Document:

Exhibit 10.1

 

February 7,
2008

 

ARTISTdirect, Inc.

1601 Cloverfield Blvd., Suite 400

Santa Monica, CA 90404

 

	
  Attention:

  	
   

  	
  Mr. Neil
  McCarthy

  
	
   

  	
   

  	
  Interim
  Chief Financial Officer

  

 

1.             This
agreement (the “Agreement”) confirms the engagement (the “Engagement”)
of Salem Partners LLC (“Salem Partners”) on an exclusive basis (except
as described below) as financial advisor to ARTISTdirect, Inc. (“ARTISTdirect”
or the “Company”) in connection with a potential M&A Transaction
involving the Company.  The parties
acknowledge the Company’s engagement of Libra Securities, LLC in connection
with such potential M&A Transaction and Restructuring Transaction shall not
be considered a breach or violation of this Agreement.  For purposes of the Agreement, the term “M&A
Transaction” shall mean whether effected in one transaction or a series of
transactions, any sale, merger, consolidation, reorganization or other business
combination pursuant to which all or any portion of assets owned by the Company
are sold or otherwise transferred to, or combined with, a third party or one or
more third parties formed by or affiliated with such third party (collectively,
a “Purchaser”), including, without limitation, any joint venture.  For purposes of the Agreement, the term “Restructuring
Transaction” shall mean any restructuring of the material terms of the
senior notes of the Company and/or the subordinated convertible notes of the
Company.  The parties acknowledge that by
entering into the Agreement, the Company has not obligated itself to engage in
any Transaction and the Company may accept or reject any proposed Transaction
in the Company’s sole discretion.

 

2.             In
connection with the Engagement, Salem Partners shall perform the following
services with respect to a potential Transaction:

 

(a)           review selected documents and other information provided
by the Company;

 

(b)           assist in structuring, planning and negotiating a
Transaction.

 

(c)           advise the Company with respect to a potential
Transaction;

 

(d)           complete and deliver a fairness opinion (“Opinion”)
regarding the M&A Transaction or Restructuring Transaction to the Board of
Directors of the Company, if requested by the Board of Directors of the
Company.

 

3.             The
Company agrees to provide Salem Partners with such financial and other
available information concerning the Company as is reasonably required for
Salem Partners to render the services performed or to be performed
hereunder.  In providing its services
hereunder, Salem Partners will not assume any responsibility to independently
verify the accuracy or completeness of information furnished by or on behalf of
the Company or by any relevant third parties but will rely on the accuracy and
completeness of such information in all respects.  Salem Partners will not assume responsibility
to perform (or be required to retain any persons to perform) any independent
valuations or appraisals of the Company’s assets.  In addition, Salem Partners (i) shall be
entitled to assume that any forecasts and projections supplied to Salem
Partners by or on behalf of the Company or by any relevant third parties
represent the best current judgments of the Company or such persons, as
applicable, as to the future financial performance of the entities involved,
and that such forecasts and projections have been reasonably prepared based on
such current judgment of the Company or 

 

 

such persons, as applicable, (ii) shall not be obligated to
attempt independently to verify, or undertake any obligation to verify, such
forecasts and projections and (iii) shall not assume responsibility for,
nor shall it express a view as to, such forecasts or projections or the
assumptions on which they were based. 
The Company will promptly notify Salem Partners if it learns of a
material inaccuracy or misstatement in, or material omission from, any
information delivered by or on behalf of the Company or by any relevant third
parties to Salem Partners.

 

4.             As
compensation for its services rendered pursuant to this engagement, Salem
Partners shall be paid (a) a retainer fee of $50,000 per month, for the
first four months of service, with the first three months payable in cash upon
the execution of this engagement letter (and the payment for the fourth month
due on the three month anniversary of the execution of this engagement letter)
and non-contingent of a Transaction or termination of this agreement, which fee
shall be credited against the M&A Transaction Fee payable to Salem pursuant
to this engagement, plus a cash fee of the greater of (x) 2.0% of the
portion of the Aggregate Consideration of an M&A Transaction, described in Section 1(a) hereof,
and (y) $1 million, payable upon the closing of an M&A
Transaction  (together the “M&A
Transaction Fees”), plus (b) a cash fee of $300,000 due upon the
completion and delivery of an Opinion regarding the M&A Transaction, if
requested by the Board of Directors of the Company, regardless of the
conclusions of the Opinion; plus (c) a cash fee of $300,000 in the case of
a Restructuring Transaction for which Salem Partners delivers an Opinion, due
upon the completion and delivery of an Opinion, regardless of the conclusions
of the Opinion; plus (d) $150,000 in the case of a Restructuring
Transaction for which Salem Partners does not deliver an Opinion.

 

“Aggregate Consideration” for the purposes of
calculating the compensation payable pursuant to paragraph 4 above shall
be:  (i) the total consideration
paid or to be paid in cash or cash equivalents or in any form of equity (valued
at fair market value) or debt in a Transaction (including without limitation
amounts received by holders of warrants, options or convertible securities);
plus (ii) the principal amount of indebtedness for borrowed money assumed
directly or indirectly by the Purchaser. 
In the event an agreement for a Transaction provides for escrowed
payments, the applicable M&A Transaction Fees will be payable upon closing
of the Transaction and due upon release of escrow.  The Company will make a good faith effort to
ensure such payments are directly held in escrow for Salem Partners upon
closing of the Transaction.  In the event
an agreement for a Sale Transaction provides for contingent payments, the
present value of any contingent payments (discounted at LIBOR and based upon
reasonable projections developed in connection with the proposed Sale Transaction),
shall be included in Aggregate Consideration for purposes of this paragraph 4.

 

5.             In
addition to the fees payable under paragraph 4, whether or not a Transaction is
consummated, the Company shall reimburse Salem Partners on a monthly basis for
its reasonable out-of-pocket travel and other expenses (including, without
limitation, lodging, word processing, graphics and communication charges,
research costs, courier services and reasonable attorneys’ fees and expenses)
in connection with the Engagement and the services hereunder, provided that any
such expenses in excess of Two Thousand Five Hundred Dollars ($2,500) per month
shall require the approval of the Company, in its sole discretion.  In addition, in the event that Salem Partners
is requested to appear as a witness to any litigation or other proceedings
relating to a Transaction or the Engagement or services hereunder, the Company
shall pay Salem Partners a fee of U.S. $5,000 for each day or fraction of a day
for each person appearing in addition to its reasonable out-of-pocket travel
and other expenses (including, without limitation, reasonable attorneys’ fees
and expenses).  The provisions of this
paragraph 5 shall not limit or restrict the indemnification and contribution
provisions set forth in paragraph 10 hereof. 
The Company agrees that at the closing of the Transaction it will effect
a wire transfer to Salem Partners of all fees payable to Salem Partners under
the agreement that have not previously been paid, as well as all out-of-pocket
travel and other expenses incurred by Salem Partners through the closing date
in connection with its services rendered hereunder which have not previously
been reimbursed by the Company.

