hereto as Exhibit G. "Subsequent Closing" shall mean each Closing of a Subsequent Purchase. -------------------- "Subsequent Purchase" shall have the meaning set forth in Section --------------------- 3.3(a). "Subsidiary" means, with respect to any Person, (a) any corporation of ------------ which at least a majority in interest of the outstanding voting stock (having by the terms thereof voting power under ordinary circumstances to elect a majority of the directors of such corporation, irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned or controlled by such Person, by one or more Subsidiaries of such Person, or by such Person and one or more of its Subsidiaries, or (b) any corporate or non-corporate entity in which such Person, one or more Subsidiaries of such Person, or such person and one or more Subsidiaries of such Person, directly or indirectly, at the date of determination thereof, has an ownership interest and 100% of the revenue of which is included in the consolidated financial reports of such Person consistent with GAAP. "Tax" or "Taxes" means any federal, state, local or foreign net or ----- ------- gross income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, (including taxes under Code Sec. 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax, governmental fee or like assessment or charge of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not, imposed by any governmental authority or arising under any Tax law or agreement, including, without limitation, any joint venture or partnership agreement. "Tax Return" means any return, declaration, report, claim for refund ------------ or information or return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendments thereof. "Third Party Notice" shall have the meaning set forth in Section 9.5. -------------------- "Title Policies" shall have the meaning set forth in Section 4.16(a). ---------------- 11 "Transaction" means, taken together, the transactions contemplated ------------- under this Agreement. "Transaction Expenses" means the reasonable fees and expenses incurred ---------------------- by the Purchaser, including, but not limited to, fees and expenses of legal counsel, accountants and consultants and travel expenses in connection with the preparation of the Agreement and the Purchaser's due diligence examination relating to the Agreement and the transactions contemplated hereby, including, without limitation, Hart-Scott-Rodino filing fees, if any. "Warrant Agreement" means that certain Warrant Agreement by and among ------------------- the Company and the Purchaser substantially in the form attached hereto as Exhibit E pursuant to which the Company shall, on the date of each Closing, issue the Warrants to the Purchaser. "Warrants" shall have the meaning set forth in recital hereto. ---------- "Warrant Shares" means the Common Stock issuable upon the exercise of ---------------- the Warrants. "Welfare Plan" means any "employee welfare benefit plan" as defined in -------------- Section 3(1) of ERISA, which (A) the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or under which the Company or any ERISA Affiliate may incur any liability and (B) covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with such entities). ARTICLE II PURCHASE AND SALE OF SECURITIES ------------------------------- Section 2.1. Purchase and Sale of Securities. Subject to the terms and ------------------------------- conditions hereof, from time to time after the date hereof, at the Closings, the Company will sell, convey, assign, transfer, and deliver, and the Purchaser will purchase and acquire from the Company (i) an aggregate of 35,000 shares of Class AA Preferred Stock, (ii) an aggregate of 40,000 shares of Class AB Preferred Stock which shall be apportioned between the Class ABI Preferred Stock and the Class ABII Preferred Stock as set forth in Section 10.17 and (iii) an aggregate of 1,000,000 Warrants (subject to adjustment in accordance with the terms of the Warrant Agreement). Section 2.2. Consideration. Subject to the terms and conditions ------------- hereof, at each Closing, the Purchaser shall deliver to the Company the Purchase Price with respect to the number of shares of Preferred Stock to be purchased and sold at such Closing by wire transfer of immediately available funds in U.S. dollars to the account or accounts specified by the Company. Section 2.3. Right to Assign. The Purchaser may assign its rights and --------------- delegate its obligations created hereby to purchase Securities in accordance with the provisions of Section 10.7. 12 ARTICLE III CLOSING ------- Section 3.1. Location of Closings. Each Closing shall be held at 9:00 -------------------- a.m. Eastern Time on the applicable Closing Date at the offices of Latham & Watkins, 885 Third Avenue, New York, New York 10022. Section 3.2. First and Second Closings. ------------------------- (a) First Closing. Subject to the terms and conditions hereof, on ------------- September 30, 1997, the Purchaser will purchase and acquire from the Company, and the Company will sell, convey, assign, transfer and deliver to the Purchaser, such number of shares of Class ABI Preferred Stock, up to 15,000, as may be issued by the Company without resulting in the Purchaser having more than 19.9% of the outstanding voting power of the Company's capital stock and 375,000 Warrants, and the Purchaser will pay to the Company the Purchase Price for such shares of Preferred Stock (the "First Closing"). ------------- (b) Second Closing. Subject to the terms and conditions hereof, on -------------- December 30, 1997, the Purchaser will purchase and acquire from the Company and the Company will sell, convey, assign, transfer and deliver to the Purchaser, 16,333 shares of Class AA Preferred Stock, the number of shares of Class AB Preferred Stock as results from deducting the number of shares of Class AB Preferred Stock issued pursuant to Section 3.2(a) above from 18,667, apportioned between the Class ABI Preferred Stock and the Class ABII Preferred Stock as set forth in Section 10.17 and 625,000 Warrants, and the Purchaser will pay to the Company the Purchase Price for such shares of Preferred Stock (the "Second Closing"); provided, however, that if Stockholder Approval has not been obtained -------- ------- by December 30, 1997, the Company may, at its option, extend the date of the Second Closing to any Business Day up to and including January 31, 1998. Section 3.3. Subsequent Purchases and Sales. ------------------------------ (a) Subject to the terms and conditions hereof, following the Second Closing, the Company shall be obligated to sell to the Purchaser, from time to time at one or more Subsequent Closings, an aggregate of 18,667 shares of Class AA Preferred Stock and 21,333 shares of Class AB Preferred Stock, apportioned between the Class AA Preferred Stock and the Class AB Preferred Stock in proportionate amounts and apportioned between the Class ABI Preferred Stock and the Class ABII Preferred Stock as set forth in Section 10.17 (each referred to as a "Subsequent Purchase" and, together, the "Subsequent Purchases"), subject --------------------- ---------------------- to satisfaction or waiver of the conditions set forth in Sections 7.1 and 7.3 and Article VIII. Subject to the terms and conditions hereof, the Closing of any Subsequent Purchase shall occur as soon as practicable following the date on which the conditions set forth in Article VII and Article VIII shall have been satisfied or duly waived and the applicable notice period referred to in Section 3.3(b) below shall have expired. 13 (b) At least 20 Business Days prior to any Subsequent Purchase, the Company shall notify (which shall be in writing and irrevocable) the Purchaser of the anticipated date of the Subsequent Closing (which shall be a Business Day) and the number of shares of Preferred Stock the Company is requiring the Purchaser to purchase, which shall not be fewer than 10,000 Shares of Preferred Stock unless such purchase is of the balance of the Preferred Stock. The Company shall be obligated to require the Purchaser to make Subsequent Purchases of all of the Preferred Stock on or before December 31, 1998. Section 3.4. Deliveries by the Company at Closing. At each Closing, ------------------------------------ the Company shall issue and deliver to the Purchaser: (a) certificates evidencing the Preferred Shares to be issued and delivered at such Closing in the name of the Purchaser (or its permitted assignee(s)) in the respective amounts as set forth in a written notice provided to the Company by the Purchaser, free and clear of all Encumbrances; (b) at the First Closing, certificates evidencing 375,000 Warrants to be issued and delivered at the First Closing and at the Second Closing certificates evidencing 625,000 Warrants to be issue of and delivered at the Second Closing, in each case in the name of the Purchaser (or its permitted assignee(s)) in the respective amounts as set forth in a written notice provided to the Company by the Purchaser, free and clear of all Encumbrances; and (c) all such other documents and instruments as the Purchaser or its counsel shall reasonably request to consummate or evidence the Transaction. Section 3.5. Deliveries by the Purchaser at Closing. At each Closing, -------------------------------------- the Purchaser shall deliver to the Company: (a) immediately available funds as provided in Section 2.2; (b) all such other documents and instruments as the Company or its counsel shall reasonably request to consummate or evidence the Transaction. Section 3.6. Certificates; Opinions. ---------------------- At each Closing, the Purchaser and the Company shall deliver the certificates, opinions of counsel, and other documents described in Article VII. Section 3.7. Ancillary Agreements. At the First Closing, the Company -------------------- and the Purchaser shall enter into the Ancillary Agreements. Section 3.8 Form of Documents and Instruments. All of the documents --------------------------------- and instruments delivered at Closing shall be in form and substance, and shall be executed and delivered in a manner, reasonably satisfactory to the parties' respective counsel. 14 Section 3.9. Further Purchases. Provided that the Company has at such time sold all Subsequent Purchases to the Purchaser, the Company may, at its option, request in writing on not less than thirty (30) Business Days' notice that the Purchaser purchase in the aggregate from the Company, in proportionate amounts and on terms otherwise identical to the terms of the securities set forth in Section 2.1., in addition to the Securities set forth in Section 2.1, up to an additional 11,667 shares of Class AA Preferred Stock, up to an additional 13,333 shares of Class AB Preferred Stock apportioned between Class ABI Preferred Stock and Class ABII Preferred Stock as set forth in Section 10.17 and up to an additional 333,250 Warrants (a "Further Purchase"). The Purchaser ---------------- may, in its sole discretion accede to or refuse any such request for a Further Purchase. If the Purchaser accepts any request for a Further Purchase, all Further Purchases shall take place in accordance with Sections 3.3 through 3.8 as if the number of Securities set forth in Section 3.3(a) were increased by the number of additional Securities which the Purchaser has agreed to purchase as a Further Purchase pursuant to this Section 3.9. Purchaser shall have a right of first refusal with respect to any bona fide offer to purchase up to $25,000,000 of equity capital (provided that Purchaser must respond to such offer within 30 days and if Purchaser does not accept such offer, the Company cannot raise such capital on terms materially less favorable to the Company without first offering the securities again to Purchaser). Section 3.10 Redelivery and Cancellation of Warrants. From and after --------------------------------------- the Second Closing, in the event the Purchaser defaults in any of its obligations hereunder to fund Subsequent Purchases, the Purchaser shall promptly redeliver to the Company for cancellation all Warrants received by it in excess of twenty-five (25) Warrants for every 100 shares of Class AB Preferred Stock purchased by the Purchaser hereunder. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY --------------------------------------------- The Company represents and warrants to the Purchaser as follows: Section 4.1 Organization of the Company. The Company is a corporation --------------------------- duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease, and operate its properties and to carry on its business as presently being conducted. No actions or proceedings to dissolve the Company are pending or, to the knowledge of the Company, threatened. The copies of the Certificate of Incorporation and Bylaws heretofore delivered by the Company to the Purchaser are accurate and complete as of the date hereof. The Company is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which the property owned, leased, or operated by it or the conduct of its business requires such qualification or licensing, except where the failure to do so taken in the aggregate would not have a Material Adverse Effect on the Company. Section 4.2. Capitalization of the Company. ----------------------------- 15 (a) The authorized capital stock of the Company as of the date hereof, consists of 49,000,000 shares of Common Stock, par value $0.01 per share and 1,000,000 shares of preferred stock. As of the date hereof, 11,745,275 shares of Common Stock, 10,000 shares of Series A Preferred Stock, 8,854 shares of Series B Preferred Stock, no shares of Series C Preferred Stock and no shares of Series D Preferred Stock were outstanding. As of the date hereof, 379,800 shares of Common Stock are reserved for issuance upon exercise of outstanding employee stock options, 188,540 shares of Common Stock are reserved for issuance upon conversion of the Existing Preferred Stock and other outstanding securities, a maximum of 60,000 shares of Series C Preferred Stock are reserved for issuance pursuant to existing contractual agreements and a maximum of 600,000 shares of Common Stock are reserved for issuance upon conversion of such Series C Preferred Stock. Schedule 4.2 sets forth the beneficiaries of all such ------------ reserved shares. Schedule 4.2 contains the aggregate number of outstanding ------------ options to purchase shares of Common Stock, the weighted average exercise price with respect to such options and the plan or other arrangements pursuant to which such options were issued. All outstanding shares of capital stock of the Company have been validly issued and are fully paid and nonassessable, and no shares of capital stock of the Company are subject to, nor have any been issued in violation of, any preemptive or similar rights. (b) Except as set forth above in paragraph (a) of this Section 4.2, as contemplated by this Agreement and as set forth on Schedule 4.2 hereof, there ------------ are outstanding (i) no shares of capital stock or other voting securities of the Company; (ii) no securities of the Company convertible into or exchangeable for shares of capital stock or other voting securities of the Company; (iii) no subscriptions, options, warrants, calls, commitments, preemptive rights or other rights of any kind to acquire from the Company, and no obligation of the Company to issue or sell, any shares of capital stock or other voting securities of the Company or any securities of the Company convertible into or exchangeable for such capital stock or voting securities; and (iv) no equity equivalents, stock appreciation rights, interests in the ownership or earnings or other similar rights of or with respect to the Company. Except as set forth on Schedule 4.2, ------------ there are no outstanding contractual obligations of the Company to repurchase, redeem or otherwise acquire any shares of Common Stock or any other securities of the type described in clauses (i)-(iv) of the preceding sentence. Except as set forth on Schedule 4.2, there are no restrictions upon the voting or transfer ------------ of any share of the capital stock or other voting securities of the Company pursuant to the Certificate of Incorporation, the Existing Preferred Stock Certificates of Designation, the Bylaws or other governing documents or any agreement or other instrument to which the Company is a party or by which the Company is bound other than restricted stock held by certain employees. Schedule 4.2 contains a true and correct list of all persons holding restricted - ------------ stock (as defined under any plan or arrangement pursuant to which it was issued), the number of shares of restricted stock held by such persons and the document or documents which describe such restrictions. 16 Section 4.3. Authorization of Issuance. Upon consummation of the ------------------------- transactions contemplated hereby, the Preferred Stock acquired by the Purchaser from the Company will be duly authorized and validly issued, fully paid and not subject to any preemptive or similar rights. Upon consummation of the transactions contemplated hereunder, the Conversion Shares will be duly authorized and reserved for issuance and upon conversion in accordance with the terms of the Preferred Stock will be validly issued, fully paid and nonassessable and not subject to any preemptive or similar rights. Upon the First Closing, the Warrant Shares will be duly authorized and reserved for issuance and, upon exercise of the Warrants in accordance with the terms thereof, will be validly issued, fully paid and nonassessable and not subject to any preemptive or similar rights. Section 4.4. Authorization. The Company has full corporate power ------------- and authority to execute and deliver this Agreement and the Ancillary Agreements to which it is a party and to consummate the transactions contemplated hereby and thereby other than the Stockholder Approval. The execution and delivery by the Company of this Agreement has been duly authorized by all necessary corporate action of the Company. The execution and delivery by the Company of the Ancillary Agreements to which it is a party, and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action of the Company (other than the Stockholder Approval). This Agreement has been duly executed and delivered by the Company and constitutes, and each Ancillary Agreement executed or to be executed by the Company has been, or when executed will be, duly executed and delivered by the Company and constitutes, or when executed and delivered will constitute, a valid and legally binding obligation of the Company, enforceable against the Company in accordance with its terms. 17 Section 4.5. Noncontravention. Except as set forth on Schedule 4.5, ---------------- ------------ the execution and delivery by the Company of this Agreement and the Ancillary Agreements and the performance by it of the transactions contemplated hereby and thereby (including the conversion/exercise of all of the Securities acquired or to be acquired by the Purchaser hereunder) do not and will not (i) conflict with or result in a violation of any provision of the Certificate of Incorporation or the Bylaws, or the charter, bylaws, or other governing instruments of any of its Subsidiaries, (ii) conflict with or result in a violation of any provision of, or constitute (with or without the giving of notice or the passage of time or both) a default under, or give rise (with or without the giving of notice or the passage of time or both) to any loss of a benefit which would have a Material Adverse Effect, or of any event of default, right of termination, cancellation, or acceleration under, any Material Agreement including, without limitation, the Indenture, (iii) result in the creation or imposition of any Encumbrance (other than a Permitted Encumbrance) upon the properties of the Company or any of its Subsidiaries, or (iv) violate any Applicable Law binding upon the Company or any of its Subsidiaries. Schedule 4.5 sets forth, in reasonable detail, the ------------ calculations of the Company demonstrating that the Company is currently in compliance with the Indenture and that the transactions contemplated hereby do not and will not result in an event of default under or breach of the terms of the Indenture, or give rise to a "Change of Control Offer" as defined in the Indenture. Section 4.6. Consents and Approvals. No consent, approval, order, ---------------------- authorization of, or declaration, filing, or registration with, any Governmental Entity is required to be obtained or made by the Company or any of its Subsidiaries in connection with the execution and delivery by the Company of this Agreement and the Ancillary Agreements to which it is a party or the consummation of the transactions contemplated hereby and thereby, other than (i) filings under the HSR Act and expiration or termination of any applicable waiting period required thereunder, (ii) the filing of the Certificate Amendments with the Secretary of State of the State of Delaware, and (iii) filings under the Exchange Act. Except as set forth on Schedule 4.6, no consent ------------ or approval of any person other than any Governmental Entity or The Nasdaq Stock Market, Inc. is required to be obtained or made by the Company or any of its Subsidiaries in connection with the execution and delivery by the Company of this Agreement and the Ancillary Agreements to which it is a party or the consummation of the transactions contemplated hereby and thereby. Section 4.7. Subsidiaries. ------------ (a) Except as otherwise set forth on Schedule 4.7, the Company does ------------ not own, directly or indirectly, any of the capital stock or other securities of any corporation or partnership or have any direct or indirect equity or ownership interest of more than five percent in any other person, other than its Subsidiaries. Schedule 4.7 lists each such Subsidiary of the Company as of the ------------ date hereof and its respective jurisdiction of incorporation or formation. As set forth on Schedule 4.7, each Subsidiary of the Company is a corporation, ------------ partnership or limited liability company duly organized or formed, as the case may be, validly existing, and in good standing under the laws of the jurisdiction of its incorporation or formation. Each such Subsidiary has all requisite organizational authority to own, lease, and operate its properties and to carry on its 18 business as now being conducted. Except as otherwise indicated on Schedule 4.7, ------------ no actions or proceedings to dissolve any Subsidiary of the Company are pending. (b) Except as otherwise indicated on Schedule 4.7 or under the ------------ Securities Act or the rules and regulations promulgated thereunder, all the outstanding capital stock or other equity interests of each Subsidiary of the Company is owned directly or indirectly by the Company, free and clear of all Encumbrances and restrictions on voting, sale, transfer or disposition. All outstanding shares of capital stock of each Subsidiary of the Company have been validly issued and are fully paid and nonassessable. No shares of capital stock or other equity interests of any Subsidiary of the Company are subject to, nor have any been issued in violation of, preemptive or similar rights. (c) Except for shares of Common Stock owned by the Company or any Subsidiary of the Company and as set forth above on Schedule 4.7, there are ------------ outstanding (i) no shares of capital stock or other voting securities of any Subsidiary of the Company; (ii) no securities of any Subsidiary of the Company convertible into or exchangeable for shares of capital stock or other voting securities of any of any Subsidiary of the Company; (iii) no subscriptions, options, warrants, calls, commitments, preemptive rights or other rights of any kind to acquire from any Subsidiary of the Company, and no obligation of any Subsidiary of the Company to issue or sell, any shares of capital stock or other voting securities of any Subsidiary of the Company or any securities of any Subsidiary of the Company convertible into or exchangeable for such capital stock or voting securities; and (iv) no equity equivalents, stock appreciation rights, interests in the ownership or earnings, or other similar rights of or with respect to any Subsidiary of the Company. There are no outstanding contractual obligations of any Subsidiary of the Company to repurchase, redeem or otherwise acquire any shares of capital stock or any other securities of the type described in clauses (i)-(iv) of the preceding sentence. Section 4.8. Employee Benefit Plans and Other Agreements. ------------------------------------------- (a) Disclosure; Delivery of Copies of Relevant Documents and Other -------------------------------------------------------------- Information. Schedule 4.8 contains a complete list of Employee Plans which - ----------- ------------ cover or have covered present or former employees, directors or consultants of the Company or any of its Subsidiaries (with respect to their relationship with such entities) (each, a "Company Employee Plan"). True and complete copies of --------------------- each of the following Company Employee Plan documents have been delivered or made available by the Company to the Purchaser: (i) each Company Employee Plan document (and, if applicable, related trust agreements and all annuity contracts or other funding instruments) and all amendments thereto, all reasonably available written descriptions thereof which have been distributed to the Company's employees and those of its ERISA Affiliates and a complete description of any Company Employee Plan, which is not in writing (including a description of the number and level of employees covered thereby), (ii) the most recent determination or opinion letter issued by the Internal Revenue Service with respect to each Pension Plan and each Welfare Plan (other than a Multiemployer Plan), which covers or has covered employees of the Company or any of its ERISA Affiliates (with respect to their relationship with such entities), (iii) for the three most recent plan years, any Annual Reports on Form 5500 Series required to be filed with any governmental agency for each Pension Plan which 19 covers or has covered employees or former employees of the Company or any of its ERISA Affiliates (with respect to their relationship with such entities) (each, a "Company Pension Plan"), (iv) any actuarial reports prepared for the last -------------------- three plan years for each Pension Plan which covers or has covered present or former employees, directors or consultants of the Company or any of its Subsidiaries (with respect to their relationship with such entities), (v) a tabulation of age, salary, service and related data as of the last day of the last plan year for employees of the Company or any of its Subsidiaries and (vi) a description setting forth the amount of any liability of the Company or any of its Subsidiaries as of the Closing Date for payments more than thirty (30) calendar days past due with respect to each Welfare Plan which covers or has covered employees or former employees of the Company or any of its Subsidiaries. (b) Employee Plans. -------------- (i) Pension Plans. ------------- (A) The funding method used in connection with any Pension Plan which is subject to the minimum funding requirements of ERISA is acceptable and the actuarial assumptions used in connection with funding each such plan are reasonable. As of the last day of the last plan year of each Pension Plan and as of the Closing Date, the "amount of unfunded benefit liabilities" as defined in Section 4001(a)(18) of ERISA (but excluding from the definition of "current value" of "assets" of such Pension Plan, accrued but unpaid contributions) did not and will not exceed zero. No "accumulated funding deficiency" (for which an excise tax is due or would be due in the absence of a waiver) as defined in Section 412 of the Code or as defined in Section 302(a)(2) of ERISA, whichever may apply, has been incurred with respect to any Pension Plan with respect to any plan year, whether or not waived. Neither the Company nor any ERISA Affiliate has failed to pay when due any "required installment", within the meaning of Section 412(m) of the Code and Section 302(e) of ERISA, whichever may apply, with respect to any Pension Plan. Neither the Company nor any ERISA Affiliate is subject to any lien imposed under Section 412(n) of the Code or Section 302(f) of ERISA, whichever may apply, with respect to any Pension Plan. Neither the Company nor any ERISA Affiliate has any liability for unpaid contributions with respect to any Pension Plan. (B) Neither the Company nor any ERISA Affiliate is required to provide security to any Company Pension Plan under Section 401(a)(29) of the Code. (C) Any Company Pension Plan and each related trust agreement, annuity contract or other funding instrument is qualified and tax- exempt under the provisions of Code Sections 401(a) (or 403(a), as appropriate) and 501(a) and has been so qualified during the period from its adoption to date. (D) Any Company Pension Plan and each related trust agreement, annuity contract or other funding instrument presently complies and has been maintained in compliance, in all material respects, with its terms and, both as to form and in operation, with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such plans, including without limitation ERISA and the Code. 20 (E) The Company has paid all premiums (and interest charges and penalties for late payment, if applicable) due the PBGC with respect to each Company Pension Plan for each plan year thereof for which such premiums are required. Neither the Company nor any ERISA Affiliate has engaged in, or is a successor or parent corporation to an entity that has engaged in, a transaction described in Section 4069 of ERISA. There has been no "reportable event" (as defined in Section 4043(b) of ERISA and the PBGC regulations under such Section) with respect to any Pension Plan. No filing has been made by the Company or any ERISA Affiliate with the PBGC, and no proceeding has been commenced by the PBGC, to terminate any Pension Plan. No condition exists and no event has occurred that could constitute grounds for the termination of any Pension Plan by the PBGC. Neither the Company nor any ERISA Affiliate has, at any time, (1) ceased operations at a facility so as to become subject to the provisions of Section 4062(e) of ERISA, (2) withdrawn as a substantial employer so as to become subject to the provisions of Section 4063 of ERISA, or (3) ceased making contributions on or before the Closing Date to any Pension Plan subject to Section 4064(a) of ERISA to which the Company or any ERISA Affiliate made contributions during the six years prior to the Closing Date. (ii) Multiemployer Plans. ------------------- (A) Neither the Company nor any ERISA Affiliate has, at any time, withdrawn from a Multiemployer Plan in a "complete withdrawal" or a "partial withdrawal" as defined in Sections 4203 and 4205 of ERISA, respectively, so as to result in a liability, contingent or otherwise (including without limitation the obligations pursuant to an agreement entered into in accordance with Section 4204 of ERISA), of the Company or any ERISA Affiliate. Neither the Company nor any ERISA Affiliate has engaged in, or is a successor or parent corporation to an entity that has engaged in, a transaction described in Section 4212(c) of ERISA. (B) All contributions required to be made by the Company or any ERISA Affiliate to any Multiemployer Plan have been made when due. (C) If, as of the Closing Date, the Company (and all ERISA Affiliates) were to withdraw from any Multiemployer Plans to which it (or any of them) has contributed or been obligated to contribute, it (and they) would incur no liabilities to such plans under Title IV of ERISA. (D) To the best of the Company's knowledge, with respect to any Multiemployer Plan: (1) no such Multiemployer Plan has been terminated or has been in reorganization under ERISA so as to result, directly or indirectly, in any liability, contingent or otherwise, of the Company or any ERISA Affiliate under Title IV of ERISA; (2) no proceeding has been initiated by any person (including the PBGC) to terminate such Multiemployer Plan; (3) a "mass withdrawal", as defined in PBGC Reg. Section 2640.7, with respect to such Multiemployer Plan has not occurred; (4) the Company and the ERISA Affiliates have no reason to believe that such Multiemployer Plan will be terminated or will be reorganized under ERISA or that a "mass withdrawal", as defined in PBGC Reg. Section 2640.7, will occur 21 with respect to such Multiemployer Plan; and (5) the Company and the ERISA Affiliates do not expect to withdraw in a "complete withdrawal" or "partial withdrawal" from such Multiemployer Plan. (iii) Welfare Plans ------------- (A) Each Welfare Plan presently complies and has been maintained in compliance, in all material respects, with its terms and, both as to form and operation, with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Welfare Plan, including without limitation ERISA and the Code. (B) None of the Company, any ERISA Affiliate or any Welfare Plan has any present or future obligation to make any payment to, or with respect to any present or former employee of the Company or any ERISA Affiliate pursuant to, any retiree medical benefit plan, or other retiree Welfare Plan, and no condition exists which would prevent the Company from amending or terminating any such benefit plan or Welfare Plan. (C) Each Welfare Plan which is a "group health plan," as defined in Section 607(1) of ERISA, has been operated in material compliance with provisions of Part 6 of Title I, Subtitle B of ERISA and 4980B of the Code at all times. (D) Neither the Company nor any ERISA Affiliate has incurred any liability with respect to any Welfare Plan that is a "multiemployer plan", as defined in Section 3(37) of ERISA, under the terms of such Welfare Plan, any collective bargaining agreement or otherwise resulting from any cessation of contributions, cessation of obligation to make contributions or other form of withdrawal from such Welfare Plan. (E) If, as of the Closing Date, the Company (and all ERISA Affiliates) were to have a cessation of contribution, cessation of obligations to make contribution or other form of withdrawal from all Welfare Plans that are "multiemployer plans", as defined in Section 3(37) of ERISA, it (and they) would incur no material liabilities with respect to any such Welfare Plans under the terms of such Welfare Plans, any collective bargaining agreement or otherwise. (iv) Benefit Arrangements. Each Benefit Arrangement has -------------------- been maintained in all material respects in compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Benefit Arrangement, including without limitation, the Code. Except as set forth in Schedule 4.8 and except as provided ------------ by law, the employment of all persons presently employed or retained by the Company is terminable at will. (v) Unrelated Business Taxable Income. No Employee Plan --------------------------------- (or trust or other funding vehicle pursuant thereto) is subject to any tax under Code Section 511. (vi) Deductibility of Payments. There is no contract, ------------------------- agreement, plan or arrangement covering any present or former employee, director or consultant of the 22 Company or any of its Subsidiaries (with respect to his or her relationship with such entities) that, individually or collectively, provides for the payment by the Company of any amount (i) that is not deductible under Section 162(a)(1), 162(m) or 404 of the Code or (ii) that is an "excess parachute payment" pursuant to Section 280G of the Code. (vii) Fiduciary Duties and Prohibited Transactions. -------------------------------------------- Neither the Company nor any plan fiduciary of any Welfare Plan or Pension Plan, has engaged in any transaction in violation of Sections 404 or 406 of ERISA or any "prohibited transaction," as defined in Section 4975(c)(1) of the Code, for which no exemption exists under Section 408 of ERISA or Section 4975(c)(2) or (d) of the Code, or has otherwise violated the provisions of Part 4 of Title I, Subtitle B of ERISA. The Company has not knowingly participated in a violation of Part 4 of Title I, Subtitle B of ERISA by any plan fiduciary of any Welfare Plan or Pension Plan and has not been assessed any civil penalty under Section 502(l) of ERISA. (viii) Validity and Enforceability. Each Welfare Plan, --------------------------- Pension Plan, related trust agreement, annuity contract or other funding instrument is legally valid and binding and in full force and effect. (ix) Litigation. There is no action, order, writ, ---------- injunction, judgment or decree outstanding or claim, suit, litigation, proceeding, arbitral action, governmental audit or investigation relating to or seeking benefits under any Employee Plan that is pending, threatened or anticipated against the Company, any ERISA Affiliate or any Employee Plan. (x) No Amendments. Neither the Company nor any ERISA ------------- Affiliate has any announced plan or legally binding commitment to create any additional Employee Plans which are intended to cover present or former employees, directors or consultants of the Company or any of its Subsidiaries (with respect to their relationship with such entities) or to amend or modify any existing Company Employee Plan. (xi) No Other Material Liability. No event has occurred --------------------------- in connection with which the Company or any ERISA Affiliate or any Employee Plan, directly or indirectly, could be subject to any material liability (A) under any statute, regulation or governmental order relating to any Employee Plan or (B) pursuant to any obligation of the Company to indemnify any person against liability incurred under any such statute, regulation or order as they relate to the Employee Plans. (xii) Unpaid Contributions. Neither the Company nor any -------------------- ERISA Affiliate has any liability for unpaid contributions under Section 515 of ERISA with respect to any Pension Plan, Multiemployer Plan or Welfare Plan. (xiii) Insurance Contracts. Neither the Company nor any ------------------- Employee Plan (other than a Multiemployer Plan) holds as an asset of any Employee Plan any interest in any annuity contract, guaranteed investment contract or any other investment or insurance contract issued by an insurance company that is the subject of bankruptcy, conservatorship or rehabilitation proceedings. 23 (xiv) No Acceleration or Creation of Rights. Except as ------------------------------------- disclosed on Schedule 4.8, neither the execution and delivery of this Agreement ------------ by the Company nor the consummation of the transactions contemplated hereby (including the conversion/exercise of all of the Securities acquired or to be acquired by the Purchaser hereunder) will result in the acceleration or creation of any rights of any person to benefits under any Employee Plan (including, without limitation, the acceleration of the vesting or exercisability of any stock options, the acceleration of the vesting of any restricted stock, the acceleration of the accrual or vesting of any benefits under any Pension Plan or the acceleration or creation of any rights under any severance, parachute or change in control agreement). (xv) No Severance Payments. There are no agreements, --------------------- including, without limitation, any employment or consulting agreements to which the Company or any of its Subsidiaries is a party that will require the Company or any of its Subsidiaries to make a severance payment or incur or assume any other liability as a result of the transactions contemplated by this Agreement and the Ancillary Agreements, including, without limitation, any obligation to make any payments upon the occurrence of a change of control. Section 4.9. SEC Filings. The Company has filed with the Commission ----------- all forms, reports, schedules, statements, and other documents required to be filed by it under the Securities Act, the Exchange Act, and all other Federal securities laws and the rules and regulations promulgated thereunder, during the period from June 1996 to the date of this Agreement (the "SEC Filings"). A final ----------- draft of the Company's 10Q for the quarter ended June 30, 1997 is annexed to Schedule 4.9 (the "June 10Q"). Each SEC Filing and the June 10Q was prepared in - ------------ -------- accordance with, and at the time of filing complied (or will comply) in all material respects with, the requirements of the Securities Act, the Exchange Act or other applicable Federal securities law and the rules and regulations promulgated thereunder, as the case may be, except as the same was corrected or superseded in a subsequent SEC Filing filed with the Commission. Neither the SEC Filings nor the June 10Q, including, without limitation, any financial statements or schedules included therein, at the time filed, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading, except as the same was corrected or superseded in a subsequent SEC Filing filed with the Commission. The consolidated historical financial statements (including, in each case, any related notes thereto) contained in the SEC Filings and the June 10Q have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis (except as ---- described therein) and each presents fairly the consolidated financial position of the Company and its consolidated Subsidiaries at the respective dates thereof and the consolidated results of its operations and changes in cash flows for the period indicated (subject to normal year-end audit adjustments in the case of any unaudited interim financial statements). Section 4.10. Absence of Undisclosed Liabilities; Guarantees. ---------------------------------------------- (a) Except as set forth on Schedule 4.10, neither the Company nor any ------------- of its Subsidiaries has any Liabilities which are reasonably expected to have, individually or in the 24 aggregate, a Material Adverse Effect on the Company (including any liabilities, tax or otherwise, related to the "roll-up" of the homebuilding operations into the Company). (b) Except as set forth on Schedule 4.10, neither the Company nor any ------------- of its Subsidiaries is a party to: (i) any Material Agreement relating to the making of any advance to, or investment in, any Person other than advances or investments made by the Company to or in its Subsidiaries; or (ii) any Material Agreement, other than from the Company with respect to its Subsidiaries providing for a guaranty or other contingent liability with respect to any indebtedness for money borrowed or similar obligation of any Person. Section 4.11 Absence of Certain Changes. Except as set forth on -------------------------- Schedule 4.11 or disclosed in any SEC Filings or the June 10-Q, since December - ------------- 31, 1996: (i) there has not been any event or occurrences, or series of events or occurrences, which have had, or may have, a Material Adverse Effect on the Company, (ii) neither the Company nor any of its Subsidiaries has incurred any liability or engaged in any transaction that is material to the Company and its Subsidiaries taken as a whole, or entered into any Material Agreement, except in the ordinary course of business consistent with past practice, or as contemplated by this Agreement, (iii) neither the Company nor any of its Subsidiaries is in default under (and no event has occurred which with the lapse of time or action by a third party could result in a default under) any Material Agreement, (iv) there has not been any declaration, setting aside or payment of any dividend or other distribution with respect to the Preferred Stock or the Existing Preferred Stock, (v) there has not been any commitment, contractual obligation, borrowing, capital expenditure or transaction (each, a "Commitment") ---------- entered into by the Company or any of its Subsidiaries, other than Commitments which would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect on the Company, or (vi) there has not been any change in the Company's accounting principles, practices or methods which would, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect on the Company. Section 4.12. Compliance With Laws. Except as set forth on Schedule -------------------- -------- 4.12, (i) the Company and its Subsidiaries are in compliance with all - ---- Applicable Laws other than violations which do not and will not, individually or in the aggregate, have a Material Adverse Effect on the Company; (ii) each of the Company and its Subsidiaries has obtained and holds all material permits, licenses, variances, exemptions, orders, franchises, approvals and authorizations of all Governmental Entities necessary for the lawful conduct of its business as currently conducted or the lawful ownership, use and operation of its assets; (iii) neither the Company nor any of its Subsidiaries has received any written notice of violation of any Applicable Law, which has not been dismissed or otherwise disposed of, that the Company or such Subsidiary has not so complied other than with respect to violations of Applicable Law which do not and will not, individually or in the aggregate, have a Material Adverse Effect on the Company; and (iv) neither the Company nor any of its Subsidiaries is charged or, to the best knowledge of the Company, threatened with, or, to the best knowledge of the Company, under investigation with respect to, any violation of any Applicable Law, including Environmental Laws, relating to any aspect of the business of the Company or any of its Subsidiaries other than violations which do not and will not, individually or in the aggregate, have a Material Adverse Effect on the Company. 25 Section 4.13. Litigation. Schedule 4.13 sets forth all Proceedings ---------- ------------- pending or, to the best knowledge of the Company, threatened against or involving the Company or any of its Subsidiaries (or any of their respective directors or officers in connection with the business or affairs of the Company or such Subsidiary) or any properties or rights of the Company or any of its Subsidiaries as of the date hereof. Except as set forth on Schedule 4.13, any ------------- and all liabilities of the Company and its Subsidiaries under such Proceedings that are probable and subject to reasonable estimation within the meaning of GAAP are adequately covered (except for standard deductible amounts) by the existing insurance maintained by the Company or estimates in accordance with GAAP for the uninsured costs thereof are reflected in the financial statements of the Company. Except as set forth on Schedule 4.13, the Company has no ------------- knowledge of any facts that are likely to give rise to any additional Proceedings that would reasonably be expected to have a Material Adverse Effect on the Company. As of the date hereof, there are no Proceedings (including with respect to Environmental Laws) pending or, to the best knowledge of the Company, threatened seeking to restrain, prohibit, or obtain damages or other relief in connection with this Agreement, the Ancillary Agreements to which the Company is a party or the transactions contemplated hereby or thereby. Section 4.14. True and Complete Disclosure. The representations and ---------------------------- warranties of the Company set forth with this Agreement, the information included in the Schedules, and in any certificates delivered pursuant to Section 7.3 of this Agreement, when taken together, are true and accurate in all material respects on the date as of which such information is dated and not incomplete by omitting to state any material fact necessary to make the statements of fact contained therein, in the light of the circumstances under which they were made, not misleading at such date. All financial projections prepared and furnished by the Company to the Purchaser were prepared in good faith on the basis of assumptions believed to be reasonable at the time such projections were prepared. Section 4.15. Taxes. ----- (a) Except as set forth on Schedule 4.15: ------------- (i) The Company and all of its Subsidiaries have filed all Tax Returns required to be filed by them on or before the Closing Date (taking into account all extensions for filing such Tax Returns) and all such Tax Returns are correct and complete in all material respects. Each affiliated group with which any of the Company and its Subsidiaries files a consolidated or combined Tax Return has filed all such Tax Returns that it was required to file for each taxable period during which any of the Company and its Subsidiaries was a member of the group. All such consolidated and combined Tax Returns were correct and complete in all materials respects; (ii) All Taxes due and payable by the Company and/or its Subsidiaries (whether or not shown on any Tax Return) have been timely paid in full. All income Taxes owed by any affiliated group with which any of the Company and its Subsidiaries files a consolidated or combined Tax Return (whether or not shown on any Tax Return) have been paid 26 for each taxable period during which any of the Company and its Subsidiaries was a member of the group; (iii) There are no liens or encumbrances related to Taxes on any of the assets of the Company or its Subsidiaries (other than for current Taxes not yet due and payable); (iv) The Company and its Subsidiaries have withheld all Taxes required to have been withheld and paid by them or on their behalf in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party, and such withheld Taxes have either been duly paid to the proper governmental authority or set aside in accounts for such purpose; (v) None of the Company or any of its Subsidiaries (A) has been a member of any affiliated group filing a consolidated federal income Tax Return (other than (i) a group the common parent of which is the Company or (ii) a former group of members of which are owned by the Company) and (B) has any liability for the Taxes of any person as defined in Section 7701(a)(1) of the Code (other than the Company and its Subsidiaries) under Treas. Reg. (S) 1.1502-6 (or any similar provision of state, local, or foreign tax), as a transferee or successor, by contract, or otherwise; (vi) The charges, accruals and reserves for Taxes (including deferred Taxes) currently reflected on the Financial Statements in accordance with GAAP are adequate in the reasonable estimation of the Company to cover all unpaid Taxes accruing or payable by the Company and its Subsidiaries in respect of taxable periods that end on or before the Closing Date and for any taxable periods that begin before the Closing Date and end thereafter to the extent such Taxes are attributable to the portion of such period ending on the Closing Date (determined under the closing of the books method of allocation); (vii) The Company and its Subsidiaries have no Tax deficiency or claim assessed or, to the best of the Company's knowledge, proposed or threatened (whether orally or in writing) against any of them, except to the extent that adequate liabilities or reserves with respect thereto are accrued on the Financial Statements in accordance with GAAP or (i) such deficiency or claim is being contested in good faith by appropriate proceedings, (ii) no such accrual is required by GAAP and (iii) the nature and amount of the disputed Tax is set forth on Schedule 4.15. ------------- (viii) None of the Company or any of its Subsidiaries has made any payments, nor is any of them obligated to make any payments, and is not a party to any agreements that could obligate it to make any payments, that will not be deductible under Code Section 280G. (ix) None of the assets of the Company (a) is property that is required to be treated as being owned by any other person pursuant to the so-called safe harbor lease provisions of former Section 168(f)(8) of the Code, or (b) directly or indirectly secures any 27 debt the interest on which is tax-exempt under Section 103(a) of the Code, or (c) is "tax-exempt use property" within the meaning of Section 168(h) of the Code. (x) Except as set forth on Schedule 4.7, none of the ------------ Company or any of its Subsidiaries is subject to any joint venture, partnership or other arrangement or contract which is treated as a partnership for federal income tax purposes. (b) Schedule 4.15 lists (a) elections or material consents with ------------- respect to Taxes affecting the Company or any of its Subsidiaries as of the date hereof, and (b) all federal, state, local, and foreign Tax Returns that have been audited, and indicates those Tax Returns that currently are the subject of audit. Correct and complete copies of all federal Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by the Company or any of its Subsidiaries since January 1, 1994 have been delivered to Purchaser. Section 4.16. Properties. ---------- (a) Permits. The Company possesses all material Permits and waivers ------- necessary for the lawful conduct of its Business as currently conducted, the absence of which would materially adversely affect the Real Property or the Business of the Company. Each of the material Permits is listed on Schedule -------- 4.16(a) hereto. All material Permits are in full force and effect, no material - ------- violations have occurred with respect thereto, and to the Company's knowledge no basis exists for any limitation, revocation, or withdrawal thereof or any denial of any extension or renewal with respect thereto. (b) Real Property. (a) Schedule 4.16(b) hereto sets forth each ------------- ---------------- parcel of real property that the Company owns as of the date hereof (collectively, the "Real Property"). The Real Property has all necessary access ------------- to and from public highways, streets, and roads and no pending or to the best knowledge of the Company, threatened proceeding or other fact or condition exists that could limit or result in the termination of such access. The Real Property is connected to and serviced by electric, gas, sewage, telephone, and water facilities in all areas where such connections and services are available, which facilities are in compliance, in all material respects, with all Applicable Laws and installation and connection charges with respect thereto have been paid in full. (c) Under the heading "Real Property Leases", Schedule 4.16(c) hereto ---------------- describes each agreement, arrangement, contract, commitment, or lease (the "Real ---- Property Leases") pursuant to which the Company is the lessor or the lessee with - --------------- respect to any real property (the "Leased Real Property") as of the date hereof. -------------------- As to each Real Property Lease (a) the Company has neither delivered nor received notice that any material breach or material event of default exists, and (b) no condition or event of default by the Company or any other Person. (d) Land Contracts. Under the heading "Land Contracts", -------------- Schedule 4.16(d) hereto lists all written and oral agreements, arrangements, - ---------------- contracts, and commitments to which the Company is a party or entered into on behalf thereof pursuant to which the Company has any 28 material obligation or right to purchase any developed or undeveloped real property (the "Land Contract Property") as of the date hereof. Each such parcel ---------------------- of developed real property included in the Land Contract Property satisfies all ---------------------- of the representations and warranties set forth herein concerning the Real Property. (e) Good and Marketable Title. The Company has good and marketable ------------------------- title in fee simple to its Real Property, subject to the Permitted Encumbrances and upon acquisition of the Land Contract Property, the Land Contract Property will likewise be owned in fee and the Company shall have good and marketable title thereto subject only to Permitted Encumbrances and the Encumbrances listed on Schedule 4.16(e). ------------- (f) No Breach or Default. Except as set forth in Schedule 4.16(f) -------------------- ---------------- hereto, with respect to any agreements, arrangements, contracts, covenants, conditions, deeds, deeds of trust, rights-of-way, easements, mortgages, restrictions, surveys, title insurance policies, and other documents granting to the Company title to or an interest in or otherwise affecting its Real Property, no material breach or event of default has occurred nor has any event occurred that with the giving of notice, the lapse of time, or both would constitute a material breach or event of default, by the Company or, to the best knowledge of the Company, any other Person. (g) No Condemnation. No condemnation, eminent domain, or similar --------------- proceeding exists, is pending or, to the best knowledge of the Company is threatened with respect to, or that could affect, in any material respect any Real Property or Leased Real Property. (h) Compliance with Laws. The buildings and improvements on the Real -------------------- Property and the Leased Real Property and the subdivision and improvements of the Real Property do not violate, in any material respect (i) any Applicable Law, including any building, set-back, or zoning law, ordinance, regulation, or statute, or other governmental restriction in the nature thereof, or (ii) any restrictive covenant affecting any such property. (i) Parties in Possession. There are no parties in possession --------------------- (other than in the ordinary course of the Company's business) of any material portion of the Real Property as lessees, tenants at sufferance, or trespassers. (j) Unpaid Obligations. Except as set forth on Schedule 4.16(j), ------------------ ---------------- there are not material unpaid charges, debts, liabilities, claims or obligations arising from the construction, occupancy, ownership, use, or operation of the Real Property. No such Real Property is subject to any condition or obligation to any material Governmental Entity or other person requiring the owner or any transferee thereof to donate land, money or other property or to make off-site public improvements. (k) Assessments. Except as set forth on Schedule 4.16(k), no ----------- ---------------- developer- related material charges or assessments for public improvements or otherwise made against the Real Property or any lots included therein are unpaid, including without limitation those for construction of sewer lines, water lines, storm drainage systems, electric lines, natural gas lines, streets (including perimeter streets), roads and curbs. 