 

 

6.             The
Company expressly acknowledges and agrees that Salem Partners has been retained
solely as financial advisor to the Company and not as financial advisor to or
agent of any other person.  In such
capacity, Salem Partners shall act as an independent contractor and the Engagement
of Salem Partners by the Company is not intended to confer rights upon any
persons not a party hereto (including securityholders, employees, creditors or
other interest or stake holders of the Company) as against Salem Partners or
any subsidiary, affiliate, partner, member, stockholder, director, officer,
employee, agent, representative, advisor or controlling person of Salem
Partners.  The advice (oral or written)
rendered by Salem Partners pursuant to the Engagement is intended solely for
the benefit and use of the Company (and its Board of Directors) in considering
the matters to which the Engagement relates, and the Company agrees that such
advice may not be relied upon by any other person, used for any other purpose,
disseminated/disclosed publicly or made available to third parties, or quoted
or referred to at any time, without the prior written consent of Salem
Partners.  The Company further expressly
acknowledges that, in the ordinary course of business in its representation of
certain third party clients, Salem Partners or its affiliates may at any time
receive information concerning the Company, its officers, directors, employees,
customers, creditors or other similar persons from such third party clients,
some or all of which may be material and/or non-public, and Salem Partners shall
have no obligation to disclose such information to the Company or use such
information in the performance of its services hereunder.

 

7.             The
Agreement shall continue in effect until the earlier of (x) 12 months or (y) 30
days following notice of termination by either the Company or Salem
Partners.  The provisions of paragraphs 3
(other than the first sentence thereof), 4, 5, 6, 7, 8, 9, 10 and 11 hereof
shall survive any termination of the Agreement. 
In addition, in the event that a Transaction is entered into within 12
months following the termination of the Agreement, with a party which conducts
discussions with the Company in which Salem Partners participates or is
substantially involved during the term of the agreement, the Company shall pay
Salem Partners the compensation described in paragraph 4 upon the consummation
thereof.

 

8.             Following
the completion of a Transaction, Salem Partners shall be permitted, at its own
expense, to place tombstone advertisements describing its services to the
Company in financial and other newspapers and journals.

 

9.             Salem
Partners agrees that all information furnished, whether before or after the
date of this Agreement, by or on behalf of the Company to Salem Partners or any
of its agents or representatives in connection with the services provided
hereunder or the matters described herein (regardless of the manner in which it
is furnished, including, without limitation, in electronic format, and
regardless of whether in the form originally furnished by or on behalf of the
Company or incorporated or reflected in any document or record prepared by
Salem Partners or its representatives), including information relating to the
funding, capitalization, debt restructuring, or any other negotiation,
engagement or agreement relating to the Restructuring Transaction or the
operations of the Company (collectively, “Confidential Information”)
will be treated as confidential by Salem Partners, and except as may be
required by law, will not be disclosed by Salem Partners to any third party
without the prior written approval of the Company.  The term “Confidential Information” does not
include information which (i) is or becomes generally available to the
public other than as a result of an unauthorized disclosure thereof by Salem
Partners pursuant to the terms hereof; (ii) was available on a
non-confidential basis prior to its disclosure; or (iii) becomes available
on a non-confidential basis from a third party source who is not known to be
under a confidentiality obligation. 
Salem Partners agrees not to use any Confidential Information for any
purpose other than the rendering of services in accordance with this
Agreement.  If the Company, in its sole
discretion, so requests, Salem Partners will, promptly either deliver to the
Company or destroy (at the Company’s election) all documents and records in
Salem Partners’ possession or control containing Confidential Information.

 

10.           The
Company agrees to indemnify and hold Salem Partners harmless from and against
any liabilities, losses, claims, damages, fees, fines, costs, deficiencies,
expenses and obligations of any nature (including, without limitation, those
arising out of any action, suit, claim, arbitration, investigation, proceeding 

 

 

or otherwise by any party, including actions by securityholders),
whether known or unknown, absolute, accrued, contingent or otherwise (“Losses”)
related to or arising out of Salem Partners’ Engagement or its services
hereunder, or its role in connection therewith or herewith, except for any
Losses which are finally judicially determined to have resulted from the gross
negligence, fraud or willful misconduct of Salem Partners.  The Company further agrees, except as
otherwise specified below, to reimburse Salem Partners for all reasonable out
of pocket expenses (including, without limitation, reasonable attorneys’ fees
and expenses) as and when actually incurred by Salem Partners in connection
with investigating, preparing for or defending any action, suit, claim,
arbitration, investigation, proceeding or other similar action related to or
arising out of Salem Partners’ Engagement or its services hereunder, whether or
not in connection with pending or threatened litigation in which Salem Partners
is a party.  The Company also agrees that
Salem Partners shall not have any liability (whether direct or indirect, in
contract or tort or otherwise) to the Company for or in connection with the
Engagement or its services hereunder, except for any such liability for Losses
incurred by the Company that are finally judicially determined to have resulted
from the willful misconduct, fraud or gross negligence of Salem Partners.  In the event that the Company shall have
reimbursed expenses to Salem Partners or any other indemnified person in
circumstances in which Salem Partners or such other indemnified persons would
not be entitled to indemnification as provided herein, Salem Partners shall
promptly repay such expenses to the Company. 
In the event that the foregoing indemnity is unavailable or insufficient
(except by reason of willful misconduct, fraud or gross negligence of Salem
Partners as provided herein), then the Company shall contribute to amounts paid
or payable by Salem Partners in respect of its Losses in such proportion as
appropriately reflects the relative benefits received by, and fault of, the
Company and Salem Partners in connection with the matters as to which such
Losses relate and taking into consideration other equitable considerations;
provided, however, that in no event shall the amount to be paid or contributed
by Salem Partners exceed the amount of the fee actually received by Salem
Partners under the Engagement (except by reason of willful misconduct, fraud or
gross negligence of Salem Partners as provided herein).  The foregoing shall be in addition to any
rights that Salem Partners or any other indemnified person may have at common
law or otherwise and shall extend to and inure to the benefit of any
subsidiary, affiliate, partner, director, officer, member, stockholder,
employee, agent, representative, advisor or controlling person of Salem
Partners.  Promptly after receipt by
Salem Partners or any other indemnified person of notice of any complaint or
the commencement of any proceeding with respect to which indemnification is
being sought hereunder, such indemnified person shall notify the Company of
such complaint or of the commencement of such proceeding.  The failure to so notify the Company will not
relieve the Company from any liability which the Company may have hereunder,
except to the extent that such failure materially prejudices the Company’s
defense of such proceeding (and only to the extent thereof).  The Company shall undertake, conduct and
control, through counsel of its own choosing and at its own expense, the
settlement or defense of any pending or threatened claim or proceeding related
to or arising out of the Engagement or any actual or proposed Transaction or
other conduct in connection therewith and Salem Partners and the other
indemnified parties shall (1) cooperate fully with the Company in
defending Salem Partners in respect of any claim or damage made against any of
them in respect of which it is seeking and entitled to indemnification from the
Company hereunder (2) have the right to participate in the defense of such
claim at their own expense, except where the Company would otherwise be
responsible for such fees and expenses as provided herein and (3) be bound
by any settlement, compromise or entry of judgment obtained in good faith by
the Company and consented to by Salem Partners as subject to the conditions
provided herein.  Notwithstanding the
foregoing, Salem Partners and the other indemnified parties, as a group, shall
have the right to employ separate counsel at the Company’s expense if such
parties shall have been advised by counsel that a conflict of interest is
likely to exist if the same counsel were to represent both the Company, on the
one hand, and Salem Partners and the other indemnified parties, on the other
hand; provided that in no event will the Company be responsible for the fees
and expenses of more than one counsel for Salem Partners and the other
indemnified parties.  The Company agrees
that it will not, without the prior written consent of Salem Partners (which consent
shall not be unreasonably withheld) settle, compromise or consent to the entry
of any judgment in any pending or threatened claim, action or proceeding or
investigation in respect of which indemnification or contribution could be
sought hereunder (whether or not Salem Partners or any indemnified party is a
party to such claim or 

 

 

proceeding) unless such settlement includes a provision unconditionally
releasing Salem Partners and each other indemnified party from any and all
liability in respect of such claims.

 

11.           The
Agreement may be executed in any number of counterparts, each of which shall be
deemed an original and all of which when taken together shall be one and the
same instrument.  The provisions hereof
shall inure to the benefit of and be binding upon the successors and assigns of
the Company, Salem Partners and each indemnified party.  The Agreement may not be amended or modified
except in writing and shall be governed by and construed in accordance with the
laws of the State of California, except with respect to conflict of laws
provisions that would require the application of the laws of another
jurisdiction.  Any rights to trial by
jury with respect to any claim or proceeding related to, or arising out of, the
Agreement, the Engagement or any Transaction or conduct in connection herewith,
is waived.

 

[Remainder of page intentionally
left blank.]

 

 

Please confirm that the foregoing is in accordance
with your understanding and agreement by signing where indicated below and
returning to us the duplicate of the Agreement enclosed herewith, whereupon the
Agreement will constitute our binding agreement with respect to the matters set
forth herein.

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  SALEM PARTNERS LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Stephen Prough 

  
	
   

  	
   

  	
  Title:

  	
  Managing Director

  
	
   

  	
   

  	
   

  
	
  CONFIRMED AND AGREED:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTISTDIRECT, INC.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
  Neil McCarthy

  	
   

  	
   

  
	
   

  	
  Title:

  	
  Interim Chief Financial OfficerExhibit 10.1

 

LIMITED
DURATION WAIVER AGREEMENT AND AMENDMENT

 

This LIMITED DURATION WAIVER
AGREEMENT AND AMENDMENT (this “Limited Duration Waiver
Agreement”) is dated as of January 25, 2008, and is entered
into by and among KIMBALL HILL, INC., an Illinois corporation (the “Borrower”), the Guarantors (defined below), the Lenders
(defined below) signatory hereto, and HARRIS N.A., as administrative agent (in
such capacity, the “Administrative Agent”)
for the Lenders.

 

RECITALS:

 

WHEREAS, the Borrower, the
Guarantors party thereto from time to time (the “Guarantors”),
the Lenders party thereto from time to time (the “Lenders”),
the Administrative Agent, Bank of America, N.A., as the Syndication Agent,
KeyBank National Association and Wachovia Bank, National Association, as the
Co-Documentation Agents, and BMO Capital Markets and Banc of America
Securities, LLC, as the Co-Lead Arrangers and the Joint Book Runners, have
entered into that certain Amended and Restated Credit Agreement dated as of August 10,
2007 (as amended, restated, supplemented or otherwise modified from time to
time, the “Credit Agreement”; each capitalized
term used herein and not otherwise defined shall have the meanings ascribed to
such term in the Credit Agreement); and

 

WHEREAS, attached hereto (i) as
Schedule 1 is a list of Defaults and Events of Default under the Credit
Agreement of which senior management of the Borrower has knowledge as of the
date hereof (the “Credit Agreement Defaults”), (ii) as
Schedule 2 is a list of all breaches and defaults of the Borrower or any
of the Guarantors that have occurred and are continuing under agreements
evidencing or securing Indebtedness for Borrowed Money (other than under the Credit
Agreement) and of which the senior management of the Borrower has knowledge
(the “Borrowed Money Defaults”), and (iii) as
Schedule 3 is a list of all written notices received by senior management
of the Borrower of breaches and defaults that have occurred and are continuing
of obligations of the Borrower or any of the Guarantors under material
agreements (other than agreements covered by clauses (i) and (ii) of this
paragraph) which, if not performed in accordance with the terms thereof, could
reasonably be expected to result in a Material Adverse Effect (the “Material Agreement Defaults”); and

 

WHEREAS, the Borrower has
asked the Lenders to temporarily waive their rights, remedies and options under
the Credit Agreement as a consequence of the Credit Agreement Defaults and to
amend certain provisions of the Credit Agreement, as set forth in this Limited Duration
Waiver Agreement; and

 

WHEREAS, the Lenders are
willing to temporarily waive the Credit Agreement Defaults, subject to the terms
and conditions set forth in this Limited Duration Waiver Agreement.

 

NOW, THEREFORE, for good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

 

 

SECTION I.  DEFINITIONS

 

1.1. The following terms
used in this Limited Duration Waiver Agreement shall have the meanings set
forth below:

 

“Borrowed Money Defaults” is defined in the recitals.

 

“Credit Agreement Defaults” is defined in
the recitals.

 

“Effective Date” is defined in Section 6.3  hereof.

 

“Event of Termination” shall mean the
earlier of (i) 5:00 p.m. (Chicago, Illinois time) on March 14,
2008 or (ii) if prior thereto, any of the following has occurred and is
continuing and the Administrative Agent, acting at the direction of the
Required Lenders, terminates the Limited Duration Waiver Agreement by giving
notice to the Borrower and the Guarantors:

 

(a)          the occurrence of any
Default or Event of Default other than (i) the Credit Agreement Defaults, (ii) the
Borrowed Money Defaults or (iii) the Material Agreement Defaults (unless,
except in the case of the First Bank and Trust revolving credit loan dated as
of February 28,2007 for the reasons set forth in Schedule 2), the
agreement under which a Borrowed Money Defaults or a Material Agreement
Defaults exists has been accelerated or remedies to enforce (through judicial
process) the performance thereof have been commenced against the Borrower or
one or more of the Guarantors);

 

(b)         the failure of the Borrower
or any of the Guarantors to comply with any term, condition or covenant set
forth in this Limited Duration Waiver Agreement;

 

(c)          any representation or
warranty made by the Borrower or any of the Guarantors under this Limited
Duration Waiver Agreement shall be false or materially misleading as of the date
made or deemed remade; or

 

(d)         the date on which the Borrower,
the Guarantors, the Administrative Agent and the Lenders enter into a
modification of the Credit Agreement which expressly provides for a termination
of this Limited Duration Waiver Agreement.

 

“Loan Party” means the
Borrower and the Guarantors.

 

“Material Agreement Defaults” is defined in
the recitals.

 

“Termination Date” means 5:00 p.m.
(Chicago, Illinois time) on the date upon which an Event of Termination first
occurs. 

 

1.2. Unless the context of
this Limited Duration Waiver Agreement requires otherwise, references to the
plural include the singular, references to the singular include the plural and
the term “including” is not limiting. The words “hereof,” “herein,” “hereby,” “hereunder,”
and similar terms in this Limited Duration Waiver Agreement refer to this
Limited Duration Waiver Agreement

 

2

 

as a whole and not to any
particular provision hereof. Section, subsection and clause references herein
are to this Limited Duration Waiver Agreement unless otherwise specified.

 

SECTION
2.  DEFAULTS; AND AGREEMENT TO LIMITED WAIVER AND AUTHORIZATION

 

2.1. The Borrower and each
of the Guarantors acknowledge and agree that the Credit Agreement Defaults have
occurred and are continuing, and as a result thereof, the Lenders are entitled
to exercise their rights, remedies and options against the Borrower, the
Guarantors and the Collateral. The Borrower and each of the Guarantors
acknowledge and agree that the exercise of such rights,
remedies and options by the Lenders or the Administrative Agent on their behalf
is not subject to any offsets or defenses by the Borrower or the Guarantors to
their obligations under the Loan Documents, and that neither the Borrower nor
the Guarantors have any claims or counterclaims against the Lenders or the
Administrative Agent; provided, however, that if permitted under
applicable law, the foregoing shall not affect the rights of third parties that
are not Affiliates of the Borrower or the Guarantors from making derivative or
independent claims against the Lenders or the Administrative Agent on behalf of
the Borrower or the Guarantors or otherwise.