29 (l) Subdivision Standards. The Real Property and all lots included --------------------- therein conform in all material respects to the appropriate governmental authority's subdivision standards. (m) Moratoria. There is no moratorium applicable to any of the Real --------- Property on (i) the issuance of building permits for the construction of houses, or certificates of occupancy therefor or (ii) the purchase of sewer or water taps. (n) Construction Conditions. The lots included in the Real Property ----------------------- are stable and otherwise suitable in all material respects for the construction of a residential structure by customary means and without extraordinary site preparation measures. (o) Environmental Matters. The Real Property does not contain --------------------- wetlands or a level of radon above action levels of the U.S. Environmental Protection Agency and is not located within a "critical", "preservation", "conservation", or similar type of area except where such conditions are not reasonably expected to have a Material Adverse Effect on the Company. No material portion of the Real Property is situated within a "noise cone" such that the Federal Housing Administration will not approve mortgages due to the noise level classification of such Real Property. (p) Claims. No material Proceeding is pending or, to the best ------ knowledge of the Company, threatened which involves any of the Real Property or against the Company with respect to any of the Real Property; all of the Real Property and the lots included therein are in compliance, in all material respects, with all applicable zoning and subdivision ordinances; none of the development-site preparation and construction work performed on the Real Property has concentrated or diverted surface water or percolating water improperly onto or from the Real Property in any material respect. (q) Third Party Rights. The Company has not granted to any Person ------------------ any contract or other right to the use of any portion of the Real Property or to the furnishing or use of any facility or amenity on or relating to the Real Property other than rights granted to individual homebuyers to purchase lots in the ordinary course of business. (r) Zoning. All of the Real Property is zoned to permit ------ single-family home construction and occupancy thereon, except as set forth on Schedule 4.16(s). - ---------------- (s) No Foreign Sellers. The Company is not a "foreign person" ------------------ within the meaning of Sections 1445 and 7701 of the Code. Section 4.17. Environmental Matters. --------------------- (a) For purposes of this Section, the term "Company" shall include ------- (i) the Company, (ii) any Subsidiaries of the Company, (iii) all partnerships, joint ventures and other entities or organizations in which Company was at any time or is a partner, joint venturer, member or participant, and (iv) all predecessor or former corporations, partnerships, joint ventures, organizations, businesses or other entities, whether in existence as of the date hereof or at any 30 time prior to the date hereof, the assets or obligations of which have been acquired or assumed by Company or the Business or to which Company or the Business has succeeded. (b) Except as disclosed in Schedule 4.17, the Company and its ------------- Subsidiaries: (i) are, and within the period of all applicable statutes of limitation have been, in compliance with all applicable Environmental Laws; (ii) hold all Environmental Permits (each of which is in full force and effect) required for any of their current operations or for any property owned, leased or otherwise operated by any of them; (iii) are, and within the period of all applicable statutes of limitation have been, in compliance with all of their Environmental Permits; and (iv) reasonably believe that each of their Environmental Permits will be renewed before the expiration of such Environmental Permit currently in effect, except where the failure to so comply with such Environmental Laws, hold or comply with such Environmental Permits or timely renew such Environmental Permits is not reasonably expected to have a Material Adverse Effect on the Company. With respect to the Company's reasonably foreseeable future operations, it does not anticipate any issues arising under Environmental Laws that would prevent the Company from receiving Permits that are necessary to allow it to conduct its Business. (c) Except as set forth on Schedule 4.17, the Company and its ------------- Subsidiaries have not received any notice of alleged, actual or potential responsibility for, or any inquiry or investigation regarding, any Environmental Condition except where such Environmental Condition is not reasonably expected to have a Material Adverse Effect on the Company. The Company has not received any notice of any other claim, demand or action by any individual or entity alleging any actual or threatened injury or damage to any person, property, natural resource or the environment arising from or relating to any Release or threatened Release of any Hazardous Materials at, on, under, in or from any Facility or any former Facilities, or in connection with any operations or activities of the Company or any of its Subsidiaries except with respect to any claim, demand or action which is not reasonably expected to have a Material Adverse Effect on the Company. (d) Except as disclosed in Schedule 4.17 or with respect to such ------------- matters as have been fully and finally resolved and as to which there are no remaining obligations known or reasonably anticipated, neither the Company nor any of its Subsidiaries has entered into or agreed to any consent decree, order, or settlement or other agreement, nor is subject to any judgment, decree, or order or other agreement, in any judicial, administrative, arbitral, or other forum, relating to compliance with or liability under any Environmental Law, except where such obligations, consent decrees, orders, settlement or other agreements is not reasonably expected to have a Material Adverse Effect on the Company. (e) Except as disclosed in Schedule 4.17 or for actions of third ------------- parties occurring after the Company's or any of its Subsidiaries disposition of any real property formerly owned or leased by the Company or any of its Subsidiaries, Hazardous Materials have not been disposed of, emitted, discharged, transported or otherwise Released or threatened to be Released, to or at any real property presently or formerly owned or leased by the Company or any of its Subsidiaries, or, to the knowledge of the Company, any other location, which Hazardous Materials are reasonably expected to (i) give rise to liability of the Company or any of its 31 Subsidiaries under any applicable Environmental Law, except where such liability is not reasonably expected to have a Material Adverse Effect on the Company, or (ii) interfere with the Company's or any of its Subsidiaries' continued operations, except where such interference is not reasonably expected to have a Material Adverse Effect on the Company or (iii) impair the fair saleable value of any real property owned or leased by the Company or any of its Subsidiaries, except for such impairment as is not reasonably expected to have a Material Adverse Effect on the Company. (f) Except as disclosed in Schedule 4.17, neither the Company nor any ------------- of its Subsidiaries has assumed or retained, whether by contract or by operation of law in connection with the sale or transfer of any assets or business, liabilities under any applicable Environmental Law arising from or associated with or otherwise in connection with such assets or business of any kind, fixed or contingent, known or not known, except where such liabilities are not reasonably expected to have a Material Adverse Effect on the Company. (g) True, complete and correct copies of the written reports, and all parts thereof, of all environmental audits or assessments which have been conducted in respect of any Facility or any former Facility within the past five years, either by the Company or any attorney, environmental consultant or engineer engaged for such purpose, have been delivered to the Purchaser and a list of all such reports, audits and assessments and any other similar report, audit or assessment of which the Company has knowledge is included on Schedule -------- 4.17. - ---- Section 4.18. Insurance. Schedule 4.18 sets forth a list of the --------- ------------- insurance policies held by, or for the benefit of, the Company and its Subsidiaries. Each of the Company and its Subsidiaries carry, and will continue to carry, insurance with reputable insurers with respect to such of their respective properties and business, in such amounts and against such risks as is customarily maintained by other entities of similar size engaged in similar businesses. None of such insurance was obtained through the use of materially false or misleading information or the failure to provide the insurer with all material information requested in order to evaluate the liabilities and risks insured. Neither the Company nor any of its Subsidiaries has received any notice of cancellation or non-renewal of any current insurance policies or binders. Section 4.19. Condition of Tangible Assets. The Facilities of the ---------------------------- Company and its Subsidiaries and the Fixtures and Equipment are in good operating condition and repair (except for ordinary wear and tear) are reasonably sufficient for the operation of the business of the Company and its Subsidiaries as presently conducted and are in conformity, in all material respects, with all Applicable Laws, ordinances, orders, regulations and other requirements (including applicable zoning, environmental, motor vehicle safety or standards, occupational safety and health laws and regulations) relating thereto currently in effect, except where the failure to conform would not have a Material Adverse Effect on the Company. Section 4.20. Contracts and Commitments. Except for documents set ------------------------- forth on Schedule 4.20 or listed as exhibits to the Company's Annual Report on ------------- For 10-K for the fiscal year ended December 31, 1996, neither the Company nor any of its Subsidiaries is a party to any Material Agreement except for contracts between the Company or any of its Subsidiaries and 32 individual home buyers for purchases of homes or lots in the ordinary course of business. Except as set forth on Schedule 4.20, neither the Company nor any of ------------- its Subsidiaries is (and, to the knowledge of the Company, no other party is) in material breach or violation of, or default under any Material Agreement to which it is a party, the breach or violation of which will or may have a Material Adverse Effect on the Company. Section 4.21 Books and Records. The Company has made and kept ----------------- (and given the Purchaser access to) books and records and accounts, which, in reasonable detail, accurately and fairly reflect the activities of the Company and each of its Subsidiaries. The minute books of the Company and each of its Subsidiaries previously provided to the Purchaser accurately and adequately reflect all action previously taken by the stockholders, the board of directors and committees of the board of directors of the Company and each of its Subsidiaries. Section 4.22 Labor Matters. Since January 1, 1994, neither the ------------- Company nor any of its Subsidiaries has experienced any attempt by organized labor or its representatives to make the Company or such Subsidiary conform to demands of organized labor relating to its employees or to enter into a binding agreement with organized labor that would cover the employees of the Company or any of its Subsidiaries. The Company and its Subsidiaries are in compliance with all Applicable Laws respecting employment practices, terms and conditions of employment and wages and hours except where noncompliance would not have a Material Adverse Effect on the Company and, to the Company's knowledge, are not engaged in any unfair labor practice. There is no unfair labor practice charge or complaint against the Company or any of its Subsidiaries pending before the National Labor Relations Board or any other governmental agency arising out of the activities of the Company or any of its Subsidiaries, and the Company has no knowledge of any facts or information which would give rise thereto. There is no labor strike or labor disturbance pending or, to the Company's knowledge, threatened against the Company or any of its Subsidiaries. There is no grievance currently being asserted and neither the Company nor any of its Subsidiaries has experienced since January 1, 1994, a work stoppage or other labor difficulty which grievance, work stoppage or other labor difficulty is reasonably likely to have a Material Adverse Effect on the Company. Section 4.23 Payments. Neither the Company nor any of its -------- Subsidiaries has directly indirectly, paid or delivered any fee, commission or other sum of money or item of property, however characterized, to any finder, agent, government official or other party, in the United States or any other country, which is in any manner related to the business or operations of the Company or its Subsidiaries and which the Company knows or has reason to believe to have been illegal under any federal, state or local laws of the United States (including, without limitation the U.S. Foreign Corrupt Practices Act) or any other country having jurisdiction; and neither the Company nor any of its Subsidiaries has participated, directly or indirectly, in any boycotts or other similar practices affecting any of its actual or potential customers. Section 4.24 Information. The information contained in the Proxy ----------- Material (other than information with respect to the Purchaser, or any of their Affiliates which shall have been supplied in writing by them or any of their authorized representatives for use in or in preparing the Proxy Material) will not, at the date of mailing to the Company's stockholders or at 33 the date of the Stockholders Meeting, contain any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact required to be stated therein or necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Stockholders Meeting. The Proxy Material will comply as to form in all material respects with the Exchange Act and the rules and regulations of the SEC thereunder. Section 4.25 Board Recommendations. By a vote of the directors --------------------- present at a meeting of the board of directors of the Company (which meeting was duly called and held and at which a quorum was present at all times), the board of directors has (i) approved and adopted (A) this Agreement, including the issuance of the Securities, (B) the Company's entering into the Ancillary Agreements to which it is or will be a party, and (C) the Certificate Amendments, and (ii) resolved to recommend to the Company's stockholders approval of the transactions contemplated hereunder and under the Ancillary Agreements to which it is or will be a party, including issuance of the Securities to the Purchaser pursuant to this Agreement. Section 4.26 Intellectual Property. --------------------- (a) The Company and its Subsidiaries either own or have valid licenses or other rights to use all patents, copyrights, trademarks, software, databases, data, other technical information used in their businesses as presently conducted ("Proprietary Rights"), subject to the limitations contained in the agreements governing the use of the same, with such exceptions as would not result in a Material Adverse Effect on the Company. There are no limitations contained in the agreements of the type described in the immediately preceding sentence which, upon consummation of the transactions contemplated hereunder, will alter or impair any such rights, breach any such agreement with any third party vendor, or require payments of additional sums thereunder, except any such limitations that would not have a Material Adverse Effect on the Company. The Company and its Subsidiaries are in compliance with such licenses and agreements and, except as set forth on Schedule 4.26, there are no pending or, to the best ------------- knowledge of the Company or any of its Subsidiaries, threatened Proceedings challenging or questioning the validity or effectiveness of any license or agreement relating to such property or the right of the Company or any of its Subsidiaries to use, copy, modify or distribute the same. (b) No person has a right, other than those set forth on Schedule 4.26 ------------- to receive a royalty or similar payment in respect of any material Proprietary Rights whether or not pursuant to any contractual arrangements entered into by the Company or its Subsidiaries. Section 4.27 Securities Offerings. -------------------- (a) Except as set forth on Schedule 4.27, since the date of its ------------- initial public offering, the Company has not sold any securities other than securities registered pursuant to the Securities Act. The sale of the Securities to the Purchaser hereunder and the issuance of the Conversion Shares complies with all federal and state securities laws. 34 (b) Neither the Company nor any affiliate (as defined in Rule 501(b) of Regulation D under the Securities Act ("Regulation D")) of the Company has, ------------ directly or through any agent (provided that no representation is made as to the Purchaser or any person acting on their behalf), (i) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of any security (as defined in the Securities Act) that is or will be integrated with the offering and sale of the Securities in a manner that would require the registration of the Securities under the Securities Act or (ii) engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offering of the Securities. (c) Except as set forth on Schedule 4.27, neither the Company nor any ------------- of its Subsidiaries is a party to or bound by any contract or other agreement, or otherwise obligated, to register any of the securities of the Company or any of its Subsidiaries under the Act. Section 4.28 No Agreements to Sell the Assets or the Company. ----------------------------------------------- Except as contemplated by this Agreement and the Galloway Letter of Intent, none of the Company or any of its Subsidiaries have any legal obligation, absolute or contingent, to any person or firm to sell the capital stock, material assets or business of the Company or any of its Subsidiaries or to effect any merger, consolidation, liquidation, dissolution, recapitalization or other reorganization of the Company or any of its Subsidiaries or to enter into any agreement with respect thereto. Section 4.29 No Brokers. The Company has not employed, and is not ---------- subject to the valid claim of, any broker, finder, consultant or other intermediary in connection with the transactions contemplated hereby who might be entitled to a fee or commission from the Company in connection with such transactions. Section 4.30 Transactions with Certain Persons. Except as disclosed --------------------------------- in SEC Filings or as would not be required to be so disclosed, no officer, director or employee of the Company or any of its Subsidiaries nor any member of any such person's immediately family is or has been, since the Company's formation, a party to any transaction with the Company or any of its Subsidiaries, including without limitation, any contract, agreement or other arrangement (a) providing for the furnishing of services by, (b) providing for the rental of real or personal property from, or (c) otherwise requiring payments to (other than for services as officers, directors or employees of the Company or its Subsidiaries) any such person or corporation, partnership, trust or other entity in which any such person has an interest as a shareholder, officer, director, trustee or partner. ARTICLE V REPRESENTATIONS AND WARRANTIES OF PURCHASER ------------------------------------------- The Purchaser hereby represents and warrants to the Company as follows: Section 5.1 Organization of the Purchaser. The Purchaser is a ----------------------------- limited liability company duly formed and validly existing and in good standing as a limited liability company 35 under the laws of its jurisdiction of formation and has full limited liability company power and authority to carry on its business as currently being conducted. Section 5.2 Authorization. The Purchaser has full limited liability ------------- company power and authority to execute and deliver this Agreement and the Ancillary Agreements and to consummate the transactions contemplated hereby and thereby. The execution and delivery by the Purchaser of this Agreement and the Ancillary Agreements, and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by all necessary limited liability company action of the Purchaser. This Agreement has been duly executed and delivered by the Purchaser and constitutes, and each Ancillary Agreement executed or to be executed by the Purchaser has been, or when executed will be, duly executed and delivered by the Purchaser and constitutes, or when executed and delivered will constitute, a valid and legally binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms. Section 5.3 Noncontravention. The execution and delivery by the ---------------- Purchaser of this Agreement and the Ancillary Agreements and the consummation by it of the transactions contemplated hereby and thereby do not and will not (i) conflict with or result in a violation of any provision of the limited liability company agreement or other governing agreement of the Purchaser, (ii) conflict with or result in a violation of any provision of, or constitute (with or without the giving of notice or the passage of time or both) a default under, or give rise (with or without the giving of notice or the passage of time or both) to any right of termination, cancellation, or acceleration under, any bond, debenture, note, mortgage, indenture, lease, agreement, or other instrument or obligation to which the Purchaser is a party or by which the Purchaser or any of its properties may be bound, (iii) result in the creation or imposition of any Encumbrance upon the properties of the Purchaser, or (iv) violate any Applicable Law binding upon the Purchaser, except, in the case of clauses (ii), (iii), and (iv) above, for any such conflicts, violations, defaults, termination, cancellations, accelerations, or Encumbrances which would not, individually or in the aggregate, materially and adversely affect the ability of the Purchaser to consummate the transactions contemplated hereby. Section 5.4 Consents and Appeals. No consent, approval, order or -------------------- authorization of, or declaration, or registration with, any Government Entity is required to be obtained or made by the Purchaser in connection with the execution and delivery by the Purchaser of this Agreement and the Ancillary Agreements or the consummation of the transaction contemplated hereby and thereby other than (i) filings under the HSR Act and expiration or termination of any applicable waiting period required thereunder and (ii) any filings required under Section 13 and Section 16 of the Exchange Act and Rule 13d-1 under the Exchange Act and (iii) such consents, approvals, orders or authorization which, if not made, would not, individually or in the aggregate, materially and adversely affect the ability of the Purchaser to consummate the transactions contemplated hereby. Section 5.5 Purchase for Investment. ----------------------- (a) The Purchaser is acquiring the Securities solely by and for its own account, for investment purposes only and not for the purpose of resale or distribution; and the Purchaser 36 has no contract, undertaking, agreement or arrangement with any person or entity to sell, transfer or pledge to such person or anyone else any Securities; and the Purchaser has no present plans or intentions to enter into any such contract, undertaking or arrangement. (b) The Purchaser acknowledges and understands that: (i) the Securities, the Conversion Shares and the Warrant Shares cannot be sold or transferred without compliance with the registration provisions of the Securities Act or compliance with exemptions, if any, available thereunder; (ii) the certificates representing the respective Securities will include a legend thereon that refers to the foregoing; and (iii) the Company has no obligation or intention to register the Securities, Conversion Shares or the Warrant Shares under any federal or state securities act or law; except to the extent, in each case, that the terms of the Registration Rights Agreement shall otherwise provide. (c) The Purchaser (i) is an "accredited investor" as defined in Rule 501 of Regulation D; (ii) has such knowledge and experience in financial and business matters in general that it has the capacity to evaluate the merits and risks of an investment in the Securities and to protect its own interest in connection with an investment in the Securities; (iii) has such a financial condition that it has no need for liquidity with respect to its investment in the Securities to satisfy any existing or contemplated undertaking, obligation or indebtedness; and (iv) is able to bear the economic risk of its investment in the Securities for an indefinite period of time. Section 5.6 Disclosure Documents. None of the information with -------------------- respect to the Purchaser or any of its Affiliates which shall have been supplied in writing by the Purchaser for inclusion in the Proxy Material will at the date of mailing of the Proxy Material to the Company's stockholders contain any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact required to be stated therein or necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Stockholders Meeting. Section 5.7 No Brokers. The Purchaser has not employed, and is not ---------- subject to the valid claim of, any broker, finder, consultant or other intermediary in connection with the transactions contemplated by this Agreement who might be entitled to a fee or commission in connection with such transactions. ARTICLE VI. ACTIONS BY THE COMPANY AND -------------------------- THE PURCHASER PRIOR TO THE CLOSING ---------------------------------- The Company and the Purchaser covenants as follows for the period from the date hereof through the Second Closing: Section 6.1 Meeting of Stockholders; Proxy Statement; Certificate ----------------------------------------------------- Amendments. - ---------- 37 (a) The Company shall take all action necessary in accordance with Applicable Law and the Certificate of Incorporation and Bylaws to duly call, give notice of, convene and hold a meeting of its stockholders, which meeting may be the Company's annual meeting of stockholders (the "Stockholders ------------ Meeting"), as promptly as practicable after the date hereof to consider and vote - ------- upon the adoption and approval of the transaction as contemplated hereunder, including, without limitation, the Certificate Amendments. The stockholder vote required for the adoption and approval of the transactions contemplated hereunder shall be the vote or votes required by Applicable Law, the Certificate of Incorporation, the Existing Preferred Stock Certificates of Designation and the rules of The Nasdaq Stock Market, Inc. Except as provided in Section 6.1(b) below, the board of directors of the Company shall (i) recommend to the Company's stockholders that they vote in favor of the adoption and approval of all matters necessary to effectuate the transactions contemplated hereunder, (ii) use its reasonable best efforts to solicit from the Company's stockholders proxies in favor of such adoption and approval, and (iii) take all other action reasonably necessary to secure a vote of the Company's stockholders in favor of such adoption and approval. The Company has delivered the Shareholder Undertakings committing all of its executive officers and directors who own shares of Common Stock to vote all such shares of Common Stock in favor of the transactions contemplated hereunder at the Stockholders Meeting. (b) As promptly as practicable after the date hereof, the Company shall take or cause to be taken, all actions, and do, or cause to be done, all things reasonably necessary, proper or advisable to (i) prepare and file with the Commission any documents or materials, including, but not limited to, the Proxy Materials, pertaining to the issuance of the Securities and the Stockholders Meeting, (ii) have the Proxy Materials cleared by the Commission (including with respect to clauses (i) and (ii) by consulting with the Purchaser and responding promptly to any comments from the Commission) and (iii) take such action as may be required to be taken under applicable state securities or blue sky laws in connection with the issuance of the Securities, the Conversion Shares or the Warrant Shares except that the Company shall have no registration obligations other than as set forth in the Registration Rights Agreement. Except to the extent otherwise determined in good faith by the Company's board of directors in the exercise of its fiduciary duties, taking into account the advice of outside counsel, the Proxy Materials shall contain the recommendation of the Board of Directors that stockholders of the Company vote in favor of the adoption and approval of all matters necessary to effectuate the transactions contemplated hereunder. The Company shall notify the Purchaser promptly of the receipt of any comments on, or any requests for amendments or supplements to, the Proxy Materials by the Commission, and the Company shall supply the Purchaser with copies of all correspondence between it and its representatives, on the one hand, and the Commission or members of its staff, on the other, with respect to the Proxy Materials. The Company, after consultation with the Purchaser, shall use its reasonable best efforts to respond promptly to any comments made by the Commission with respect to the Proxy Materials. The Company and the Purchaser shall cooperate with each other in preparing the Proxy Materials, and the Company and the Purchaser shall each use its reasonable best efforts to obtain and furnish the information required to be included in the Proxy Materials. The Company and the Purchaser each agrees promptly to correct any information provided by it for use in the Proxy Statement if and to the extent that such information shall have become false or misleading in any material respect, and the Company 38 further agrees to take all steps necessary to cause the Proxy Statement as so corrected to be filed with the Commission and to be disseminated promptly to holders of shares of the Common Stock, in each case as and to the extent required by Applicable Law. (c) As promptly as practicable after the date hereof, the Company shall provide the Purchaser (i) with the form of the Certificate Amendments, if any, (excluding the Certificate of Designations) substantially in the form to be included in the Proxy Materials and to be filed with the Secretary of State of the State of Delaware and (ii) with the form of Bylaws Amendments required to give effect to the provisions of the Stockholders Agreement.. The form of Certificate Amendments and Bylaws Amendments are subject to the approval of the Purchaser, which approval shall not be unreasonably withheld. Section 6.2 Stock Exchange Approval. The Company shall use its ----------------------- reasonable best efforts and take all action reasonably necessary to obtain the confirmation of The Nasdaq Stock Market, Inc. that the transactions contemplated hereby (including the Certificate Amendments) will not violate Rule 4310 or Rule 4460 of the National Association of Securities Dealers, Inc. Manual. Section 6.3 Continuing Operations. From the date of this Agreement --------------------- to the earlier of (i) the Second Closing or (ii) the termination of this Agreement in accordance with its terms, the Company and its Subsidiaries shall conduct their business in the ordinary and usual course, and, except as set forth on Schedule 6.3, neither the Company nor any of its Subsidiaries shall, ------------ without the prior consent of the Purchaser except as expressly contemplated hereby: (a) purchase, sell, license, assign, transfer, convey or otherwise acquire or dispose of any assets, securities, or businesses, unless such transaction is provided for in the annual budget or is in the ordinary course of business and does not involve (i) the acquisition or disposition of homebuilding operations or any homebuilding company or entity or (ii) land acquisitions with a value in excess of $100,000 for any transaction or group of related transactions or with an aggregate value in excess of $5,000,000 in any twelve (12) month period; (b) directly or indirectly incur, refinance, repay, prepay, create, assume, guarantee or otherwise become liable with respect to any liabilities with an aggregate face amount in excess of $1,000,000 in the aggregate, other than in accordance with existing credit facilities and renewals thereof on substantially the same terms; (c) enter into any transaction after the date hereof or materially amend any transaction in effect on the date hereof, with any Affiliate of the Company (other than between the Company and its Subsidiaries or between Subsidiaries); (d) split (including any reverse split), combine, or reclassify any shares of its capital stock; adopt resolutions authorizing a liquidation, dissolution, merger, consolidation, restructuring, recapitalization, or other reorganization of the capital structure of the Company or any of its subsidiaries; or make any other material changes in its capital structure; 39 (e) engage in any new development or redevelopment of any real property for an amount in excess of $100,000, whether in a single transaction or a series of related transactions; (f) incur any capital expenditure for an amount, outside of the approved annual budget, in excess of $50,000 per occurrence or $500,000 in the aggregate, whether in a single transaction or a series of related transactions or waive, release, grant or transfer any rights of value in respect thereof or enter into any agreement or arrangement that could adversely affect the marketability of any real estate of the Company or any of its subsidiaries; (g) enter into any employment agreement with any employee involving payments in excess of $100,000 per annum or with any director or executive officer of the Company or any of its Subsidiaries or enter into or materially change any Benefit Arrangement ; (h) enter into any new line of business other than the business engaged in by the Company and its Subsidiaries on the date hereof, cease to be engaged in any material line of business engaged in by the Company and its Subsidiaries on the date hereof or materially change the nature of the business engaged in by any of them on the date hereof; (i) approve the annual operating budget of the Company for any year after 1997; (j) amend or take actions materially inconsistent with the approved annual operating budget for 1997 or any subsequent year; (k) make any general assignment for the benefit of creditors; (l) file any petition seeking relief, or consent to the institution of any proceeding against itself seeking to adjudicate it a bankrupt or insolvent, under any law relating to bankruptcy, insolvency or reorganization or relief of debtors; (m) institute, voluntarily dismiss, terminate or settle any litigation or arbitration against any Person (A) involving payments for damages and penalties in excess of $50,000 or (B) otherwise material to the Company and its subsidiaries taken as a whole; (n) engage, retain, pay or agree to pay the fees or expenses of any third party consultants or advisors (other than advisors retained in the ordinary course of business), to the extent that such fees and expenses exceed one hundred thousand dollars ($100,000) in the aggregate; (o) appoint, ratify or replace the independent accountants, change any accounting policy or practice other than as mandated by generally accepted accounting principles then in effect; or change any significant tax methods, practices, procedures or policies; (p) enter into or amend any joint venture, partnership or profit sharing agreement or arrangement; 40 (q) amend to the Company's or any Subsidiary's certificate of incorporation or bylaws; or (r) declare or pay any dividend or make any other distribution with respect to its capital stock, other than dividends paid by any subsidiary to the Company or another subsidiary in the ordinary and usual course of business or to the holders of the Preferred Stock and the Existing Preferred Stock as required pursuant to the terms of the Preferred Stock and the Preferred Stock Certificates of Designations; (s) issue, sell, (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase, or otherwise) any of its capital stock (other than upon conversion of the Preferred Stock or the Existing Preferred Stock or upon exercise of the Warrants) or deliver or other securities other than as contemplated herein or pursuant to stock options issued and outstanding as of the date hereof or purchase or otherwise acquire any of its capital stock, employee or director stock options or debt securities; or (t) agree to do any of the foregoing. Section 6.4 Press Releases. Except as may be required by applicable -------------- law or by the rules of any national securities exchange, neither the Purchaser nor the Company shall issue any press release with respect to this Agreement or the transactions contemplated hereunder without the prior consent of the Company in the case of the Purchaser, and of the Purchaser in the case of the Company (which consent shall not be unreasonably withheld under the circumstances). Any such press release required by applicable law or by the rules of any national securities exchange shall only be made after reasonable notice to the other party. Section 6.5 Additional Financial Statements. During the period from ------------------------------- the date hereof through the First Closing, as soon as reasonably practicable after they become publicly available, the Company shall furnish to the Purchaser (i) the quarterly consolidated financial statements of the Company and its consolidated Subsidiaries, which shall have been prepared in accordance with GAAP and on a basis consistent with past practice and (ii) all monthly financial statements or reports of the Company and its consolidated Subsidiaries, which shall have been prepared in a manner consistent with past practice. Section 6.6 Investigations and Access. The Company agrees to permit ------------------------- the Purchaser and its agents and representatives reasonable access during normal business hours to (i) the premises of the Company and its Subsidiaries and (ii) all the books, computer software application systems, files and records of the Company and its Subsidiaries, including, but not limited to, lease, loan, real estate, financial, tax and personnel files and records, and to furnish the Purchaser such financial and operating data and other information with respect to the business, assets and properties of the Company as the Purchaser shall reasonably request. The Company will authorize its accountants to provide the Purchaser, in accordance with such accountant's internal policies, with their working papers for the Company's financial statements. The Company shall deliver true, correct and complete copies of all resolutions, and minutes of all meetings, reflecting any action taken by the Company stockholders, board of directors or committees of the 41 board of directors and by each Subsidiary during the period from the date hereof through the First Closing. Section 6.7 Notification of Certain Matters. The Company shall give ------------------------------- prompt notice to the Purchaser, and the Purchaser shall give prompt notice to the Company, of (i) the occurrence, or failure to occur, of any event which occurrence or failure would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect any time from the date hereof to the Closing Date and (ii) any material failure of the Company or the Purchaser, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder, and each party shall use all reasonable efforts to remedy such failure. In addition, the Company shall give prompt notice to the Purchaser of any material developments involving the operations or activities of the Company or its Subsidiaries. Section 6.8 No Solicitation. Until the Second Closing shall have --------------- occurred, neither the Company nor any of its Affiliates nor any of their respective directors, officers, employees, representatives or agents, shall directly or indirectly solicit or initiate any discussions, submissions of proposals or offers or negotiations with, participate in any negotiations or discussions with, or provide any information or data of any nature whatsoever to, or otherwise cooperate in any other way with, or assist or participate in, facilitate or encourage any effort or attempt by, any corporation, partnership, person or other entity or group, other than the Purchaser and its respective partners, employees, representatives, agents and Affiliates, concerning any Alternative Transaction, provided, however, that nothing contained in this -------- ------- Section 6.8 shall prohibit the Board of Directors from (i) furnishing information or affording access to properties, books or records to, or entering into discussions or negotiations with, any person or entity in connection with any unsolicited bona fide proposal by such person or entity to enter into any Alternative Transaction or entering into an Alternative Transaction if, and only to the extent that, (A) the Company receives the written advice of outside legal counsel that such action is advisable to enable the Board of Directors to comply with its fiduciary duties imposed by Applicable Law and (B) prior to furnishing such information to, or entering into discussions or negotiations with, such person or entity, the Company (A) provides written notice to the Purchaser to the effect that it is furnishing information or affording access to properties, books or records to, or entering into discussions or negotiations with, such person or entity and (B) receives from such person or entity an executed confidentiality agreement on terms and in form customary for similar transactions or (ii) complying with Rule 14e-2 promulgated under the Exchange Act, with regard to an Alternative Transaction. For purposes of this Agreement, "Alternative Transaction" means any merger, consolidation (other than insofar as ----------------------- such merger or consolidation relates exclusively to the acquisition by the Company or one of its Subsidiaries of companies or businesses engaged primarily in the same business as the Company), sale of substantial assets not in the ordinary course, sale of shares of existing or future capital stock or other equity securities or securities convertible into equity securities or derivatives thereof (other than pursuant to employee stock options), recapitalization, capital infusion, incurrence of material additional indebtedness except pursuant to existing lines of credit or refinancings thereof, debt restructuring or similar transaction involving the Company or any of its Subsidiaries, or any division of the Company or any of its Subsidiaries except, in each case, as disclosed in the 42 Schedules to this Agreement. As part of the written notice provided to the Purchaser pursuant to clause (i)(B) above, the Company shall indicate the identity of the offeror and the terms and conditions of any proposals or offers or the nature of any inquiries or contacts, and thereafter shall use reasonable efforts to keep the Purchaser informed, on a current basis, of the status and terms of any such proposals or offers and the status of any such discussions or negotiations. The Company shall not release any third party from, or waive any provision of, any confidentiality or standstill agreement to which the Company is a party. Section 6.9 Further Assurances. Upon the terms and subject to the ------------------ conditions contained herein, the Company agrees, both before and after each Closing, (i) to use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement, (ii) to execute any documents, instruments or conveyances of any kind which may be reasonably necessary or advisable to carry out any of the transactions contemplated hereunder, and (iii) to cooperate with the Purchaser in connection with the foregoing. Without limiting the foregoing, the Company agrees to use its reasonable best efforts (A) to obtain all necessary waivers, consents and approvals, (B) to defend all actions challenging this Agreement or the consummation of the transactions contemplated hereby, (C) to lift or rescind any injunction or restraining order or other court order adversely affecting the ability of the Company to consummate the transactions contemplated hereby, (D) to give all notices to and make all registrations and filings with third parties, including without limitation, submissions of information requested by Governmental Entities and The Nasdaq National Market, Inc., and (E) to fulfill all conditions to this Agreement. In addition, the Company will commence all action required under this Section 6.9 by a date which is early enough to allow the transactions contemplated hereunder to be consummated by each Closing Date. Section 6.10 HSR Act Notification. To the extent it is determined -------------------- that the HSR Act will be applicable to the transactions as contemplated hereunder, each of the affected parties hereto shall (i) file or cause to be filed, as promptly as practicable after the execution and delivery of this Agreement, with the Federal Trade Commission and the United States Department of Justice, all reports and other documents required to be filed by such party under the HSR Act concerning the transactions contemplated hereby and (ii) promptly comply with or cause to be complied with any requests by the Federal Trade Commission or the United States Department of Justice for additional information concerning the Transaction, in each case so that the waiting period applicable to this Agreement and the transaction contemplated hereby under the HSR Act shall expire as soon as practicable after the execution and delivery), of this Agreement. Each party hereto agrees to request, and to cooperate with the other party or parties in requesting, early termination of any applicable waiting period under the HSR Act. Section 6.11 Employee Matters. On or prior to the First Closing, the ---------------- Board of Directors shall take all actions necessary to ensure that the acquisition of the Securities by the Purchaser (including the conversion/exercise of all of the Securities acquired or to be acquired by the Purchaser hereunder) and the transactions contemplated herein shall not result in the acceleration or creation of any rights of any person to benefits under any Employee Plan (including, without limitation, the acceleration of the vesting or exercisability of any stock 43 options, the acceleration of the vesting of any restricted stock, the acceleration of the accrual or vesting of any benefits under any Pension Plan or the acceleration or creation of any rights under any severance, parachute or change in control agreement). Section 6.12 Action by the Company. --------------------- On the date of Stockholder Approval, the Board of Directors shall take, or cause to be taken, all actions necessary or desirable to (i) cause the Board of Directors to consist of fifteen (15) directors, three of whom shall be elected by the Purchaser by delivery of a written consent immediately following the date of Stockholder Approval and (ii) effect the Bylaws Amendments. Prior to the Second Closing, the Board of Directors shall take, or cause to be taken, all actions necessary or desirable to file with the Secretary of State of the State of Delaware the Certificate Amendments. Section 6.13 Liability Insurance. On or prior to the Closing, the ------------------- Company shall ensure that each person serving on the board of directors of the Company on and after the Closing Date shall receive the same liability insurance coverage as a member of the board of directors as the Company's directors receive as of the date hereof (including coverage for liabilities arising before the date of taking office to the extent arising from such person's status as a prospective member of the board of directors) and that such policies shall be in full force and effect in accordance with their terms as of the Closing Date and in no event shall such coverage be for an amount less than $25,000,000. Section 6.14 Confidentiality. The Company and the Purchaser agree --------------- that all information provided to any of them or any of their representatives pursuant to this Agreement shall be kept confidential, and such parties shall not (x) disclose such information to any persons other than the directors, officers, employees, financial advisors, legal advisors, accountants, consultants and affiliates of such parties who reasonably need to have access to the confidential information and who are advised of the confidential nature of such information or (y) use such information in a manner which would be detrimental to the Company or the Purchaser; provided, however, the foregoing -------- ------- obligation of such parties shall not (a) relate to any information that (i) is or becomes generally available other than as a result of unauthorized disclosure by such parties or by persons to whom such parties have made such information available, (ii) is or becomes available to such parties on a non-confidential basis from a third party that is not, to such parties' knowledge, bound by any other confidentiality agreement with the Company, or (b) prohibit disclosure of any information if required by law, rule, regulation, court order or other legal or governmental process. ARTICLE VII CONDITIONS TO ALL CLOSINGS -------------------------- Conditions to Each Party's Obligations. --------------------------------------- Section 7.1 Conditions to Each Party's Obligations. The respective -------------------------------------- obligations of each party to consummate the transactions contemplated hereby in respect of each Closing are subject to the satisfaction or waiver, on or prior to the relevant Closing Date, of each of the following conditions: 44 (a) No Governmental or Other Proceedings or Litigation. There shall -------------------------------------------------- be no injunction or court order restraining consummation of the transactions contemplated hereunder and there shall be no pending or threatened action or proceeding by or before a court or governmental body brought by or on behalf of any Governmental Entity seeking to restrain or invalidate all or any portion of the transactions contemplated hereunder, and there shall not have been adopted any law or regulation making all or any portion of the transactions contemplated hereunder illegal. (b) HSR Act. To the extent that the HSR Act is applicable to the ------- transactions contemplated hereunder, all waiting periods (and any extensions thereof) applicable to any such transactions under the HSR Act shall have expired or been terminated. (c) NASDAQ Listing. The Nasdaq Stock Market, Inc. shall have informed -------------- the Company that the transactions contemplated hereby will not violate Rule 4310 or Rule 4460 of the National Association of Securities Dealer, Inc. Manual and The Nasdaq Stock Market, Inc. shall not have indicated any intention to delist the Company's Common Stock. Section 7.2 Conditions to the Company's Obligations. The obligation --------------------------------------- of the Company to consummate the transactions contemplated hereby on the Closing Date is subject to the satisfaction or waiver on or prior to the Closing Date, of each of the following conditions: (a) Representations, Warranties and Covenants. All representations ----------------------------------------- and warranties of the Purchaser contained in this Agreement shall be true and correct in all material respects at and as of the applicable Closing Date as if such representations and warranties were made at and as of the applicable Closing Date, and the Purchaser shall have performed in all material respects all agreements and covenants required hereby to be performed by it prior to or at the applicable Closing Date. There shall be delivered to the Company a certificate (signed by a managing member of the Purchaser) to the foregoing effect. (b) Consents. All consents, approvals, Permits and waivers from -------- Governmental Entities and other parties necessary to permit the Company to consummate the transactions contemplated hereby including, but not limited to, the approval of The Nasdaq Stock Market, Inc. to the transactions contemplated hereby, shall have been obtained, unless the failure to obtain any such consent, approval, Permit or waiver would not have a Material Adverse Effect upon the Company. The Certificate of Designations for the Series D Preferred Stock shall have been filed in a form and substance acceptable to the Purchaser providing, among other things, that the Series D Preferred Stock shall be pari passu with the Preferred Stock and the Existing Preferred Stock. (c) Opinion of Counsel. The Purchaser shall have delivered to the ------------------ Company the opinions of Latham & Watkins, counsel to the Purchaser, in form and substance reasonably acceptable to the Company. 45 (d) Certificates. The Purchaser will furnish the Company with such ------------ certificates of its general partner and others to evidence compliance with the conditions set forth in this Article VII as may be reasonably requested by the Company. Section 7.3 Conditions to the Purchaser's Obligations. The ----------------------------------------- obligation of the Purchaser to consummate the transactions contemplated hereby on the applicable Closing Date is subject to the satisfaction or waiver on or prior to the applicable Closing Date of each of the following conditions : (a) Representations, Warranties and Covenants. All representation ----------------------------------------- and warranties of the Company contained in this Agreement shall be true and correct in all material respects at and as of the applicable Closing Date as if such representations and warranties were made at and as of the applicable Closing Date (provided that no representation or warranty shall be deemed breached if the action causing such representation or warranty to be untrue as of the relevant Closing Date was consented to by the Purchaser under Section 6.3), and the Company shall have performed in all material respects all agreements and covenants required hereby to be performed prior to or at the applicable Closing Date. There shall be delivered to the Purchaser a certificate (signed by the President and Chief Executive Officer and the Secretary of the Company) to the foregoing effect. (b) Consents. All consents, approvals, Permits and waivers from -------- Governmental Entities and other parties necessary to permit the Purchaser and the Company to consummate the transactions contemplated hereby shall have been obtained, unless the failure to obtain any such consent, approval, Permit or waiver would not have a Material Adverse Effect upon the Company or the Purchaser. (c) Opinion of Counsel. The Company shall have delivered to the ------------------ Purchaser the opinions of Arent Fox Kintner Plotkin & Kahn, counsel for the Company, in form and substance reasonably acceptable to the Purchaser. (d) Certificates. The Company shall furnish the Purchaser with such ------------ certificates of the Chief Executive Officer and the Secretary of the Company and others to evidence compliance with the conditions set forth in this Article VIII as may be reasonably requested by the Purchaser. (e) No Adverse Changes. Since the date of this Agreement, there ------------------ shall not have been any Material Adverse Effect on the Company. (f) Elections of Directors. All actions shall have been taken by the ---------------------- Company, its stockholders and board of directors so that, immediately upon the Purchaser's purchase of the Preferred Stock, the board of directors shall consist of fifteen (15) directors and the Purchaser may, by execution and delivery of a written consent, elect three (3) members of the board of directors of the Company effective as of the Closing Date. As of the date of the First Closing the Company shall have established a five-member executive committee (the "Executive Committee") of the Board of Directors to which substantial ------------------- authority for operational matters shall be delegated, 46 as further described in the Stockholders Agreement. The Company shall appoint two members of the Executive Committee nominated by the Purchaser. (g) Certificate Amendments; Bylaw Amendments. The Certificate ---------------------------------------- Amendments and Bylaw Amendments in a form satisfactory to Purchaser necessary to give effect to the transactions contemplated hereby and the provisions of the Ancillary Documents shall have become effective. (h) Liability Insurance. The Company shall have provided to the ------------------- Purchaser a copy of the insurance policies together with the riders and schedules thereto which evidence compliance with the provisions set forth in Section 6.13. (i) Ancillary Agreements. The Company shall enter into and deliver -------------------- to the Purchaser the Ancillary Agreements to which it is a party. (j) Employment Agreements. The Company shall amend the employment --------------------- agreements of J. Marshall Coleman and James J. Martell, Jr. in a form and substance satisfactory to the Purchaser, in Purchaser's sole discretion, to require that each of them devote not less than 95% of their working time to conducting the business affairs of the Company and to include customary non- compete provisions. (k) Amendment to Existing Stockholders Agreement. If necessary, the -------------------------------------------- Existing Stockholders Agreement shall be amended to be consistent with the terms of this Agreement and the Ancillary Agreements (including the Stockholders Agreement). ARTICLE SECOND CLOSING -------------- Section 8.1 Conditions to Each Party's Obligations at the Second ---------------------------------------------------- Closing. In addition to the conditions set forth in Article VII, the respective ------- obligations of each party to consummate the transactions contemplated hereby on the Second Closing are subject to the satisfaction or waiver, on or prior to the date of the Second Closing, of each of the following conditions: (a) Stockholder Approval. The holders of the requisite number of -------------------- shares of outstanding Common Stock of the Company shall have duly and validly approved all items necessary to effectuate the transactions contemplated hereby and under the Ancillary Agreements, including without limitation, the Certificate Amendments (the "Stockholder Approval"). -------------------- ARTICLE INDEMNIFICATION --------------- Section 9.1 Survival of Representations, Etc. The representations, -------------------------------- warranties, covenants and agreements of the parties hereto contained herein shall survive all of the Closings 47 and shall remain in full force and effect until December 31, 2000; provided, --------- however, that (i) the representations and warranties set forth in Section 4.17 - -------- shall survive until December 31, 2004; (ii) the representations and warranties in Sections 4.1 through 4.4 and Section 4.7 shall survive indefinitely and the covenants and agreements set forth in Articles IX and X shall remain in full force and effect indefinitely and (iii) the representations and warranties set forth in Section 4.15 shall survive and shall remain in full force and effect for a period equal to the applicable statute of limitations for any Taxes imposed payable in breach of such representations and warranties; and provided, --------- further, that there shall be no termination with respect to any representation - -------- or warranty as to which either (a) a bona fide claim has been asserted prior to such date or (b) the Purchaser had actual knowledge of any breach thereof prior to any Closing Date. Section 9.2 Indemnification by the Company. The Company shall ------------------------------ indemnify and hold harmless the Purchaser and its members, Affiliates, directors, officers, advisors, agents and employees (the "Purchaser Indemnified -------------------------- Parties") to the fullest extent lawful, from and against any and all demands, - ------- damages, penalties, claims, liabilities, obligations, actions, causes of action, and reasonable expenses (including without limitation, costs of investigating, preparing or defending any such claim or action and reasonable legal fees and expenses) (collectively, "Losses"), (i) arising out of or in connection with ------ this Agreement, the transactions contemplated hereby, and/or the delivery, enforcement and performance of this Agreement or the Ancillary Agreements except to the extent that Losses with respect thereto are the result of the Purchaser's actions or omissions, or (ii) arising by reason of or resulting from any breach of any warranty, representation, covenant or agreement of the Company contained in this Agreement, the Ancillary Agreements or in any certificate delivered pursuant thereto. Section 9.3 Indemnification by the Purchaser. The Purchaser shall -------------------------------- indemnify and hold harmless the Company and its Affiliates, directors, officers, advisors, agents and employees (the "Company Indemnified Parties" and, together --------------------------- with the Purchaser Indemnified Parties, the "Indemnified Parties") to the ------------------- fullest extent lawful, from and against any and all Losses (i) arising from this Agreement or the Ancillary Agreements, to the extent of Losses from the Purchaser's actions or omissions or (ii) arising by reason of or resulting from any breach of any warranty, representation, covenant or agreement of the Purchaser contained in this Agreement or in any certificate delivered pursuant thereto. Section 9.4 Losses. The term "Losses" as used in this Section 9 is ------ not limited to matters asserted by third parties, but includes Losses incurred or sustained by an Indemnified Party in the absence of third party claims. Payments by an Indemnified Party of amounts for which such Indemnified Party is indemnified hereunder shall not necessarily be a condition precedent to recovery. Section 9.5 Defense of Claims. If a claim for Losses (a "Claim") is ----------------- ----- to be made by an Indemnified Party, such Indemnified Party shall give written notice (a "Claim Notice") to the indemnifying party as soon as practicable after ------------ such Indemnified Party becomes aware of any fact, condition or event which may give rise to Losses for which indemnification may be sought under this Section 9. If any lawsuit or enforcement action is filed against any Indemnified Party hereunder, notice thereof (a "Third Party Notice") shall be given to the ------------------ indemnifying party as 48 promptly as practicable (and in any event within five (5) calendar days after the service of the citation or summons). The failure of any indemnified party to give timely notice hereunder shall not affect rights to indemnification hereunder, except to the extent that the indemnifying party demonstrates actual damage caused by such failure. After receipt of a Third Party Notice, if the indemnifying party shall acknowledge in writing to the indemnified party that the indemnifying party shall be obligated under the terms of its indemnity hereunder in connection with such lawsuit or action, then the indemnifying party shall be entitled, if it so elects, (i) to take control of the defense and investigation of such lawsuit or action, (ii) to employ and engage attorneys approved by the Indemnified Party (such approval not to be unreasonably withheld) to handle and defend the same, at the indemnifying party's cost, risk and expense unless the named parties to such action or proceeding include both the indemnifying party and the Indemnified Party and the Indemnified Party has been advised in writing by counsel that there may be one or more legal defenses available to such Indemnified Party that are different from or additional to those available to the indemnifying party, and (iii) to compromise or settle such claim, which compromise or settlement shall be made only with the written consent of the Indemnified Party, such consent not to be unreasonably withheld. The Indemnified Party shall cooperate in all reasonable respects with the indemnifying party and such attorneys in the investigation, trial and defense of such lawsuit or action and any appeal arising therefrom; and the Indemnified Party may, at its own cost, participate in the investigation, trial and defense of such lawsuit or action and any appeal arising therefrom and appoint its own counsel therefor, at its own cost. The parties shall also cooperate with each other in any notifications to insurers. If the indemnifying party fails to assume the defense of such claim within fifteen (15) calendar days after receipt of the Third Party Notice, the Indemnified Party against which such claim has been asserted will (upon delivering notice to such effect to the indemnifying party) have the right to undertake the defense, compromise or settlement of such claim and the indemnifying party shall have the right to participate therein at its own cost; provided, however, that such claim shall not be compromised or -------- ------- settled without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld. In the event the Indemnified Party assumes the defense of the claim, the Indemnified Party will keep the indemnifying party reasonably informed of the progress of any such defense, compromise or settlement. Notwithstanding the foregoing, the indemnifying party shall not be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for any and all Indemnified Parties (which firm shall be designated in writing by such Indemnified Party or Parties) in connection with any one such action or proceeding arising out of the same general allegations or circumstances. Section 9.6 Tax Treatment of Indemnity. The parties agree that any -------------------------- indemnification payments made pursuant to this Agreement shall be treated for Tax purposes as an adjustment to the consideration for the purchase of the Securities, unless otherwise required by applicable law, in which event indemnification payments shall be made in an amount sufficient to indemnify the party on a net after-Tax basis. ARTICLE MISCELLANEOUS ------------- 49 Section 10.1. Termination. (a) Prior to the First Closing, this ----------- Agreement may be terminated: (i) by the Purchaser, if there is a breach of any representation warranty set forth in Article IV hereof or any covenant or agreement to be complied with or performed by the Company pursuant to the terms of this Agreement except for any breach which would not have a Material Adverse Effect on the Company or the Purchaser; and (ii) by the Company, if there is a material breach of any representation or warranty set forth in Article V hereof or of any covenant or agreement to be complied with or performed by the Purchaser pursuant to the terms of this Agreement except for any breach which would not have a Material Adverse Effect on the Company. (iii) by the Purchaser on or before five (5) Business Days following the date the final versions of the Schedules and unemployment tax returns for each of the builders for the years 1994, 1995, and 1996 have been delivered by the Company to the Purchaser for any reason. (b) Prior to the Second Closing, this Agreement may be terminated: (i) by the Company or the Purchaser if the Stockholder Approval shall not have been obtained on or before January 31, 1998, provided that the Company shall not have the right to elect this termination if the Company has not complied with all of its obligations under this Agreement; (ii) by the Purchaser if the Second Closing shall not have occurred by January 31, 1998; (iii) by the Purchaser, if there is a breach of any representation or warranty set forth in Article IV hereof or any covenant or agreement to be complied with or performed by the Company pursuant to the terms of this Agreement except for any breach which would not have a Material Adverse Effect on the Company or the Purchaser; and (iv) by the Company, if there is a material breach of any representation or warranty set forth in Article V hereof or of any covenant or agreement to be complied with or performed by the Purchaser pursuant to the terms of this Agreement except for any breach which would not have a Material Adverse Effect on the Company. Section 10.2. In the Event of Termination: In the event of --------------------------- termination of this Agreement: (a) Each party will redeliver all documents, work papers and other material of any other party relating to the transactions contemplated hereby, whether so obtained before or after the execution hereof to the party furnishing the same; 50 (b) The provisions of Sections 9 and 10.3 shall continue in full force and effect; and (c) Other than pursuant to Sections 9 and 10.3, no party hereto shall have any liability or further obligation to any other party relating to the transactions contemplated hereby, provided that no such termination shall relieve any party from liability or a prior breach of this Agreement. Section 10.3. Fees and Expenses. The Company shall be responsible for ----------------- the payment of all costs and expenses incurred by the Company in connection with the transactions contemplated hereunder, regardless of whether such transactions close, including, without limitation, all fees and expenses incurred in connection with the Proxy Materials and the fees and expenses of the Company's legal counsel and all third party consultants engaged by the Company to assist in the transactions. On the Closing Date, the Company shall reimburse the Purchaser for the Transaction Expenses (by wire transfer of same day funds). In the event that the Agreement is terminated, other than pursuant to Section 10.1(a)(ii) or Section 10.1(b)(iv) hereof, in addition to any other rights of the Purchaser hereunder, the Company shall promptly pay the Purchaser, by way of liquidated damages, a termination fee of $4,000,000, plus the Transaction ---- Expenses (to the extent not already paid or reimbursed by the Company). Section 10.4. Injunctive Relief. The parties hereto acknowledge and ----------------- agree that irreparable damage would occur in the event any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement, and shall be entitled to enforce specifically the provisions of this Agreement, in any court of the United States or any state thereof having jurisdiction, in addition to any other remedy to which the parties may be entitled under the Agreement or at law or in equity. Section 10.5 Independent Determination. From and after the Closing ------------------------- Date, all decisions on behalf of the Company as to payment of indemnification pursuant hereto and otherwise regarding the Company's rights and obligations pursuant to this Agreement and the Ancillary Agreements shall be made by a committee of the board of directors consisting of all directors not elected by the holders of the Preferred Stock voting as a separate class and a decision of a majority of such directors shall be the decision of the committee. Nothing contained in this Section 10.5 shall prevent any Indemnified Party from receiving indemnification pursuant to some other source (such as, by way of example, the bylaws of the Company in the event that such Indemnified Party is a director of the Company and such director seeks indemnification due to circumstances that do not pertain to an alleged breach of this Agreement), and the determination as to whether indemnification pursuant to such other source is available shall be made in accordance with the procedures applicable thereto. Section 10.6. Brokers, etc. ------------ 51 No brokerage fees shall be payable to any Person in connection with the transactions contemplated hereunder, other than a fee to be payable to Furman Selz, LLC by the Company (in an amount to be negotiated). Section 10.7. Assignment. Neither this Agreement nor any of the ---------- rights or obligations hereunder may be assigned by the Company without the prior written consent of the Purchaser, or by the Purchaser without the prior written consent of the Company, except that the Purchaser may, without such consent, assign its rights hereunder, in whole or in part, including, the right to acquire the Preferred Stock and the Warrants hereunder, to one or more Affiliates of the Purchaser. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, and no other person shall have any right, benefit or obligation hereunder. Section 10.8. Notices. Unless otherwise provided herein, any notice, ------- request, instruction or other document to be given hereunder by any party to the other shall be in writing and delivered by hand-delivery, registered first-class mail, telex, confirmed telecopy, or air courier guaranteeing overnight delivery, as follows: If to the Company: The Fortress Group, Inc. 1921 Gallows Road, Suite 730 Vienna, Virginia 22182 Telephone: (703) 442-4545 Facsimile: (703) 442-7730 Attn: J. Marshall Coleman with a copy to: Secretary With an additional copy to: Arent Fox Kintner Plotkin & Kahn 1050 Connecticut Avenue, NW Washington, DC 20036 Telephone: (202) 857-6235 Facsimile: (202) 857-6120 Attn: Jeffrey E. Jordan 52 If to the Purchaser: Prometheus Homebuilders LLC c/o Lazard Freres Real Estate Investors, LLC Thirty Rockefeller Plaza, 63rd Floor New York, NY 10020 Telephone: (212) 632-6060 Facsimile: (212) 632-6052 Attn: Robert P. Freeman Murry N. Gunty With a copy to: Latham & Watkins 885 Third Avenue New York, NY 10022 Telephone: (212) 906-1200 Facsimile: (212) 751-4864 Attn: R. Ronald Hopkinson or to such other place and with such other copies as either party may designate as to itself by written notice to the other. All such notices, requests, instructions or other documents shall be deemed to have been duly given; at the time delivered by hand, if personally delivered; four Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged by addressee, if by telecopier transmission; and on the next Business Day if timely delivered to an air courier guaranteeing overnight delivery. Section 10.9. Choice of Law. This Agreement shall be construed, ------------- interpreted and the rights of the parties determined in accordance with the internal laws of the State of New York, without regard to the conflict of law principles thereof, except with respect to matters of law concerning the internal corporate affairs of any corporate entity which is a party to or the subject of this Agreement, and as to those matters the law of the jurisdiction under which the respective entity derives its powers shall govern. Section 10.10. Entire Agreement; Amendments and Waivers. This ---------------------------------------- Agreement, including all schedules attached hereto (each, a "Schedule" and, -------- collectively, the "Schedules") constitutes the entire agreement among the --------- parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties, including the written summary of proposed terms between the Company and the Purchaser. Capitalized terms used in the Schedules but not defined therein shall have the respective meanings ascribed to such terms in this Agreement. Any item disclosed in one Schedule shall be deemed to have been disclosed in all other Schedules. 53 Section 10.11. 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. Section 10.12. Invalidity. In the event that any one or more of the ---------- provisions contained in this Agreement or in any other instrument referred to herein, shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any other such instrument. Section 10.13. Headings. The headings of the Articles and Sections -------- herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. Section 10.14. Limitation of Liability. In no event shall any member, ----------------------- partnership which is a partner of the Purchaser or any partner of any such partnership, or any direct or indirect stockholder, officer, director, partner, employee or any other such person, be personally liable for any obligation of the Purchaser under this Agreement. In no event shall any officer, director, employee or shareholder of the Company be personally liable for any obligation of the Company under this Agreement. Section 10.15. Galloway Transaction. The parties hereby acknowledge -------------------- that the Galloway Transaction is currently under contract pursuant to the Galloway Letter of Intent. The parties hereby acknowledge and agree that the representations and warranties made herein by the Company include and are made with respect to all of the assets subject to the Galloway Transaction as if the Company owned such assets on the date hereof. If the Galloway Transaction does not close pursuant to the terms of the Galloway Purchase Agreement, then the parties hereby acknowledge that such failure to close shall not constitute a breach of the representations and warranties set forth herein or a Material Adverse Effect. Section 10.16. Mutual Agreement. The parties hereby agree that between ---------------- the date hereof and the date of the Second Closing they shall mutually cooperate with a view to structuring the issuance of a portion of the Class ABI Preferred Stock through a limited liability company formed by the Company. Notwithstanding the foregoing, nothing in this Section 10.16 shall obligate the Purchaser to agree to any such structure. If the parties cannot agree on such a limited liability structure, the Company shall have the right to issue a debt instrument in lieu of all or any portion of the Class AB Preferred Stock to be issued hereunder, provided that such debt instrument contains terms and conditions that are no less favorable to the Purchaser than the terms and conditions of the Class ABI Preferred Stock (such debt to have a maturity date of December 31, 2004). Section 10.17. Apportionment of Stock Between Class ABI Preferred -------------------------------------------------- Stock and Class ABII Preferred Stock. The parties will apportion the Class AB - ------------------------------------ Preferred Stock to be issued between the Class ABI Preferred Stock and the Class ABII Preferred Stock to ensure that the Purchaser has no more than 45% of the total voting power of the Company, but so that the 54 Company shall issue the maximum amount of Class ABI Preferred Stock it is permitted to issue before issuing any Class ABII Preferred Stock. [Signature Page Follows] 55 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: ___________________________ 56 EXHIBIT A FORM OF CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF OF CLASS AA PREFERRED STOCK OF THE FORTRESS GROUP, INC. EXHIBIT B FORM OF CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF OF CLASS ABI PREFERRED STOCK OF THE FORTRESS GROUP, INC. EXHIBIT C FORM OF CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF OF CLASS ABII PREFERRED STOCK OF THE FORTRESS GROUP, INC EXHIBIT D FORM OF REGISTRATION RIGHTS AGREEMENT EXHIBIT E FORM OF WARRANT AGREEMENT EXHIBIT F FORM OF STOCKHOLDERS AGREEMENT EXHIBIT G EXECUTED STOCKHOLDERS VOTING AGREEMENT EX-99.2 3 STOCKHOLDERS VOTING AGREEMENT DATED 8/14/1997 EXHIBIT 99.2 This STOCKHOLDERS VOTING AGREEMENT, dated as of August 14, 1997, between certain holders of the shares of outstanding voting Common Stock, $0.01 par value per share ("Common Stock"), of the Company (as defined below) set forth on the signature page hereof (each, a "Stockholder" and, collectively, the "Stockholders") and Prometheus Homebuilders LLC, a Delaware limited liability company (the "Purchaser"). Capitalized terms not otherwise defined herein have the meaning ascribed to them in the Stock Purchase Agreement (as hereinafter defined). RECITALS A. Concurrently with the execution of this Agreement, pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement") dated as of August 14, 1997, by and between The Fortress Group, Inc., a Delaware corporation (the "Company") and the Purchaser, the parties thereto agreed to a series of transactions, including the sale to the Purchaser of certain shares of the Company's Class AA Preferred Stock and Class AB Preferred Stock (all such transactions between the Company and the Purchaser are hereinafter collectively referred to as the "Transactions"). B. As an additional inducement to the Purchaser to enter into the Transactions, each of the Stockholders have agreed to vote in favor of the Transactions on the terms set forth below. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Voting of Shares. During the term of this Agreement for so long as ---------------- such Stockholder shall be the owner of any Shares (as hereinafter defined), each of the Stockholders covenants and agrees with each other Stockholder and the Purchaser, to vote (which term shall include taking action without a meeting by written consent) such number of Shares that may be voted by such Stockholder in favor of the Transactions. 2. Shares. The term "Shares" as used herein shall mean any and all shares ------ of the capital stock of the Company (including Common Stock) which carry voting rights (including any voting rights which arise by reason of default) now owned or subsequently acquired by a Stockholder through purchase, gift, stock splits, stock dividends and exercise of stock options. 3. Termination. This Agreement shall terminate at the Second Closing (as ----------- defined in the Stock Purchase Agreement). Each Stockholder hereby agrees not to sell, transfer or otherwise dispose of any of its Shares until the Second Closing (other than Shares pledged by Charles F. Smith, Jr. as of the date hereof pursuant to an existing loan agreement). 4. No Revocation. The voting agreements contained herein are coupled with ------------- an interest and may not be revoked prior to termination in accordance with Section 3, except by written consent of the Purchaser, the Company and the Stockholders owning a majority of the Shares. 5. Irrevocable Proxy. Each Stockholder hereby constitutes and appoints ----------------- the Purchaser as the proxy of the Stockholder and hereby authorizes the Purchaser to represent and to vote all of the Shares in favor of the approval of the Transactions at the Stockholders Meeting and at every adjournment or postponement thereof, to the same extent and with the same effect as the Stockholder might or could do under applicable law, rules and regulations. The proxy granted pursuant to the immediately preceding sentence is given in consideration of the agreements and covenants of the Company pursuant to this Agreement and as such is coupled with an interest and shall be irrevocable unless and until this Agreement terminates pursuant to Section 3 hereof. The Stockholder hereby revokes any and all previous proxies granted with respect to any of the Shares and shall not hereafter, unless and until this Agreement terminates pursuant to Section 3 hereof, purport to grant any other proxy or power of attorney with respect to any of the Shares, deposit any of the Shares into a voting trust or enter into any agreement (other than this Agreement), arrangement or understanding with any Person, directly or indirectly, to vote or grant any proxy or give instructions with respect to the voting of any of the Shares. 6. General. -------- (a) Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of Delaware, without regard to any principles of conflicts of law. (b) Notices. All notices, requests, demands and other communications ------- under this Agreement shall be in writing and shall be deemed given if delivered personally or by facsimile transmission (with subsequent letter confirmation by mail) or three days after being mailed by certified or registered mail, postage prepaid, return receipt requested, to the parties, their successors in interest or their assigns at the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid: If to the Stockholders: ATTN: [Stockholder Name] c/o The Fortress Group, Inc. 1921 Gallows Road, Suite 730 Vienna, Virginia 22182 Telephone: (703) 442-4545 Facsimile: (703) 442-7730 Attn: J. Marshall Coleman with a copy to: Arent Fox Kintner Plotkin & Kahn 1050 Connecticut Avenue, NW Washington, D.C. 20036 Telephone: (202) 857-6235 Facsimile: (202) 857-6120 Attn: Jeffrey E. Jordan 2 If to the Purchaser: Prometheus Homebuilders LLC c/o Lazard Freres Real Estate Investors, LLC Thirty Rockefeller Plaza, 63rd Floor New York, NY 10020 Telephone: (212) 632-6060 Facsimile: (212) 632-6052 Attn: Robert Freeman Murry N. Gunty with a copy to: Latham & Watkins 885 Third Avenue New York, NY 10022 Telephone: (212) 906-1200 Facsimile: (212) 751-4864 Attn: R. Ronald Hopkinson (c) Entire Agreement. This Agreement contains the entire ---------------- understanding among the parties hereto and supersedes any prior understandings and agreements, either oral or written, between or among the parties hereto relating to the subject matter hereof. (d) Equitable Remedies. In addition to legal remedies, in recognition ------------------ of the fact that remedies at law may not be sufficient, the parties (and their permitted successors and assigns) shall be entitled to equitable remedies for breaches or defaults hereunder, including, without limitation, specific performance and injunction. (e) Amendment. No amendment, modification or termination of any --------- provision of this Agreement shall be valid unless in writing and signed by the Purchaser, the Company and Stockholders owning a majority of the Shares. (f) Binding Agreement: Successors and Assigns. This Agreement shall ----------------------------------------- be binding upon the parties hereto and their respective successors and legal representatives; provided, however, that the rights and obligations of the Purchaser under this Agreement shall not be assigned to any party other than: (i) to an affiliate of the Purchaser or to any entity with which the Purchaser merges or combines; or (ii) with the consent of the Stockholders owning a majority of the Shares. (g) Counterparts. This Agreement may be executed in several ------------ counterparts, and as so executed shall constitute one agreement, binding on all of the parties hereto, notwithstanding that all the parties are not a signatory to the original or the same counterparts. (h) No Waiver; Cumulative Remedies. No failure or delay on the part ------------------------------ of any party in exercising any right, power or remedy hereunder shall, except to the extent expressly provided herein, operate as a waiver hereof, nor shall any single or partial exercise of any right, power or remedy preclude any other future exercise thereof or the exercise of any other right, power or remedy hereunder. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 3 (i) Severability. The provisions of this Agreement are severable, and ------------ if any clause or provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such clause or provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability of such clause or provision in any other jurisdiction or the remaining provisions hereof in any jurisdiction. (j) By its execution and delivery of this Agreement, each Stockholder represents and warrants to the Purchaser that it owns 100% of the Shares set forth opposite its name on the signature page hereof. [Signature Page Follows] 4 IN WITNESS WHEREOF, this agreement has been executed by the parties hereto as of the day and year first above written. _________________________________ by: _____________________________ Name: Title: _________________________________ by: _____________________________ Name: Title: _________________________________ by: _____________________________ Name: Title: _________________________________ by: _____________________________ Name: Title: _________________________________ by: _____________________________ Name: Title: _________________________________ by: _____________________________ Name: Title: _________________________________ 5 by: _____________________________ Name: Title: _________________________________ by: _____________________________ Name: Title: _________________________________ by: _____________________________ Name: Title: PROMETHEUS HOMEBUILDERS LLC by: _____________________________ Name: Title: 6 EX-99.3 4 FORM OF REGISTRATION RIGHTS AGREEMENT EXHIBIT 99.3 REGISTRATION RIGHTS AGREEMENT by and between THE FORTRESS GROUP, INC. and PROMETHEUS HOMEBUILDERS LLC Dated as of ______________, 1997 TABLE OF CONTENTS -----------------
PAGE ---- 1. DEFINITIONS.......................................................... 1 2. DEMAND REGISTRATIONS................................................. 3 (a) Timing Of Demand Registrations................................. 3 (b) Number of Demand Registrations................................. 4 (c) Required Thresholds............................................ 4 (d) Participation.................................................. 4 (e) Underwriter's Cutback.......................................... 4 (f) Managing Underwriter........................................... 5 3. PIGGYBACK REGISTRATIONS.............................................. 5 (a) Participation.................................................. 5 (b) Underwriter's Cutback.......................................... 5 (c) Company Control................................................ 6 4. HOLD BACK AGREEMENTS................................................. 6 (a) By Holders of Registrable Securities........................... 6 (b) By the Company and Others...................................... 6 5. REGISTRATION PROCEDURES.............................................. 7 6. REGISTRATION EXPENSES................................................ 10 (a) Demand Registrations........................................... 10 (b) Piggyback Registrations........................................ 11 (c) Company Expenses............................................... 11 7. INDEMNIFICATION...................................................... 11 (a) Indemnification by Company..................................... 11 (b) Indemnification Procedures..................................... 11 (c) Indemnification by Holder of Registrable Securities............ 12 (d) Contribution................................................... 13 8. EXCHANGE ACT REPORTING REQUIREMENTS.................................. 13 9. REQUIREMENTS FOR PARTICIPATION IN UNDERWRITTEN OFFERINGS............. 14 10. SUSPENSION OF SALES................................................. 14 11. FUTURE REGISTRATION RIGHTS AGREEMENTS............................... 14 12. MISCELLANEOUS....................................................... 15 (a) Remedies....................................................... 15 (b) No Inconsistent Agreements..................................... 15 (c) Amendments and Waivers......................................... 16 (d) Notices........................................................ 16 (e) Successors and Assigns......................................... 16 (f) Counterparts................................................... 16 (g) Table of Contents and Headings................................. 17 (h) Governing Law.................................................. 17 (i) Severability................................................... 17 (j) Forms.......................................................... 17 (k) Entire Agreement............................................... 17
i This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered into as of ___, 1997, by and between The Fortress Group, Inc., a Delaware corporation (the "Company") and Prometheus Homebuilders LLC (the "Investor"). In order to induce the Investor to enter into the that certain Stock Purchase Agreement, dated as of _______, 1997 (the "Stock Purchase Agreement"), the Company has agreed to provide the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Stock Purchase Agreement. The parties hereby agree as follows: 1. Definitions. ----------- As used in this Agreement, the following capitalized terms shall have the following meanings: Board: The Board of Directors of the Company. ----- Claim: Any loss, claim, damages, liability or expense (including the ----- reasonable costs of investigation and legal fees and expenses). Common Stock: The common stock, par value $0.01 per share, of the ------------ Company. Demand Registration: A registration pursuant to Section 2 hereof. ------------------- Equity Security: Any capital stock of the Company or any security --------------- convertible, with or without consideration, into any such stock, or any security carrying any warrant or right to subscribe to or purchase any such stock, or any such warrant or right. Exchange Act: The Securities Exchange Act of 1934, as amended. ------------ Firm Commitment Underwritten Offering: An offering in which the ------------------------------------- underwriters agree to purchase securities for distribution pursuant to a registration statement under the Securities Act and in which the obligation of the underwriters is to purchase all the securities being offered if any are purchased. Holder: The beneficial owner of a security. For all purposes of this ------ Agreement, the Company shall be entitled to treat the record owner of a security as the beneficial owner of such security unless the Company has been given written notice of the existence and identity of a different beneficial owner. A Holder of Preferred Stock shall be deemed to be the Holder of the Common Stock into which such Preferred Stock could be converted. Indemnified Holder: Any Holder of Registrable Securities, any ------------------ officer, director, employee or agent of any such Holder and any Person who controls any such Holder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act. Misstatement: An untrue statement of a material fact or an omission ------------ to state a material fact required to be stated in a Registration Statement or Prospectus or necessary to make the statements in a Registration Statement, Prospectus or preliminary prospectus not misleading. Person: A natural person, partnership, corporation, business trust, ------ association, joint venture or other entity or a government or agency or political subdivision thereof. Piggyback Registration: A registration pursuant to Section 3 hereof. ---------------------- Preferred Stock: The Class AA Convertible Preferred Stock and the --------------- Class AB Convertible Redeemable Preferred Stock of the Company being issued and sold pursuant to the Stock Purchase Agreement. Prospectus: The prospectus included in any Registration Statement, as ---------- supplemented by any and all prospectus supplements and as amended by any and all post-effective amendments and including all material incorporated by reference in such prospectus. Registration: A Demand Registration or a Piggyback Registration. ------------ Registration Expenses: The out-of-pocket expenses of a Registration, --------------------- including: (1) all registration and filing fees (including fees with respect to filings required to be made with the National Association of Securities Dealers); (2) fees and expenses of compliance with securities or blue sky laws (including fees and disbursements of counsel for the underwriters or selling holders in connection with blue sky qualifications of the Registrable Securities and determinations of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or holders of a majority of the Registrable Securities being sold may designate); (3) printing, messenger, telephone and delivery expenses; (4) fees and disbursements of counsel for the Company and of not more than one firm of attorneys for the sellers of the Registrable Securities; (5) fees and disbursements of all independent certified public accountants of the Company incurred in connection with such Registration (including the expenses of any special audit and "cold comfort" letters incident to such registration); (6) fees and disbursements of underwriters (excluding discounts, commissions, fees or expenses of underwriters, selling brokers, dealer managers or similar securities industry professionals relating to the distribution of the Registrable Securities); (7) premiums and other costs of securities acts liability insurance if the Company so desires or if the underwriters or selling holders of Registrable Securities so require; and (8) fees and expenses of any other Persons retained by the Company. 2 Registration Statement: Any registration statement under the ---------------------- Securities Act on an appropriate form (which form shall be available for the sale of the Registrable Securities in accordance with the intended method or methods of distribution thereof and shall include all financial statements required by the SEC to be filed therewith) which covers Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus included in such registration statement, amendments (including post-effective amendments) and supplements to such registration statement, and all exhibits to and all material incorporated by reference in such registration statement. Registrable Securities: (a) The shares of the Preferred Stock, ---------------------- whether or not owned by the Investor, (b) the shares of Common Stock issued or issuable upon conversion of the Preferred Stock, whether or not owned by the Investor, (c) the shares of Common Stock issued or issuable upon exercise of any Warrants, whether or not owned by the Investor, and (d) any securities issued or issuable with respect to such Common Stock by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or reorganization; provided that any such share or other security shall be deemed to be Registrable Securities only if and so long as it is a Transfer Restricted Security. Securities Act: The Securities Act of 1933, amended. -------------- SEC: The Securities and Exchange Commission. --- Transfer Restricted Security: A security that has not been sold to or ---------------------------- through a broker, dealer or underwriter in a public distribution or other public securities transaction or sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Rule 144 promulgated thereunder (or any successor rule). The foregoing notwithstanding, a security shall remain a Transfer Restricted Security until (i) all stop transfer instructions or notations and restrictive legends with respect to such security have been lifted or removed and (ii) the Holder of such security has received at Company expense an opinion of counsel to the Company (which counsel and opinion are reasonably satisfactory to such Holder), to the effect that such shares in such Holder's hands are freely transferable in any public or private transaction without registration under the Securities Act (or such Holder has waived receipt of such opinion). Underwritten registration or underwritten offering: A registration in -------------------------------------------------- which securities of the Company are sold to an underwriter for distribution to the public. Warrants: The warrants to purchase Common Stock issued pursuant to -------- that certain Warrant Agreement dated of even date herewith by and among the Company and the Investor. 