 

2.2. From and after the
Effective Date until the existence of an Event of Termination, the Administrative
Agent and the Lenders hereby agree to temporarily waive the Credit Agreement Defaults,
subject to the terms of this Limited Duration Waiver Agreement. Upon the
occurrence of an Event of Termination, the limited duration waivers set forth
herein and the amendments set forth in Section 3.2 shall be void ab
initio and the Credit Agreement Defaults shall be deemed to exist from and
after January 5, 2008.

 

2.3. Except as expressly
provided herein, the execution and delivery of this Limited Duration Waiver
Agreement shall not: (a) constitute an extension or modification of the
Credit Agreement or the other Loan Documents; (b) extend the terms of the
Credit Agreement or the due date of any of the Obligations; or (c) give
rise to any obligation on the part of the Administrative Agent or the Lenders
to extend or modify any term or condition of the Credit Agreement or any of the
other Loan Documents.

 

SECTION 3.  AMENDMENTS
AND MODIFICATIONS TO THE LOAN DOCUMENTS

 

Notwithstanding anything to
the contrary set forth in the Credit Agreement or the other Loan Documents, the
following provisions shall apply:

 

3.1. From and after the
Effective Date:

 

(a)          The Revolving Credit Commitments
are reduced to $400.0 million.

 

(b)         The Borrower shall have no
right to require any Facility Increase.

 

3.2. From and after the
Effective Date until the Termination Date:

 

3

 

(a)                                  All rights of
the Borrower and the Guarantors under the Loan Documents that are restricted or
prohibited during such time as a Default or Event of Default has occurred and
is continuing shall, except as expressly set forth in this Section 3,
be restricted or prohibited as if an Event of Default has occurred and is
continuing from and after January 5, 2008.

 

(b)                                 Except as set
forth in clause (h) below, Net Cash Proceeds of all Dispositions shall
be deposited by the Borrower into a cash collateral account to be designated by
the Administrative Agent and under the dominion and control of the
Administrative Agent and such proceeds (or portions thereof) shall be, in the
Administrative Agent’s sole discretion, (x) made available to the Borrower
for general corporate purposes or (y) applied against outstanding Obligations
in accordance with Section 3.1 of the Credit Agreement.

 

(c)                                  The Borrower is
permitted to obtain a Borrowing in the form of advanced Loans only from the
Effective Date and prior to an Event of Termination in the aggregate principal amount
of $10.0 million. Additional advances of Loans in excess of $10.0 million, not
to exceed an incremental $5.0 million in the aggregate shall be permitted if on
or before January 3 I, 2008 the Borrower provides
to the Administrative Agent a 13-week cash flow forecast in form reasonably satisfactory
to the Administrative Agent and such forecast demonstrates that the Borrower
has or thereafter will have additional liquidity needs, in which case, such
additional advances of Loans will be made available to the Borrower, not to
exceed an incremental $5.0 million in the aggregate (i.e.  from the
Effective Date and prior to an Event of Termination, $15.0 million in the
aggregate) (it being understood that any portion of the Net Cash Proceeds
deposited by the Borrower in the cash collateral account referred to above that
are made available to the Borrower for the purpose set forth in clause (x) of
Section 3.2 shall not reduce such $15.0 million aggregate amount).

 

(d)                                 No Letters of
Credit in excess of $1.0 million shall be issued or extended and no Swing Loans
shall be made (it being understood that advances of the $15.0 million aggregate
amount set forth in Section 3.4 shall be reduced by the face amount
of any Letters of Credit that are issued or extended and outstanding from and
after the Effective Date and prior to an Event of Termination, as the case may
be).

 

(e)                                  Notwithstanding
the Credit Agreement Defaults, releases under the fourth sentence of clause (b) of
Section 4.8 of the Credit Agreement may be made by the Administrative Agent
in its reasonable discretion so long as no Default or Event of Default (other
than the Credit Agreement Defaults) have occurred and are continuing.

 

(f)                                    Clause (b) of
Section 7.1 of the Credit Agreement shall be amended to provide that “no
Default or Event of Default (other than the Credit Agreement Defaults) shall
have occurred and be continuing or would occur as a result of such Credit
Event.”

 

(g)                                 No other
Indebtedness shall be incurred by the Borrower or any of the Guarantors under
clause (b), clause (d) (unless such Indebtedness is evidenced by one or
more notes that have have been pledged to the Administrative Agent for the
benefit of the Lenders and such notes have been delivered to the Administrative
Agent), clause (g) or clause (h) of Section 8.7 of the Credit
Agreement, and no Liens shall be granted by the Borrower with respect thereto.

 

4

 

(h)                                 Notwithstanding
the Credit Agreement Defaults, the restrictions in Section 8.10 shall not apply
to or operate to prevent the sales, conveyances, transfers or Dispositions permitted
by clauses (a), (c) (but only if such Subsidiary is a Wholly-owned
Subsidiary), (e), (f) (but only as to model Housing Units), or (h) of
said Section or the mergers permitted by clause (b) of said Section (but
only if such Subsidiary is a Wholly-owned Subsidiary and it being understood
that such merger shall not extinguish the Borrower’s and Guarantor’s
obligations under the Loan Documents); provided, however, that
notwithstanding the foregoing, all Net Proceeds received by the Borrower under Section 1.8(b) of
the Credit Agreement (other than amounts received in connection with sales and
conveyances permitted under clause (a) of Section 8.10 of the Credit Agreement)
shall be deposited by the Borrower into the account designated by the
Administrative Agent pursuant to clause (b) of this Section 3.2
and held and applied as set forth in said clause (b). 

 

(i)                                     The proviso in Section 8.20
of the Credit Agreement shall be amended to add “(other than the Credit
Agreement Defaults)” after the word “exists” in such proviso. 

 

(j)                                     For the fiscal
quarters ending September 30, 2007 and December 31, 2007, the
covenant levels in clauses (a), (b), (c), (e) and (f) of Section 8.22 of the
Credit Agreement shall be amended to be the levels for such covenants set forth
on Schedule 4. Clause (g) of Section 8.22 of the Credit
Agreement shall be amended to provide that the Borrower shall not, at any time,
permit Liquidity to be less than $1.0 million.

 

(k)                                  From and after
the Effective Date through, but not including, the date on which an Event of Termination
occurs, all Loans (other than existing Eurodollar Loans until the expiration of
the relevant Interest Period) shall bear interest at the Base Rate.

 

(1)                                  Until the
expiration of the relevant interest period, the Applicable Margin with respect
to existing Eurodollar Loans shall be Level IV.

 

(m)                               From and after January 5,
2008, the Applicable Margin with respect to the Commitment Fee shall be Level
IV.

 

(n)                                 The Borrower
shall have no option to request that any Loans bear interest at a rate based upon
the LIBOR Index Rate, and upon the expiration of the relevant Interest Period,
all outstanding Eurodollar Loans shall automatically be converted to Base Rate
Loans (and for purposes of Section 1.5 of the Credit Agreement,
this Limited Duration Waiver Agreement shall constitute a notice by the
Borrower that all outstanding Eurodollar Loans shall be so converted and that
this notice is acceptable to the Administrative Agent).

 

(o)                                 Notwithstanding
anything to the contrary set forth in Footnote I of the Form of Borrowing Base
Certificate attached as Exhibit E to the Credit Agreement, if an Appraisal
has not yet been completed under clause (b) of Section 4.7 of the Credit
Agreement with respect to a Borrowing Base Property, the valuation of such
Borrowing Base Property shall be that set forth in the most recent Borrowing
Base Certificate delivered by the Borrower until the Appraised Value for such
Borrowing Base Property is established under clause (a) of Section 5.1
of this Limited Duration Waiver Agreement.