2. Demand Registrations. -------------------- (a) Timing Of Demand Registrations. ------------------------------ Holders of Registrable Securities constituting at least twenty percent (20%) of the Registrable Securities then outstanding may request at any time that the Company file a registration statement under the Securities Act on an appropriate form (which form shall be available for the sale of the Registrable Securities in accordance with the intended method or methods of distribution thereof 3 and shall include all financial statements required by the SEC to be filed therewith) covering the shares of Registrable Securities that are the subject of such request. (b) Number of Demand Registrations. ------------------------------ The Company shall be obligated to prepare, file and cause to become effective pursuant to this Section 2: (i) no more than two Registration Statements in any two-year period and (ii) no more than three Registration Statements in total; provided, however, that a Registration Statement shall not be counted as one of the three Demand Registrations hereunder unless it becomes effective and is maintained effective in accordance with the requirements specified in Section 5(a). (c) Required Thresholds. ------------------- The Company shall not be obligated to prepare, file and cause to become effective pursuant to this Section 2 a Registration Statement on Form S-1 unless the proposed aggregate public offering price of the securities to be included in such Demand Registration is at least $5 million. Nor shall the Company be obligated to prepare, file and cause to become effective such Registration Statement upon a demand made by less than 50% of the Holders of the Registrable Securities then outstanding if such demand is made less than 90 days after the effective date of the Company's most recent registration statement for shares of Common Stock (other than a Registration Statement on Form S-4 or Form S-8 or any successor forms thereto). (d) Participation. ------------- The Company shall promptly give written notice to all Holders of Registrable Securities upon receipt of a request for a Demand Registration pursuant to Section 2(a) above. The Company shall include in such Demand Registration such shares of Registrable Securities for which it has received written requests to register such shares within 30 days after such written notice has been given. (e) Underwriter's Cutback. --------------------- If the public offering of Registrable Securities is to be underwritten and, in the good faith judgment of the managing underwriter, the inclusion of all the Registrable Securities requested to be registered hereunder would interfere with the successful marketing of a smaller number of such shares of Registrable Securities, the number of shares of Registrable Securities to be included shall be reduced to such smaller number with the participation in such offering to be pro rata among the Holders of Registrable Securities requesting such registration, based upon the number of shares of Registrable Securities owned by such Holders. Any shares that are thereby excluded from the offering shall be withheld from the market by the Holders thereof for a period (not to exceed 30 days prior to the effective date and 75 days thereafter) that the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. The Company and, subject to the requirements of Section 11 hereof, other Holders of securities of the Company may include such securities in such Registration if, but only if, the managing 4 underwriter concludes that such inclusion will not interfere with the successful marketing of all the Registrable Securities requested to be included in such registration. (f) Managing Underwriter. -------------------- The managing underwriter or underwriters of any underwritten public offering covered by a Demand Registration shall be selected by the Holders of a majority of the shares of Registrable Securities to be included in such registration. (g) Black-Out Periods of Investor. ----------------------------- Notwithstanding anything herein to the contrary, (i) the Company shall have the right, exercisable once per Demand Registration to require the Investor not to sell under a Demand Registration or to suspend the effectiveness thereof (but not for a period exceeding 90 days in any calendar year) if the Company determines, in its good faith judgment, that such offering or continued effectiveness would interfere with any material financing, acquisition, disposition, corporate reorganization or other material transaction involving the Company or any of its subsidiaries or public disclosure thereof would be required prior to the time such disclosure might otherwise be required, or when the Company is in possession of material information that it deems advisable not to disclose in a registration statement. 3. Piggyback Registrations. ----------------------- (a) Participation. ------------- Each time the Company decides to file a registration statement under the Securities Act (other than registrations on Forms S-4 or S-8 or any successor form thereto, and other than a Demand Registration) covering the offer and sale by it or any of its security holders of any of its securities for money, the Company shall give written notice thereof to all Holders of Registrable Securities. The Company shall include in such registration statement such shares of Registrable Securities for which it has received written requests to register such shares within 30 days after such written notice has been given. If the registration statement is to cover an underwritten offering, such Registrable Securities shall be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. (b) Underwriter's Cutback. --------------------- Subject to the requirements of Section 11 hereof, if in the good faith judgment of the managing underwriter of such offering the inclusion of all of the shares of Registrable Securities and any other Common Stock requested to be registered would interfere with the successful marketing of a smaller number of such shares, then the number of shares of Registrable Securities and other Common Stock to be included in the offering (except for shares of Registrable Securities to be included in a Demand Registration in accordance with Section 2 hereof) shall be reduced to such smaller number with the participation in such offering to be in the following order of priority: (1) first, the shares of Registrable Securities requested to be included, and (2) second, any other shares of Common Stock requested to be included. Any necessary allocation among the Holders of shares within each of the 5 foregoing groups shall be pro rata among such Holders requesting such registration based upon the number of shares of Common Stock and Registrable Securities owned by such Holders. All shares so excluded from the underwritten public offering shall be withheld from the market by the Holders thereof for a period (not to exceed 30 days prior to the effective date and 75 days thereafter) that the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. (c) Company Control. --------------- The Company may decline to file a Registration Statement after giving notice to any Holder pursuant to Section 3(a) above, or withdraw a Registration Statement after filing and after such notice, but prior to the effectiveness thereof, provided that the Company shall promptly notify each Holder in writing of any such action and provided further that the Company shall bear all expenses incurred by such Holder or otherwise in connection with such withdrawn Registration Statement. 4. Hold-Back Agreements. -------------------- (a) By Holders of Registrable Securities. ------------------------------------ Upon the written request of the managing underwriter of any underwritten offering of the Company's securities, a Holder of Registrable Securities shall not sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in such registration) without the prior written consent of such managing underwriter for a period (not to exceed 30 days before the effective date and 75 days thereafter) that such managing underwriter reasonably determines is necessary in order to effect the underwritten public offering; provided that each of the officers and directors of the Company shall have entered into substantially similar holdback agreements with such managing underwriter covering at least the same period. (b) By the Company and Others. ------------------------- The Company agrees: not to effect any public or private sale or distribution of its Equity Securities during the 30-day period prior to, and during the 75-day period after, the effective date of each underwritten offering made pursuant to a Demand Registration or a Piggyback Registration, if so requested in writing by the managing underwriter (except as part of such underwritten offering or pursuant to registrations on Forms S-4 or S-8 or any successor forms thereto), and not to issue any Equity Securities other than for sale in a registered public offering unless each of the Persons to which such securities are issued has entered a written agreement binding on its transferees not to effect any public sale or distribution of such securities during such period, including, without limitation, a sale pursuant to Rule 144 under the Securities Act (except as part of such underwritten registration, if and to the extent permitted hereunder). 6 5. Registration Procedures. ----------------------- If and whenever the Company is required to register Registrable Securities in a Demand Registration or a Piggyback Registration, the Company will use its best efforts to effect such registration to permit the sale of such Registrable Securities in accordance with the intended plan of distribution thereof, and pursuant thereto the Company will as expeditiously as possible: (a) prepare and file with the SEC as soon as practicable a Registration Statement with respect to such Registrable Securities and use its best efforts to cause such Registration Statement to become effective and remain effective until the Registrable Securities covered by such Registration Statement have been sold, provided that before filing a Registration Statement or Prospectus or any amendments or supplements thereto, the Company shall furnish to the Holders of the Registrable Securities covered by such Registration Statement and the underwriters, if any, draft copies of all such documents proposed to be filed, which documents will be subject to the review of such Holders and underwriters, and the Company shall not file any Registration Statement or amendment thereto or any Prospectus or any supplement thereto to which the Holders of a majority of the Registrable Securities covered by such Registration Statement or the underwriters, if any, shall reasonably object; (b) prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement, and such supplements to the Prospectus, as may be requested by any Holder of Registrable Securities or any underwriter of Registrable Securities or as may be required by the rules, regulations or instructions applicable to the registration form used by the Company or by the Securities Act or rules and regulations thereunder to keep the Registration Statement effective until all Registrable Securities covered by such Registration Statement are sold in accordance with the intended plan of distribution set forth in such Registration Statement or supplement to the Prospectus; (c) promptly notify the selling Holders of Registrable Securities and the managing underwriter, if any, and (if requested by any such Person) confirm such advice in writing, when the Prospectus or any supplement or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for additional information, of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, if at any time the representations and warranties of the Company contemplated by clause (1) of paragraph (o) below cease to be accurate in all material respects, of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, and 7 of the existence of any fact which results in the Registration Statement, the Prospectus or any document incorporated therein by reference containing a Misstatement; (d) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible time; (e) if requested by the managing underwriter or a Holder of Registrable Securities being sold in connection with an underwritten offering, immediately incorporate in a supplement or post-effective amendment such information as the managing underwriter and the Holders of a majority of the Registrable Securities being sold agree should be included therein relating to the sale of the Registrable Securities, including, without limitation, information with respect to the number of shares of Registrable Securities being sold to underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten offering of the Registrable Securities to be sold in such offering; and make all required filings of such supplement or post-effective amendment as soon as notified of the matters to be incorporated in such supplement or post-effective amendment; (f) promptly prior to the filing of any document which is to be incorporated by reference into the Registration Statement or the Prospectus (after initial filing of the Registration Statement) provide copies of such document to counsel to the selling Holders of Registrable Securities and to the managing underwriter, if any, and make the Company's representatives available for discussion of such document and make such changes in such document prior to the filing thereof as counsel for such selling Holders or underwriters may reasonably request; (g) furnish to each selling Holder of Registrable Securities and the managing underwriter, without charge, at least one signed copy of the Registration Statement and any post-effective amendments thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference); (h) deliver to each selling Holder of Registrable Securities and the underwriters, if any, without charge, as many copies of each Prospectus (and each preliminary prospectus) as such Persons may reasonably request (the Company hereby consenting to the use of each such Prospectus (or preliminary prospectus) by each of the selling Holders of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by such Prospectus (or preliminary prospectus); (i) prior to any public offering of Registrable Securities, register or qualify or cooperate with the selling Holders of Registrable Securities, the underwriters, if any, and their respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions in the United States as such selling Holders or underwriters may designate in writing and do anything else necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the Registration Statement; provided that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process in any such jurisdiction where it is not then so subject; 8 (j) cooperate with the selling Holders of Registrable Securities and the managing underwriter, if any, to facilitate the timely preparation and delivery of certificates not bearing any restrictive legends representing the Registrable Securities to be sold and cause such Registrable Securities to be in such denominations and registered in such names as the managing underwriter may request at least three business days prior to any sale of Registrable Securities to the underwriters; (k) use its best efforts to cause the Registrable Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities in the United States as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities; (l) if the Registration Statement or the Prospectus contains a Misstatement, prepare a supplement or post-effective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the Prospectus will not contain a Misstatement; (m) use its best efforts to cause all registrable securities covered by the Registration Statement to be listed on any national securities exchange or authorized for quotation on NASDAQ or in the National Market System, if requested by the Holders of a majority of such Registrable Securities or the managing underwriter, if any; (n) provide a CUSIP number for all Registrable Securities not later than the effective date of the Registration Statement; (o) enter into such agreements (including an underwriting agreement) and do anything else necessary or advisable in order to expedite or facilitate the disposition of such Registrable Securities, and in such connection: make such representations and warranties to the Holders of such Registrable Securities and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings; obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriter, if any, and the Holders of a majority of the Registrable Securities being sold) addressed to each selling Holder and the underwriter, if any, covering the matters customarily covered in opinions delivered to underwriters in primary underwritten offerings and such other matters as may be reasonably requested by such Holders or underwriters; obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to the selling Holders of Registrable Securities and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by underwriters in connection with primary underwritten offerings; 9 if an underwriting agreement is entered into, cause the same to include the indemnification and contribution provisions and procedures of Section 7 hereof with respect to all parties to be indemnified pursuant to said Section (or, with respect to the indemnification of such underwriters, such similar indemnification and contribution provisions as such underwriters shall customarily require); and deliver such documents and certificates as may be requested by the Holders of a majority of the Registrable Securities being sold and the managing underwriter, if any, to evidence compliance with clause (1) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The above shall be done at each closing under such underwriting or similar agreement or as and to the extent otherwise reasonably requested by the Holders of a majority of the Registrable Securities being sold; (p) make available for inspection by representatives of the Holders of a majority of the Registrable Securities being sold, any underwriter participating in any disposition pursuant to such Registration Statement, and any attorney or accountant retained by the sellers or any such underwriter, all financial and other records and pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with the Registration; provided that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such Persons unless disclosure of such records, information or documents is required by court or administrative order; and (q) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make generally available to its security holders earnings statements satisfying the provisions of Section 11(a) of the Securities Act, no later than 45 days after the end of any 12-month period (or 90 days, if such period is a fiscal year) (x) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in an underwritten offering, or, if not sold to underwriters in such an offering, (y) beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the Registration Statement, which statements shall cover said 12-month periods. 6. Registration Expenses. --------------------- (a) Demand Registrations. -------------------- The Company shall bear all Registration Expenses incurred in connection with the first two of the three Demand Registrations and of any Registrations which do not become or are not maintained effective in accordance with the requirements specified in Section 5(a) other than any Registration terminated prior to effectiveness at the request of, or solely as a result of the actions of holders whose Registrable Securities are included in such registration. The Registration Expenses of the third Demand Registration incurred by the Investor or any other holder whose Registrable Securities are included in such Demand Registration shall be split proportionally between the Investor, any such holder and the Company. 10 (b) Piggyback Registrations. ----------------------- The Company shall bear all Registration Expenses incurred in connection with all Piggyback Registrations. (c) Company Expenses. ---------------- The Company also will, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with any listing of the securities to be registered on a securities exchange, and the fees and expenses of any Person, including special experts, retained by the Company. 7. Indemnification. --------------- (a) Indemnification by Company. -------------------------- The Company agrees to indemnify and hold harmless each Indemnified Holder from and against all Claims arising out of or based upon any Misstatement or alleged Misstatement, except insofar as such Misstatement or alleged Misstatement was based upon information furnished in writing to the Company by such Indemnified Holder expressly for use in the document containing such Misstatement or alleged Misstatement. This indemnity shall not be exclusive and shall be in addition to any liability which the Company may otherwise have. The foregoing notwithstanding, the Company shall not be liable to the extent that any such Claim arises out of or is based upon a Misstatement or alleged Misstatement made in any preliminary prospectus if (i) such Indemnified Holder failed to send or deliver a copy of the Prospectus with or prior to the delivery of written confirmation of the sale of Registrable Securities giving rise to such Claim and (ii) the Prospectus would have corrected such untrue statement or omission. In addition, the Company shall not be liable to the extent that any such Claim arises out of or is based upon a Misstatement or alleged Misstatement in a Prospectus, (x) if such Misstatement or alleged Misstatement is corrected in an amendment or supplement to such Prospectus and (y) having previously been furnished by or on behalf of the Company with copies of the Prospectus as so amended or supplemented, such Indemnified Holder thereafter fails to deliver such Prospectus as so amended or supplemented prior to or concurrently with the sale to the person who purchased a Registrable Security from such Indemnified Holder and who is asserting such Claim. The Company shall also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in a distribution covered by a Registration Statement, their officers and directors and each Person who controls such Persons (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same extent as provided above with respect to the indemnification of the Indemnified Holders of Registrable Securities. (b) Indemnification Procedures. -------------------------- If any action or proceeding (including any governmental investigation or inquiry) shall be brought or asserted against an Indemnified Holder in respect of which indemnity may be sought 11 from the Company, such Indemnified Holder shall promptly notify the Company in writing, and the Company shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Holder and the payment of all expenses. Such Indemnified Holder shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such separate counsel shall be the expense of such Indemnified Holder unless (i) the Company has agreed to pay such fees and expenses, (ii) the Company shall have failed to assume the defense of such action or proceeding or has failed to employ counsel satisfactory to such Indemnified Holder in any such action or proceeding or (iii) the named parties to any such action or proceeding (including any impleaded parties) include both such Indemnified Holder and the Company, and such Indemnified Holder shall have been advised by counsel that there may be one or more legal defenses available to such Indemnified Holder that are different from or additional to those available to the Company. If such Indemnified Holder notifies the Company in writing that it elects to employ separate counsel at the expense of the Company as permitted by the provisions of the preceding paragraph, the Company shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Holder. The foregoing notwithstanding, the Company shall not be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for such Indemnified Holder and any other Indemnified Holders (which firm shall be designated in writing by such Indemnified Holders) in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances. The Company shall not be liable for any settlement of any such action or proceeding effected without its written consent, but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action or proceeding, the Company agrees to indemnify and hold harmless such Indemnified Holders from and against any loss or liability by reason of such settlement or judgment. (c) Indemnification by Holder of Registrable Securities. --------------------------------------------------- Each Holder of Registrable Securities agrees to indemnify and hold harmless the Company, its directors and officers and each Person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Holder, but only with respect to information relating to such Holder furnished in writing by such Holder expressly for use in any Registration Statement, Prospectus or preliminary prospectus. In no event, however, shall the liability hereunder of any selling Holder of Registrable Securities be greater than the dollar amount of the proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. In case any action or proceeding shall be brought against the Company or its directors or officers or any such controlling person, in respect of which indemnity may be sought against a Holder of Registrable Securities, such Holder shall have the rights and duties given the Company and the Company or its directors or officers or such controlling person shall have the rights and duties given to each Holder by Sections 7(a) and 7(b) above. 12 The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such Persons specifically for inclusion in any Prospectus or Registration Statement. (d) Contribution. ------------ If the indemnification provided for in this Section 7 is unavailable to an indemnified party under Section 7(a) or Section 7(c) above (other than by reason of exceptions provided in those Sections) in respect of any Claims referred to in such Sections, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such Claims in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and of the Indemnified Holder on the other in connection with the statements or omissions which resulted in such Claims as well as any other relevant equitable considerations. The amount paid or payable by a party as a result of the Claims referred to above shall be deemed to include, subject to the limitations set forth in Section 7(b), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The relative fault of the Company on the one hand and of the Indemnified Holder on the other shall be determined by reference to, among other things, whether the Misstatement or alleged Misstatement relates to information supplied by the Company or by the Indemnified Holder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such Misstatement or alleged Misstatement. The Company and each Holder of Registrable Securities agree that it would not be just and equitable if contribution pursuant to this Section 7(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 7(d), an Indemnified Holder shall not be required to contribute any amount in excess of the amount by which (i) the total price at which the securities that were sold by such Indemnified Holder and distributed to the public were offered to the public exceeds (ii) the amount of any damages which such Indemnified Holder has otherwise been required to pay by reason of such Misstatement. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 8. Exchange Act Reporting Requirements. ----------------------------------- From and after the date hereof, the Company shall (whether or not it shall then be required to do so) timely file such information, documents and reports as the Commission may require or prescribe under Section 13 or 15(d) (whichever is applicable) of the Exchange Act. In addition, the Company shall take such other measures and file such other information, documents and reports, as 13 shall hereafter be required by the Commission as a condition to the availability of Rule 144 under the Securities Act (or any successor provision) and the use of Form S-3. From and after the date hereof, the Company shall forthwith upon request furnish any Holder of Registrable Securities (i) a written statement by the Company that it has complied with such reporting requirements, (ii) a copy of the most recent annual or quarterly report of the Company, and (iii) such other reports and documents filed by the Company with the Commission as such Holder may reasonably request in availing itself of an exemption for the sale of Registrable Securities without registration under the Securities Act. The purpose of the foregoing requirements are (x) to enable any such Holder to comply with the current public information requirements contained in paragraph (c) of Rule 144 under the Securities Act (or any successor provision) and (y) to qualify the Company for the use of registration statements on Form S- 3. 9. Requirements for Participation in Underwritten Offerings. -------------------------------------------------------- No Person may participate in any underwritten offering pursuant to a Registration hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 10. Suspension of Sales. ------------------- Upon receipt of written notice from the Company that a Registration Statement or Prospectus contains a Misstatement, each Holder of Registrable Securities shall forthwith discontinue disposition of Registrable Securities until such Holder has received copies of the supplemented or amended Prospectus required by Section 5(1) hereof, or until such Holder is advised in writing by the Company that the use of the Prospectus may be resumed, and, if so directed by the Company, such Holder shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. 11. Future Registration Rights Agreements. ------------------------------------- Except for an underwriting agreement between the Company and one or more professional underwriters of securities, the Company shall not agree after the date hereof to register any Equity Securities under the Securities Act unless such agreement specifically provides that: (a) the Holder of such Equity Securities may not participate in any Demand Registration without the consent of the Holders of a majority of the shares of the Registrable Securities included in such registration unless: (i) the offering of the Registrable Securities is to be a Firm Commitment Underwritten Offering and the managing underwriter concludes that the public offering or sale 14 of such Equity Securities would not interfere with the successful marketing of all Registrable Securities requested to be sold and (ii) the Holders of Registrable Securities shall have the right to participate, to the extent they may request, in any registration statement initiated under a demand registration right exercised by the Holder of such Equity Securities, except that if the managing underwriter of a public offering made pursuant to such a demand registration limits the number of shares of Common Stock to be sold, the participation of the Holders of the Registrable Securities and the Holders of all other Common Stock (other than the Equity Securities held by such Holder of Equity Securities) shall be determined as set forth in Section 3 hereof. (b) the Holder of such Equity Securities may not participate in any Piggyback Registration if the sale of Registrable Securities is to be underwritten unless, if the managing underwriter limits the total number of shares to be sold, the Holders of such Equity Securities and the Holders of Registrable Securities are entitled to participate in such underwritten distribution based on the order of priority set forth in Section 3 hereof, and (c) all Equity Securities excluded from any Registration as a result of the foregoing limitations may not be publicly offered or sold for a period (not to exceed at least 30 days prior to the effective date and 75 days thereafter) that the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering of Registrable Securities registered pursuant to this Agreement. 12. Miscellaneous. ------------- (a) Remedies. -------- Each Holder of Registrable Securities, in addition to being entitled to exercise all rights provided herein, in the Stock Purchase Agreement and granted by law, including recovery of damages, shall be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. -------------------------- The Company shall not on or after the date of this Agreement enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. Other than as disclosed on Schedule I attached hereto, the Company has not previously entered into any agreement with respect to its securities granting any registration rights to any Person. The rights granted to the Holders of Registrable Securities hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's securities under any such agreements. 15 (c) Amendments and Waivers. ---------------------- The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of the Holders of at least a majority of the outstanding shares of Registrable Securities. The foregoing notwithstanding, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders of shares of Registrable Securities whose shares are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders of shares of Registrable Securities may be given by the Holders of a majority of the shares of Registrable Securities being sold. (d) Notices. ------- All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder of Registrable Securities, at the most current address given by such Holder to the Company in accordance with the provisions hereof, which address initially is, with respect to the Investor, the address set forth on the Investor's signature page of the Stock Purchase Agreement, with a copy to Latham & Watkins, 885 Third Avenue, Suite 1000, New York, New York 10022, Attention: R. Ronald Hopkinson, Esq.; and (ii) if to the Company, initially at its address set forth in the Stock Purchase Agreement and thereafter at such other address, notice of which is given in accordance with the provisions hereof, with a copy to Arent Fox Kintner Plotkin & Kahn, 1050 Connecticut Avenue, N.W., Washington, D.C. 20036, Attention: Jeffrey E. Jordan, Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery. The Company shall promptly provide a list of the most current addresses of the Holders of Registrable Securities given to it in accordance with the provisions hereof to any such Holder for the purpose of enabling such Holder to communicate with other Holders in connection with this Agreement. (e) Successors and Assigns. ---------------------- This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties. (f) Counterparts. ------------ This Agreement may be executed in one or more of counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same agreement. 16 (g) Table of Contents and Headings. ------------------------------ The table of contents and headings in this Agreement are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. (h) Governing Law. ------------- This Agreement shall be governed by and construed in accordance with the laws of the State of New York. (i) Severability. ------------ In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (j) Forms. ----- All references in this Agreement to particular forms of registration statements are intended to include all successor forms which are intended to replace, or to apply to similar transactions as, the forms herein referenced. (k) Entire Agreement. ---------------- This Agreement and the Stock Purchase Agreement are intended by the parties as the final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein with respect to the registration rights granted by the Company with respect to the securities sold pursuant to the Stock Purchase Agreement. This Agreement and the Stock Purchase Agreement supersede all prior agreements and understandings between the parties with respect to such subject matter. [Signature Page Follows] 17 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. THE FORTRESS GROUP, INC. By: _________________________________________ Name:____________________________________ Title:___________________________________ PROMETHEUS HOMEBUILDERS LLC By: Prometheus Homebuilders Funding Corp. Managing Member By: _________________________________________ Name:____________________________________ Title:___________________________________ 18 EX-99.4 5 FORM OF STOCKHOLDERS AGREEMENT EXHIBIT 99.4 STOCKHOLDERS AGREEMENT by and among THE FORTRESS GROUP, INC., PROMETHEUS HOMEBUILDERS LLC and THE STOCKHOLDERS NAMED HEREIN dated as of ________, 1997 TABLE OF CONTENTS -----------------
PAGE ---- ARTICLE I. DEFINITIONS....................................................... 1 Section 1.1. Defined Terms.................................................. 1 ARTICLE II. BOARD............................................................ 5 Section 2.1. Members of the Board........................................... 5 ARTICLE III. COVENANTS....................................................... 6 Section 3.1. Operating Statements; Public Company Status.................... 6 Section 3.2. Conduct of Business............................................ 7 ARTICLE IV. PARTICIPATION RIGHTS............................................. 11 Section 4.1................................................................. 11 ARTICLE V. TAG-ALONG RIGHTS.................................................. 13 Section 5.1. Tag-Along Rights............................................... 13 ARTICLE VI. MISCELLANEOUS.................................................... 15 Section 6.1. Counterparts................................................... 15 Section 6.2. Governing Law.................................................. 14 Section 6.3. Expenses....................................................... 14 Section 6.4. Notices........................................................ 14 Section 6.5. Successors and Assigns......................................... 15 Section 6.6. Headings....................................................... 16 Section 6.7. Amendments and Waivers......................................... 16 Section 6.8. Interpretation, Absence of Presumption......................... 16
i Section 6.9. Severability................................................ 16 Section 6.10. Further Assurances.......................................... 16 Section 6.11. Specific Performance........................................ 17 Section 6.12. Confidentiality............................................. 17
ii THIS STOCKHOLDERS AGREEMENT (the "Agreement"), dated as of August ___, 1997, is made by and among Prometheus Homebuilders LLC (the "Purchaser"), The Fortress Group, Inc., a Delaware corporation (the "Company") and the stockholders named herein (the "Stockholders"). Capitalized terms not otherwise defined herein have the meaning ascribed to them in the Stock Purchase Agreement (as hereinafter defined). RECITAL ------- WHEREAS, the Company, and the Purchaser have entered into a Stock Purchase Agreement, dated as of August, 1997 (the "Stock Purchase Agreement"), pursuant to which the Company has agreed to sell, and the Purchaser has agreed to purchase (i) up to an aggregate of 35,000 shares of the Class AA Convertible Preferred Stock of the Company, $0.01 par value per share (the "Class AA Preferred Stock"), (ii) up to an aggregate of 40,000 shares of Convertible Redeemable Preferred Stock of the Company $0.01 par value per share divided into Class ABI Convertible Redeemable Preferred Stock (the "Class ABI Preferred Stock") and Class ABII Convertible Redeemable Preferred Stock (the "Class ABII Preferred Stock" and, together with the Class AA Preferred Stock and the Class ABI Preferred Stock, the "Preferred Stock"), together with up to an aggregate of, initially, 1,000,000 Warrants (the "Warrants"), upon the terms and subject to the conditions set forth therein; WHEREAS, it is a condition to the transactions contemplated by the Stock Purchase Agreement and the parties believe it to be in their best interests that they enter into this Agreement and provide for certain rights and restrictions with respect to the investment by the Purchaser in the Company and the corporate governance of the Company; and WHEREAS, the Company and the Purchaser believe that the combination in a strategic partnership of the leadership, expertise and experience in the operations of the Company and the investment and capital markets expertise and access to capital of the Purchaser and its Affiliates will significantly enhance the Company's ability to pursue its growth and operating strategies. AGREEMENT --------- NOW, THEREFORE, in consideration of the premises and the covenants and agreements contained herein and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: ARTICLE I. DEFINITIONS ----------- Section 1.1 Defined Terms. As used in this Agreement, the following ------------- terms shall have the following respective meanings: "Additional Preferred Stock Directors" shall have the meaning set forth in Section 2.1(a). "Adverse Event" shall have the meaning set forth in Section 2.1(a). "Affiliate" shall mean any entity controlling, controlled by or under common control with the Company. For the purposes of this definition, "control" shall have the meaning presently specified for that word in Rule 405 promulgated by the Commission under the Securities Act. "Agreement" shall have the meaning set forth in the first paragraph hereof. "Average Trading Price" shall have the meaning set forth in Section 2.1(a). "Beneficially Own" shall mean, with respect to any security, having direct or indirect (including through any Subsidiary or Affiliate) "beneficial ownership" of such security, as determined pursuant to Rule 13d-3 under the Exchange Act, including pursuant to any agreement, arrangement or understanding, whether or not in writing; provided, however, that all of the shares of the -------- ------- Preferred Stock and the Warrants which the Purchaser has agreed to purchase under the Stock Purchase Agreement but which have not yet been purchased shall be deemed to be Beneficially Owned by the Purchaser until the Termination Event, if any, and provided, further, that for the purposes of Section 5.1 the -------- ------- Purchaser shall be deemed to own that number of shares of Common Stock that it actually Beneficially Owns at any given date plus the number of shares of Common ---- Stock into which the Preferred Stock is convertible, based on the Conversion Price (as defined in the Preferred Stock Certificates of Designations) of such Preferred Stock in effect on the relevant date. "Board" shall mean the board of directors of the Company. "Business Day" shall mean any day other than a Saturday, a Sunday or a bank holiday in New York, New York. "Class AA Preferred Stock" shall have the meaning set forth in the second paragraph hereof. "Class AB Preferred Stock" shall mean the Class ABI Preferred Stock and the Class ABII Preferred Stock. "Class ABI Preferred Stock" shall have the meaning set forth in the second paragraph hereof. "Class ABII Preferred Stock" shall have the meaning set forth in the second paragraph hereof. "Common Stock" shall mean the common stock, par value $0.01 per share, of the Company. 2 "Company" shall have the meaning set forth in the first paragraph hereof. "Comparable Group" shall mean Pulte Corporation, The Ryland Group, Inc., U.S. Home Corporation, NVR Inc., Hovnanian Enterprises, Inc., Toll Brothers, Inc., Washington Homes, Inc., Zaring National Corporation, M/I Schottenstein Homes, Inc., Continental Homes Holding Corp., Engle Homes, Inc., Crossman Communities, Beazer Homes USA, Inc. and D.R. Horton, Inc. "Conversion Event" shall have the meaning set forth in Section 2.1(d). "Director" shall mean a member of the Board. "EBT" shall mean earnings of the Company before interest, expenses, income, taxes, and extraordinary or non-recurring items, all calculated in accordance with generally accepted accounting principles. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Executive Committee" shall mean the five-member executive committee of the Board which shall have the powers set forth in Section 3.2(b). "Executive Equity Plan" shall have the meaning set forth in Section 3.2(e). "Executive Shareholders" shall mean J. Marshall Coleman and James J. Martell, Jr.. "Exercise Notice" shall have the meaning set forth in Section 4.1(b). "Governmental Entity" shall mean any court or tribunal in any jurisdiction (domestic or foreign) or any public, governmental, or regulatory body, agency, department, commission, board, bureau, or other authority or instrumentality (domestic or foreign). "Homebuilder Shareholders" shall mean all the Stockholders other than the Executive Shareholders. "Liquidation Preference" shall mean $1000.00 per share. "Market Capitalization of the Company" shall mean the market value of the Company's outstanding Common Stock as measured by the thirty (30) trading days preceding any measurement date. "Participation Notice" shall have the meaning set forth in Section 4.1(b). "Person" shall mean any individual, corporation, partnership, limited liability company, joint venture, trust, unincorporated organization, other form of business or legal entity or Governmental Entity. "Preferred Stock" shall have the meaning set forth in the second paragraph hereof. 3 "Preferred Stock Certificate of Designations" shall mean the Certificate of Designations of the Class AA Preferred Stock, the Certificate of Designations of the Class ABI Preferred Stock and the Certificate of Designations of the Class ABII Preferred Stock. "Preferred Stock Director" shall have the meaning set forth in Section 2.1(a). "Purchaser" shall have the meaning set forth in the first paragraph hereof. "Purchaser Nominees" shall mean the designees to the Board by Purchaser (or its assignee), with the number, committee representation and subsidiary and affiliate representation of such Purchaser Nominees being equal to the number of Preferred Stock Directors (as if such Preferred Stock remained outstanding) that would be entitled to sit on the Board or on the board of any subsidiary or affiliate of the Company and any committee of the Board pursuant to Section 2.1(a). "Quoted Price" The term "Quoted Price," with respect to the Common Stock, shall mean the last reported sales price for Common Stock as reported by the National Association of Securities Dealers, Inc. Automatic Quotations System, National Market System, or, if the applicable security is listed or admitted for trading on a securities exchange, the last reported sales price of the applicable security on the principal exchange on which the applicable security is listed or admitted for trading (which shall be for consolidated trading if applicable to such exchange), or if neither so reported or listed or admitted for trading, the last reported bid price of the applicable security in the over-the-counter market. In the event that the Quoted Price cannot be determined as aforesaid, the Board shall determine the Quoted Price on the basis of such quotations as it in good faith considers appropriate. Such determination may be challenged in good faith by a majority of holders of shares of Preferred Stock, and any dispute shall be resolved at the Company's cost, by an investment banking firm of recognized national standing selected by the Company and acceptable to such holders of Preferred Stock and shall be made in good faith and be conclusive absent manifest error. "Securities Act" shall mean the Securities Act of 1933, as amended. "Securities Filings" shall have the meaning set forth in Section 3.1(a)(iii). "Selling Shareholder" shall mean the Executive Shareholders and the Homebuilder Shareholders. "Stockholders" shall have the meaning set forth in the first paragraph hereof. "Stock Purchase Agreement" shall have the meaning set forth in the second paragraph hereof. "Tag-Along Notice" shall have the meaning set forth in Section 5.1(a). "Tag-Along Rights" shall have the meaning set forth in Section 5.1(a). 