 

5

 

 

 

 

SECTION 4.  REPRESENTATIONS
AND WARRANTIES

 

In consideration of the
limited agreement of Administrative Agent and the Lenders to temporarily waive
the Credit Agreement Defaults as expressly set forth herein and to continue to fund
the Revolving Loans and issue and participate in Letters of Credit as set forth
in this Credit Agreement, each Loan Party hereby represents and warrants to
Administrative Agent and the Lenders as follows:

 

4.1. The execution, delivery
and performance of this Limited Duration Waiver Agreement by such Loan Party
are within its power and have been duly authorized by all necessary action, and
this Limited Duration Waiver Agreement constitutes a valid and legally binding agreement,
enforceable against such Loan Party in accordance with its terms.

 

4.2. All Loan Documents to
which such Loan Party is a party, including the Credit Agreement, constitute
valid and legally binding obligations of such Loan Party, enforceable against such
Loan Party in accordance with the terms thereof and each Loan Party hereby
ratifies and reaffirms its obligations under each Loan Document which is
applicable to or binding on such Loan Party.

 

4.3. Except as contemplated
by this Limited Duration Waiver Agreement, neither any Loan Party nor any
Subsidiary of any Loan Party is in violation in any respect of (a) any
term of its charter, bylaws or other constitutive documents or (b) any term
in any material agreement or other material instrument to which it is a party
or by which it or any of its property may be bound, in each case where such
violation, individually or in the aggregate, could reasonably be expected to
have a Material Adverse Effect.

 

4.4. After giving effect to
the provisions of this Limited Duration Waiver Agreement, the representations
and warranties of the Borrower contained in Section 6 of the Credit
Agreement are true and correct as though made on and as of such date (except to
the extent that such representations and warranties relate to an earlier date,
in which case they are true and correct as of such date, and disregarding any
breaches or adverse effects arising out of the Credit Agreement Defaults, Borrowed
Money Defaults or Material Agreement Defaults or any of the other matters expressly
set forth in this Limited Duration Waiver Agreement); provided, however,
that no Default or Event of Default exists other than the Credit Agreement
Defaults.

 

4.5. Attached hereto (i) as
Schedule 1 is a list of the Credit Agreement Defaults of which senior
management of the Borrower has knowledge as of the date hereof, (ii) as Schedule
2 is a list of the Borrowed Money Defaults of which the senior management
of the Borrower has knowledge as of the date hereof, and (iii) as Schedule
3  is a list of all Material Agreement Defaults.

 

SECTION 5.  COVENANTS
AND AGREEMENTS

 

5.1. In order to induce
Administrative Agent and the Lenders to enter into this Limited Duration Waiver
Agreement, the Borrower and each of the Guarantors covenant and agree as follows:

 

6

 

(a)          Updated
Appraisals are being obtained for each of the Borrowing Base Properties, and to
the extent that the methodology set forth in an updated Appraisal has been approved
by the Borrower and the Administrative Agent, the Appraised Value set forth
therein shall be that which is used for the Borrowing Base Property covered
thereby in the Borrowing Base Certificate that is to be delivered from time to
time after the Effective Date by the Borrower pursuant to clause (a) of Section 8.5
of the Credit Agreement.

 

(b)         On or before January 31,
2008, the Borrower shall deliver a 13-week cash flow forecast in form
reasonably acceptable to the Administrative Agent.

 

(c)          On or before February 8,
2008, certain members of the Borrower’s senior management and the Borrower’s advisors
shall be available for a telephone conference call to update the Administrative
Agent and the Lenders on the Borrower’s cash flows and discuss generally
the Borrower’s financial advisor’s business plan review process.

 

(d)         On or before February 29,
2008, the Borrower shall deliver to the Administrative Agent a report on the
Borrower’s business plan in form and substance satisfactory to the
Administrative Agent.

 

(e)          On or about March 7,
2008, certain members of the Borrower’s senior management and the Borrower’s
financial and legal advisors shall be available for an in-person meeting with
the Lenders and the Administrative Agent at a location designated by the Administrative
Agent in Chicago, Illinois, at which meeting the Borrower and such advisors
shall discuss the Borrower’s business plan and other issues as the
Administrative Agent and the Lenders may reasonably request.

 

(f)            The Borrower
shall continue to have engaged a financial consultant approved by the Lenders
pursuant to terms reasonably acceptable to the Administrative Agent (it being understood
that Alvarez &  Marsal North America, LLC is acceptable to
the Lenders) from and after the Effective Date through and including the date
upon which an Event of Termination has occurred.

 

(g)         The Borrower
shall cooperate with the Administrative Agent in its review of the Liens on the
Collateral.

 

(h)         The running of
any time period of statute of limitations shall be tolled during the period commencing
on the Effective Date of this Limited Duration Waiver Agreement and ending on
the Termination Date.

 

7

 

(i)             The acceptance
by the Administrative Agent or any of the Lenders of any payments made by or on
behalf of any Loan Party prior to or on or after the Termination Date, and the
application of such payments by the Administrative Agent or the Lenders, shall
not in any way be considered to be a cure of any Default or Event of Default
(including the Credit Agreement Defaults), a discharge by any of the Loan Parties
thereunder or with respect thereto, or an estoppel, acceptance of course of
conduct or further waiver thereunder by the Lenders or the Administrative Agent
on their behalf.

 

SECTION 6.  MISCELLANEOUS

 

6.1. ACKNOWLEDGMENT OF
OBLIGATIONS AND VALIDITY AND ENFORCEABILITY OF LOAN DOCUMENTS. Except as expressly
set forth herein, the Credit Agreement and other Loan Documents shall remain in
full force and effect. Each Loan Party expressly acknowledges and agrees that:

 

(a)          as of January 14,
2008, the total aggregate outstanding amount of principal under the Credit
Agreement with respect to the Revolving Loans, the Swing Loans and the Letters of
Credit is $321,988,242.07 (the “Prior Loans Principal
Amount”), and the Prior Loans Principal Amount has accrued, and continues
to accrue, interest at the rates provided in the Credit Agreement;

 

(b)         the Credit
Agreement, the other Loan Documents and the Obligations under the Loan
Documents, including the Prior Loans Principal Amount, are valid and
enforceable by Administrative Agent, the L/C Issuer and the Lenders, and each
Loan Party expressly ratifies and reaffirms its obligations under the Credit
Agreement and other Loan Documents to which it is a party, free and clear of
all defenses, offsets, counterclaims and adjustments of any kind or nature; provided,
however, that if permitted under applicable law, the foregoing shall not
affect the rights of third parties that are not Affiliates of the Borrower or
the Guarantors from making derivative or independent
claims against the Lenders or the Administrative Agent on behalf of the
Borrower or the Guarantors or otherwise; and

 

(c)          Each Loan Party
agrees that it shall not dispute the validity or enforceability of the Credit
Agreement and other Loan Documents or any of its obligations thereunder, or the
validity, perfection, priority, enforceability or extent of Administrative Agent’s
Lien against any item of Collateral. No Loan Party has any knowledge of any
challenge to Administrative Agent’s or any Lender’s claims arising under the
Loan Documents, or to the effectiveness of the Loan Documents.

 

6.2. EXPENSES. All
reasonable fees and expenses of the Administrative Agent in connection with the
Defaults, Events of Default, preparation of outlines of proposed terms and the execution
and delivery of this Limited Duration Waiver Agreement shall be paid in full
promptly after submission by the Administrative Agent of invoices (with
reasonable back-up documentation), including, without limitation, the fees,
costs and expenses of appraisers and counsel to the Administrative Agent.

 

6.3. CONDITIONS PRECEDENT.
This Limited Duration Waiver Agreement shall become effective and be deemed
effective as of January 5, 2008
until the existence of an Event of

 

8

 

Termination (the “Effective Date”), upon the occurrence of each of the
following, to the satisfaction of Administrative Agent (or waived by the
Administrative Agent in its sole discretion) on or before 5:00 pm (Chicago,
Illinois time) on January 18, 2008:

 

(a)          The
Administrative Agent shall have received counterparts of this Limited Duration
Waiver Agreement, duly executed and delivered by the required parties hereto;
and

 

(b)         The
Administrative Agent shall have received, for the benefit of the Lenders that
have delivered their executed counterpart to this Limited Duration Waiver
Agreement on or before 5:00 pm (Chicago, Illinois time) on January 24,
2008, in accordance with their respective pro  rata shares of the
Revolving Credit Commitment (after giving effect to the reduction thereto on
the Effective Date), a fee in the amount of twenty-five basis points times the
principal amount of such Lender’s Revolving Credit Commitment, which fee shall
be earned and due and payable on the date hereof, and after payment, such fee
shall be non-refundable; and

 

(c)          The
Administrative Agent shall have received such other information and documents
as Administrative Agent may request, in form and substance reasonably
satisfactory to Administrative Agent.

 

6.4. AMENDMENTS. No
amendment or modification of any of the Loan Documents or the provisions of
this Limited Duration Waiver Agreement shall be effective without the written agreement
of Administrative Agent and, as applicable under Section 13.13 of
the Credit Agreement, the Lenders or the Required Lenders, and no termination
or waiver of any provision of this Limited Duration Waiver Agreement, or
consent to any departure by any Loan Party therefrom, shall in any event be
effective without the written concurrence of Administrative Agent and, as
applicable under Section 13.13 of the Credit Agreement, the Lenders
or the Required Lenders. Any waiver or consent shall be effective only in the
specific instance and for the specific purpose for which it was given.

 

6.5. DEFAULT WAIVER.
The Administrative Agent’s and the Lenders’ failure, at any time or times
hereafter, to require strict performance by Loan Parties with any provision or
term of this Limited Duration Waiver Agreement shall not affect or diminish any
right of Administrative Agent or the Lenders thereafter to demand strict
compliance and performance therewith. Any suspension or waiver by
Administrative Agent and the Lenders of the Credit Agreement Defaults or any
other Default or Event of Default shall not, except as expressly set forth
herein, suspend, waive or affect the Credit Agreement Defaults or any other
Default or Event of Default, whether the same is prior or subsequent thereto
and whether of the same or of a different kind or character. None of the undertakings,
agreements, warranties, covenants and representations of any Loan Party contained
in the Credit Agreement or any of the other Loan Documents, and no Default or
Event of Default, shall be deemed to have been suspended or waived by
Administrative Agent and the Lenders unless such suspension or waiver is in
writing and signed by Administrative Agent and, as applicable
under Section 13.13 of the Credit Agreement, the Lenders or the
Required Lenders.

 

6.6. SOLE BENEFIT OF
PARTIES. This Limited Duration Waiver Agreement is solely for the benefit
of the parties hereto and their respective successors and assigns, and no other
Person

 

9

 

shall have any right,
benefit or interest under or because of the existence of this Limited Duration Waiver
Agreement.

 

6.7. TIME OF THE ESSENCE.
Time shall be of the essence with respect to the performance by the Borrower
and the Guarantors of all of their respective obligations under this Limited
Duration Waiver Agreement.

 

6.8. SECTION TITLES.
The section titles contained in this Limited Duration Waiver Agreement are
included for the sake of convenience only, shall be without substantive meaning
or content of any kind whatsoever, and are not a part of the agreement between
the parties.

 

6.9. NO WAIVER; REMEDIES.
No course of dealing between the Borrower or any Guarantor and Administrative
Agent or any Lender and no delay or omission by Administrative Agent or the
Lenders in exercising any right or remedy under this Limited Duration Waiver Agreement
or the other Loan Documents or with respect to any Obligations shall operate as
a waiver thereof or of any other right or remedy, and no single or partial
exercise thereof shall preclude any other or further exercise thereof or the exercise
of any other right or remedy. All rights and remedies of Administrative Agent
and the Lenders are cumulative.

 

6.10. SUCCESSORS AND
ASSIGNS. The Administrative Agent, the Lenders and the Loan Parties, as
used herein, shall include the successors or assigns of those parties, except
that no Loan Party shall have the right to assign its rights hereunder or any
interest herein.

 

6.11. FURTHER ASSURANCES.
From time to time, each Loan Party shall take such action and execute and
deliver to Administrative Agent such additional documents, instruments, certificates
and agreements as Administrative Agent may reasonably request to effectuate the
purposes of this Limited Duration Waiver Agreement and the other Loan
Documents.

 

6.12. SEVERABILITY.
The provisions of this Limited Duration Waiver Agreement are independent of and
separable from each other, and no such provision shall be affected or rendered invalid
or unenforceable by virtue of the fact that for any reason any other such
provision may be invalid or unenforceable in whole or in part. If any provision
of this Limited Duration Waiver Agreement is prohibited or unenforceable in any
jurisdiction, such provision shall be ineffective in such jurisdiction only to
the extent of such provision or unenforceability, and such prohibition or unenforceability
shall not invalidate the balance of such provision to the extent it is not
prohibited or unenforceable nor render prohibited or unenforceable such
provision in any other jurisdiction.

 

6.13. ENTIRE AGREEMENT.
This Limited Duration Waiver Agreement and the other Loan Documents constitute
the entire agreement and understanding between the parties hereto with respect
to the Credit Agreement Defaults and supersede all prior negotiations, understandings
and agreements between such parties with respect thereto.

 

6.14. RESOLUTION OF
DRAFTING AMBIGUITIES. Each Loan Party acknowledges and agrees that it was
represented by counsel in connection with the execution and delivery of this Limited
Duration Waiver Agreement, that it and its counsel reviewed and participated in
the preparation and negotiation hereof and thereof and that any rule of
construction to the effect that

 

10

 

ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation
hereof or thereof.

 

6.15. APPLICABLE LAW.
THIS LIMITED WAIVER AGREEMENT, AND THE RIGHTS AND DUTIES OF THE PARTIES HERETO,
SHALL BE CONSTRUED AND DETERMINED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE
STATE OF ILLINOIS.

 

6.16. WAIVER OF BOND.
EACH LOAN PARTY WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED OF
ADMINISTRATIVE AGENT OR ANY LENDER IN CONNECTION WITH ANY JUDICIAL PROCESS OR
PROCEEDING OR TO ENFORCE ANY JUDGMENT OR OTHER COURT ORDER ENTERED 1N FAVOR OF
ADMINISTRATIVE AGENT OR ANY LENDER OR TO ENFORCE BY SPECIFIC PERFORMANCE, ANY TEMPORARY
RESTRAINING ORDER, PRELIMINARY OR PERMANENT INJUNCTION, OR THIS LIMITED WAIVER
AGREEMENT.