4 "Termination Event" shall mean on and after all Closings under the Stock Purchase Agreement have occurred, the date on which the aggregate remaining investment or commitment to invest in the Company by Purchaser (or any transferee or assignee of the Purchaser or group of transferees or assignees) is less than the greater of $10,000,000 or ten percent (10%) of the Market Capitalization of the Company, with the value of such investment to be based on the sum of (x) the greater of the Liquidation Preference of the Preferred Stock and the value of the Common Stock underlying such Preferred Stock (as measured by the Conversion Price) then held by it, (y) the value of the Common Stock then held by it, and (z) the value of the Warrants then held by it. "Test Date" shall have the meaning set forth in Section 2.1(a). "Third Party" shall have the meaning set forth in Section 5.1(a). "Third Party Terms" shall have the meaning set forth in Section 5.1(a). "Transfer" shall mean sell, transfer, assign, pledge, hypothecate or in any way alienate. "Warrants" shall have the meaning set forth in the second paragraph hereof. ARTICLE II. BOARD ----- Section 2.1 Members of the Board. (a) Until a Termination Event, the -------------------- Company and the Stockholders shall take all action necessary to cause: (i) the number of Directors comprising the Board to be equal to fifteen (15) (subject to increase in the case of an Adverse Event, as provided below), (ii) the holders of Preferred Stock, voting separately as a single class, as set forth in the Preferred Stock Certificates of Designations, to have the exclusive right to elect a minimum of three (3) Directors (each such Director, a "Preferred Stock Director"), (iii) any increases in the size of the Board to result in an increase in the number of Preferred Stock Directors (rounded up to the next whole number) such that Preferred Stock Directors represent at least 20 percent (20%) of the votes exercisable by the Board, and (iv) at least a proportionate number (rounded up to the next whole number) of Preferred Stock Directors to serve on each committee of the Board (provided that with respect to the Executive Committee, the Executive Committee shall consist of five members, of which two members shall be Preferred Stock Directors), and at least one Preferred Stock Director to serve on the board or other governing body of each of the Company's subsidiaries and affiliates, other than operational home building companies. In the event (an "Adverse Event") that on any date following the Initial Issue Date that is 60 days after the end of a fiscal quarter of the Company (a "Test Date") both (i) the Average Trading Price of the Common Stock is below $5 per share (provided that such amount shall be adjusted for reverse stock splits, recapitalizations and other similar events) and (ii) (x) the percentage change in the EBT per share of the Company (of the Common Stock issued and outstanding) for the most recent two fiscal quarters as measured against the same two fiscal quarters from the prior fiscal year is less than (y) the percentage change in the EBT per share (of the Common Stock issued and outstanding) of the Comparable Group for the same period as 5 compared against the EBT per share (calculated on the same basis) of the Comparable Group during the same period in the prior fiscal year then the Company and the Stockholders shall take all action necessary to cause: (i) the holders of Class AA Preferred Stock and Class ABI Preferred Stock, voting separately as a single class, to elect Preferred Stock Directors sufficient to cause the Preferred Stock Directors to constitute a majority of the Board and all committees of the Board, including the Executive Committee ("Additional Preferred Stock Directors") and (ii) the size of the Board and all committees to be automatically increased in order to effect any such additional Directors. The right of the holders of Class A Preferred Stock and Class ABI Preferred Stock to elect Additional Preferred Stock Directors shall continue until such time as neither (i) nor (ii) above is true for two consecutive Test Dates. The "Average Trading Price" shall mean, on any date of determination, the average of the closing prices of the Common Stock over the 90 day period prior to such date. (b) In the event that all the shares of the Preferred Stock shall have been converted into Common Stock prior to the occurrence of a Termination Event (a "Conversion Event"), the Company will support the nomination of and the election of Purchaser Nominees, and each Stockholder shall vote all of its shares to elect such Purchaser Nominees, such that Purchaser shall have the same right to elect Directors as set forth in paragraph (a) above, including rights to appoint Directors to committees and subsidiaries as set forth in paragraph (a) above, as if Purchaser still owned all of the Preferred Stock, and the Company and the Stockholders will exercise all authority under applicable law to cause such Purchaser Nominees to be elected to the Board. Without limiting the generality of the foregoing, with respect to each meeting of stockholders of the Company at which Directors are to be elected, the Company shall use its best efforts to solicit from the stockholders of the Company (other than the Purchaser) eligible to vote in the election of Directors provided in favor of each Purchaser Nominee. (c) If a Director has been designated by Purchaser and Purchaser requests that such Director be removed (with or without cause) then such Director shall be removed with or without cause, and each Stockholder hereby agrees to vote all shares of Common Stock owned or held of record to effect such removal. (d) Nothing in this Agreement shall prevent Purchaser or any of its transferees or assignees from voting securities owned by them in their sole and absolute discretion, including voting securities to elect additional directors to the Board in excess of the Directors which Purchaser is entitled to elect pursuant to the terms of this Agreement. ARTICLE III. COVENANTS --------- Section 3.1 Operating Statements; Public Company Status. -------------------------------------------- (a) From and after the date of this Agreement until the Termination Event, if any, the Company will: 6 (i) deliver to the Purchaser, as soon as practicable after the end of each month or other reporting period, operating and financial statements and management reports (x) of the Company, and (y) of each Subsidiary not consolidated with the Company, each as, at and for the end of such month or other reporting period, and such other statements or reports as are reasonably requested by Purchaser, all in such form as shall reasonably be required by Purchaser; (ii) deliver to Purchaser copies of all other information distributed by the Company to the Board; (iii) deliver to the Purchaser, as promptly as practicable following filing, a copy of each report, schedule or other document filed by the Company pursuant to the requirements of any federal or state securities laws (collectively, the "Securities Filings"); and (iv) continue to comply in all material respects with the reporting requirements of Section 13 or 15(d) of the Exchange Act. (b) Until a Termination Event, the Company will afford the Purchaser a reasonable opportunity to review any Securities Filing, any other filing with a Governmental Entity and any press release or similar public announcement to be issued, released or made by the Company or any of its Affiliates (including, without limitation, any oral announcement) which refers to, describes or mentions the Purchaser or any of its Affiliates at least three (3) Business Days prior to the time that such filing is filed with or sent to the applicable Governmental Entity or such release or announcement is disseminated. Section 3.2 Conduct of Business. (a) Notwithstanding the fact that a ------------------- vote of the Board or the Executive Committee may not be required under applicable law, the Company shall not, and shall not permit any of its subsidiaries without either (A) the affirmative vote of over eighty-one percent (81%) of the Directors ("Supermajority Director Approval") or (B) the affirmative vote of over eighty-one percent (81%) of the members of the Executive Committee ("Supermajority Executive Committee Approval") to: (i) purchase, sell, license, assign, transfer, convey or otherwise acquire or dispose of any assets, securities, or businesses, unless such transaction is provided for in the annual budget or is in the ordinary course of business and does not involve (i) the acquisition or disposition of homebuilding operations or any homebuilding company or entity or (ii) land acquisitions with a value in excess of $100,000 for any transaction or group of related transactions or with an aggregate value in excess of $5,000,000 in any twelve (12) month period; (ii) directly or indirectly incur, refinance, repay, prepay, create, assume, guarantee or otherwise become liable with respect to any liabilities with an aggregate face amount in excess of $1,000,000 in the aggregate, other than in accordance with existing credit facilities and renewals thereof on substantially the same terms; 7 (iii) enter into any transaction after the date hereof or materially amend any transaction in effect on the date hereof, with any Affiliate of the Company (other than between the Company and its Subsidiaries or between its Subsidiaries); (iv) split (including any reverse split), combine, or reclassify any shares of its capital stock; adopt resolutions authorizing a liquidation, dissolution, merger, consolidation, restructuring, recapitalization, or other reorganization of the capital structure of the Company or any of its subsidiaries; or make any other material changes in its capital structure; (v) engage in any new development or redevelopment of any real property for an amount in excess of $100,000, whether in a single transaction or a series of related transactions (provided that it is contemplated that such authority will be delegated to the Company's acquisitions committee on guidelines approved by the Executive Committee); (vi) incur any capital expenditure for an amount, outside of the approved annual budget, in excess of $50,000 per occurrence or $500,000 in the aggregate, whether in a single transaction or a series of related transactions or waive, release, grant or transfer any rights of value in respect thereof or enter into any agreement or arrangement that could adversely affect the marketability of any real estate of the Company or any of its subsidiaries; (vii) enter into any employment agreement with any employee involving payments in excess of $100,000 per annum or with any director or executive officer of the Company or any of its Subsidiaries or enter into or materially change any Benefit Arrangement; (viii) enter into any new line of business other than the business engaged in by the Company and its Subsidiaries on the date hereof, cease to be engaged in any material line of business engaged in by the Company and its Subsidiaries on the date hereof or materially change the nature of the business engaged in by any of them on the date hereof; (ix) approve the annual operating budget of the Company for any year after 1997; (x) amend or take actions materially inconsistent with the approved annual operating budget for 1997 or any subsequent year; (xi) make any general assignment for the benefit of creditors; 8 (xii) file any petition seeking relief, or consent to the institution of any proceeding against itself seeking to adjudicate it a bankrupt or insolvent, under any law relating to bankruptcy, insolvency or reorganization or relief of debtors; (xiii) institute, voluntarily dismiss, terminate or settle any litigation or arbitration against any Person (A) involving payments for damages and penalties in excess of $50,000 or (B) otherwise material to the Company and its subsidiaries taken as a whole; (xiv) engage, retain, pay or agree to pay the fees or expenses of any third party consultants or advisors (other than advisors retained in the ordinary course of business), to the extent that such fees and expenses exceed one hundred thousand dollars ($100,000) in the aggregate; (xv) appoint, ratify or replace the independent accountants, change any accounting policy or practice other than as mandated by generally accepted accounting principles then in effect; or change any significant tax methods, practices, procedures or policies; (xvi) enter into or amend any joint venture, partnership or profit sharing agreement or arrangement; (xvii) amend to the Company's or any Subsidiary's certificate of incorporation or bylaws; or (xviii) declare or pay any dividend or make any other distribution with respect to its capital stock, other than dividends paid by any subsidiary to the Company or another subsidiary in the ordinary and usual course of business or to the holders of the Preferred Stock and the Existing Preferred Stock as required pursuant to the terms of the Preferred Stock and the Preferred Stock Certificates of Designations; (xix) issue, sell, (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase, or otherwise) any of its capital stock (other than upon conversion of the Preferred Stock or the Existing Preferred Stock or upon exercise of the Warrants) or deliver or other securities other than as contemplated herein or pursuant to stock options issued and outstanding as of the date hereof or purchase or otherwise acquire any of its capital stock, employee or director stock options or debt securities; or (xx) agree to do any of the foregoing. (b) The Board will promptly establish an Executive Committee, which shall be delegated the authority to the maximum extent permitted by law to approve any matter 9 permissible under law for authorization by an Executive Committee, including the matters set forth in Section 3.2(a). (c) The bylaws of the Company shall provide that the number of directors required to constitute a Supermajority Director Approval and a Supermajority Executive Committee Approval shall constitute a quorum for the Board and Executive Committee, respectively, and the Company and the Stockholders shall take all action necessary to amend its Certificate of Incorporation, and bylaws (and the bylaws, certificates of incorporation of its subsidiaries) to give effect to terms and conditions of this Agreement, the forms of such amendments to be reasonably satisfactory to Purchaser. (d) Prior to a Termination Event, Purchaser may elect to terminate all or a portion of the voting provisions of this Agreement, such that except as otherwise required by law, actions requiring Supermajority Director Approval or Supermajority Executive Committee Approval will require only majority approval, and the Company and each Stockholder agree to take all such action as may be necessary to give effect to such termination, including amending this Agreement and the bylaws and certificates of incorporation of the Company and its subsidiaries. (e) Purchaser agrees to support, in principle, the adoption by the Company of a stock option plan in a form reasonably acceptable to the Purchaser pursuant to which the Company may issue options to purchase up to one million (1,000,000) shares (inclusive of available options under the existing option plan) of Common Stock to management of the Company (the "Executive Equity Plan"). (f) Each of the Stockholders agree to take all such action as may be necessary to effect a Certificate Amendment to increase the number of authorized shares of Common Stock if required to satisfy the conversion/exercise rights of the Securities purchased by Purchaser under the Stock Purchase Agreement. (g) Each of the Stockholders hereby constitute and appoint ______, [and each of them,] with full power of substitution, as the proxies of the Stockholders and hereby authorizes each of them to represent and to vote all of the shares of capital stock of the Company held by them in favor of the approval of all transactions that are necessary to give effect to the terms of this Agreement to the same extent and with the same effect as the Stockholder might or could do under applicable law, rules and regulations. The proxy granted pursuant to the immediately preceding sentence is given in consideration of the agreements and covenants of the Company pursuant to this Agreement and as such is coupled with an interest and shall be irrevocable unless and until a Termination Event occurs. The Stockholder hereby revokes any and all previous proxies granted with respect to any of the Shares and shall not hereafter, unless and until a Termination Event occurs, purport to grant any other proxy or power of attorney with respect to any of the Shares, deposit any of the Shares into a voting trust or enter into any agreement (other than this Agreement), arrangement or understanding with any Person, directly or indirectly, to vote or grant any proxy or give instructions with respect to the voting of any of the Shares. 10 ARTICLE IV. PARTICIPATION RIGHTS -------------------- Section 4.1. (a) Right to Participate. From and after the date hereof -------------------- until a Termination Event, if any, the Purchaser shall be entitled to a participation to purchase or subscribe for up to that number of additional shares of capital stock (including as "capital stock" for purposes of this Section 4.1, any security, option, warrant, call, commitment, subscription, right to purchase or other agreement of any character that is convertible into or exchangeable or redeemable for shares of capital stock of the Company or any Subsidiary (and all references in this Section 4.1 to capital stock shall, as appropriate, be deemed to be references to any such securities), and also including additional shares of capital stock to be issued pursuant to the conversion, exchange or redemption of any security, option, warrant, call, commitment, subscription, right to purchase or other agreement of any character that is convertible into or exchangeable or redeemable for shares of capital stock, as if the price at which such additional shares of capital stock is issued pursuant to any such conversion, exchange or redemption were the market price on the date of such issuance) to be issued or sold by the Company which represents the same proportion of the total number of shares of capital stock to be issued or sold by the Company (including the shares of capital stock to be issued to the Purchaser upon exercise of its participation rights hereunder; it being understood and agreed that the Company will accordingly be required to either increase the number of shares of capital stock to be issued or sold so that the Purchaser may purchase additional shares to maintain its proportionate interest, or to reduce the number of shares of capital stock to be issued or sold to Persons other than the Purchaser) as is represented by the number of shares of Common Stock owned by the Purchaser or into which the Purchaser has the right to convert prior to such sale or issuance at the conversion prices in effect at the relevant time (and including for this purpose any shares of Common Stock to be acquired pursuant to the Stock Purchase Agreement, but not yet issued) relative to the number of shares of Common Stock outstanding prior to such sale or issuance (and including for this purpose any shares of Common Stock to be acquired pursuant to the Stock Purchase Agreement, but not yet issued); provided, however, that the provisions of this Section 4.1 shall not apply to - -------- ------- (i) the conversion of the Existing Preferred Stock, the Preferred Stock or the exercise of Warrants, or the conversion, exchange or exercise of other securities convertible into or exchangeable or exercisable for Common Stock whose issuance was subject to an adjustment pursuant to the Preferred Stock Certificates of Designations and (ii) Common Stock issued to the Corporation's employees under to the Executive Equity Plan and other bona fide employee benefit plans adopted by the Board and approved by the holders of Common Stock when required by law (but only to the extent that the aggregate number of shares excluded thereby and issued after the date hereof pursuant to such other benefit plans shall not exceed 5% of the common stock outstanding at the time of any such issuance). (b) Notice. In the event the Company proposes to issue or sell any ------ shares of capital stock in a transaction giving rise to the participation rights provided for in this Section, the Company shall send a written notice (the "Participation Notice") to the Purchaser setting forth the number of shares of such capital stock of the Company that the Company proposes to sell or issue, the price (before any commission or discount) at which such shares are proposed to be issued (or, in the case of an underwritten or privately placed offering in which the price is not 11 known at the time the Participation Notice is given, the method of determining such price and an estimate thereof), and all other relevant information as to such proposed transaction as may be necessary for the Purchaser to determine whether or not to exercise the rights granted in this Section. At any time within 20 days after its receipt of the Participation Notice, the Purchaser may exercise its participation rights to purchase or subscribe for shares of such shares of capital stock, as provided for in this Section, by so informing the Company in writing (an "Exercise Notice"). Each Exercise Notice shall state the percentage of the proposed sale or issuance that the Purchaser elects to purchase. (c) Terms of Sale. The purchase or subscription by the Purchaser or ------------- an Affiliate thereof, as the case may be, pursuant to this Section shall be on the same price and other terms and conditions, including the date of sale or issuance, as are applicable to the purchasers or subscribers of the additional shares of capital stock of the Company whose purchases or subscriptions give rise to the participation rights (except that the price to Investor to make such purchase or subscription shall be net of payment of any underwriting, placement agent or similar fee associated with such purchase or subscription), which price and other terms and conditions shall be substantially as stated in the relevant Participation Notice (which standard shall be satisfied if the price, in the case of a negotiated transaction, is not greater than 110% of the estimated price set forth in the relevant Participation Notice or, in the case of an underwritten or privately placed offering, is not greater than the greater of (i) 110% of the estimated price set forth in the relevant Participation Notice, and (ii) the most recent Quoted Price on or prior to the date of the pricing of the offering); provided, however, that in the event the purchases or -------- ------- subscriptions giving rise to the participation rights are effected by an offering of securities registered under the Securities Act and in which offering it is not legally permissible for the securities to be purchased by the Purchaser to be included, such securities to be purchased by Investor will be purchased in a concurrent private placement. (d) Timing of Sale. If, with respect to any Participation Notice, the -------------- Purchaser fails to deliver an Exercise Notice within the requisite time period, the Company shall have sixty (60) days after the expiration of the time in which the Exercise Notice is required to be delivered in which to sell not more than 110% of the number of shares of capital stock of the Company described in the Participation Notice (plus, in the event such shares are to be sold in an underwritten public offering, an additional number of shares of capital stock of the Company, not in excess of 15% of 110% of the number of shares of capital stock of the Company described in the Participation Notice, in respect of any underwriters overallotment option) and not less than 90% of the number of shares of capital stock of the Company described in the Participation Notice at a price of not less than 90% of the estimated price set forth in the Participation Notice. If, at the end of sixty (60) days following the expiration of the time in which the Exercise Notice is required to be delivered, the Company has not completed the sale or issuance of capital stock of the Company in accordance the terms described in the Participation Notice (or at a price which is at least 90% of the estimated price set forth in the Participation Notice), or in the event of any contemplated sale or issuance within such sixty (60)-day period but outside such price parameters, the Company shall again be obligated to comply with the provisions of this Section with respect to, and provide the opportunity to participate in, any proposed sale or issuance of shares of capital stock of the Company; provided, however, that notwithstanding the foregoing, if -------- ------- 12 the price at which such capital stock is to be sold in an underwritten offering is not at least 90% of the estimated price set forth in the Participation Notice, the Company may inform Investor of such fact and Investor shall be entitled to elect, by written notice delivered within three (3) Business Days following such notice from the Company, to participate in such offering in accordance with the provisions of this Section 4.1. ARTICLE V. TAG-ALONG RIGHTS ---------------- Section 5.1. Tag-Along Rights. (a) Each of the Executive Shareholders ---------------- agrees that (i) from the date hereof through the third anniversary of the date hereof he shall not Transfer, whether in a single transaction or in a series of linked transactions, more than ten percent (10%) per year, when aggregated with all such other Transfers made by such shareholder in such year, of the Common Stock Beneficially Owned by him on the date hereof and (ii) from the third anniversary of the date hereof through the fourth anniversary of the date hereof he shall not Transfer, whether in a single transaction or in a series of linked transactions, more than five percent (5%), when aggregated with all such other Transfers made by such shareholder during such period, of the Common Stock Beneficially Owned by him on the date hereof, unless, the terms and conditions of such Transfer shall include an offer to the Purchaser to include in the transfer to the proposed transferee (the "Third Party"), at the Purchaser's option and on the same price and on the same terms and conditions as apply to the Executive Shareholder, an amount of Preferred Stock and Common Stock held by the Purchaser determined in accordance with this Section 5.1. Each of the Homebuilder Shareholders agrees that from and after the date hereof, he shall not Transfer, whether in a single transaction or in a series of linked transactions, more than fifty percent (50%), when aggregated with all such other Transfers made by such shareholder, of the Common Stock then Beneficially Owned by him, unless the terms and conditions of such Transfer shall include an offer to the Purchaser to include in the transfer to the Third Party at the Purchaser's Option and on the same price and on the same terms and conditions as apply to the Homebuilder Shareholder, an amount of Preferred Stock and Common Stock determined in accordance with this Section 5.1. The Third Party shall be required to purchase from the Purchaser, if the Purchaser desires to participate in such transaction, the number of shares of Common Stock Beneficially Owned by the Purchaser equaling the lesser of (x) the number derived by multiplying (i) the total number of shares of Common Stock which the Third Party proposes to purchase by (ii) a fraction, the numerator of which shall be the number of shares of Common Stock Beneficially Owned by the Purchaser and the denominator of which shall be the number of shares of Common Stock Beneficially Owned by the Purchaser and the applicable Selling Shareholder or (y) such lesser number of shares as the Purchaser shall designate in the Tag- Along Notice (defined below). If the Tag-Along Right results in the Purchaser including more shares of Common Stock Beneficially Owned by him in any Tag-Along Notice, than will, on the date of transfer by the Purchaser to the Third Party, have been converted into Common Stock, the Purchaser and the Company shall take such steps as are reasonably required to convert to Common Stock any Preferred Stock to be purchased by the Third Party (at the prevailing Conversion Price(s) for the Preferred Stock being sold by the Selling Shareholder) which the Purchaser desires to transfer immediately prior to such 13 transfer and contingent upon such transfer occurring, it being the parties' intention that only Common Stock will be transferred to the Third Party pursuant to this Section 5.1. The Selling Shareholder shall notify the Company and the Purchaser of any proposed Transfer to which the provisions of this Section 5.1 apply. Each such notice shall set forth: (i) the name of the Third Party and the number of shares of Common Stock proposed to be transferred, (ii) the address of the Third Party, (iii) the proposed amount and form of consideration and terms and conditions of payment offered by the Third Party, and any other material terms pertaining to the Transfer (the "Third Party Terms") and (iv) that the Third Party has been informed of the "Tag-Along Rights" provided for in this Section 5.1 and has agreed to purchase shares of Common Stock in accordance with the terms hereof. The Tag-Along Rights set forth above in this Section 5.1 may be exercised by the Purchaser by delivery of a written notice to the Company and the Selling Shareholder (the "Tag-Along Notice") within thirty (30) days following receipt of the notice specified in the preceding paragraph. The Tag- Along Notice shall state the number of shares of Common Stock that the Purchaser wishes to include in such transfer to the Third Party. Upon the giving of a Tag-Along Notice, the Purchaser shall be entitled and obligated to sell the number of shares of Common Stock set forth in the Tag- Along Notice to the Third Party on the Third Party Terms; provided, however, -------- ------- that neither the Selling Shareholder nor the Purchaser shall consummate the sale of any shares offered by it if the Third Party does not purchase all shares which the Selling Shareholder and the Purchaser are entitled and desire to sell pursuant hereto. After expiration of the thirty-day period referred to above, if the provisions of this Section have been complied with in all respects, the Selling Shareholder shall have the right for a sixty (60)-day period to transfer the shares of Common Stock to the Third Party on the Third Party Terms (or on other terms no more favorable to the Selling Shareholder) without further notice to the Purchaser, but after such sixty (60)-day period no such transfer may be made without again giving notice to the Purchaser of the proposed transfer and complying with the requirements of this Section 5.1. (b) At the closing of the transfer to any Third Party (of which the Selling Shareholder shall give the Purchaser who has elected to exercise the Tag-Along Right provided by this Section 5.1 at least five (5) Business Days' prior written notice), the Third Party shall remit to the Purchaser the consideration for the total sales price of the Common Stock of the Purchaser sold pursuant thereto, against delivery by the Purchaser of certificates for such Common Stock, duly endorsed or with duly executed stock powers and the compliance by such Shareholder with any other conditions to closing generally applicable to the Selling Shareholder and all Other Shareholders selling shares in such transaction. (c) Notwithstanding the foregoing, the Tag-Along Rights provided by this Section 5.1 shall terminate upon a Termination Event. 14 ARTICLE VI. MISCELLANEOUS ------------- Section 6.1. Counterparts. This Agreement maybe executed in one or ------------ more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. Copies of executed counterparts transmitted by telecopy, telefax or other electronic transmission service shall be considered original executed counterparts for purposes of this Section, provided receipt of copies of such counterparts is confirmed. Section 6.2 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND ------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT REFERENCE TO THE CHOICE OF LAW PRINCIPLES THEREOF. Section 6.3. Expenses. The Company shall pay all costs and expenses -------- incurred by the Company and the Purchaser in connection with the transactions contemplated by this Agreement. Section 6.4. Notices. Unless otherwise provided herein, any notice, ------- request, instruction or other document to be given hereunder by any party to the other shall be in writing and delivered by hand-delivery, registered first-class mail, telex, confirmed telecopy, or air courier guaranteeing overnight delivery, as follows: If to the Company: The Fortress Group, Inc. 1921 Gallows Road, Suite 730 Vienna, VA 22182 Telephone: (703) 442-4545 Facsimile: (703) 442-7730 Attn: J. Marshall Coleman with a copy to: Secretary With an additional copy to: Arent Fox Kintner Plotkin & Kahn 1050 Connecticut Avenue, NW Washington, DC 20036 Telephone: (202) 857-6235 Facsimile: (202) 857-6120 Attn: Jeffrey E. Jordan 15 If to the Purchaser: Prometheus Homebuilders LLC c/o Lazard Freres Real Estate Investors, LLC Thirty Rockefeller Plaza, 63rd Floor New York, NY 10020 Telephone: (212) 632-6060 Facsimile: (212) 632-6052 Attn: Robert P. Freeman Murry N. Gunty With a copy to: Latham & Watkins 885 Third Avenue New York, NY 10022 Telephone: (212) 906-1200 Facsimile: (212) 751-4864 Attn: R. Ronald Hopkinson or to such other place and with such other copies as either party may designate as to itself by written notice to the other. All such notices, requests, instructions or other documents shall be deemed to have been duly given; at the time delivered by hand, if personally delivered; four (4) Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged by addressee, if by telecopier transmission; and on the next Business Day if timely delivered to an air courier guaranteeing overnight delivery. Section 6.5 Successors and Assigns. This Agreement shall be binding ---------------------- upon and inure to the benefit of the parties hereto and their respective successors. Neither party shall be permitted to assign any of its rights hereunder to any third party, except that the Purchaser shall be permitted to assign its rights hereunder any transferee or assignee or group of transferees or assignees of any of the Preferred Stock provided that such person agrees to be bound by this Agreement. Section 6.6. Headings. The Section, Article and other headings -------- contained in this Agreement are inserted for convenience of reference only and will not affect the meaning or interpretation of this Agreement. All references to Sections or Articles contained herein mean Sections or Articles of this Agreement unless otherwise stated. Section 6.7. Amendments and Waivers. This Agreement may not be ---------------------- modified or amended except by an instrument or instruments in writing signed by the party against whom enforcement of any such modification or amendment is sought. Any party hereto may, only by an instrument in writing, waive compliance by another party hereto with any term or provision hereof on the part of such other party hereto to be performed or complied with. The waiver by any party 16 hereto of a breach of any term or provision hereof shall not be construed as a waiver of any subsequent breach. Section 6.8. Interpretation, Absence of Presumption. (a) For the -------------------------------------- purposes hereof, (i) words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other gender as the context requires, (ii) the terms "hereof, "herein", and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Schedules and Exhibits hereto) and not to any particular provision of this Agreement, and Article, Section and paragraph, references are to the Articles, Sections and paragraphs to this Agreement unless otherwise specified, (iii) the word "including" and words of similar import when used in this Agreement shall mean "including, without limitation," unless the context otherwise requires or unless otherwise specified, (iv) the word "or" shall not be exclusive, and (v) provisions shall apply, when appropriate, to successive events and transactions. (b) This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting or causing any instrument to be drafted. Section 6.9. Severability. Any provision hereof which is invalid or ------------ unenforceable shall be ineffective to the extent of such invalidity or unenforceability, without affecting in any way the remaining provisions hereof. Section 6.10. Further Assurances. The Company and the Purchaser agree ------------------ that, from time to time, each of them will, and will cause their respective Affiliates to, execute and deliver such further instruments and take such other action as may be necessary to carry out the purposes and intents hereof. Section 6.11. Specific Performance. The Company and the Purchaser each -------------------- acknowledge that, in view of the uniqueness of arrangements contemplated by this Agreement, the parties hereto would not have an adequate remedy at law for money damages in the event that this Agreement were not performed in accordance with its terms, and therefore agree that the parties hereto shall be entitled to specific enforcement of the terms hereof in addition to any other remedy to which the parties hereto may be entitled at law or in equity. Section 6.12. Confidentiality. The Purchaser and the Company agrees --------------- that all information provided to each other or any of their respective representatives pursuant to this Agreement shall be kept confidential, and such parties shall not (x) disclose such information to any persons other than the directors, officers, employees, financial advisors, legal advisors, accountants, consultants and affiliates of such parties who reasonably need to have access to the confidential information and who are advised of the confidential nature of such information or (y) use such information in a manner which would be detrimental to the Company or the Purchaser; provided, however, the foregoing -------- ------- obligation of such parties shall not (a) relate to any information that (i) is or becomes generally available other than as a result of unauthorized disclosure by such parties or by persons to whom such parties have made such information available, (ii) is or becomes available to such parties on a non-confidential basis from a third party 17 that is not, to such parties' knowledge, bound by any other confidentiality agreement with the other party, or (b) prohibit disclosure of any information if required by law, rule, regulation, court order or other legal or governmental process. [Signature Page Follows] 18 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. THE FORTRESS GROUP, INC. By:______________________________________ Name:____________________________________ Title:___________________________________ PROMETHEUS HOMEBUILDERS LLC By: Prometheus Homebuilders Funding Corp. Managing Member STOCKHOLDERS _________________________________________ Name: J. Marshall Coleman _________________________________________ Name: James J. Martell, Jr. _________________________________________ Name: Robert Short _________________________________________ Name: J. Christopher Stuhmer _________________________________________ Name: Thomas Buffington _________________________________________ Name: Lawrence Witek _________________________________________ Name: Ted Kirkpatrick _________________________________________ Name: Lanold Caldwell _________________________________________ Name: James Giddens 19 EX-99.5 6 FORM OF WARRANT AGREEMENT EXHIBIT 99.5 WARRANT AGREEMENT BY AND BETWEEN THE FORTRESS GROUP, INC. and PROMETHEUS HOMEBUILDERS LLC Dated as of _________, 1997 WARRANT 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 -------------------- 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 ------------ 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 --------------------------------------- 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 ------------------------------ 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 -------- ------- 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 2 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 3 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 - -------- ------- 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. 4 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 ---------------- stamp taxes attributable to the initial issuance of Warrant Shares upon the exercise of Warrants; provided, however, that the Company shall not be required -------- ------- 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 ----------------------------- 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 5 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 ----------------------- 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 --------------------------------------------------------- Issuable. The Exercise Price and the number of Warrant Shares issuable upon - -------- 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, 6 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) 7 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. 8 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 ----- 9 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. -------------------- 10 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 -------- ------- 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, 11 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 12 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. 13 (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 bill 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. 14 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. 1921 Gallows Road Vienna, Virginia 22182 Telephone (703) 442-4545 Facsimile: (703) 442-7730 Attention: J. Marshall Coleman 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 Hart- Scott-Rodino Improvements Act of 1976 (the "HSR Act") 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 EX-99.6 7 FORM OF CLASS AA CERTIFICATE OF DESIGNATIONS EXHIBIT 99.6 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF OF CLASS AA CONVERTIBLE PREFERRED STOCK OF THE FORTRESS GROUP, INC. _________________________ Pursuant to Section 151 of the General Corporation Law of the State of Delaware _________________________ The Fortress Group, Inc., a Delaware corporation (the "Corporation") certifies that pursuant to the authority contained in Article Fourth of its Certificate of Incorporation (the "Certificate of Incorporation") and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors by unanimous written consent dated __________, 1997 adopted the following resolution which resolution remains in full force and effect on the date hereof: RESOLVED, that there is hereby established a series of authorized preferred stock having a par value of $0.01 per share, which series shall be designated as "Class AA Convertible Preferred Stock" (the "Class AA Preferred Stock"), shall consist of 35,000 shares and shall have the following voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof as follows: 1 Certain Definitions; Number of Shares and Designation. ----------------------------------------------------- (a) Definitions. Unless the context otherwise requires, the terms ----------- defined in this paragraph 1 shall have, for all purposes of this resolution, the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). Additional Preferred Stock Directors. The term "Additional Preferred ------------------------------------ Stock Directors" shall have the meaning set forth in subparagraph 5(d). Adjustment Period. The term "Adjustment Period" shall have the meaning ----------------- set forth in subparagraph 4(a)(i). Adjustment Price. The term "Adjustment Price" shall mean, on any date ---------------- of determination, the average of the closing prices of the Common Stock over the 60 day period prior to such date. Adverse Event. The term "Adverse Event" shall have the meaning set ------------- forth in subparagraph 5(d) Approval Date. The term "Approval Date" shall mean _____________ __, ------------- 1997. Average Trading Price. The term "Average Trading Price" shall have --------------------- the meaning set forth in subparagraph 5(d). Board of Directors. The term "Board of Directors" shall mean the ------------------ Board of Directors of the Corporation. Business Day. The term "Business Day" shall mean a day other than a ------------ Saturday or Sunday or a bank holiday in New York. Class AA Preferred Stock. The term "Class AA Preferred Stock" shall ------------------------ have the meaning set forth in subparagraph 1(b). Class ABI Preferred Stock. The term "Class ABI Preferred Stock" shall ------------------------- mean the ______ shares of Class ABI Convertible Redeemable Preferred Stock, $0.01 par value per share, of the Corporation. Class ABII Preferred Stock. The term "Class ABII Preferred Stock -------------------------- shall mean the ______ shares of Class ABII Convertible Redeemable Preferred Stock, $0.01 par value per share, of the Corporation. Commission. The term "Commission" shall mean the United States ---------- Securities and Exchange Commission. Common Equity. The term "Common Equity" shall mean all shares now or ------------- hereafter authorized of any class of common stock of the Corporation, including the Common Stock, and any other stock of the Corporation, howsoever designated, authorized after the Initial Issue Date, which has the right (subject always to prior rights of any class or series of preferred stock) to participate in the distribution of the assets and earnings of the Corporation without limit as to per share amount. Common Stock. The term "Common Stock" shall mean the common stock, ------------ par value $0.01 per share, of the Corporation. Comparable Group. The term "Comparable Group" shall mean Pulte ---------------- Corporation, The Ryland Group, Inc., U.S. Home Corporation, NVR Inc., Hovnanian Enterprises, Inc., Toll Brothers, Inc., Washington Homes, Inc., Zaring National Corporation, M/I Schottenstein Homes, 2 Inc., Continental Homes Holding Corp., Engle Homes, Inc., Crossman Communities, Beazer Homes USA, Inc. and D.R. Horton, Inc. Conversion Date. The term "Conversion Date" shall mean the Optional --------------- Conversion Date and the Mandatory Conversion Date, as applicable. Conversion Price. The term "Conversion Price" shall mean the Mandatory ---------------- Conversion Price or the Optional Conversion Price(s). (as the context requires) and "Conversion Prices" shall mean the Mandatory Conversion Price or the Optional Conversion Price(s). Corporation Conversion Period. The term "Corporation Conversion ----------------------------- Period" shall mean any date when the Average Trading Price is equal to or exceeds $12.00 provided that, should the Corporation issue any stock or do any of the other acts or things specified in subparagraphs 4(f) through (j) hereof, the Corporation shall each time successively adjust the $12.00 Average Trading Price in a like manner to the adjustments specified in paragraph 4 hereof, following the procedures and using the assumptions set forth in such paragraph and shall notify the holder of the Class AA Preferred Stock of any such adjustment in the manner specified in paragraph 4 and such adjusted number shall appear in lieu of the $12.00 Average Trading Price giving rise to a Corporate Conversion Period. Current Market Price. The term "Current Market Price" means, for a -------------------- share of Common Stock on any date, the average of Quoted Prices for the thirty (30) consecutive Trading Days commencing forty-five (45) Trading Days before the date in question. Director. The term "Director" means a member of the Board of -------- Directors. Dividend Payment Date. The term "Dividend Payment Date" shall have --------------------- the meaning set forth in subparagraph 2(b). Dividend Period. The term "Dividend Period" shall mean the period --------------- from, and including, the Initial Issue Date to, but not including, the first Dividend Payment Date and thereafter, each quarterly period from, and including, the Dividend Payment Date to, but not including the next Dividend Payment Date. Dividend Rate. The term "Dividend Rate" shall mean six percent (6%). ------------- EBT. The term "EBT" shall mean earnings before interest expense, --- income taxes and extraordinary or non-recurring items, all calculated in accordance with generally accepted accounting principles. Executive Committee. The term "Executive Committee" shall mean the ------------------- five-member executive committee of the Board of Directors to which substantial operational matters regarding the Corporation shall be delegated. Initial Issue Date. The term "Initial Issue Date" shall mean the date ------------------ that shares of Class AA Preferred Stock are first issued by the Corporation. 3 Investor. The term "Investor" shall mean, at any time, Prometheus -------- Homebuilders LLC and any of its affiliates, including, but not limited to, Lazard Freres Real Estate Investors, LLC and its affiliates. Junior Stock. The term "Junior Stock" shall mean, for purposes of ------------ paragraph 2 below, Common Equity and any class or series of stock of the Corporation authorized after the Initial Issue Date which is not entitled to receive any dividends in any Dividend Period unless all dividends required to have been paid or declared and set apart for payment on the Class AA Preferred Stock and any Parity Stock shall have been so paid or declared and set apart for payment, and for purposes of paragraph 3 below, shall mean Common Equity and any class or series of stock of the Corporation authorized after the Initial Issue Date which is not entitled to receive any assets upon liquidation, dissolution or winding up of the affairs of the Corporation until the Class AA Preferred Stock and any Parity Stock shall have received the entire amount to which such stock is entitled upon such liquidation, dissolution or winding up. Liquidation Preference. The term "Liquidation Preference" shall mean ---------------------- $1000.00 per share. Non-Preferred Stock Director. The term "Non-Preferred Stock Director" ---------------------------- means a Director of the Corporation other than a Preferred Stock Director. Mandatory Conversion Date. The term "Mandatory Conversion Date" shall ------------------------- mean the Business Day, specified in a notice to holders of Class AA Preferred Stock given by the Corporation in accordance with the provisions of subparagraph 4(b)(ii), upon which the Corporation shall convert all outstanding shares of Class AA Preferred Stock into Common Stock as set forth in such subparagraph. Mandatory Conversion Price. The term "Mandatory Conversion Price" shall initially mean $6.00 per share subject thereafter to further adjustment pursuant to paragraph 4. Market Capitalization of the Company. The term "Market Capitalization ------------------------------------- of the Company" shall mean the market value of the Company's outstanding Common Stock as measured by the thirty (30) trading days preceding any measurement date. Officers' Certificate. The term "Officers' Certificate" means a --------------------- certificate signed on behalf of the Corporation by two officers of the Corporation, one of whom must be the principal executive officer, the principal financial officer or the principal accounting officer of the Corporation. Optional Conversion Date. The term "Optional Conversion Date" shall ------------------------ have the meaning set forth in subparagraph 4(b)(i) below. Optional Conversion Price. The term "Optional Conversion Price", in ------------------------- respect of any share of Class AA Preferred Stock, shall initially mean $6.00 unless adjusted at the option of the holder thereof during the Adjustment Period, as adjusted pursuant to paragraph 4. Parity Stock. The term "Parity Stock" shall mean, for purposes of ------------ paragraph 2 below, (i) the Series A Preferred Stock, (ii) the Series B Preferred Stock, (iii) the Series C 4 Preferred Stock, (iv) the Series D Preferred Stock, (v) the Class ABI Preferred Stock, (vi) the Class ABII Preferred Stock, and (vii) any class or series of stock of the Corporation authorized after the Initial Issue Date which is entitled to receive payment of dividends on a parity with the Class AA Preferred Stock, and for purposes of paragraph 3 below, shall mean (i) the Series A Preferred Stock, (ii) the Series B Preferred Stock, (iii) the Series C Convertible Preferred Stock, (iv) the Series D Preferred Stock, (v) the Class AB Preferred Stock, (vi) the Class ABII Preferred Stock and (vii) any class or series of stock of the Corporation authorized after the Initial Issue Date which is entitled to receive assets upon liquidation, dissolution or winding up of the affairs of the Corporation on a parity with the Class AA Preferred Stock. Preferred Stock. The term "Preferred Stock" shall mean the Class AA --------------- Preferred Stock, the Class ABI Preferred Stock and the Class ABII Preferred Stock. Preferred Stock Director. The term "Preferred Stock Director" has the ------------------------ meaning set forth in subparagraph 5(d). Quoted Price. The term "Quoted Price", with respect to the Common ------------ Stock, shall mean the last reported sales price for Common Stock as reported by the National Association of Securities Dealers, Inc. Automatic Quotations System, National Market System, or, if the applicable security is listed or admitted for trading on a securities exchange, the last reported sales price of the applicable security on the principal exchange on which the applicable security is listed or admitted for trading (which shall be for consolidated trading if applicable to such exchange), or if neither so reported or listed or admitted for trading, the last reported bid price of the applicable security in the over-the-counter market. In the event that the Quoted Price cannot be determined as aforesaid, the Board of Directors 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 Class AA Preferred Stock, and any dispute shall be resolved at the Corporation's cost, by an investment banking firm of recognized national standing selected by the Corporation and reasonably acceptable to such holders of Class AA Preferred Stock and shall be made in good faith and be conclusive absent manifest error; provided, however, if the Quoted Price as determined by -------- ------- the Board of 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 holders of Class AA Preferred Stock who challenged such price. Record Date. The term "Record Date" shall mean the date designated by ----------- the Board of Directors at the time a dividend is declared; provided, however, that such Record Date shall not be more than thirty (30) days nor less than ten (10) days prior to the respective Dividend Payment Date or such other date designated by the Board of Directors for the payment of dividends. Series A Preferred Stock. The term "Series A Preferred Stock" shall ------------------------ mean the Series A 11% Cumulative Convertible Preferred Stock, $0.01 par value per share, of the Corporation. 5 Series B Preferred Stock. The term "Series B Preferred Stock" shall ------------------------ mean the Series B Convertible Preferred Stock, $0.01 par value per share, of the Corporation. Series C Preferred Stock. The term "Series C Preferred Stock" shall ------------------------ mean the Series C Convertible Preferred Stock, $0.01 par value per share, of the Corporation. Series D Preferred Stock. The term "Series D Preferred Stock" shall ------------------------ mean the Series D 6% Convertible Redeemable Preferred Stock, $0.01 par value per share, of the Corporation. Stock Purchase Agreement. The term "Stock Purchase Agreement" shall ------------------------ mean that certain Stock Purchase Agreement, dated as of August 14, 1997 by and between the Corporation and Prometheus Homebuilders LLC. Termination Event. The term "Termination Event" shall have the ----------------- meaning set forth in subparagraph 6(a) below. Test Date. The term "Test Date" shall have the meaning set forth in --------- subparagraph 5(d). Trading Day. The term "Trading Day" with respect to any security ----------- shall mean 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. (b) Number of Shares and Designation. 46,670 shares of the preferred -------------------------------- stock, $0.01 par value per share, of the Corporation are hereby constituted as a series of the preferred stock designated as "Class AA Convertible Preferred Stock" (the "Class AA Preferred Stock"). 2 Dividends. --------- (a) The record holders of Class AA Preferred Stock shall be entitled to receive dividends, when and as declared by the Board of Directors, out of funds legally available for payment of dividends. Subject to the distributions referred to in the final sentence of subparagraph 4(m) hereof, such dividends shall be payable by the Corporation in cash at the rate of six percent (6%) per annum of the Liquidation Preference. (b) Dividends on shares of Class AA Preferred Stock shall accrue and be , 1997]. If any cumulative from the date of issuance of such shares. Dividends shall be Dividend Payment Date payable quarterly in arrears when and as declared by the Board of Directors occurs on a day that is on March 31, June 30, September 30 and December 31 of each year (a "Dividend not a Business Day, any Payment Date"), [commencing on _____________, 1997]. If any Dividend Payment Date occurs on a day that is not a Business Day, any accrued dividends otherwise payable on such Dividend Payment Date shall be paid on the next succeeding Business Day. The amount of dividends payable on Class AA Preferred Stock for each full Dividend Period shall be computed by dividing by four (4) the annual rate per share set forth in subparagraph 2(a) above. Dividends shall be paid to the holders of record of the Class AA Preferred Stock as their names shall appear on the share register of the Corporation on the Date for such dividend. Dividends payable in any Dividend Period which is less than a full Dividend Period in length will be computed on the basis of a ninety (90) day quarterly period and 6 actual days elapsed in such Dividend Dividends on account of arrears for any past Dividend Periods may be declared and paid at any time to holders of record on the Record Date therefor. For any Dividend Period in which dividends are not paid in full on the Dividend Payment Date first succeeding the end of such Dividend Period, then on such Dividend Payment Date such accrued and unpaid dividends shall be added (solely for the purpose of calculating dividends payable on the Class AA Preferred Stock) to the Liquidation Preference of the Class AA Preferred Stock effective at the beginning of the Dividend Period succeeding the Dividend Period as to which such dividends were not paid and shall thereafter accrue additional dividends in respect thereof at the Dividend Rate until such accrued and unpaid dividends have been paid in full. (c) So long as any shares of Class AA Preferred Stock shall be outstanding, the Corporation shall not declare, pay or set apart for payment on any Junior Stock any dividends whatsoever, whether in cash, property or otherwise (other than dividends payable in shares of the class or series upon which such dividends are declared or paid, or payable in shares of Common Stock with respect to Junior Stock other than Common Stock, together with cash in lieu of fractional shares), nor shall the Corporation make any distribution on any Junior Stock, nor shall any Junior Stock be purchased, redeemed or otherwise acquired by the Corporation or any of its subsidiaries of which it owns not less than a majority of the outstanding voting power, nor shall any monies be paid or made available for a sinking fund for the purchase or redemption of any Junior Stock, unless all dividends to which the holders of Class AA Preferred Stock shall have been entitled for all previous Dividend Periods shall have been paid or declared and a sum of money sufficient for the payment thereof has been set apart. (d) The Company shall be obligated to declare and pay dividends in an amount equal to the Dividend Rate on each Dividend Payment Date to the extent that funds are legally available for declaration of such dividends. In the event that full dividends are not paid or made available to the holders of all outstanding shares of Class AA Preferred Stock and of any Parity Stock with respect to any Dividend Period and funds available for payment of dividends shall be insufficient to permit payment in full to holders of all such stock of the full preferential amounts to which they are then entitled, then the entire amount legally available for payment of dividends shall be distributed each Dividend Period ratably among all such holders of Class AA Preferred Stock and of any Parity Stock in proportion to the full amount to which they would otherwise be respectively entitled. The dividends payable in respect of the Class AA Preferred Stock shall be a mandatory obligation of the Corporation, subject only to the limitations set forth in Section 170 of the Delaware General Corporation Law with respect to funds legally permitted to be used for the payment of dividends (the "Legal Funds Requirement"). In stating that the dividends payable in respect of the Class AA Preferred Stock are a mandatory obligation, it is the explicit intent of the Corporation to eliminate any and all discretion of the Board of Directors with respect to the declaration and payment of such dividends and to require the Board of Directors to declare and pay such dividends as and when provided herein, subject only to compliance with the Legal Funds Requirement. 