 

6.17. CONSULTATION WITH
COUNSEL. EACH LOAN PARTY ACKNOWLEDGES THAT IT HAS BEEN
REPRESENTED BY ITS OWN LEGAL COUNSEL IN CONNECTION ITS EXECUTION OF THIS
LIMITED WAIVER AGREEMENT AND THE OTHER LOAN DOCUMENTS, THAT IT HAS EXERCISED
INDEPENDENT JUDGMENT WITH RESPECT TO THIS LIMITED WAIVER AGREEMENT AND THE
OTHER LOAN DOCUMENTS, AND THAT IT HAS NOT RELIED ON ADMINISTRATIVE AGENT OR ANY
LENDER OR ON ADMINISTRATIVE AGENT’S OR ANY LENDER’S COUNSEL FOR ANY ADVICE WITH RESPECT
TO THIS LIMITED WAIVER AGREEMENT OR THE OTHER LOAN DOCUMENTS.

 

6.18. COUNTERPARTS.
This Limited Duration Waiver Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original and all of which,
taken together, shall constitute one and the same agreement. In proving this
Limited Duration Waiver Agreement in any judicial proceedings, it shall not be
necessary to produce or account for more than one such counterpart signed by
the party against whom such enforcement is sought. Any signatures delivered by
a party by facsimile transmission or by electronic mail transmission shall be
deemed an original signature hereto.

 

6.19. LOAN DOCUMENT.
This Limited Duration Waiver Agreement shall be deemed a Loan Document
for all purposes.

 

[Remainder
of page intentionally left blank.]

 

11

 

IN WITNESS
WHEREOF, the parties hereto have caused this Limited Duration Waiver Agreement
to be executed as of the date first set forth above, by their respective duly
authorized officers.

 

	
   

  	
  “BORROWER”

  
	
   

  	
   

  
	
   

  	
  KIMBALL
  HILL, INC., an Illinois corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ C. Kenneth Love

  
	
   

  	
   

  	
  C. Kenneth Love

  
	
   

  	
   

  	
  President and Chief
  Executive Officer

  

 

 

	
   

  	
  “GUARANTORS”

  
	
   

  	
   

  
	
   

  	
  CACTUS HILLS, LLC

  
	
   

  	
  KIMBALL HILL HOMES
  TEXAS

  
	
   

  	
  INVESTMENTS, L.L.C.

  
	
   

  	
  KIMBALL HILL HOMES TEXAS

  
	
   

  	
  OPERATIONS, L.L.C.

  
	
   

  	
  KIMBALL HILL TEXAS INVESTMENT

  
	
   

  	
  COMPANY, L.L.C.

  
	
   

  	
  KIMBALL HILL FAR EAST DETROIT,
  LLC

  
	
   

  	
  KH FINANCIAL HOLDING COMPANY

  
	
   

  	
  KHH TEXAS TRADING COMPANY L.P.

  
	
   

  	
  KIMBALL HILL HOMES AUSTIN, L.P.

  
	
   

  	
  KIMBALL HILL HOMES
  CALIFORNIA, INC.

  
	
   

  	
  KIMBALL HILL HOMES DALLAS, L.P.

  
	
   

  	
  KIMBALL HILL HOMES FLORIDA,
  INC.

  
	
   

  	
  KIMBALL HILL HOMES HOUSTON,
  L.P.

  
	
   

  	
  KIMBALL HILL HOMES ILLINOIS,
  LLC

  
	
   

  	
  KIMBALL HILL HOMES NEVADA, INC.

  
	
   

  	
  KIMBALL HILL HOMES OHIO, INC.

  
	
   

  	
  KIMBALL HILL HOMES OREGON, INC.

  
	
   

  	
  KIMBALL HILL HOMES REALTY FLORIDA,
  INC.

  
	
   

  	
  KIMBALL HILL HOMES SAN ANTONIO,
  L.P.

  
	
   

  	
  KIMBALL HILL HOMES TEXAS, INC.

  
	
   

  	
  KIMBALL HILL HOMES WASHINGTON, INC.

  
	
   

  	
  KIMBALL HILL HOMES WISCONSIN,
  INC.

  
	
   

  	
  NATIONAL CREDIT AND GUARANTY

  
	
   

  	
  CORPORATION

  
	
   

  	
  RIVER OAKS REALTY, L.P.

  
	
   

  	
  18TH AND PEORIA, LLC

  
	
   

  	
  KIMBALL HILL URBAN CENTERS,
  L.L.C.

  
	
   

  	
  KIMBALL HILL URBAN CENTERS CHICAGO
  ONE, L.L.C.

  
	
   

  	
  KIMBALL HILL URBAN CENTERS CHICAGO
  TWO, L.L.C.

  
	
   

  	
  KIMBALL HILL STATEWAY, INC.

  
	
   

  	
  KIMBALL HILL BELLEVUE RANCH,
  LLC

  
	
   

  	
  KIMBALL HILL SHELDON LAKES, LLC

  
	
   

  	
  KIMBALL HILL VILLAGES, LLC

  
	
   

  	
  KH INGHAM PARK SOUTH, LLC

  
	
   

  	
  KH SRAV II, LLC

  
	
   

  	
  RIVER OAKS HOMES, LLP

  
	
   

  	
  PARKVIEW LIMITED PARTNERSHIP

  

 

 

	
   

  	
  RIVER POINTE LIMITED PARTNERSHIP

  
	
   

  	
  KIMBALL HILL CHADWICK FARMS

  
	
   

  	
  LIMITED PARTNERSHIP

  
	
   

  	
  KIMBALL HILL MARBELLA ESTATES

  
	
   

  	
  LIMITED PARTNERSHIP

  
	
   

  	
  INDIAN TRAILS LIMITED PARTNERSHIP

  
	
   

  	
  EDGEWATER LIMITED PARTNERSHIP

  
	
   

  	
  HUNTINGTON CHASE LIMITED

  
	
   

  	
  PARTNERSHIP

  
	
   

  	
  LEGEND LAKES LIMITED PARTNERSHIP

  
	
   

  	
  WATERFORD LIMITED PARTNERSHIP

  
	
   

  	
  WHISPERING MEADOW LIMITED

  
	
   

  	
  PARTNERSHIP

  
	
   

  	
  WHITE OAK LIMITED PARTNERSHIP

  
	
   

  	
  KIMBALL MOUNTAIN FIRST LIMITED

  
	
   

  	
  PARTNERSHIP

  
	
   

  	
  GABLES AT HIDDENBROOK LIMITED

  
	
   

  	
  PARTNERSHIP

  
	
   

  	
  PARK SHORE, L.L.C.

  
	
   

  	
  KIMBALL HILL URBAN CENTERS SPECIAL
  PURPOSES, L.L.C.

  
	
   

  	
  TERRAMINA, LLC

  

 

	
   

  	
  By: 

  	
  /s/ C. Kenneth Love

  
	
   

  	
   

  	
  C. Kenneth Love

  
	
   

  	
   

  	
  Vice Chairman

  
	
   

  	
   

  
	
   

  	
  EAST LAKE PARK, INC.