3 Distributions Upon Liquidation, Dissolution or Winding Up. --------------------------------------------------------- (a) In the event of any voluntary or involuntary liquidation, dissolution or other winding up of the affairs of the Corporation before any payment or distribution shall be 7 made to the holders of Junior Stock, the holders of Class AA Preferred Stock shall be entitled to be paid out of the assets of the Corporation in cash or property at its fair market value as determined by the Board of Directors of the Corporation the Liquidation Preference per share plus an amount equal to all dividends accrued and unpaid thereon to the date of such liquidation, dissolution or such other winding up. Except as provided in this paragraph, holders of Class AA Preferred Stock shall not be entitled to any distribution in the event of liquidation, dissolution or winding up of the affairs of the Corporation. (b) If, upon any such liquidation, dissolution or other winding up of the affairs of the Corporation the assets of the Corporation shall be insufficient to permit the payment in full of the Liquidation Preference per share plus an amount equal to all dividends accrued and unpaid on the Class AA Preferred Stock and the full liquidating payments on all Parity Stock, then the assets of the Corporation shall be ratably distributed among the holders of Class AA Preferred Stock and of any Parity Stock in proportion to the full amounts to which they would otherwise be respectively entitled if all amounts thereon were paid in full. Neither the consolidation or merger of the Corporation into or with another entity or entities, nor the sale, lease, transfer or conveyance of all or substantially all of the assets of the Corporation to another corporation or any other entity shall be deemed a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this paragraph 3. 4 Conversion Rights. ---------------- (a) (i) At any time after the Initial Issue Date a holder of shares of Class AA Preferred Stock may convert such shares into Common Stock at the then prevailing Optional Conversion Price. On or after [ ], 2001, and on or before [ ], 2003 (the "Adjustable Period"), a holder of shares of Class AA Preferred Stock may elect to adjust up to five(5) times per year the Optional Conversion Price for the Class AA Preferred Stock held by such holder, by reference to the then prevailing Adjustment Price as follows: ADJUSTMENT PRICE(S) CONVERSION PRICE(S) 10.01-12.00 5.50 8.01-10.00 5.00 6.01-8.00 4.00 4.01-6.00 3.00 2.01-4.00 2.00 0.00-2.00 1.00 If and whenever the Corporation makes any adjustment to the Conversion Prices pursuant to subparagraphs 4(f) through 4(j) hereof, the Corporation shall make a like adjustment to the Adjustment Prices set forth above calculated in the same manner and in accordance with the conventions, terms and principles set out in this paragraph 4. (ii) At any time during a Corporation Conversion Period, the Corporation, at its option, may convert all, but not less than all of the shares of Class AA Preferred Stock outstanding at such time into Common Stock at the then prevailing Mandatory Conversion Price; provided that, on the Mandatory Conversion Date, the Corporation shall have 8 paid all accrued dividends on all shares of Class AA Preferred Stock then outstanding, up to and including the most recent Dividend Payment Date. For the purposes of conversion, each share of Class AA Preferred Stock shall be valued at the Liquidation Preference plus all accrued but unpaid dividends thereon through the relevant Conversion Date, which shall be divided by the Optional Conversion Price or Mandatory Conversion Price (as applicable) in effect on the Conversion Date to determine the number of shares issuable upon conversion. Immediately following such conversion, the rights of the holders of converted Class AA Preferred Stock shall cease (in respect of such converted stock) and the persons entitled to receive the Common Stock upon the conversion of Class AA Preferred Stock shall be treated for all purposes as having become the owners of such Common Stock. (b) (i) To convert Class AA Preferred Stock pursuant to subparagraph 4(a)(i), a holder must (i) surrender the certificate or certificates evidencing the shares of Class AA Preferred Stock to be converted, duly endorsed in a form satisfactory to the Corporation, at the office of the Corporation or transfer agent for the Class AA Preferred Stock, (ii) notify the Corporation at such office that he elects to convert Class AA Preferred Stock, and the number of shares he wishes to convert, (iii) state in writing the name or names in which he wishes the certificate or certificates for shares of Common Stock to be issued, and (iv) pay any transfer or similar tax if required (provided, however, that no such payment shall be required if the Common Stock issuable upon conversion is to be issued in the name of the converting holder of Class AA Preferred Stock). In the case of lost or destroyed certificates evidencing ownership of shares of Class AA Preferred Stock to be surrendered for conversion, the holder shall submit proof of loss or destruction, and such indemnity as shall be reasonably required by the Corporation. In the event that a holder fails to notify the Corporation of the number of shares of Class AA Preferred Stock which he wishes to convert, he shall be deemed to have elected to convert all shares represented by the certificate or certificates surrendered for conversion. The date on which the holder satisfies all those requirements is the "Optional Conversion Date." As soon as practical and in any event within five (5) Business Days of the Optional Conversation Date, the Corporation shall deliver through the transfer agent a certificate for the number of full shares of Common Stock issuable upon the conversion, a check for any fractional share and a new certificate representing the unconverted portion, if any, of the shares of Class AA Preferred Stock represented by the certificate or certificates surrendered for conversion. The person in whose name the Common Stock certificate is registered shall be treated as the stockholder of record on and after the Optional Conversion Date. All shares of Common Stock issuable upon conversion of the Class AA Preferred Stock shall be fully paid and nonassessable and shall rank pari passu with the other shares of Common Stock outstanding from ---- ----- time to time. In the case of Class AA Preferred Stock that has been converted after any Record Date but before the next succeeding Dividend Payment Date, dividends that are payable on such Dividend Payment Date shall be payable on such Dividend Payment Date notwithstanding such conversion, and such dividends shall be paid to the holder of such Class AA Preferred Stock on such Record Date (and shall not constitute "accrued and unpaid dividends" for purposes of subparagraph 4(a)). Holders of Common Stock issued upon conversion shall not be entitled to receive any dividend payable to holders of Common Stock as of any record time before the close of business on the Optional Conversion Date. If a holder of Class AA Preferred Stock converts more than one share at a time the number of full shares of Common Stock issuable upon conversion shall be based on the total value of all shares of Class AA Preferred Stock converted. If during the Adjustment Period it is 9 possible for a holder of Class AA Preferred Stock to adjust the Optional Conversion Price and such holder elects to do so, he must inform the Corporation in writing of such election. The Corporation will then be obligated to notify such electing holder and all other holders of Class AA Preferred Stock in writing within three (3) Business Days of receipt of the election by the holder of the new Optional Conversion Price for such holder's Class AA Preferred Stock. Such new Optional Conversion Price shall remain the Optional Conversion Price for such Class AA Preferred Stock until such time, if any, as the then holder elects to re-adjust the Optional Conversion Price of the Class AA Preferred Stock then held by such holder. If any other holder of Class AA Preferred Stock, upon receipt of a notice from the Corporation, wishes to adjust the Optional Conversion Price in respect of the Class AA Preferred Stock held by him, he may do so by notifying the Corporation accordingly in writing within fifteen (15) Business Days of the receipt of notice from the Corporation. Upon such notification in writing, the Optional Conversion Price of his shares of Class AA Preferred Stock shall be adjusted by the Corporation with effect from the date of his receipt of notification from the Corporation. (ii) To convert Class AA Preferred Stock pursuant to subparagraph 4(a)(ii), notice of any conversion shall be sent by or on behalf of the Corporation not more than sixty (60) days nor less than thirty (30) days prior to the Mandatory Conversion Date, by first class mail, postage prepaid, to all holders of record of the Class AA Preferred Stock at their respective last addresses as they shall appear on the books of the Corporation; provided, however, that no failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the conversion of any shares of Class AA Preferred Stock except as to the holder to whom the Corporation has failed to give notice or except as to the holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which Class AA Preferred Stock may be listed or admitted to trading, such notice shall state: (i) the Mandatory Conversion Date; (ii) the Mandatory Conversion Price; (iii) the number of shares of Class AA Preferred Stock to be converted being all the Class AA Preferred Stock held of record by all holders; (iv) the place or places where certificates for such shares are to be surrendered for receipt of such Common Stock issuable upon such Mandatory Conversion; and (v) that dividends on the shares to be converted will cease to accrue on the Mandatory Conversion Date. Upon the mailing of any such notices of conversion, the Corporation shall become obligated to convert on the Mandatory Conversion Date all of the Class AA Preferred Stock. The person in whose name the Common Stock certificate is registered shall be treated as the stockholder of record on and after the Mandatory Conversion Date. All shares of Common Stock issuable upon conversion of the Class AA Preferred Stock shall be fully paid and nonassessable and shall rank pari passu with the other shares of Common Stock outstanding from time to ---- ----- time. In the case of Class AA Preferred Stock that has been converted after any Record Date but before the next succeeding Dividend Payment Date, dividends that are payable on such Dividend Payment Date shall be payable on such Dividend Payment Date notwithstanding such conversion, and such dividends shall be paid to the holder of such Class AA Preferred Stock on such Record Date (and shall not constitute "accrued and unpaid dividends" for purposes of subparagraph 4(a)). Holders of Common Stock issued upon conversion shall not be entitled to receive any dividend payable to holders of Common Stock as of any record time before the close of business on the Mandatory Conversion Date. If a holder of Class AA Preferred Stock converts 10 more than one share at a time the number of full shares of Common Stock issuable upon conversion shall be based on the total value of all shares of Class AA Preferred Stock converted. (c) The Corporation will not issue a fractional share of Common Stock upon conversion of Class AA Preferred Stock. Instead the Corporation will deliver its check for the current market value of the fractional share. The current market value of a fraction of a share is determined as follows: Multiply the closing price of a full share by the fraction. Round the result to the nearest cent. The closing price of a share of Common Stock is the Quoted Price of the Common Stock on the last Trading Day prior to the Conversion Date. (d) If a holder converts shares of Class AA Preferred Stock, the Corporation shall pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of Common Stock upon the conversion. However, the holder shall pay any such tax which is due because the shares are issued in a name other than the holder's name. (e) The Corporation has reserved and shall continue to reserve out of its authorized but unissued Common Stock or its Common Stock held in treasury enough shares of Common Stock to permit the conversion of the Class AA Preferred Stock in full. All shares of Common Stock which may be issued upon conversion of Class AA Preferred Stock shall be fully paid and nonassessable. The Corporation will endeavor to comply with all securities laws regulating the offer and delivery of shares of Common Stock upon conversion of Class AA Preferred Stock and will endeavor to list such shares on each national securities exchange on which the Common Stock is listed. (f) If the Corporation: (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 Conversion Prices in effect immediately prior to such action shall be adjusted so that each holder of Class AA Preferred Stock thereafter converted may receive the number of shares of capital stock of the Corporation which he would have owned immediately following such action if he had converted Class AA Preferred Stock immediately prior to such action. The adjustment shall become effective immediately after the record date in the case of dividend or distribution and immediately after the effective date of a subdivision, 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 Class AA Preferred Stock upon conversion of it may receive shares of two or more classes of capital stock of the Corporation, the Corporation shall determine the allocation of the adjusted Conversion Prices between the classes of capital stock. After such allocation, 11 the Conversion Prices of each class of capital stock shall thereafter be subject to adjustment on terms comparable to those applicable to Common Stock in this subparagraph (f). (g) If the Corporation 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, each of the Conversion Prices shall be adjusted in accordance with the formula: NxP --- C'= C x O + M ----- O + N where: C' = the adjusted Conversion Price. C = the then current Conversion 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 warrants or rights are exercisable, not all warrants or rights shall have been exercised, the Conversion Prices shall be immediately readjusted to what it would have been if "N" in the above formula had been the number of shares actually issued. (h) If the Corporation distributes to all holders of shares of its Common Stock (i) any shares of any class of capital stock of the Corporation other than its Common Stock, (ii) any evidence of indebtedness or other securities of the Corporation or any subsidiary of the Corporation, (iii) any other assets of the Corporation or any subsidiary of the Corporation (other than cash), (iv) distributions in cash in excess of three percent (3%) of the 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 subparagraph 4(g) above), each of the Conversion Prices shall be adjusted in accordance with the formula: 12 C'= C x M - F ----- M where: C' = the adjusted Conversion Price. C = the then current Conversion 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 subparagraph 4(h) is 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 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. (i) If the Corporation issues shares of Common Stock for a consideration per share less than the Current Market Price per share on the date the Corporation fixes the offering price of such additional shares, each of the Conversion Prices shall be adjusted in accordance with the formula: P - C'= C x O + M ----- A where: C' = the adjusted Conversion Price. C = the then current Conversion Price. 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. 13 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 subparagraph 4(i) does not apply to (i) any transaction or issuance described in subparagraph 4(g) or 4(h) above or subparagraph 4(j) 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 exercise of warrants to purchase Common Stock issued to the initial holder of the Class AA Preferred Stock on the Initial Issue Date, 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 subparagraph 4(g) or 4(h) above or subparagraph 4(j) below, (iii) Common Stock issued to the Corporation's employees under bona fide employee benefit plans adopted by the Board of Directors and approved by the holders of Common Stock when required by law, if such Common Stock would otherwise by covered by this subparagraph 4(i) (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 subparagraph 4(j) 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 Corporation 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. (j) If the Corporation 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 subparagraph 4(g) or 4(h) 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, each of the Conversion Prices shall be adjusted in accordance with the formula: P - C'= C x O + M ----- O + D 14 where: C' = the adjusted Conversion Price. C = the then current Conversion 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 each of the Conversion Prices shall promptly be readjusted to the Conversion Prices 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 subparagraph 4(j) 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 Corporation 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 Corporation's employees under bona fide employee benefit plans adopted by the Board of Directors and approved by the holders of Common Stock when required by law, if such securities would otherwise by covered by this subparagraph 4(j) (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 subparagraph 4(i) above) and issued after the Initial Issue Date shall not exceed 5% of the Common Stock outstanding at the time of any such issuance). (k) For purposes of any computation respecting consideration received pursuant to subparagraphs 4(i) and 4(j) above, the following shall apply: (i) in 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 Corporation for any underwriting of the issue or otherwise in connection therewith; 15 (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 by the Board of Directors (irrespective of the accounting treatment thereof); and (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 Corporation for the issuance of such options, warrants or other securities plus the additional minimum consideration, if any, to be received by the Corporation upon the conversion or 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 subparagraph 4(k)). (l) No adjustment in the Conversion Price need be made unless the adjustment would require an increase or decrease of at least 1% in the Conversion Price. Any adjustments that are not made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this paragraph 4 shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. (m) No adjustment in the Conversion Prices need be made under this paragraph 4 for (i) rights to purchase Common Stock pursuant to a Corporation plan for reinvestment of dividends or interest, or (ii) any change in the par value or no par value of the Common Stock, and in no event shall any adjustment made under this paragraph 4 reduce the Conversion Prices below the par value of the Common Stock ($0.01). If an adjustment is made to the Conversion Price upon the establishment of a record date for a distribution subject to subparagraphs 4(g) or 4(h) above and if such distribution is subsequently canceled, the Conversion Prices then in effect shall be readjusted, effective as of the date when the Board of Directors determines to cancel such distribution, to the Conversion Prices which would have been in effect if such record date had not been fixed. No adjustment in the Conversion Prices need be made under subparagraphs 4(g) and 4(h) above if the Corporation issues or distributes to each holder of Class AA Preferred Stock the shares of Common Stock, evidences of indebtedness, assets, rights, options or warrants referred to in those subparagraphs which each holder would have been entitled to receive had Class AA Preferred Stock been converted into Common Stock prior to the happening of such event or the record date with respect thereto. (n) Whenever the Conversion Prices are adjusted, the Corporation shall promptly mail to holders of Class AA Preferred Stock, first class, postage prepaid, a notice of the adjustment. The Corporation shall file with the transfer agent, if any, for Class AA Preferred Stock a certificate from the Corporation's independent public accountants briefly stating the facts requiring the adjustment and the manner of computing it. Subject to subparagraph 4(s) below, the certificate shall be conclusive evidence that the adjustment is correct. (o) The Corporation from time to time may reduce the Conversion Prices by any amount for any period of time if the period is at least twenty (20) Business Days and if the reduction is irrevocable during the period, but in no event may the Conversion Prices be less than the par value of a share of Common Stock. Whenever the Conversion Prices are reduced, the Corporation shall mail to holders of Class AA Preferred Stock a notice of the reduction. The 16 Corporation shall mail, first class, postage prepaid, the notice at least 15 days before the date the reduced conversion price takes effect. The notice shall state the reduced conversion prices and the period they will be in effect. A reduction of the Conversion Prices does not change or adjust the Conversion Prices otherwise in effect for purposes of subparagraphs 4(f), 4(g), 4(h), 4(i) and 4(j) above. (p) If: (i) the Corporation takes any action which would require an adjustment in the Conversion Prices pursuant to subparagraph 4(g) or 4(h) above, or clause (iv) of subparagraph 4(f) above; (ii) the Corporation consolidates or merges with, or transfers all or substantially all of its assets to, another entity, and stockholders of the Corporation must approve the transaction; or (iii) there is a dissolution or liquidation of the Corporation; a holder of Class AA Preferred Stock may want to convert such stock into shares of Common Stock prior to the record date for or the effective date of the transaction so that he may receive the rights, warrants, securities or assets which a holder of shares of Common Stock on that date may receive. Therefore, the Corporation shall mail to such holders, first class, postage prepaid, a notice stating the proposed record or effective date, as the case may be. The Corporation shall mail the notice at least ten (10) days before such date. Failure to mail the notice or any defect in it shall not affect the validity of any transaction referred to in clause (i), (ii) or (iii) of this subparagraph 4(p). (q) If the Corporation is party to a merger which reclassifies or changes its Common Stock, upon consummation of such transaction Class AA Preferred Stock shall automatically become convertible into the kind and amount of securities, cash or other assets which the holder of Class AA Preferred Stock would have owned immediately after the consolidation, merger, transfer or lease if such holder had converted Class AA Preferred Stock immediately before the effective date of the transaction. Appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of Class AA Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to changes in and other adjustment of the Conversion Prices) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other securities or property thereafter deliverable upon the conversion of Class AA Preferred Stock. If this subparagraph 4(q) applies, subparagraph 4(f) does not apply. (r) In any case in which this paragraph 4 shall require that an adjustment as a result of any event become effective from and after a record date, the Corporation may elect to defer until after the occurrence of such event (i) the issuance to the holder of any shares of Class AA Preferred Stock converted after such record date and before the occurrence of such event of the additional shares of Common Stock issuable upon such conversion over and above the shares issuable on the basis of the Conversion Prices in effect immediately prior to adjustment and (ii) a 17 check for any remaining fractional shares of Common Stock as provided in subparagraph 4(c) above. (s) Except as provided in the immediately following sentence, any determination that the Corporation or its Board of Directors must make pursuant to this paragraph 4 shall be conclusive. Whenever the Corporation or its Board of Directors shall be required to make a determination under this paragraph 4, such determination shall be made in good faith and may be challenged in good faith by a majority of the holders of Class AA Preferred Stock, and any dispute shall be resolved, at the Corporation's expense, by an investment banking firm of recognized national standing selected by the Corporation and acceptable to such holders of Class AA Preferred Stock; provided, however, if the Conversion -------- ------- Prices or Adjustment Prices as determined by the Board of Directors are more than 110% of the price determined by such investment banking firm, then the costs incurred by such investment banking firm shall be borne by the holders of Class AA Preferred Stock who challenged such price. (t) All shares of Class AA Preferred Stock converted pursuant to this paragraph 4 shall be retired and shall be restored to the status of authorized and unissued shares of preferred stock, without designation as to series and may thereafter be reissued as shares of any series of preferred stock other than Class AA Preferred Stock. 5 Voting Rights. -------------- (a) The holders of record of shares of Class AA Preferred Stock shall not be entitled to any voting rights except as hereinafter provided in this paragraph 5 or as otherwise provided by law. (b) So long as any shares of the Class AA Preferred Stock remain outstanding, each share of Class AA Preferred Stock shall entitle the holder thereof to vote on all matters voted on by holders of Common Stock, voting together with the Common Stock as a single class (together with all other classes and series of stock of the Corporation that are entitled to vote as a single class with the Common Stock) at all meetings of the stockholders of the Corporation. In any vote with respect to which the Class AA Preferred Stock shall vote with the holders of Common Stock as a single class together with all other classes and series of stock of the Corporation that are entitled to vote as a single class with the Common Stock, each share of Class AA Preferred Stock shall entitle the holder thereof to cast the number of votes equal to the number of votes which could be cast in such vote by a holder of the number of shares of Common Stock into which such share of Class AA Preferred Stock is convertible based on the Mandatory Conversion Price of such Class AA Preferred Stock (with such vote to remain constant, even though the conversion rate changes pursuant to the terms hereunder). Such voting right of the holders of the Class AA Preferred Stock may be exercised at any annual meeting of stockholders, any special meeting of stockholders, or by written consent of the minimum number of shares required to take such action pursuant to Section 228 of the Delaware General Corporation Law. (c) On any matter on which the holders of Class AA Preferred Stock are entitled by law or under the Certificate of Incorporation to vote separately as a class, each such holder shall be entitled to one vote for each share held, and such matter shall be determined by a 18 majority of the votes cast unless Delaware law or this Certificate of Designations requires approval by a higher percentage. (d) Until a Termination Event, the number of Directors comprising the Board of Directors shall be equal to fifteen (15) and the holders of Preferred Stock, voting separately as a single class, shall have the exclusive right to elect three (3) Directors (each such Director, a "Preferred Stock Director") at any special meeting of stockholders called for such purpose, at each annual meeting of stockholders and in any written consent of stockholders pursuant to Section 228 of the Delaware General Corporation Law. Any increases in the size of the Board of Directors will require a proportional increase in the number of Preferred Stock Directors (rounded up to the next whole number) such that the Preferred Stock Directors represent not less than twenty percent (20%) of the votes of the Board of Directors. A proportionate number (rounded up to the next whole number, but not less than one) of Preferred Stock Directors shall serve on each committee of the Board of Directors (provided that with respect to the Executive Committee, the Executive Committee shall consist of five members of which two members shall be Preferred Stock Directors), and at least one Preferred Stock Director shall serve on the board or other governing body of each of the Corporation's subsidiaries and affiliates, other than operational home building companies. In the event (an "Adverse Event") that on any date following the Initial Issue Date that is 60 days after the end of a fiscal quarter of the Corporation (a "Test Date") both (i) the Average Trading Price of the Common Stock is below $5 per share (adjusted in the same manner as the Mandatory Conversion Price to take account of any of the occurrences that would require an adjustment pursuant to subparagraphs 4(f) through 4(j) hereof) and (ii) (x) the percentage change in the EBT per share of the Corporation (of the common stock issued and outstanding) for the most recent two fiscal quarters as measured against the same two fiscal quarters from the prior fiscal year is less than (y) the percentage change in the EBT per share (of the common stock issued and outstanding) of the Comparable Group for the same period as compared against the EBT per share (calculated on the same basis) of the Comparable Group during the same period in the prior fiscal year then the holders of Preferred Stock, voting separately as a single class, shall be entitled to elect Preferred Stock Directors sufficient to cause the Preferred Stock Directors to constitute a majority of the Board of Directors and all committees of the Board of Directors, including the Executive Committee ("Additional Preferred Stock Directors"). The size of the Board of Directors and all committees shall be automatically increased in order to effect any such additional Directors. The right of the holders of Preferred Stock to elect Additional Preferred Stock Directors shall continue until such time as neither (i) nor (ii) above is true for two consecutive Test Dates. The "Average Trading Price" shall mean, on any date of determination, the average of the closing prices of the Common Stock over the 90 day period prior to such date. (e) The Preferred Stock Directors elected as provided herein shall serve until the next annual meeting or until their respective successors shall be elected and shall qualify. Upon the termination of the right of the holders of Preferred Stock to elect Additional Preferred Stock Directors as set forth in subparagraph 5(d) above, any Additional Preferred Stock Directors shall resign. Any Preferred Stock Director may be removed with or without cause by, and shall not be removed other than by, the vote of the holders of a majority of the outstanding shares of Preferred Stock, voting separately as a single class, at a meeting called for such purpose or by written consent in accordance with Section 228 of the Delaware General Corporate Law. If the office of any Preferred Stock Director becomes vacant by reason of death, resignation, retirement, 19 disqualification or removal from office or otherwise, the remaining Preferred Stock Directors, by majority vote, may elect a successor, or, alternatively, the holders of a majority of the outstanding shares of Preferred Stock, voting separately as a single class, at a meeting called for such purpose or by written consent in accordance with Section 228 of the Delaware General Corporation Law may elect a successor. Any such successor shall hold office for the unexpired term in respect of which such vacancy occurred. Upon the occurrence of a Termination Event, the Preferred Stock Directors then serving on the Board of Directors may continue to hold their office for the remainder of their term. This subparagraph (e) may not be amended without (x) the affirmative vote of the holders of a majority of the outstanding shares of Common Stock and (y) the affirmative vote of the holders of a majority of the outstanding shares of Preferred Stock. (f) At any time when the right to elect Preferred Stock Directors or Additional Preferred Stock Directors provided in subparagraph 5(d) shall have vested in the holders of Class AA Preferred Stock and if such right shall not already have been initially exercised, a proper officer of the Corporation shall, upon the written request of any holder of record of Class AA Preferred Stock then outstanding, addressed to the Secretary of the Corporation, call a special meeting of holders of Preferred Stock. Such meeting shall be held at the earliest practicable date upon the notice required for annual meetings of stockholders at the place for holding annual meetings of stockholders of the Corporation or, if none, at a place designated by the Secretary of the Corporation. If such meeting shall not be called by the proper officers of the Corporation within thirty (30) days after the personal service of such written request upon the Secretary of the Corporation, or within thirty (30) days after mailing the same within the United States, by registered mail, addressed to the Secretary of the Corporation at its principal office (such mailing to be evidenced by the registry receipt issued by the postal authorities), then the holders of record of ten percent (10%) of the shares of Class AA Preferred Stock then outstanding may designate in writing a holder of Class AA Preferred Stock to call such meeting at the expense of the Corporation, and such meeting may be called by such person so designated upon the notice required for annual meetings of stockholders and shall be held at the place for holding annual meetings of the Corporation or, if none, at a place designated by such holder. Any holder of Class AA Preferred Stock that would be entitled to vote at such meeting shall have access to the stock books of the Corporation for the purpose of causing a meeting of the holders of Preferred Stock to be called pursuant to the provisions of this paragraph and to contact the holders of Preferred Stock with respect to matters relating to such meeting. Notwithstanding the provisions of this paragraph, however, no such special meeting shall be called if any such request is received less than 90 days before the date fixed for the next ensuing annual or special meeting of stockholders. (g) If at any time when the holders of Class AA Preferred Stock are entitled to elect directors pursuant to the foregoing provisions of this paragraph 6, and the holders of Class ABI Preferred Stock and Class ABII Preferred Stock are entitled to elect directors by reason of any provision of the Certificate of Incorporation, as in effect at the time, or the respective Certificate of Designation for such Classes, and if the terms of the Class ABI Preferred Stock and Class ABII Preferred Stock so permit, the voting rights of the Preferred Stock then entitled to vote shall be combined (with each series having a number of votes proportional to the aggregate liquidation preference of its outstanding shares). In such case, the holders of Preferred Stock, voting as a class, shall elect such directors. 20 (h) In addition to any vote or consent of shareholders required by law or the Certificate of Incorporation, the consent of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the shares of Class AA Preferred Stock at the time outstanding, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating: (i) Any amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation, or of the by-laws of the Corporation, which affects adversely the voting powers, preferences and relative, participating, optional and other special rights of the holders of shares of Class AA Preferred Stock; provided, however, that the amendment of the provisions of the Certificate of Incorporation so as to authorize or create, or to increase the authorized amount of any class of any security convertible into any shares ranking junior to the Class AA Preferred Stock in the distribution of assets on any liquidation, dissolution, or winding up of the Corporation or in the payment of dividends, shall not be deemed to affect adversely the voting powers, preferences and relative, participating, optional and other special rights of the holders of shares of Class AA Preferred Stock; (ii) Any authorization or creation of, or increase in the authorized amount of, any shares of any class or any security convertible into shares of any class ranking senior to or on parity with shares of Class AA Preferred Stock (other than the Class AB Preferred Stock) in the distribution of assets on any liquidation, dissolution, or winding up of the Corporation or in the payment of dividends or otherwise; (iii) Any increase or decrease (other than by conversion) in the total number of authorized shares of Class AA Preferred Stock; (iv) Any sale, lease, assignment, transfer or other conveyance of all or substantially all of the assets of the Corporation or any of its material subsidiaries of which it owns fifty percent (50%) or more of the voting power thereof, or any consolidation or merger involving the Corporation or any of such subsidiaries (except mergers between the Corporation and any of its subsidiaries or mergers among any of the Corporation's subsidiaries), or any reclassification or other change of any stock, or any dissolution, liquidation, or winding up of the Corporation or, unless the obligations of the Corporation under an agreement are expressly conditioned upon the requisite approval of the holders of sixty-six and two-thirds percent (66-2/3%) of the Class AA Preferred Stock then outstanding as provided for herein, make any agreement or become obligated to do so; (v) Any purchase, redemption or other acquisition for value (or payment into or setting aside as a sinking fund for such purpose) of any shares of Common Stock or other capital stock of the Corporation; or (vi) Any declaration or payment of any dividends on or declaration or making of any other distribution, direct or indirect, on account of the Common Stock or setting apart any sum for any such purpose unless all accrued unpaid dividends on Class AA Preferred Stock have been paid in cash. 21 6 Financial Statements. -------------------- (a) Until (i) the aggregate amount of Preferred Stock outstanding is less than twenty percent (20%) of the maximum amount of the Preferred Stock issued to date or (ii) the aggregate remaining investment in the Corporation by Investor (or any single transferee of Investor or related group of transferees) is less than the greater of $10,000,000 or ten percent (10%) of the Market Capitalization of the Company (a "Termination Event") (provided that a Termination Event shall not occur prior to all Closings being consummated under the Stock Purchase Agreement), with the value of such investment to be based on the sum of (x) the greater of the Liquidation Preference of the Preferred Stock and the value of the Common Stock underlying such Preferred Stock (as measured by the Conversion Price) then held by it, (y) the value of the Common Stock then held by it and (z) the value of the warrants then held by it whether or not required by the rules and regulations of the Commission, the Corporation shall furnish to the holders of Class AA Preferred Stock (i) all quarterly and annual financial information required to be filed with the Commission on Forms 10-Q and 10-K and, with respect to the annual information only, a report thereon by the Corporation's certified independent accountants, (ii) all current reports required to be filed with the Commission on Form 8-K. (b) The Corporation shall, so long as a Termination Event has not occurred, deliver to the holders of Class AA Preferred Stock, forthwith upon any executive officer of the Corporation becoming aware of any breach under this Certificate of Designations, an Officers' Certificate specifying such breach and what action the Corporation is taking or proposes to take with respect thereto. 7 Ranking. -------- With regard to rights to receive dividends, and distributions upon liquidation, dissolution or winding up of the Corporation, the Class AA Preferred Stock shall rank pari passu with any Parity Stock and senior to the Common Stock and any other equity securities or other securities into which any convertible indebtedness is convertible which are issued by the Corporation after the date of this Certificate of Designation. The Class AA Preferred Stock shall not be subject to the creation of capital stock senior with regards to the right to receive dividends, and distribution upon liquidation, dissolution or winding up of the Corporation. 8 Modification and Waiver. ------------------------ Except as otherwise provided above, the terms of this Certificate of Designation may be amended and the rights hereunder may be waived with the consent of holders of a majority of the shares of the Class AA Preferred Stock then outstanding, provided, that no such modification or waiver shall change the -------- dividend rights or the terms for conversion of the Class AA Preferred Stock without the consent of each holder of Class AA Preferred Stock. 9 Exclusion of Other Rights. -------------------------- Except as may otherwise be required by law, the shares of Class AA Preferred Stock shall not have any voting powers, preferences and relative, participating, optional or other 22 special rights, other than those specifically set forth in this resolution (as such resolution may be amended from time to time) and in the Certificate of Incorporation. 10 Headings of Subdivisions. ------------------------ The headings of the various subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. 11 Severability of Provisions. -------------------------- If any voting powers, preferences and relative, participating, optional and other special rights of the Class AA Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution (as such resolution may be amended from time to time) is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Class AA Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution (as so amended) which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional and other special rights of Class AA Preferred Stock and qualifications, limitations and restrictions thereof shall, nevertheless, remain in full force and effect, and no voting powers, preferences and relative, participating, optional or other special rights of Class AA Preferred Stock and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special rights of Class AA Preferred Stock and qualifications, limitations and restrictions thereof unless so expressed herein. 12 Record Holders. -------------- The Corporation and the transfer agent for the Class AA Preferred Stock may deem and treat the record holder of any shares of Preferred Stock as the true and lawful owner thereof for all purposes, and neither the Corporation nor the transfer agent shall be affected by any notice to the contrary. 13 Notice. ------ Except as may otherwise be provided for herein, all notices referred to herein shall be in writing, and all notices hereunder shall be deemed to have been given upon the earlier of receipt of such notice or three (3) Business Days after the mailing of such notice if sent by registered mail (unless first-class mail shall be specifically permitted for such notice under the terms of this Certificate) with postage prepaid, addressed: if to the Corporation, to its offices at 1921 Gallows Road, Suite 730, Vienna Virginia 22182 Attention: Secretary or to an agent of the Corporation designated as permitted by this Certificate, or, if to any holder of the Class AA Preferred Stock, to such holder at the address of such holder of the Class AA Preferred Stock as listed in the stock record books of the Corporation (which may include the records of any transfer agent for the Class AA Preferred Stock); or to such other address as the Corporation or holder, as the case may be, shall have designated by notice similarly given. [Signature Page Follows] 23 IN WITNESS WHEREOF, the Corporation has caused this certificate to be duly executed by [NAME AND TITLE OF OFFICER] and attested by [NAME OF SECRETARY] its secretary, this __ day of ____, 1997. THE FORTRESS GROUP, INC. By: _________________________________ Name: Title: ATTEST: By: __________________________________ Name: Secretary: 24 EX-99.7 8 FORM OF CLASS ABI CERTIFICATE OF DESIGNATIONS EXHIBIT 99.7 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF OF CLASS ABI CONVERTIBLE REDEEMABLE PREFERRED STOCK OF THE FORTRESS GROUP, INC. _________________________ Pursuant to Section 151 of the General Corporation Law of the State of Delaware _________________________ The Fortress Group, Inc., a Delaware corporation (the "Corporation") certifies that pursuant to the authority contained in Article Fourth of its Certificate of Incorporation (the "Certificate of Incorporation") and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors by unanimous written consent dated __________, 1997 adopted the following resolution which resolution remains in full force and effect on the date hereof: RESOLVED, that there is hereby established a series of authorized preferred stock having a par value of $0.01 per share, which series shall be designated as "Class ABI Convertible Redeemable Preferred Stock" (the "Class ABI Preferred Stock"), shall consist of _______ shares and shall have the following voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof as follows: 1 Certain Definitions; Number of Shares and Designation. (a) Definitions. Unless the context otherwise requires, the terms ----------- defined in this paragraph 1 shall have, for all purposes of this resolution, the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). Additional Preferred Stock Directors. The term "Additional Preferred ------------------------------------ Stock Directors" shall have the meaning set forth in subparagraph 6(d). Adverse Event. The term "Adverse Event" shall have the meaning set ------------- forth in subparagraph 6(d) Approval Date. The term "Approval Date" shall mean _____________ __, ------------- 1997. Average Trading Price. The term "Average Trading Price" shall have --------------------- the meaning set forth in subparagraph 6(d). Board of Directors. The term "Board of Directors" shall mean the ------------------ Board of Directors of the Corporation. Business Day. The term "Business Day" shall mean a day other than a ------------ Saturday or Sunday or a bank holiday in New York. Class AA Preferred Stock. The term "Class AA Preferred Stock" shall ------------------------ mean the 46,670 shares of Class AA Convertible Preferred Stock, $0.01 par value per share, of the Corporation. Class ABI Preferred Stock. The term "Class ABI Preferred Stock" shall ------------------------- have the meaning set forth subparagraph 1(b). Class ABII Preferred Stock. The term "Class ABII Preferred Stock" -------------------------- shall mean the _____ shares of Class ABII Convertible Redeemable Preferred Stock, $0.01 par value per share, of the Corporation. Commission. The term "Commission" shall mean the United States ---------- Securities and Exchange Commission. Common Equity. The term "Common Equity" shall mean all shares now or ------------- hereafter authorized of any class of common stock of the Corporation, including the Common Stock, and any other stock of the Corporation, howsoever designated, authorized after the Initial Issue Date, which has the right (subject always to prior rights of any class or series of preferred stock) to participate in the distribution of the assets and earnings of the Corporation without limit as to per share amount. Common Stock. The term "Common Stock" shall mean the common stock, ------------ par value $0.01 per share, of the Corporation. Comparable Group. The term "Comparable Group" shall mean Pulte ---------------- Corporation, The Ryland Group, Inc., U.S. Home Corporation, NVR Inc., Hovnanian Enterprises, Inc., Toll Brothers, Inc., Washington Homes, Inc., Zaring National Corporation, M/I Schottenstein Homes, Inc., Continental Homes Holding Corp., Engle Homes, Inc., Crossman Communities, Beazer Homes USA, Inc. and D.R. Horton, Inc. Conversion Date. The term "Conversion Date" shall mean the Optional --------------- Conversion Date and the Mandatory Conversion Date, as applicable. 2 Conversion Price. The term "Conversion Price" shall be equal to 95% ---------------- of the Current Market Price on the applicable Conversion Date. Current Market Price. The term "Current Market Price" means, for a -------------------- share of Common Stock on any date, the average of Quoted Prices for the thirty (30) consecutive Trading Days commencing forty-five (45) Trading Days before the date in question. Director. The term "Director" means a member of the Board of -------- Directors. Dividend Payment Date. The term "Dividend Payment Date" shall have --------------------- the meaning set forth in subparagraph 2(b). Dividend Period. The term "Dividend Period" shall mean the period --------------- from, and including, the Initial Issue Date to, but not including, the first Dividend Payment Date and thereafter, each quarterly period from, and including, the Dividend Payment Date to, but not including the next Dividend Payment Date. Dividend Rate. The term "Dividend Rate" shall mean twelve percent ------------- (12%). EBT. The term "EBT" shall mean earnings before interest expense, --- income taxes and extraordinary or non-recurring items, all calculated in accordance with generally accepted accounting principles. Executive Committee. The term "Executive Committee" shall mean the ------------------- five-member executive committee of the Board of Directors to which substantial operational matters regarding the Corporation shall be delegated. Initial Issue Date. The term "Initial Issue Date" shall mean the date ------------------ that shares of Class ABI Preferred Stock are first issued by the Corporation. Investor. The term "Investor" shall mean, at any time, Prometheus -------- Homebuilders LLC and any of its affiliates, including, but not limited to, Lazard Freres Real Estate Investors, LLC and its affiliates. Junior Stock. The term "Junior Stock" shall mean, for purposes of ------------ paragraph 2 below, Common Equity and any class or series of stock of the Corporation authorized after the Initial Issue Date which is not entitled to receive any dividends in any Dividend Period unless all dividends required to have been paid or declared and set apart for payment on the Class AB Preferred Stock and any Parity Stock shall have been so paid or declared and set apart for payment, and for purposes of paragraph 3 below, shall mean Common Equity and any class or series of stock of the Corporation authorized after the Initial Issue Date which is not entitled to receive any assets upon liquidation, dissolution or winding up of the affairs of the Corporation until the Class AB Preferred Stock and any Parity Stock shall have received the entire amount to which such stock is entitled upon such liquidation, dissolution or winding up. 3 Liquidation Preference. The term "Liquidation Preference" shall mean ---------------------- $1000.00 per share. Non-Preferred Stock Director. The term "Non-Preferred Stock Director" ---------------------------- means a Director of the Corporation other than a Preferred Stock Director. Mandatory Conversion Date. The term "Mandatory Conversion Date" shall ------------------------- mean the Business Day, specified in a notice to holders of Class ABI Preferred Stock given by the Corporation in accordance with the provisions of subparagraph 4(b)(ii), upon which the Corporation shall convert all outstanding shares of Class ABI Preferred Stock into Common Stock as set forth in such subparagraph. Market Capitalization of the Company. The term "Market Capitalization ------------------------------------ of the Company" shall mean the market value of the Company's outstanding Common Stock as measured by the thirty (30) trading days preceding any measurement date. Officers' Certificate. The term "Officers' Certificate" means a --------------------- certificate signed on behalf of the Corporation by two officers of the Corporation, one of whom must be the principal executive officer, the principal financial officer or the principal accounting officer of the Corporation. Optional Conversion Date. The term "Optional Conversion Date" shall ------------------------ have the meaning set forth in subparagraph 4(b)(i) below. Parity Stock. The term "Parity Stock" shall mean, for purposes of ------------ paragraph 2 below, (i) the Series A Preferred Stock, (ii) the Series B Preferred Stock, (iii) the Series C Preferred Stock, (iv) the Series D Preferred Stock, (v) the Class AA Preferred Stock, (vi) the Class ABII Preferred Stock and (vii) any class or series of stock of the Corporation authorized after the Initial Issue Date which is entitled to receive payment of dividends on a parity with the Class AB Preferred Stock, and for purposes of paragraph 3 below, shall mean (i) the Series A Preferred Stock, (ii) the Series B Preferred Stock, (iii) the Series C Convertible Preferred Stock, (iv) the Series D Preferred Stock, (v) the Class AA Preferred Stock, (vi) the Class ABII Preferred Stock and (vii) any class or series of stock of the Corporation authorized after the Initial Issue Date which is entitled to receive assets upon liquidation, dissolution or winding up of the affairs of the Corporation on a parity with the Class AB Preferred Stock. Preferred Stock. The term "Preferred Stock" shall mean the Class AA --------------- Preferred Stock, the Class ABI Preferred Stock and the Class ABII Preferred Stock. Preferred Stock Director. The term "Preferred Stock Director" has the ------------------------ meaning set forth in subparagraph 6(d). Quoted Price. The term "Quoted Price", with respect to the Common ------------ Stock, shall mean the last reported sales price for Common Stock as reported by the National Association of Securities Dealers, Inc. Automatic Quotations System, National Market System, or, if the applicable security is listed or admitted for trading on a securities exchange, the last reported sales 4 price of the applicable security on the principal exchange on which the applicable security is listed or admitted for trading (which shall be for consolidated trading if applicable to such exchange), or if neither so reported or listed or admitted for trading, the last reported bid price of the applicable security in the over-the-counter market. In the event that the Quoted Price cannot be determined as aforesaid, the Board of Directors 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 Class ABI Preferred Stock, and any dispute shall be resolved at the Corporation's cost, by an investment banking firm of recognized national standing selected by the Corporation and reasonably acceptable to such holders of Class ABI Preferred Stock and shall be made in good faith and be conclusive absent manifest error; provided, however, if the Quoted Price as -------- ------- determined by the Board of 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 holders of Class AB Preferred Stock who challenged such price. Record Date. The term "Record Date" shall mean the date designated by ----------- the Board of Directors at the time a dividend is declared; provided, however, that such Record Date shall not be more than thirty (30) days nor less than ten (10) days prior to the respective Dividend Payment Date or such other date designated by the Board of Directors for the payment of dividends. Redemption Date. The term "Redemption Date" shall have the meaning --------------- set forth in subparagraph 5(b) below. Redemption Price. The term "Redemption Price" shall mean a price per ---------------- share equal to the Liquidation Preference, plus an amount equal to all cumulative dividends accrued and unpaid on such share to the Redemption Date, together with accrued and unpaid dividends thereon to the Redemption Date. Series A Preferred Stock. The term "Series A Preferred Stock" shall ------------------------ mean the Series A 11% Cumulative Convertible Preferred Stock, $0.01 par value per share, of the Corporation. Series B Preferred Stock. The term "Series B Preferred Stock" shall ------------------------ mean the Series B Convertible Preferred Stock, $0.01 par value per share, of the Corporation. Series C Preferred Stock. The term "Series C Preferred Stock" shall ------------------------ mean the Series C Convertible Preferred Stock, $0.01 par value per share, of the Corporation. Series D Preferred Stock. The term "Series D Preferred Stock" shall ------------------------ mean the Series D 6% Convertible Redeemable Preferred Stock, $0.01 par value per share, of the Corporation. 5 Stock Purchase Agreement. The term "Stock Purchase Agreement" shall ------------------------ mean that certain Stock Purchase Agreement, dated as of August 14, 1997 by and between the Corporation and Prometheus Homebuilders LLC. Termination Event. The term "Termination Event" shall have the ----------------- meaning set forth in subparagraph 7(a) below. Test Date. The term "Test Date" shall have the meaning set forth in --------- subparagraph 6(d). Trading Day. The term "Trading Day" with respect to any security ----------- shall mean 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. (b) Number of Shares and Designation. _______ shares of the -------------------------------- preferred stock, $0.01 par value per share, of the Corporation are hereby constituted as a series of the preferred stock designated as "Class ABI Convertible Redeemable Preferred Stock" (the "Class ABI Preferred Stock"). 2 Dividends. --------- (a) The record holders of Class ABI Preferred Stock shall be entitled to receive dividends, when and as declared by the Board of Directors, out of funds legally available for payment of dividends. Such dividends shall be payable by the Corporation in cash at the rate of twelve percent (12%) per annum of the Liquidation Preference. (b) Dividends on shares of Class ABI Preferred Stock shall accrue and be cumulative from the date of issuance of such shares. Dividends shall be payable quarterly in arrears when and as declared by the Board of Directors on March 31, June 30, September 30 and December 31 of each year (a "Dividend Payment Date"), [commencing on ______, 1997]. If any Dividend Payment Date occurs on a day that is not a Business Day, any accrued dividends otherwise payable on such Dividend Payment Date shall be paid on the next succeeding Business Day. The amount of dividends payable on Class ABI Preferred Stock for each full Dividend Period shall be computed by dividing by four (4) the annual rate per share set forth in subparagraph 2(a) above. Dividends shall be paid to the holders of record of the Class ABI Preferred Stock as their names shall appear on the share register of the Corporation on the Record Date for such dividend. Dividends payable in any Dividend Period which is less than a full Dividend Period in length will be computed on the basis of a ninety (90) day quarterly period and actual days elapsed in such Dividend Period. Dividends on account of arrears for any past Dividend Periods may be declared and paid at any time to holders of record on the Record Date therefor. For any Dividend Period in which dividends are not paid in full on the Dividend Payment Date first succeeding the end of such Dividend Period, then on such Dividend Payment Date such accrued and unpaid dividends shall be added (solely for the purpose of calculating dividends payable on the Class ABI Preferred Stock) to the Liquidation Preference of the Class ABI Preferred Stock effective at the beginning of the Dividend Period succeeding the Dividend Period as to which such dividends were not paid and shall thereafter accrue additional dividends in 6 respect thereof at the Dividend Rate until such accrued and unpaid dividends have been paid in full. (c) So long as any shares of Class ABI Preferred Stock shall be outstanding, the Corporation shall not declare, pay or set apart for payment on any Junior Stock any dividends whatsoever, whether in cash, property or otherwise (other than dividends payable in shares of the class or series upon which such dividends are declared or paid, or payable in shares of Common Stock with respect to Junior Stock other than Common Stock, together with cash in lieu of fractional shares), nor shall the Corporation make any distribution on any Junior Stock, nor shall any Junior Stock be purchased, redeemed or otherwise acquired by the Corporation or any of its subsidiaries of which it owns not less than a majority of the outstanding voting power, nor shall any monies be paid or made available for a sinking fund for the purchase or redemption of any Junior Stock, unless all dividends to which the holders of Class ABI Preferred Stock shall have been entitled for all previous Dividend Periods shall have been paid or declared and a sum of money sufficient for the payment thereof has been set apart. (d) The Company shall be obligated to declare and pay dividends in an amount equal to the Dividend Rate on each Dividend Payment Date to the extent that funds are legally available for declaration of such dividends. In the event that full dividends are not paid or made available to the holders of all outstanding shares of Class ABI Preferred Stock and of any Parity Stock with respect to any Dividend Period and funds available for payment of dividends shall be insufficient to permit payment in full to holders of all such stock of the full preferential amounts to which they are then entitled, then the entire amount legally available for payment of dividends shall be distributed each Dividend Period ratably among all such holders of Class ABI Preferred Stock and of any Parity Stock in proportion to the full amount to which they would otherwise be respectively entitled. The dividends payable in respect of the Class ABI Preferred Stock shall be a mandatory obligation of the Corporation, subject only to the limitations set forth in Section 170 of the Delaware General Corporation Law with respect to funds legally permitted to be used for the payment of dividends (the "Legal Funds Requirement"). In stating that the dividends payable in respect of the Class ABI Preferred Stock are a mandatory obligation, it is the explicit intent of the Corporation to eliminate any and all discretion of the Board of Directors with respect to the declaration and payment of such dividends and to require the Board of Directors to declare and pay such dividends as and when provided herein, subject only to compliance with the Legal Funds Requirement. 3 Distributions Upon Liquidation, Dissolution or Winding Up. --------------------------------------------------------- (a) In the event of any voluntary or involuntary liquidation, dissolution or other winding up of the affairs of the Corporation before any payment or distribution shall be made to the holders of Junior Stock, the holders of Class ABI Preferred Stock shall be entitled to be paid out of the assets of the Corporation in cash or property at its fair market value as determined by the Board of Directors the Liquidation Preference per share plus an amount equal to all dividends accrued and unpaid thereon to the date of such liquidation, dissolution or such other winding up. Except as provided in this paragraph, holders of Class ABI Preferred Stock 7 shall not be entitled to any distribution in the event of liquidation, dissolution or winding up of the affairs of the Corporation. (b) If, upon any such liquidation, dissolution or other winding up of the affairs of the Corporation the assets of the Corporation shall be insufficient to permit the payment in full of the Liquidation Preference per share plus an amount equal to all dividends accrued and unpaid on the Class ABI Preferred Stock and the full liquidating payments on all Parity Stock, then the assets of the Corporation shall be ratably distributed among the holders of Class ABI Preferred Stock and of any Parity Stock in proportion to the full amounts to which they would otherwise be respectively entitled if all amounts thereon were paid in full. Neither the consolidation or merger of the Corporation into or with another entity or entities, nor the sale, lease, transfer or conveyance of all or substantially all of the assets of the Corporation to another corporation or any other entity shall be deemed a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this paragraph 3. 4 Conversion Rights. ----------------- (a) (i) At any time, on or after [ ], 2001, a holder of shares of Class ABI Preferred Stock may convert such shares into Common Stock at any time before the close of business on the Redemption Date (unless the Corporation shall default in payment of the Redemption Price). (ii) At any time, on or after [ ], 2002, the Corporation, at its option, may convert all, but not less than all of the aggregate shares of Class ABI Preferred Stock and Class ABII Preferred Stock outstanding at such time into Common Stock at any time before the close of business on the Redemption Date; provided that, on the Mandatory Conversion Date, the Corporation shall have paid all accrued dividends on all shares of Class ABI Preferred Stock then outstanding, up to and including the most recent Dividend Payment Date (unless the Corporation shall default in payment of the Conversion Price). For the purposes of conversion, each share of Class ABI Preferred Stock shall be valued at the Liquidation Preference plus all accrued but unpaid dividends thereon through the relevant Conversion Date, which shall be divided by the Conversion Price in effect on the Conversion Date to determine the number of shares issuable upon conversion. Immediately following such conversion, the rights of the holders of converted Class ABI Preferred Stock shall cease (in respect of such converted stock) and the persons entitled to receive the Common Stock upon the conversion of Class ABI Preferred Stock shall be treated for all purposes as having become the owners of such Common Stock. (b) (i) To convert Class ABI Preferred Stock pursuant to subparagraph 4(a)(i), a holder must (i) surrender the certificate or certificates evidencing the shares of Class ABI Preferred Stock to be converted, duly endorsed in a form satisfactory to the Corporation, at the office of the Corporation or transfer agent for the Class ABI Preferred Stock, (ii) notify the Corporation at such office that he elects to convert Class ABI Preferred Stock, and the number of shares he wishes to convert, (iii) state in writing the name or names in which he wishes the certificate or certificates for shares of Common Stock to be issued, and (iv) pay any transfer or similar 8 tax if required (provided, however, that no such payment shall be required if the Common Stock issuable upon conversion is to be issued in the name of the converting holder of Class ABI Preferred Stock). In the case of lost or destroyed certificates evidencing ownership of shares of Class ABI Preferred Stock to be surrendered for conversion, the holder shall submit proof of loss or destruction, and such indemnity as shall be reasonably required by the Corporation. In the event that a holder fails to notify the Corporation of the number of shares of Class ABI Preferred Stock which he wishes to convert, he shall be deemed to have elected to convert all shares represented by the certificate or certificates surrendered for conversion. The date on which the holder satisfies all those requirements is the "Optional Conversion Date." As soon as practical and in any event within five (5) Business Days of the Optional Conversation Date, the Corporation shall deliver through the transfer agent a certificate for the number of full shares of Common Stock issuable upon the conversion, a check for any fractional share and a new certificate representing the unconverted portion, if any, of the shares of Class ABI Preferred Stock represented by the certificate or certificates surrendered for conversion. The person in whose name the Common Stock certificate is registered shall be treated as the stockholder of record on and after the Optional Conversion Date. All shares of Common Stock issuable upon conversion of the Class ABI Preferred Stock shall be fully paid and nonassessable and shall rank pari passu with the other ---- ---- shares of Common Stock outstanding from time to time. In the case of Class ABI Preferred Stock that has been converted after any Record Date but before the next succeeding Dividend Payment Date, dividends that are payable on such Dividend Payment Date shall be payable on such Dividend Payment Date notwithstanding such conversion, and such dividends shall be paid to the holder of such Class ABI Preferred Stock on such Record Date (and shall not constitute "accrued and unpaid dividends" for purposes of subparagraph 4(a)). Holders of Common Stock issued upon conversion shall not be entitled to receive any dividend payable to holders of Common Stock as of any record time before the close of business on the Optional Conversion Date. If a holder of Class ABI Preferred Stock converts more than one share at a time the number of full shares of Common Stock issuable upon conversion shall be based on the total value of all shares of Class ABI Preferred Stock converted. (ii) To convert Class ABI Preferred Stock and Class ABII Preferred Stock pursuant to subparagraph 4(a)(ii), notice of any conversion shall be sent by or on behalf of the Corporation not more than sixty (60) days nor less than thirty (30) days prior to the Mandatory Conversion Date, by first class mail, postage prepaid, to all holders of record of the Class ABI Preferred Stock and Class ABII Preferred Stock at their respective last addresses as they shall appear on the books of the Corporation; provided, however, that no failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the conversion of any shares of Class ABI Preferred Stock and Class ABII Preferred Stock except as to the holder to whom the Corporation has failed to give notice or except as to the holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which Class ABI Preferred Stock and Class ABII Preferred Stock may be listed or admitted to trading, such notice shall state: (i) the Mandatory Conversion Date; (ii) the date on which the Conversion Price shall be calculated; (iii) the number of shares of Class ABI Preferred Stock and Class ABII Preferred Stock to be converted being all the Class ABI Preferred Stock and Class ABII Preferred Stock held of record by all holders; (iv) the place or places where certificates for such shares are to be surrendered for receipt of such Common Stock 9 issuable upon such conversion; and (v) that dividends on the shares to be converted will cease to accrue on the Mandatory Conversion Date. Upon the mailing of any such notices of conversion, the Corporation shall become obligated to convert on the Mandatory Conversion Date all of the Class ABI Preferred Stock and Class ABII Preferred Stock. The person in whose name the Common Stock certificate is registered shall be treated as the stockholder of record on and after the Mandatory Conversion Date. All shares of Common Stock issuable upon conversion of the Class ABI Preferred Stock and Class ABII Preferred Stock shall be fully paid and nonassessable and shall rank pari passu with the other shares of Common ---- ----- Stock outstanding from time to time. In the case of Class ABI Preferred Stock and Class ABII Preferred Stock that has been converted after any Record Date but before the next succeeding Dividend Payment Date, dividends that are payable on such Dividend Payment Date shall be payable on such Dividend Payment Date notwithstanding such conversion, and such dividends shall be paid to the holder of such Class ABI Preferred Stock and Class ABII Preferred Stock on such Record Date (and shall not constitute "accrued and unpaid dividends" for purposes of subparagraph 4(a)). Holders of Common Stock issued upon conversion shall not be entitled to receive any dividend payable to holders of Common Stock as of any record time before the close of business on the Mandatory Conversion Date. (c) The Corporation will not issue a fractional share of Common Stock upon conversion of Class ABI Preferred Stock. Instead the Corporation will deliver its check for the current market value of the fractional share. The current market value of a fraction of a share is determined as follows: Multiply the closing market price of a full share by the fraction. Round the result to the nearest cent. The closing market price of a share of Common Stock is the Quoted Price of the Common Stock on the last Trading Day prior to the Conversion Date. (d) If a holder converts shares of Class ABI Preferred Stock, the Corporation shall pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of Common Stock upon the conversion. However, the holder shall pay any such tax which is due because the shares are issued in a name other than the holder's name. (e) The Corporation has reserved and shall continue to reserve out of its authorized but unissued Common Stock or its Common Stock held in treasury enough shares of Common Stock to permit the conversion of the Class ABI Preferred Stock in full. All shares of Common Stock which may be issued upon conversion of Class ABI Preferred Stock shall be fully paid and nonassessable. The Corporation will endeavor to comply with all securities laws regulating the offer and delivery of shares of Common Stock upon conversion of Class ABI Preferred Stock and will endeavor to list such shares on each national securities exchange on which the Common Stock is listed. (f) The Corporation from time to time may reduce the Conversion Price by any amount for any period of time if the period is at least twenty (20) Business Days and if the reduction is irrevocable during the period, but in no event may the Conversion Price be less than the par value of a share of Common Stock. Whenever the Conversion Price is reduced, the Corporation shall mail to holders of Class ABI Preferred Stock a notice of the reduction. The Corporation shall mail, first class, postage prepaid, the notice at least 15 days before the date the 10 reduced conversion price takes effect. The notice shall state the reduced conversion price and the period it will be in effect. (g) If the Corporation is party to a merger which reclassifies or changes its Common Stock, upon consummation of such transaction Class ABI Preferred Stock shall automatically become convertible into the kind and amount of securities, cash or other assets which the holder of Class ABI Preferred Stock would have owned immediately after the consolidation, merger, transfer or lease if such holder had converted Class ABI Preferred Stock immediately before the effective date of the transaction. Appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of Class ABI Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to changes in and other adjustment of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other securities or property thereafter deliverable upon the conversion of Class ABI Preferred Stock. (h) In any case in which this paragraph 4 shall require that an adjustment as a result of any event become effective from and after a record date, the Corporation may elect to defer until after the occurrence of such event (i) the issuance to the holder of any shares of Class ABI Preferred Stock converted after such record date and before the occurrence of such event of the additional shares of Common Stock issuable upon such conversion over and above the shares issuable on the basis of the Conversion Price in effect immediately prior to adjustment and (ii) a check for any remaining fractional shares of Common Stock as provided in subparagraph 4(c) above. (i) Except as provided in the immediately following sentence, any determination that the Corporation or its Board of Directors must make pursuant to this paragraph 4 shall be conclusive. Whenever the Corporation or its Board of Directors shall be required to make a determination under this paragraph 4, such determination shall be made in good faith and may be challenged in good faith by a majority of the holders of Class ABI Preferred Stock, and any dispute shall be resolved, at the Corporation's expense, by an investment banking firm of recognized national standing selected by the Corporation and acceptable to such holders of Class ABI Preferred Stock; provided, however, if the Conversion -------- ------- Price as determined by the Board of 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 holders of Class ABI Preferred Stock who challenged such price. (j) All shares of Class ABI Preferred Stock converted pursuant to this paragraph 4 shall be retired and shall be restored to the status of authorized and unissued shares of preferred stock, without designation as to series and may (subject to any restriction imposed on the Company by its Certificate of Incorporation, bylaws or the Stock Purchase Agreement or any documents entered into pursuant thereto) thereafter be reissued as shares of any series of preferred stock other than Class ABI Preferred Stock. 5 Redemption by the Corporation. ----------------------------- 11 (a) The Class ABI Preferred Stock and the Class ABII Preferred Stock, together, may be redeemed, in whole, but not in part, at any time on or after ___________, 2002 at the option of the Corporation at the Redemption Price. If the Redemption Date is on or after a Record Date and on or before the related Dividend Payment Date, the dividend payable shall be paid to the holder in whose name the Class ABI Preferred Stock is registered at the close of business on such record date. (b) Notice of any redemption shall be sent by or on behalf of the Corporation not more than sixty (60) days nor less than thirty (30) days prior to the Redemption Date, by first class mail, postage prepaid, to all holders of record of the Class ABI Preferred Stock and the Class ABII Preferred Stock at their respective last addresses as they shall appear on the books of the Corporation; provided, however, that no failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any shares of Class ABI Preferred Stock or Class ABII Preferred Stock except as to the holder to whom the Corporation has failed to give notice or except as to the holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which Class ABI Preferred Stock and Class ABII Preferred Stock may be listed or admitted to trading, such notice shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) the number of shares of Class ABI Preferred Stock and Class ABII Preferred Stock to be redeemed; (iv) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Price; and (v) that dividends on the shares to be redeemed will cease to accrue on the Redemption Date (vi) the Conversion Price; (vii) that Class ABI Preferred Stock and Class ABII Preferred Stock called for redemption may be converted at any time before the close of business on the Redemption Date; and (viii) that holders of Class ABI Preferred Stock and Class ABII Preferred Stock must satisfy the requirements of subparagraph 4(b) above if such holders desire to convert such shares. Upon the mailing of any such notices of redemption, the Corporation shall become obligated to redeem at the time of redemption specified thereon all the Class ABI Preferred Stock and Class ABII Preferred Stock. (c) If notice has been mailed in accordance with subparagraph 5(b) above and provided that on or before the Redemption Date specified in such notice, all funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds in trust for the pro rata benefit of the holders of the shares so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Redemption Date, dividends on the shares of the Class ABI Preferred Stock so called for redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding and shall not have the status of shares of Class ABI Preferred Stock, and all rights of the holders thereof as shareholders of the Corporation (except the right to receive from the Corporation the Redemption Price) shall cease. Upon surrender, in accordance with said notice, of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Corporation shall so require and the notice shall so state), such shares shall be redeemed by the Corporation at the Redemption Price. (d) Any funds deposited with a bank or trust company for the purpose of redeeming Class ABI Preferred Stock shall be irrevocable except that: 12 (i) the Corporation shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; and (ii) any balance of monies so deposited by the Corporation and unclaimed by the holders of the Class ABI Preferred Stock entitled thereto at the expiration of two (2) years from the applicable Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Corporation, and after any such repayment, the holders of the shares entitled to the funds so repaid to the Corporation shall look only to the Corporation for payment without interest or other earnings. (e) No Class ABI Preferred Stock may be redeemed except with funds legally available for the payment of the Redemption Price. (f) All shares of Class ABI Preferred Stock redeemed pursuant to this paragraph 5 shall be retired and shall be restored to the status of authorized and unissued shares of preferred stock, without designation as to series and may thereafter be reissued as shares of any series of preferred stock other than shares of Class ABI Preferred Stock. 6 Voting Rights. ------------- (a) The holders of record of shares of Class ABI Preferred Stock shall not be entitled to any voting rights except as hereinafter provided in this paragraph 6 or as otherwise provided by law. (b) So long as any shares of the Class ABI Preferred Stock remain outstanding, each share of Class ABI Preferred Stock shall entitle the holder thereof to vote on all matters voted on by holders of Common Stock, voting together with the Common Stock as a single class (together with all other classes and series of stock of the Corporation that are entitled to vote as a single class with the Common Stock) at all meetings of the stockholders of the Corporation. In any vote with respect to which the Class ABI Preferred Stock shall vote with the holders of Common Stock as a single class together with all other classes and series of stock of the Corporation that are entitled to vote as a single class with the Common Stock, each share of Class ABI Preferred Stock shall entitle the holder thereof to cast the number of votes equal to the number of votes which could be cast in such vote by a holder of the number of shares of Common Stock into which such share of Class ABI Preferred Stock is convertible based on the closing trading price of the Common Stock on the date immediately preceding the Initial Issue Date (with such vote to remain constant, even though the conversion rate changes pursuant to the terms hereunder). Such voting right of the holders of the Class ABI Preferred Stock may be exercised at any annual meeting of stockholders, any special meeting of stockholders, or by written consent of the minimum number of shares required to take such action pursuant to Section 228 of the Delaware General Corporation Law. (c) On any matter on which the holders of Class ABI Preferred Stock are entitled by law or under the Certificate of Incorporation to vote separately as a class, each such holder shall be entitled to one vote for each share held, and such matter shall be determined by a 13 majority of the votes cast unless Delaware law or this Certificate of Designations requires approval by a higher percentage. (d) Until a Termination Event, the number of Directors comprising the Board of Directors shall be equal to fifteen (15) and the holders of Preferred Stock, voting separately as a single class, shall have the exclusive right to elect three (3) Directors (each such Director, a "Preferred Stock Director") at any special meeting of stockholders called for such purpose, at each annual meeting of stockholders and in any written consent of stockholders pursuant to Section 228 of the Delaware General Corporation Law. Any increases in the size of the Board of Directors will require a proportional increase in the number of Preferred Stock Directors (rounded up to the next whole number such that the Preferred Stock Directors represent not less than twenty percent (20%) of the votes of the Board of Directors). A proportionate number (rounded up to the next whole number, but not less than one) of Preferred Stock Directors shall serve on each committee of the Board of Directors (provided that with respect to the Executive Committee, the Executive Committee shall consist of five members of which two members shall be Preferred Stock Directors), and at least one Preferred Stock Director shall serve on the board or other governing body of each of the Corporation's subsidiaries and affiliates, other than operational home building companies. In the event (an "Adverse Event") that on any date following the Initial Issue Date that is 60 days after the end of a fiscal quarter of the Corporation (a "Test Date") both (i) the Average Trading Price of the Common Stock is below $5 per share (provided that such amount shall be adjusted for reverse stock splits, recapitalizations and other similar events) and (ii) (x) the percentage change in the EBT per share of the Corporation (of the Common Stock issued and outstanding) for the most recent two fiscal quarters as measured against the same two fiscal quarters from the prior fiscal year is less than (y) the percentage change in the EBT per share (of the common stock issued and outstanding) of the Comparable Group for the same period as compared against the EBT per share (calculated on the same basis) of the Comparable Group during the same period in the prior fiscal year then the holders of Preferred Stock, voting separately as a single class, shall be entitled to elect Preferred Stock Directors sufficient to cause the Preferred Stock Directors to constitute a majority of the Board of Directors and all committees of the Board of Directors, including the Executive Committee ("Additional Preferred Stock Directors"). The size of the Board of Directors and all committees shall be automatically increased in order to effect any such additional Directors. The right of the holders of Preferred Stock to elect Additional Preferred Stock Directors shall continue until such time as neither (i) nor (ii) above is true for two consecutive Test Dates. The "Average Trading Price" shall mean, on any date of determination, the average of the closing prices of the Common Stock over the 90 day period prior to such date. (e) The Preferred Stock Directors elected as provided herein shall serve until the next annual meeting or until their respective successors shall be elected and shall qualify. Upon the termination of the right of the holders of Preferred Stock to elect Additional Preferred Stock Directors as set forth in subparagraph 6(d) above, any Additional Preferred Stock Directors shall resign. Any Preferred Stock Director may be removed with or without cause by, and shall not be removed other than by, the vote of the holders of a majority of the outstanding shares of Preferred Stock, voting separately as a single class, at a meeting called for such purpose or by written consent in accordance with Section 228 of the Delaware General Corporate Law. If the 14 office of any Preferred Stock Director becomes vacant by reason of death, resignation, retirement, disqualification or removal from office or otherwise, the remaining Preferred Stock Directors, by majority vote, may elect a successor, or, alternatively, the holders of a majority of the outstanding shares of Preferred Stock, voting separately as a single class, at a meeting called for such purpose or by written consent in accordance with Section 228 of the Delaware General Corporation Law may elect a successor. Any such successor shall hold office for the unexpired term in respect of which such vacancy occurred. Upon the occurrence of a Termination Event, the Preferred Stock Directors then serving on the Board of Directors may continue to hold their office for the remainder of their term. This subparagraph (e) may not be amended without (x) the affirmative vote of the holders of a majority of the outstanding shares of Common Stock and (y) the affirmative vote of the holders of a majority of the outstanding shares of Preferred Stock. (f) At any time when the right to elect Preferred Stock Directors or Additional Preferred Stock Directors provided in subparagraph 6(d) shall have vested in the holders of Class ABI Preferred Stock and if such right shall not already have been initially exercised, a proper officer of the Corporation shall, upon the written request of any holder of record of Class ABI Preferred Stock then outstanding, addressed to the Secretary of the Corporation, call a special meeting of holders of Preferred Stock. Such meeting shall be held at the earliest practicable date upon the notice required for annual meetings of stockholders at the place for holding annual meetings of stockholders of the Corporation or, if none, at a place designated by the Secretary of the Corporation. If such meeting shall not be called by the proper officers of the Corporation within thirty (30) days after the personal service of such written request upon the Secretary of the Corporation, or within thirty (30) days after mailing the same within the United States, by registered mail, addressed to the Secretary of the Corporation at its principal office (such mailing to be evidenced by the registry receipt issued by the postal authorities), then the holders of record of ten percent (10%) of the shares of Class ABI Preferred Stock then outstanding may designate in writing a holder of Class ABI Preferred Stock to call such meeting at the expense of the Corporation, and such meeting may be called by such person so designated upon the notice required for annual meetings of stockholders and shall be held at the place for holding annual meetings of the Corporation or, if none, at a place designated by such holder. Any holder of Class ABI Preferred Stock that would be entitled to vote at such meeting shall have access to the stock books of the Corporation for the purpose of causing a meeting of the holders of Preferred Stock to be called pursuant to the provisions of this paragraph and to contact the holders of Preferred Stock with respect to matters relating to such meeting. Notwithstanding the provisions of this paragraph, however, no such special meeting shall be called if any such request is received less than 90 days before the date fixed for the next ensuing annual or special meeting of stockholders. (g) If at any time when the holders of Class ABI Preferred Stock are entitled to elect directors pursuant to the foregoing provisions of this paragraph 6, and the holders of Class AA Preferred Stock and Class ABII Preferred Stock are entitled to elect directors by reason of any provision of the Certificate of Incorporation, as in effect at the time, or the respective Certificate of Designation for such Classes, and if the terms of the Class AA Preferred Stock and Class ABII Preferred Stock so permit, the voting rights of the Preferred Stock then entitled to vote shall be combined (with each series having a number of votes proportional to the aggregate 15 liquidation preference of its outstanding shares). In such case, the holders of Preferred Stock, voting as a class, shall elect such directors. (h) In addition to any vote or consent of shareholders required by law or the Certificate of Incorporation, the consent of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the shares of Class ABI Preferred Stock at the time outstanding, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating: (i) Any amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation, or of the by-laws of the Corporation, which affects adversely the voting powers, preferences and relative, participating, optional and other special rights of the holders of shares of Class ABI Preferred Stock; provided, however, that the amendment of the provisions of the Certificate of Incorporation so as to authorize or create, or to increase the authorized amount of any class of any security convertible into any shares ranking junior to the Class ABI Preferred Stock in the distribution of assets on any liquidation, dissolution, or winding up of the Corporation or in the payment of dividends, shall not be deemed to affect adversely the voting powers, preferences and relative, participating, optional and other special rights of the holders of shares of Class ABI Preferred Stock; (ii) Any authorization or creation of, or increase in the authorized amount of, any shares of any class or any security convertible into shares of any class ranking senior to or on parity with shares of Class ABI Preferred Stock (other than the Class AA Preferred Stock) in the distribution of assets on any liquidation, dissolution, or winding up of the Corporation or in the payment of dividends or otherwise; (iii) Any increase or decrease (other than by redemption or conversion) in the total number of authorized shares of Class ABI Preferred Stock; (iv) Any sale, lease, assignment, transfer or other conveyance of all or substantially all of the assets of the Corporation or any of its material subsidiaries of which it owns fifty percent (50%) or more of the voting power thereof, or any consolidation or merger involving the Corporation or any of such subsidiaries (except mergers between the Corporation and any of its subsidiaries or mergers among any of the Corporation's subsidiaries), or any reclassification or other change of any stock, or any dissolution, liquidation, or winding up of the Corporation or, unless the obligations of the Corporation under an agreement are expressly conditioned upon the requisite approval of the holders of sixty-six and two-thirds percent (66-2/3%) of the Class ABI Preferred Stock then outstanding as provided for herein, make any agreement or become obligated to do so; (v) Except as permitted by paragraph 5 above, any purchase, redemption or other acquisition for value (or payment into or setting aside as a sinking fund for such purpose) of any shares of Common Stock or other capital stock of the Corporation; (vi) Any declaration or payment of any dividends on or declaration or making of any other distribution, direct or indirect, on account of the Common Stock or setting 16 apart any sum for any such purpose unless all accrued unpaid dividends on Class ABI Preferred Stock have been paid in cash. 7 Financial Statements. -------------------- (a) Until (i) the aggregate amount of Preferred Stock outstanding is less than twenty percent (20%) of the maximum amount of the Preferred Stock issued to date or (ii) the aggregate remaining investment or commitment to invest in the Corporation by Investor (or any single transferee of Investor or related group of transferees) is less than the greater of $10,000,000 or ten percent (10%) of the Market Capitalization of the Company (a "Termination Event") (provided that a Termination Event shall not occur prior to all closings being consummated under the Stock Purchase Agreement), with the value of such investment to be based on the sum of (x) the greater of the Liquidation Preference of the Preferred Stock and the value of the Common Stock underlying such Preferred Stock (as measured by the Conversion Price) then held by it, (y) the value of the Common Stock then held by it, and (z) the value of the warrants then held by it, whether or not required by the rules and regulations of the Commission, the Corporation shall furnish to the holders of Class ABI Preferred Stock (i) all quarterly and annual financial information required to be filed with the Commission on Forms 10-Q and 10-K and, with respect to the annual information only, a report thereon by the Corporation's certified independent accountants, (ii) all current reports required to be filed with the Commission on Form 8-K. (b) The Corporation shall, so long as a Termination Event has not occurred, deliver to the holders of Class ABI Preferred Stock, forthwith upon any executive officer of the Corporation becoming aware of any breach under this Certificate of Designations, an Officers' Certificate specifying such breach and what action the Corporation is taking or proposes to take with respect thereto. 8 Ranking. ------- With regard to rights to receive dividends, redemption payments and distributions upon liquidation, dissolution or winding up of the Corporation, the Class ABI Preferred Stock shall rank pari passu with any Parity Stock and senior to the Common Stock and any other equity securities or other securities into which any convertible indebtedness is convertible which are issued by the Corporation after the date of this Certificate of Designation. The Class ABI Preferred Stock shall not be subject to the creation of capital stock senior with regards to the right to receive dividends, redemption payments and distribution upon liquidation, dissolution or winding up of the Corporation. 9 Modification and Waiver. ----------------------- Except as otherwise provided above, the terms of this Certificate of Designation may be amended and the rights hereunder may be waived with the consent of holders of a majority of the shares of the Class ABI Preferred Stock then outstanding, provided, that no such modification or waiver shall change the -------- dividend rights or the terms for conversion or redemption 17 of the Class ABI Preferred Stock without the consent of each holder of Class ABI Preferred Stock. 10 Exclusion of Other Rights. ------------------------- Except as may otherwise be required by law, the shares of Class ABI Preferred Stock shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this resolution (as such resolution may be amended from time to time) and in the Certificate of Incorporation. 11 Headings of Subdivisions. ------------------------ The headings of the various subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. 12 Severability of Provisions. -------------------------- If any voting powers, preferences and relative, participating, optional and other special rights of the Class ABI Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution (as such resolution may be amended from time to time) is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Class ABI Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution (as so amended) which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional and other special rights of Class ABI Preferred Stock and qualifications, limitations and restrictions thereof shall, nevertheless, remain in full force and effect, and no voting powers, preferences and relative, participating, optional or other special rights of Class ABI Preferred Stock and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special rights of Class ABI Preferred Stock and qualifications, limitations and restrictions thereof unless so expressed herein. 13 Record Holders. -------------- The Corporation and the transfer agent for the Class ABI Preferred Stock may deem and treat the record holder of any shares of Preferred Stock as the true and lawful owner thereof for all purposes, and neither the Corporation nor the transfer agent shall be affected by any notice to the contrary. 14 Notice. ------ Except as may otherwise be provided for herein, all notices referred to herein shall be in writing, and all notices hereunder shall be deemed to have been given upon the earlier of receipt of such notice or three (3) Business Days after the mailing of such notice if sent by registered mail (unless first-class mail shall be specifically permitted for such notice under the terms of this Certificate) with postage prepaid, addressed: if to the Corporation, to its offices at 18 1921 Gallows Road, Suite 730, Vienna Virginia 22182 Attention: Secretary or to an agent of the Corporation designated as permitted by this Certificate, or, if to any holder of the Class ABI Preferred Stock, to such holder at the address of such holder of the Class ABI Preferred Stock as listed in the stock record books of the Corporation (which may include the records of any transfer agent for the Class ABI Preferred Stock); or to such other address as the Corporation or holder, as the case may be, shall have designated by notice similarly given. [Signature Page Follows] 19 IN WITNESS WHEREOF, the Corporation has caused this certificate to be duly executed by [NAME AND TITLE OF OFFICER] and attested by [NAME OF SECRETARY] its secretary, this _____ day of ____________________, 1997. THE FORTRESS GROUP, INC. By: ____________________________ Name: Title: ATTEST: By: _______________________________ Name: Secretary: 20 EX-99.8 9 FORM OF CLASS ABII CERTIFICATE OF DESIGNATIONS EXHIBIT 99.8 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF OF CONVERTIBLE REDEEMABLE PREFERRED STOCK OF THE FORTRESS GROUP, INC. _________________________ Pursuant to Section 151 of the General Corporation Law of the State of Delaware _________________________ The Fortress Group, Inc., a Delaware corporation (the "Corporation") certifies that pursuant to the authority contained in Article Fourth of its Certificate of Incorporation (the "Certificate of Incorporation") and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors by unanimous written consent dated __________, 1997 adopted the following resolution which resolution remains in full force and effect on the date hereof: RESOLVED, that there is hereby established a series of authorized preferred stock having a par value of $0.01 per share, which series shall be designated as "Convertible Redeemable Preferred Stock" (the "Preferred Stock"), shall consist of _______ shares and shall have the following voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof as follows: 1 Certain Definitions; Number of Shares and Designation. (a) Definitions. Unless the context otherwise requires, the terms ----------- defined in this paragraph 1 shall have, for all purposes of this resolution, the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). Additional Preferred Stock Directors. The term "Additional Preferred ------------------------------------ Stock Directors" shall have the meaning set forth in subparagraph 6(d). Adverse Event. The term "Adverse Event" shall have the meaning set ------------- forth in subparagraphs 6(d) Approval Date. The term "Approval Date" shall mean _____________ __, ------------- 1997. Average Trading Price. The term "Average Trading Price" shall have --------------------- the meaning set forth in subparagraph 6(d). Board of Directors. The term "Board of Directors" shall mean the ------------------ Board of Directors of the Corporation. Business Day. The term "Business Day" shall mean a day other than a ------------ Saturday or Sunday or a bank holiday in New York. Class AA Preferred Stock. The term "Class AA Preferred Stock" shall ------------------------ mean the 46,670 shares of Class AA Convertible Preferred Stock, $0.01 par value per share, of the Corporation. Preferred Stock. The term "Preferred Stock" shall mean the _____ --------------- shares of Convertible Redeemable Preferred Stock, $0.01 par value per share, of the Corporation. Preferred Stock. The term "Class ABII Preferred Stock" shall have the --------------- meaning set forth subparagraph 1(b). Commission. The term "Commission" shall mean the United States ---------- Securities and Exchange Commission. Common Equity. The term "Common Equity" shall mean all shares now or ------------- hereafter authorized of any class of common stock of the Corporation, including the Common Stock, and any other stock of the Corporation, howsoever designated, authorized after the Initial Issue Date, which has the right (subject always to prior rights of any class or series of preferred stock) to participate in the distribution of the assets and earnings of the Corporation without limit as to per share amount. Common Stock. The term "Common Stock" shall mean the common stock, ------------ par value $0.01 per share, of the Corporation. Comparable Group. The term "Comparable Group" shall mean Pulte ---------------- Corporation, The Ryland Group, Inc., U.S. Home Corporation, NVR Inc., Hovnanian Enterprises, Inc., Toll Brothers, Inc., Washington Homes, Inc., Zaring National Corporation, M/I Schottenstein Homes, Inc., Continental Homes Holding Corp., Engle Homes, Inc., Crossman Communities, Beazer Homes USA, Inc. and D.R. Horton, Inc. Conversion Date. The term "Conversion Date" shall mean the Optional --------------- Conversion Date and the Mandatory Conversion Date, as applicable. 2 Market Capitalization of the Company. The term "Market Capitalization ------------------------------------ of the Company" shall mean the market value of the Company's outstanding Common Stock as measured by the thirty (3) trading days preceding any measurement date. Conversion Price. The term "Conversion Price" shall be equal to 95% ---------------- of the Current Market Price on the applicable Conversion Date. Current Market Price. The term "Current Market Price" means, for a -------------------- share of Common Stock on any date, the average of Quoted Prices for the thirty (30) consecutive Trading Days commencing forty-five (45) Trading Days before the date in question. Director. The term "Director" means a member of the Board of -------- Directors. Dividend Payment Date. The term "Dividend Payment Date" shall have --------------------- the meaning set forth in subparagraph 2(b). Dividend Period. The term "Dividend Period" shall mean the period --------------- from, and including, the Initial Issue Date to, but not including, the first Dividend Payment Date and thereafter, each quarterly period from, and including, the Dividend Payment Date to, but not including the next Dividend Payment Date. Dividend Rate. The term "Dividend Rate" shall mean twelve percent ------------- (12%). EBT. The term "EBT" shall mean earnings before interest expense, --- income taxes and extraordinary or non-recurring items, all calculated in accordance with generally accepted accounting principles. Executive Committee. The term "Executive Committee" shall mean the ------------------- five-member executive committee of the Board of Directors to which substantial operational matters regarding the Corporation shall be delegated. Initial Issue Date. The term "Initial Issue Date" shall mean the date ------------------ that shares of Preferred Stock are first issued by the Corporation. Investor. The term "Investor" shall mean, at any time, Prometheus -------- Homebuilders LLC and any of its affiliates, including, but not limited to, Lazard Freres Real Estate Investors, LLC and its affiliates. Junior Stock. The term "Junior Stock" shall mean, for purposes of ------------ paragraph 2 below, Common Equity and any class or series of stock of the Corporation authorized after the Initial Issue Date which is not entitled to receive any dividends in any Dividend Period unless all dividends required to have been paid or declared and set apart for payment on the Class AB Preferred Stock and any Parity Stock shall have been so paid or declared and set apart for payment, and for purposes of paragraph 3 below, shall mean Common Equity and any class or series of stock of the Corporation authorized after the Initial Issue Date which is not entitled to receive any assets upon liquidation, dissolution or winding up of the affairs of the Corporation 3 until the Class AB Preferred Stock and any Parity Stock shall have received the entire amount to which such stock is entitled upon such liquidation, dissolution or winding up. Liquidation Preference. The term "Liquidation Preference" shall mean ---------------------- $1000.00 per share. Mandatory Conversion Date. The term "Mandatory Conversion Date" shall ------------------------- mean the Business Day, specified in a notice to holders of Preferred Stock given by the Corporation in accordance with the provisions of subparagraph 4(b)(ii), upon which the Corporation shall convert all outstanding shares of Preferred Stock into Common Stock as set forth in such subparagraph. Market Capitalization of the Company. The term "Market Capitalization ------------------------------------ of the Company" shall mean the market value of the Company's outstanding Common Stock as measured by the thirty (30) trading days preceding any measurement date. Officers' Certificate. The term "Officers' Certificate" means a --------------------- certificate signed on behalf of the Corporation by two officers of the Corporation, one of whom must be the principal executive officer, the principal financial officer or the principal accounting officer of the Corporation. Optional Conversion Date. The term "Optional Conversion Date" shall ------------------------ have the meaning set forth in subparagraph 4(b)(i) below. Parity Stock. The term "Parity Stock" shall mean, for purposes of ------------ paragraph 2 below, (i) the Series A Preferred Stock, (ii) the Series B Preferred Stock, (iii) the Series C Preferred Stock, (iv) the Series D Preferred Stock, (v) the Class AA Preferred Stock, (vi) the Preferred Stock and (vii) any class or series of stock of the Corporation authorized after the Initial Issue Date which is entitled to receive payment of dividends on a parity with the Class AB Preferred Stock, and for purposes of paragraph 3 below, shall mean (i) the Series A Preferred Stock, (ii) the Series B Preferred Stock, (iii) the Series C Convertible Preferred Stock, (iv) the Series D Preferred Stock, (v) the Class AA Preferred Stock, (vi) the Preferred Stock and (vii) any class or series of stock of the Corporation authorized after the Initial Issue Date which is entitled to receive assets upon liquidation, dissolution or winding up of the affairs of the Corporation on a parity with the Class AB Preferred Stock. Preferred Stock. The term "Preferred Stock" shall mean the Class AA --------------- Preferred Stock, the Preferred Stock and the Preferred Stock. Quoted Price. The term "Quoted Price", with respect to the Common ------------ Stock, shall mean the last reported sales price for Common Stock as reported by the National Association of Securities Dealers, Inc. Automatic Quotations System, National Market System, or, if the applicable security is listed or admitted for trading on a securities exchange, the last reported sales price of the applicable security on the principal exchange on which the applicable security is listed or admitted for trading (which shall be for consolidated trading if applicable to such exchange), or if neither so reported or listed or admitted for trading, the last reported bid price of the applicable security in the over-the-counter market. In the event that the Quoted Price cannot be determined as aforesaid, the Board of Directors of the Corporation shall determine the Quoted Price on the 4 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 Class ABI Preferred Stock, and any dispute shall be resolved at the Corporation's cost, by an investment banking firm of recognized national standing selected by the Corporation and reasonably acceptable to such holders of Class ABI Preferred Stock and shall be made in good faith and be conclusive absent manifest error; provided, however, if the Quoted Price as determined by -------- ------- the Board of 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 holders of Class ABI Preferred Stock who challenged such price. Record Date. The term "Record Date" shall mean the date designated by ----------- the Board of Directors at the time a dividend is declared; provided, however, that such Record Date shall not be more than thirty (30) days nor less than ten (10) days prior to the respective Dividend Payment Date or such other date designated by the Board of Directors for the payment of dividends. Redemption Date. The term "Redemption Date" shall have the meaning --------------- set forth in subparagraph 5(b) below. Redemption Price. The term "Redemption Price" shall mean a price per ---------------- share equal to the Liquidation Preference, plus an amount equal to all cumulative dividends accrued and unpaid on such share to the Redemption Date, together with accrued and unpaid dividends thereon to the Redemption Date. Series A Preferred Stock. The term "Series A Preferred Stock" shall ------------------------ mean the Series A 11% Cumulative Convertible Preferred Stock, $0.01 par value per share, of the Corporation. Series B Preferred Stock. The term "Series B Preferred Stock" shall ------------------------ mean the Series B Convertible Preferred Stock, $0.01 par value per share, of the Corporation. Series C Preferred Stock. The term "Series C Preferred Stock" shall ------------------------ mean the Series C Convertible Preferred Stock, $0.01 par value per share, of the Corporation. Series D Preferred Stock. The term "Series D Preferred Stock" shall ------------------------ mean the Series D 6% Convertible Redeemable Preferred Stock, $0.01 par value per share, of the Corporation. Stock Purchase Agreement. The term "Stock Purchase Agreement" shall ------------------------ mean that certain Stock Purchase Agreement, dated as of August 14, 1997 by and between the Corporation and Prometheus Homebuilders LLC. Termination Event. The term "Termination Event" shall have the ----------------- meaning set forth in subparagraph 7(a) below. Test Date. The term "Test Date" shall have the meaning set forth in --------- subparagraph 6(d). 5 Trading Day. The term "Trading Day" with respect to any security ----------- shall mean 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. (a) Number of Shares and Designation. _______ shares of the -------------------------------- preferred stock, $0.01 par value per share, of the Corporation are hereby constituted as a series of the preferred stock designated as "Convertible Redeemable Preferred Stock" (the "Preferred Stock"). 2 Dividends. --------- (a) The record holders of Preferred Stock shall be entitled to receive dividends, when and as declared by the Board of Directors, out of funds legally available for payment of dividends. Such dividends shall be payable by the Corporation in cash at the rate of twelve percent (12%) per annum of the Liquidation Preference. (b) Dividends on shares of Preferred Stock shall accrue and be cumulative from the date of issuance of such shares. Dividends shall be payable quarterly in arrears when and as declared by the Board of Directors on March 31, June 30, September 30 and December 31 of each year (a "Dividend Payment Date"), [commencing on _______ , 1997]. If any Dividend Payment Date occurs on a day that is not a Business Day, any accrued dividends otherwise payable on such Dividend Payment Date shall be paid on the next succeeding Business Day. The amount of dividends payable on Preferred Stock for each full Dividend Period shall be computed by dividing by four (4) the annual rate per share set forth in subparagraph 2(a) above. Dividends shall be paid to the holders of record of the Preferred Stock as their names shall appear on the share register of the Corporation on the Record Date for such dividend. Dividends payable in any Dividend Period which is less than a full Dividend Period in length will be computed on the basis of a ninety (90) day quarterly period and actual days elapsed in such Dividend Period. Dividends on account of arrears for any past Dividend Periods may be declared and paid at any time to holders of record on the Record Date therefor. For any Dividend Period in which dividends are not paid in full on the Dividend Payment Date first succeeding the end of such Dividend Period, then on such Dividend Payment Date such accrued and unpaid dividends shall be added (solely for the purpose of calculating dividends payable on the Preferred Stock) to the Liquidation Preference of the Preferred Stock effective at the beginning of the Dividend Period succeeding the Dividend Period as to which such dividends were not paid and shall thereafter accrue additional dividends in respect thereof at the Dividend Rate until such accrued and unpaid dividends have been paid in full. (c) So long as any shares of Preferred Stock shall be outstanding, the Corporation shall not declare, pay or set apart for payment on any Junior Stock any dividends whatsoever, whether in cash, property or otherwise (other than dividends payable in shares of the class or series upon which such dividends are declared or paid, or payable in shares of Common Stock with respect to Junior Stock other than Common Stock, together with cash in lieu of fractional shares), nor shall the Corporation make any distribution on any Junior Stock, nor shall any Junior Stock be purchased, redeemed or otherwise acquired by the Corporation or any of its subsidiaries of which it owns not less than a majority of the outstanding voting power, nor shall any monies be paid or made available for a sinking fund for the purchase or redemption of any 6 Junior Stock, unless all dividends to which the holders Preferred Stock shall have been entitled for all previous Dividend Periods shall have been paid or declared and a sum of money sufficient for the payment thereof has been set apart. (d) The Company shall be obligated to declare and pay dividends in an amount equal to the Dividend Rate on each Dividend Payment Date to the extent that funds are legally available for declaration of such dividends. In the event that full dividends are not paid or made available to the holders of all outstanding shares of Preferred Stock and of any Parity Stock with respect to any Dividend Period and funds available for payment of dividends shall be insufficient to permit payment in full to holders of all such stock of the full preferential amounts to which they are then entitled, then the entire amount legally available for payment of dividends shall be distributed each Dividend Period ratably among all such holders of Preferred Stock and of any Parity Stock in proportion to the full amount to which they would otherwise be respectively entitled. The dividends payable in respect of the Class ABII Preferred Stock shall be a mandatory obligation of the Corporation, subject only to the limitations set forth in Section 170 of the Delaware General Corporation Law with respect to funds legally permitted to be used for the payment of dividends (the "Legal Funds Requirement"). In stating that the dividends payable in respect of the Class ABII Preferred Stock are a mandatory obligation, it is the explicit intent of the Corporation to eliminate any and all discretion of the Board of Directors with respect to the declaration and payment of such dividends and to require the Board of Directors to declare and pay such dividends as and when provided herein, subject only to compliance with the Legal Funds Requirement. 3 Distributions Upon Liquidation, Dissolution or Winding Up. ---------------------------------------------------------- (a) In the event of any voluntary or involuntary liquidation, dissolution or other winding up of the affairs of the Corporation before any payment or distribution shall be made to the holders of Junior Stock, the holders of Preferred Stock shall be entitled to be paid out of the assets of the Corporation in cash or property at its fair market value as determined by the Board of Directors the Liquidation Preference per share plus an amount equal to all dividends accrued and unpaid thereon to the date of such liquidation, dissolution or such other winding up. Except as provided in this paragraph, holders of Preferred Stock shall not be entitled to any distribution in the event of liquidation, dissolution or winding up of the affairs of the Corporation. (b) If, upon any such liquidation, dissolution or other winding up of the affairs of the Corporation the assets of the Corporation shall be insufficient to permit the payment in full of the Liquidation Preference per share plus an amount equal to all dividends accrued and unpaid on the Class ABII Preferred Stock and the full liquidating payments on all Parity Stock, then the assets of the Corporation shall be ratably distributed among the holders of Class ABII Preferred Stock and of any Parity Stock in proportion to the full amounts to which they would otherwise be respectively entitled if all amounts thereon were paid in full. Neither the consolidation or merger of the Corporation into or with another entity or entities, nor the sale, lease, transfer or conveyance of all or substantially all of the assets of the Corporation to another corporation or any other entity shall be deemed a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this paragraph 3. 7 4 Conversion Rights. ------------------ (a) (i) At any time, on or after [ ], 2001, a holder of shares of Class ABII Preferred Stock may convert such shares into Common Stock at any time before the close of business on the Redemption Date (unless the Corporation shall default in payment of the Redemption Price). (ii) At any time, on or after [ ], 2002, the Corporation, at its option, may convert all, but not less than all of the aggregate shares of Class ABI Preferred Stock and Preferred Stock outstanding at such time into Common Stock at any time before the close of business on the Redemption Date; provided that, on the Mandatory Conversion Date, the Corporation shall have paid all accrued dividends on all shares of Preferred Stock then outstanding, up to and including the most recent Dividend Payment Date (unless the Corporation shall default in payment of the Conversion Price) For the purposes of conversion, each share of Preferred Stock shall be valued at the Liquidation Preference plus all accrued but unpaid dividends thereon through the relevant Conversion Date, which shall be divided by the Conversion Price in effect on the Conversion Date to determine the number of shares issuable upon conversion. Immediately following such conversion, the rights of the holders of converted Preferred Stock shall cease (in respect of such converted stock) and the persons entitled to receive the Common Stock upon the conversion of Preferred Stock shall be treated for all purposes as having become the owners of such Common Stock. (b) (i) To convert Preferred Stock pursuant to subparagraph 4(a)(i), a holder must (i) surrender the certificate or certificates evidencing the shares of Preferred Stock to be converted, duly endorsed in a form satisfactory to the Corporation, at the office of the Corporation or transfer agent for the Preferred Stock, (ii) notify the Corporation at such office that he elects to convert Preferred Stock, and the number of shares he wishes to convert, (iii) state in writing the name or names in which he wishes the certificate or certificates for shares of Common Stock to be issued, and (iv) pay any transfer or similar tax if required (provided, however, that no such payment shall be required if the Common Stock issuable upon conversion is to be issued in the name of the converting holder of Preferred Stock). In the case of lost or destroyed certificates evidencing ownership of shares of Preferred Stock to be surrendered for conversion, the holder shall submit proof of loss or destruction, and such indemnity as shall be reasonably required by the Corporation. In the event that a holder fails to notify the Corporation of the number of shares of Preferred Stock which he wishes to convert, he shall be deemed to have elected to convert all shares represented by the certificate or certificates surrendered for conversion. The date on which the holder satisfies all those requirements is the "Optional Conversion Date." As soon as practical and in any event within five (5) Business Days of the Optional Conversation Date, the Corporation shall deliver through the transfer agent a certificate for the number of full shares of Common Stock issuable upon the conversion, a check for any fractional share and a new certificate representing the unconverted portion, if any, of the shares of Class ABII Preferred Stock represented by the certificate or certificates surrendered for conversion. The person in whose name the Common Stock certificate is registered shall be treated as the 8 stockholder of record on and after the Optional Conversion Date. All shares of Common Stock issuable upon conversion of the Class ABI Preferred Stock and Preferred Stock shall be fully paid and nonassessable and shall rank pari passu ---- ----- with the other shares of Common Stock outstanding from time to time. In the case of Class ABI Preferred Stock and Preferred Stock that has been converted after any Record Date but before the next succeeding Dividend Payment Date, dividends that are payable on such Dividend Payment Date shall be payable on such Dividend Payment Date notwithstanding such conversion, and such dividends shall be paid to the holder of such Class ABI Preferred Stock and Preferred Stock on such Record Date (and shall not constitute "accrued and unpaid dividends" for purposes of subparagraph 4(a)). Holders of Common Stock issued upon conversion shall not be entitled to receive any dividend payable to holders of Common Stock as of any record time before the close of business on the Optional Conversion Date. If a holder of Preferred Stock converts more than one share at a time the number of full shares of Common Stock issuable upon conversion shall be based on the total value of all shares of Preferred Stock converted. (ii) To convert Class ABI Preferred Stock and Preferred Stock pursuant to subparagraph 4(a)(ii), notice of any conversion shall be sent by or on behalf of the Corporation not more than sixty (60) days nor less than thirty (30) days prior to the Mandatory Conversion Date, by first class mail, postage prepaid, to all holders of record of the Class ABI Preferred Stock and Preferred Stock at their respective last addresses as they shall appear on the books of the Corporation; provided, however, that no failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the conversion of any shares of Class ABI Preferred Stock and Preferred Stock except as to the holder to whom the Corporation has failed to give notice or except as to the holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which Class ABI Preferred Stock and Preferred Stock may be listed or admitted to trading, such notice shall state: (i) the Mandatory Conversion Date; (ii) the date on which the Conversion Price shall be calculated; (iii) the number of shares of Class ABI Preferred Stock and Preferred Stock to be converted being all the Class ABI Preferred Stock and Preferred Stock held of record by all holders; (iv) the place or places where certificates for such shares are to be surrendered for receipt of such Common Stock issuable upon such conversion; and (v) that dividends on the shares to be converted will cease to accrue on the Mandatory Conversion Date. Upon the mailing of any such notices of conversion, the Corporation shall become obligated to convert on the Mandatory Conversion Date all of the Class ABI Preferred Stock and Preferred Stock. The person in whose name the Common Stock certificate is registered shall be treated as the stockholder of record on and after the Mandatory Conversion Date. All shares of Common Stock issuable upon conversion of the Class ABI Preferred Stock and Preferred Stock shall be fully paid and nonassessable and shall rank pari passu with the other shares of Common Stock ---- ----- outstanding from time to time. In case of Class ABI Preferred Stock and Preferred Stock that has been converted after any Record Date but before the next succeeding Dividend Payment Date, dividends that are payable on such Dividend Payment Date shall be payable on such Dividend Payment Date notwithstanding such conversion, and such dividends shall be paid to the holder of such Class ABI Preferred Stock and Preferred Stock on such Record Date (and shall not constitute "accrued and unpaid dividends" for purposes of subparagraph 4(a)). Holders 9 of Common Stock issued upon conversion shall not be entitled to receive any dividend payable to holders of Common Stock as of any record time before the close of business on the Mandatory Conversion Date. (c) The Corporation will not issue a fractional share of Common Stock upon conversion of Preferred Stock. Instead the Corporation will deliver its check for the current market value of the fractional share. The current market value of a fraction of a share is determined as follows: Multiply the closing market price of a full share by the fraction. Round the result to the nearest cent. The closing market price of a share of Common Stock is the Quoted Price of the Common Stock on the last Trading Day prior to the Conversion Date. (d) If a holder converts shares of Preferred Stock, the Corporation shall pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of Common Stock upon the conversion. However, the holder shall pay any such tax which is due because the shares are issued in a name other than the holder's name. (e) The Corporation has reserved and shall continue to reserve out of its authorized but unissued Common Stock or its Common Stock held in treasury enough shares of Common Stock to permit the conversion of the Preferred Stock in full. All shares of Common Stock which may be issued upon conversion of Preferred Stock shall be fully paid and nonassessable. The Corporation will endeavor to comply with all securities laws regulating the offer and delivery of shares of Common Stock upon conversion of Preferred Stock and will endeavor to list such shares on each national securities exchange on which the Common Stock is listed. (f) The Corporation from time to time may reduce the Conversion Price by any amount for any period of time if the period is at least twenty (20) Business Days and if the reduction is irrevocable during the period, but in no event may the Conversion Price be less than the par value of a share of Common Stock. Whenever the Conversion Price is reduced, the Corporation shall mail to holders of Preferred Stock a notice of the reduction. The Corporation shall mail, first class, postage prepaid, the notice at least 15 days before the date the reduced conversion price takes effect. The notice shall state the reduced conversion price and the period it will be in effect. (g) If the Corporation is party to a merger which reclassifies or changes its Common Stock, upon consummation of such transaction Preferred Stock shall automatically become convertible into the kind and amount of securities, cash or other assets which the holder of Preferred Stock would have owned immediately after the consolidation, merger, transfer or lease if such holder had converted Preferred Stock immediately before the effective date of the transaction. Appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to changes in and other adjustment of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other securities or property thereafter deliverable upon the conversion of Preferred Stock. 10 (h) In any case in which this paragraph 4 shall require that an adjustment as a result of any event become effective from and after a record date, the Corporation may elect to defer until after the occurrence of such event (i) the issuance to the holder of any shares of Preferred Stock converted after such record date and before the occurrence of such event of the additional shares of Common Stock issuable upon such conversion over and above the shares issuable on the basis of the Conversion Price in effect immediately prior to adjustment and (ii) a check for any remaining fractional shares of Common Stock as provided in subparagraph 4(c) above. (i) Except as provided in the immediately following sentence, any determination that the Corporation or its Board of Directors must make pursuant to this paragraph 4 shall be conclusive. Whenever the Corporation or its Board of Directors shall be required to make a determination under this paragraph 4, such determination shall be made in good faith and may be challenged in good faith by a majority of the holders of Preferred Stock, and any dispute shall be resolved, at the Corporation's expense, by an investment banking firm of recognized national standing selected by the Corporation and acceptable to such holders of Preferred Stock; provided, however, if Conversion Price as determined -------- ------- by the Board of 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 holders of Preferred Stock who challenged such price. (j) All shares of Preferred Stock converted pursuant to this paragraph 4 shall be retired and shall be restored to the status of authorized and unissued shares of preferred stock, without designation as to series and may (subject to any restriction imposed on the Company by its Certificate of Incorporation, bylaws or the Stock Purchase Agreement or any document entered into pursuant thereto) thereafter be reissued as shares of any series of preferred stock other than Preferred Stock. 5 Redemption by the Corporation. ----------------------------- (a) The Class ABI Preferred Stock and the Preferred Stock, together may be redeemed, in whole, but not in part, at any time on or after ___________, 2002 at the option of the Corporation at the Redemption Price. If the Redemption Date is on or after a Record Date and on or before the related Dividend Payment Date, the dividend payable shall be paid to the holder in whose name the Class ABI Preferred Stock is registered at the close of business on such record date. (b) Notice of any redemption shall be sent by or on behalf of the Corporation not more than sixty (60) days nor less than thirty (30) days prior to the Redemption Date, by first class mail, postage prepaid, to all holders of record of the Class ABI Preferred Stock and the Preferred Stock at their respective last addresses as they shall appear on the books of the Corporation; provided, however, that no failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any shares of Class ABI Preferred Stock or Preferred Stock except as to the holder to whom the Corporation has failed to give notice or except as to the holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which Class ABI Preferred and Preferred Stock may be listed or admitted to trading, such notice shall state: (i) 11 the Redemption Date; (ii) the Redemption Price; (iii) the number of shares of Class ABI Preferred Stock and Preferred Stock to be redeemed; (iv) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Price; and (v) that dividends on the shares to be redeemed will cease to accrue on the Redemption Date (vi) the Conversion Price; (vii) that Class ABI Preferred Stock and Preferred Stock called for redemption may be converted at any time before the close of business on the Redemption Date; and (viii) that holders of Class ABI Preferred Stock and Preferred Stock must satisfy the requirements of subparagraph 4(b) above if such holders desire to convert such shares. Upon the mailing of any such notices of redemption, the Corporation shall become obligated to redeem at the time of redemption specified thereon all the Class ABI Preferred Stock and the Preferred Stock. (c) If notice has been mailed in accordance with subparagraph 5(b) above and provided that on or before the Redemption Date specified in such notice, all funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds in trust for the pro rata benefit of the holders of the shares so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Redemption Date, dividends on the shares of the Preferred Stock so called for redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding and shall not have the status of shares of Preferred Stock, and all rights of the holders thereof as shareholders of the Corporation (except the right to receive from the Corporation the Redemption Price) shall cease. Upon surrender, in accordance with said notice, of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Corporation shall so require and the notice shall so state), such shares shall be redeemed by the Corporation at the Redemption Price. (d) Any funds deposited with a bank or trust company for the purpose of redeeming Preferred Stock shall be irrevocable except that: (i) the Corporation shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; and (ii) any of monies so deposited by the Corporation and unclaimed by the holders of the Preferred Stock entitled thereto at the expiration of two (2) years from the applicable Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Corporation, and after any such repayment, the holders of the shares entitled to the funds so repaid to the Corporation shall look only to the Corporation for payment without interest or other earnings. (e) No Preferred Stock may be redeemed except with funds legally available for the payment of the Redemption Price. (f) All shares of Preferred Stock redeemed pursuant to this paragraph 5 shall be retired and shall be restored to the status of authorized and unissued shares of preferred stock, without designation as to series and may thereafter be reissued as shares of any series of preferred stock other than shares of Preferred Stock. 12 6 Voting Rights. -------------- (a) The holders of record of shares of Preferred Stock shall not be entitled to any voting rights except as hereinafter provided in this paragraph 6 or as otherwise provided by law. (b) So long as any shares of the Preferred Stock remain outstanding, each share of Preferred Stock shall entitle the holder thereof to vote on all matters voted on by holders of Common Stock, voting together with the Common Stock as a single class (together with all other classes and series of stock of the Corporation that are entitled to vote as a single class with the Common Stock) at all meetings of the stockholders of the Corporation other than in respect of the election of Directors (provided that the Class ABII shall vote in the election of Directors if (i) the price of the Common Stock (as measured by the Current Market Price) is less than $3.00 per share (such amount to be adjusted for stock splits and recombinations as appropriate) and (ii) the holder provides notice to the Company that it elects to obtain such voting right). In any vote with respect to which the Preferred Stock shall vote with the holders of Common Stock as a single class together with all other classes and series of stock of the Corporation that are entitled to vote as a single class with the Common Stock, each share of Preferred Stock shall entitle the holder thereof to cast the number of votes equal to the number of votes which could be cast in such vote by a holder of the number of shares of Common Stock into which such share of Preferred Stock is convertible based on the closing trading price of the Common Stock on the immediately preceding Initial Issue Date of such Class ABII Preferred Stock (with such vote to remain constant, even through the conversion rate changes pursuant to the terms hereunder). Such voting right of the holders of the Preferred Stock may be exercised at any annual meeting of stockholders, any special meeting of stockholders, or by written consent of the minimum number of shares required to take such action pursuant to Section 228 of the Delaware General Corporation Law. (c) On any matter on which the holders of Preferred Stock are entitled by law or under the Certificate of Incorporation to vote separately as a class, each such holder shall be entitled to one vote for each share held, and such matter shall be determined by a majority of the votes cast unless Delaware law or this Certificate of Designations requires approval by a higher percentage. (d) Until a Termination Event, the number of Directors comprising the Board of Directors shall be equal to fifteen (15) and the holders of Preferred Stock, voting separately as a single class, shall have the exclusive right to elect three (3) Directors (each such Director, a "Preferred Stock Director") at any special meeting of stockholders called for such purpose, at each annual meeting of stockholders and in any written consent of stockholders pursuant to Section 228 of the Delaware General Corporation Law. Any increases in the size of the Board of Directors will require a proportional increase in the number of Preferred Stock Directors (rounded up to the next whole number such that the Preferred Stock Directors represent not less than twenty percent (20%) of the votes of the Board of Directors). A proportionate number (rounded up to the next whole number, but not less than one) of Preferred Stock Directors shall serve on each committee of the Board of Directors (provided that with respect to the Executive Committee, the Executive Committee shall consist of five members of which two members shall 13 be Preferred Stock Directors), and at least one Preferred Stock Director shall serve on the board or other governing body of each of the Corporation's subsidiaries and affiliates, other than operational home building companies. In the event (an "Adverse Event") that on any date following the Initial Issue Date that is 60 days after the end of a fiscal quarter of the Corporation (a "Test Date") both (i) the Average Trading Price of the Common Stock is below $5 per share (provided that such amount shall be adjusted for reverse stock splits, recapitalizations and other similar events) and (ii) (x) the percentage change in the EBT per share of the Corporation (of the Common Stock issued and outstanding) for the most recent two fiscal quarters as measured against the same two fiscal quarters from the prior fiscal year is less than (y) the percentage change in the EBT per share (of the common stock issued and outstanding) of the Comparable Group for the same period as compared against the EBT per share (calculated on the same basis) of the Comparable Group during the same period in the prior fiscal year then the holders of Preferred Stock, voting separately as a single class, shall be entitled to elect Preferred Stock Directors sufficient to cause the Preferred Stock Directors to constitute a majority of the Board of Directors and all committees of the Board of Directors, including the Executive Committee ("Additional Preferred Stock Directors"). The size of the Board of Directors and all committees shall be automatically increased in order to effect any such additional Directors. The right of the holders of Preferred Stock to elect Additional Preferred Stock Directors shall continue until such time as neither (i) nor (ii) above is true for two consecutive Test Dates. The "Average Trading Price" shall mean, on any date of determination, the average of the closing prices of the Common Stock over the 90 day period prior to such date. (e) The Preferred Stock Directors elected as provided herein shall serve until the next annual meeting or until their respective successors shall be elected and shall qualify. Upon the termination of the right of the holders of Preferred Stock to elect Additional Preferred Stock Directors as set forth in subparagraph 6(d) above, any Additional Preferred Stock Directors shall resign. Any Preferred Stock Director may be removed with or without cause by, and shall not be removed other than by, the vote of the holders of a majority of the outstanding shares of Preferred Stock, voting separately as a single class, at a meeting called for such purpose or by written consent in accordance with Section 228 of the Delaware General Corporate Law. If the office of any Preferred Stock Director becomes vacant by reason of death, resignation, retirement, disqualification or removal from office or otherwise, the remaining Preferred Stock Directors, by majority vote, may elect a successor, or, alternatively, the holders of a majority of the outstanding shares of Preferred Stock, voting separately as a single class, at a meeting called for such purpose or by written consent in accordance with Section 228 of the Delaware General Corporation Law may elect a successor. Any such successor shall hold office for the unexpired term in respect of which such vacancy occurred. Upon the occurrence of a Termination Event, the Preferred Stock Directors then serving on the Board of Directors may continue to hold their office for the remainder of their term. This subparagraph (e) may not be amended without (x) the affirmative vote of the holders of a majority of the outstanding shares of Common Stock and (y) the affirmative vote of the holders of a majority of the outstanding shares of Preferred Stock. (f) At any time when the right to elect Preferred Stock Directors or Additional Preferred Stock Directors provided in subparagraph 6(d) shall have vested in the holders of Class ABII Preferred Stock and if such right shall not already have been initially exercised, a proper 14 officer of the Corporation shall, upon the written request of any holder of record of Class ABII Preferred Stock then outstanding, addressed to the Secretary of the Corporation, call a special meeting of holders of Preferred Stock. Such meeting shall be held at the earliest practicable date upon the notice required for annual meetings of stockholders at the place for holding annual meetings of stockholders of the Corporation or, if none, at a place designated by the Secretary of the Corporation. If such meeting shall not be called by the proper officers of the Corporation within thirty (30) days after the personal service of such written request upon the Secretary of the Corporation, or within thirty (30) days after mailing the same within the United States, by registered mail, addressed to the Secretary of the Corporation at its principal office (such mailing to be evidenced by the registry receipt issued by the postal authorities), then the holders of record of ten percent (10%) of the shares of Class ABII Preferred Stock then outstanding may designate in writing a holder of Class ABII Preferred Stock to call such meeting at the expense of the Corporation, and such meeting may be called by such person so designated upon the notice required for annual meetings of stockholders and shall be held at the place for holding annual meetings of the Corporation or, if none, at a place designated by such holder. Any holder of Class ABII Preferred Stock that would be entitled to vote at such meeting shall have access to the stock books of the Corporation for the purpose of causing a meeting of the holders of Preferred Stock to be called pursuant to the provisions of this paragraph and to contact the holders of Preferred Stock with respect to matters relating to such meeting. Notwithstanding the provisions of this paragraph, however, no such special meeting shall be called if any such request is received less than 90 days before the date fixed for the next ensuing annual or special meeting of stockholders. (g) If at any time when the holders of Class ABII Preferred Stock are entitled to elect directors pursuant to the foregoing provisions of this paragraph 6, and the holders of Class AA Preferred Stock and Class ABI Preferred Stock are entitled to elect directors by reason of any provision of the Certificate of Incorporation, as in effect at the time, or the respective Certificate of Designation for such Classes, and if the terms of the Class AA Preferred Stock and Class ABI Preferred Stock so permit, the Preferred Stock then entitled to vote shall be combined (with each series having a number of votes proportional to the aggregate liquidation preference of its outstanding shares). In such case, the holders of Preferred Stock, voting as a class, shall elect such directors. (h) In addition to any vote or consent of shareholders required by law or the Certificate of Incorporation, the consent of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the shares of Class ABII Preferred Stock at the time outstanding, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating: (i) Any amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation, or of the by-laws of the Corporation, which affects adversely the voting powers, preferences and relative, participating, optional and other special rights of the holders of shares of Preferred Stock; provided, however, that the amendment of the provisions of the Certificate of Incorporation so as to authorize or create, or to increase the authorized amount of any class of any security convertible into any shares ranking junior to the Preferred Stock in the distribution of assets on any liquidation, dissolution, or winding up of the Corporation or in the payment of dividends, shall not be deemed to affect adversely the voting 15 powers, preferences and relative, participating, optional and other special rights of the holders of shares of Preferred Stock; (ii) Any authorization or creation of, or increase in the authorized amount of, any shares of any class or any security convertible into shares of any class ranking senior to or on parity with shares of Preferred Stock (other than the Class AA Preferred Stock) in the distribution of assets on any liquidation, dissolution, or winding up of the Corporation or in the payment of dividends or otherwise; (iii) Any increase or decrease (other than by redemption or conversion) in the total number of authorized shares of Preferred Stock; (iv) Any sale, lease, assignment, transfer or other conveyance of all or substantially all of the assets of the Corporation or any of its material subsidiaries of which it owns fifty percent (50%) or more of the voting power thereof, or any consolidation or merger involving the Corporation or any of such subsidiaries (except mergers between the Corporation and any of its subsidiaries or mergers among any of the Corporation's subsidiaries), or any reclassification or other change of any stock, or any dissolution, liquidation, or winding up of the Corporation or, unless the obligations of the Corporation under an agreement are expressly conditioned upon the requisite approval of the holders of sixty-six and two-thirds percent (66-2/3%) of the Preferred Stock then outstanding as provided for herein, make any agreement or become obligated to do so; (v) Except as permitted by paragraph 5 above, any purchase, redemption or other acquisition for value (or payment into or setting aside as a sinking fund for such purpose) of any shares of Common Stock or other capital stock of the Corporation; (vi) Any declaration or payment of any dividends on or declaration or making of any other distribution, direct or indirect, on account of the Common Stock or setting apart any sum for any such purpose unless all accrued unpaid dividends on Preferred Stock have been paid in cash. 7 Financial Statements. -------------------- (a) Until (i) the aggregate amount of Preferred Stock outstanding is less than twenty percent (20%) of the maximum amount of the Preferred Stock issued to date or (ii) the aggregate remaining investment or commitment to invest in the Corporation by Investor (or any transferee of Investor or related group of transferrees) is less than the greater of $10,000,000 or ten percent (10%) of the Market Capitalization of the Company (a "Termination Event") (provided that a Termination Event shall not occur prior to all closings being consummated under the Stock Purchase Agreement), with the value of such investment to be based on the sum of (x) the greater of the Liquidation Preference of the Preferred Stock and the value of the Common Stock underlying such Preferred Stock (as measured by the Conversion Price) then held by it, (y) the value of the Common Stock then held by it, and (z) the value of the warrants then held by it, whether or not required by the rules and regulations of the Commission, the Corporation shall 16 furnish to the holders of Class ABII Preferred Stock (i) all quarterly and annual financial information required to be filed with the Commission on Forms 10-Q and 10-K and, with respect to the annual information only, a report thereon by the Corporation's certified independent accountants, (ii) all current reports required to be filed with the Commission on Form 8-K. (b) The Corporation shall, so long as a Termination Event has not occurred, deliver to the holders of Preferred Stock, forthwith upon any executive officer of the Corporation becoming aware of any breach under this Certificate of Designations, an Officers' Certificate specifying such breach and what action the Corporation is taking or proposes to take with respect thereto. 8 Ranking. ------- With regard to rights to receive dividends, redemption payments and distributions upon liquidation, dissolution or winding up of the Corporation, the Preferred Stock shall rank pari passu with any Parity Stock and senior to the Common Stock and any other equity securities or other securities into which any convertible indebtedness is convertible which are issued by the Corporation after the date of this Certificate of Designation. The Preferred Stock shall not be subject to the creation of capital stock senior with regards to the right to receive dividends, redemption payments and distribution upon liquidation, dissolution or winding up of the Corporation. 9 Modification and Waiver. ----------------------- Except as otherwise provided above, the terms of this Certificate of Designation may be amended and the rights hereunder may be waived with the consent of holders of a majority of the shares of the Preferred Stock then outstanding, provided, that no such modification or waiver shall change the -------- dividend rights or the terms for conversion or redemption of the Preferred Stock without the consent of each holder of Preferred Stock. 10 Exclusion of Other Rights. ------------------------- Except as may otherwise be required by law, the shares of Preferred Stock shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this resolution (as such resolution may be amended from time to time) and in the Certificate of Incorporation. 11 Headings of Subdivisions. ------------------------ The headings of the various subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. 12 Severability of Provisions. -------------------------- If any voting powers, preferences and relative, participating, optional and other 17 special rights of the Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution (as such resolution may be amended from time to time) is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution (as so amended) which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional and other special rights of Preferred Stock and qualifications, limitations and restrictions thereof shall, nevertheless, remain in full force and effect, and no voting powers, preferences and relative, participating, optional or other special rights of Preferred Stock and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special rights of Preferred Stock and qualifications, limitations and restrictions thereof unless so expressed herein. 13 Record Holders. -------------- The Corporation and the transfer agent for the Preferred Stock may deem and treat the record holder of any shares of Preferred Stock as the true and lawful owner thereof for all purposes, and neither the Corporation nor the transfer agent shall be affected by any notice to the contrary. 14 Notice. ------ Except as may otherwise be provided for herein, all notices referred to herein shall be in writing, and all notices hereunder shall be deemed to have been given upon the earlier of receipt of such notice or three Business Days after the mailing of such notice if sent by registered mail (unless first-class mail shall be specifically permitted for such notice under the terms of this Certificate) with postage prepaid, addressed: if to the Corporation, to its offices at 1921 Gallows Road, Suite 730, Vienna Virginia 22182 Attention: Secretary or to an agent of the Corporation designated as permitted by this Certificate, or, if to any holder of the Preferred Stock, to such holder at the address of such holder of the Preferred Stock as listed in the stock record books of the Corporation (which may include the records of any transfer agent for the Preferred Stock); or to such other address as the Corporation or holder, as the case may be, shall have designated by notice similarly given. [Signature Page Follows] 18 IN WITNESS WHEREOF, the Corporation has caused this certificate to be duly executed by [NAME AND TITLE OF OFFICER] and attested by [NAME OF SECRETARY] its secretary, this _____ day of ____________________, 1997. THE FORTRESS GROUP, INC. By: _________________________________ Name: Title: ATTEST: By: ______________________________ Name: Secretary: 19 EX-99.9 10 JOINT FILING AGREEMENT EXHIBIT 9 JOINT FILING AGREEMENT ---------------------- In accordance with Rule 13d-1(f) promulgated under the Securities Exchange Act of 1934, as amended, the undersigned hereby agree to the joint filing with all other Reporting Persons (as such term is defined in the Schedule 13D referred to below) on behalf of each of them of a statement on Schedule 13D (including amendments thereto) with respect to the common stock of beneficial interest, par value $.01 per share (the "Shares"), of The Fortress Group, Inc., a Delaware corporation, and that this Agreement may be included as an Exhibit to such joint filing. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned hereby execute this Agreement as of the 25th day of August 1997. PROMETHEUS HOMEBUILDERS LLC By: Prometheus Homebuilders Funding Corp., as sole member By: /s/ Murry N. Gunty ----------------------------------- Name: Murry N. Gunty Title: Secretary and Treasurer PROMETHEUS HOMEBUILDERS FUNDING CORP. By: /s/ Murry N. Gunty ----------------------------------- Name: Murry N. Gunty Title: Secretary and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----