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ David K. Hill

  
	
   

  	
   

  	
  David K. Hill

  
	
   

  	
   

  	
  President

  

 

 

	
   

  	
  KIMBALL HILL TX PROPERTIES, LLC

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  Kimball Hill Homes
  Houston, L.P., its manager

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By: 

  	
  /s/ C. Kenneth Love

  
	
   

  	
   

  	
   

  	
  C. Kenneth Love

  
	
   

  	
   

  	
   

  	
  Vice Chairman

  
	
   

  	
   

  
	
   

  	
  THE
  HAMILTON PLACE PARTNERSHIP

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  Kimball Hill Homes
  Illinois, LLC, its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By: 

  	
  /s/ C. Kenneth Love

  
	
   

  	
   

  	
   

  	
  C. Kenneth Love

  
	
   

  	
   

  	
   

  	
  Vice Chairman

  

 

 

 

 

	
   

  	
  “ADMINISTRATIVE AGENT”

  
	
   

  	
   

  
	
   

  	
  HARRIS
  N.A., in its capacity as the
  Administrative Agent for the Lenders

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ James A. Jerz

  
	
   

  	
  Name: 

  	
  James A. Jerz

  
	
   

  	
  Title: 

  	
  Vice President

  

 

 

 

	
   

  	
  Associated Bank National
  Association, as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Robert J. Burda

  
	
   

  	
  Name: 

  	
  Robert J. Burda

  
	
   

  	
  Title: 

  	
  Vice
  President

  

 

 

	
   

  	
  Bank of America, N.A. and
  LaSalle Bank, N.A., as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Patricia A. Provrazno

  
	
   

  	
  Name: 

  	
  Patricia A. Provrazno

  
	
   

  	
  Title: 

  	
  Senior Vice President

  

 

 

	
   

  	
  BANK OF THE WEST, as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ William C. Weatherby

  
	
   

  	
  Name: 

  	
  WILLIAM C. WEATHERBY

  
	
   

  	
  Title: 

  	
  Vice
  President

  

 

 

	
   

  	
  CITIBANK, N.A. formerly known as

  
	
   

  	
  CITIBANK TEXAS, N.A., as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ William L. Kinard

  
	
   

  	
  Name: 

  	
  William L. Kinard

  
	
   

  	
  Title: 

  	
  Vice President

  

 

 

	
   

  	
  Comerica Bank, as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Charles Weddell

  
	
   

  	
  Name: 

  	
  Charles Weddell

  
	
   

  	
  Title: 

  	
  Vice President

  

 

 

	
   

  	
  Compass Bank, as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Johanna Duke Paley

  
	
   

  	
  Name: 

  	
  Johanna Duke Paley

  
	
   

  	
  Title: 

  	
  Senior Vice President

  

 

 

	
   

  	
  Fifth Third Bank, as a
  Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Thomas W. O’Connell

  
	
   

  	
  Name: 

  	
  Thomas W. O’Connell

  
	
   

  	
  Title: 

  	
  Vice President

  

 

 

 

	
   

  	
  FRANKLIN BANK, SSB, as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Sherry K. Day

  
	
   

  	
  Name: 

  	
  Sherry K. Day

  
	
   

  	
  Title: 

  	
  Senior Vice President

  

 

	
   

  	
  Address:

  	
   

  
	
   

  	
  9800 Richmond Ave, #680

  
	
   

  	
  Houston, TX 77042

  
	
   

  	
  Attention:

  	
  Sherry K. Day

  
	
   

  	
  Telecopy:

  	
  (713) 343-8160

  
	
   

  	
  Telephone:

  	
  (713)  339-8943

  

 

 

	
   

  	
  Harris N.A., as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ James A. Jerz

  
	
   

  	
  Name: 

  	
  James A. Jerz

  
	
   

  	
  Title: 

  	
  Vice President

  

 

 

	
   

  	
  JP Morgan Chase, as a
  Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Randall B. Durant

  
	
   

  	
  Name: 

  	
  RANDALL B. DURANT

  
	
   

  	
  Title: 

  	
  SENIOR VICE PRESIDENT

  

 

 

	
   

  	
  Key Bank NA, as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Nathan Weyen

  
	
   

  	
  Name: 

  	
  Nathan Weyen

  
	
   

  	
  Title: 

  	
  VP

  

 

 

	
   

  	
  MB FINANCIAL BANK, as a
  Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Gary Pleickhardt

  
	
   

  	
  Name: 

  	
  GARY PLEICKHARDT

  
	
   

  	
  Title: 

  	
  VICE PRESIDENT

  

 

 

	
   

  	
  National City, as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Todd R. Olsen

  
	
   

  	
  Name: 

  	
  TODD R. OLSEN

  
	
   

  	
  Title: 

  	
  VP

  

 

 

	
   

  	
  RBS Citizens NA, successor
  by merger to Charter 

  
	
   

  	
  One Bank NA as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Christopher G. Daniel

  
	
   

  	
  Name: 

  	
  Christopher G. Daniel

  
	
   

  	
  Title: 

  	
  Vice President

  

 

 

	
   

  	
  Wachovia Bank, National
  Association, as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Maurice M. Ryan

  
	
   

  	
  Name: 

  	
  Maurice M. Ryan

  
	
   

  	
  Title: 

  	
  Senior Vice President

  

 

 

 

SCHEDULE 1

 

CREDIT AGREEMENT DEFAULTS

 

1.               The Borrower has not provided the
Administrative Agent and the Lenders with the certificate of the Borrowing Base
as of December 31, 2007 as required by Section 8.5(a) of the
Credit Agreement(with notice thereof to the Borrower either not being required
under clause (c) of Section 9.1 of the Credit Agreement or, if
required thereunder, such notice having been received by the Borrower or such
requirement of such notice having been waived by the Borrower), and as a consequence
thereof, an Event of Default has occurred and is continuing under clause (c) of
Section 9.1 of the Credit Agreement.

 

2.               The Borrower has not provided the
Administrative Agent and the Lenders with the information regarding Liquidity
forecasts as required by Section 8.5(b) of the Credit Agreement and,
as a consequence thereof, an Event of Default has occurred and is continuing
under clause (c) of Section 9.1 of the Credit Agreement (with notice
thereof to the Borrower not being required under clause (c) of Section 9.1
of the Credit Agreement or, if required thereunder, such notice having been
received by the Borrower or such requirement of such notice being waived by the
Borrower).

 

3.               The Borrower has not provided the
Administrative Agent and the Lenders with certifications regarding the
information required by Section 8.5(c) of the Credit Agreement (with
notice thereof to the Borrower either not being required under clause (c) of
Section 9.1 of the Credit Agreement or, if required thereunder, such
notice having been received by the Borrower or such requirement of such notice
having been waived by the Borrower), and, as a consequence thereof, an Event of
Default has occurred and is continuing under clause (c) of Section 9.1
of the Credit Agreement.

 

4.               The Borrower has not provided the
Administrative Agent and the Lenders with unaudited quarterly financial
information for its historical fiscal quarters ended September 30 (with
notice thereof to the Borrower either not being required under clause (c) of
Section 9.1 of the Credit Agreement or, if required thereunder, such
notice having been received by the Borrower or such requirement of such notice
having been waived by the Borrower) and, as a consequence thereof, an Event of
Default has occurred and is continuing under clause (c) of Section 9.1
of the Credit Agreement.

 

5.               The Borrower has not provided the
Administrative Agent and the Lenders with the written statements required by Section 8.5(f) of
the Credit Agreement (with notice thereof to the Borrower either not being
required under clause (c) of Section 9.1 of the Credit Agreement or,
if required thereunder, such notice having been received by the Borrower or
such requirement of such notice having been waived by the Borrower) and, as a
consequence thereof, an Event of Default has occurred and is continuing under
clause (c) of Section 9.1 of the Credit Agreement.

 

6.               The Borrower has not provided the
Administrative Agent and the Lenders with the written statements required by Section 8.5(h) (with
notice thereof to the Borrower either not being required under clause (c) of
Section 9.1 of the Credit Agreement or, if required thereunder, such
notice having been received by the Borrower or such requirement of 

 

 

 

such notice having
been waived by the Borrower) and, as a consequence thereof, an Event of Default
has occurred and is continuing under clause (c) of Section 9.1 of the
Credit Agreement.

 

7.               The Borrower has not provided the
Administrative Agent and the Lenders with the information required by Section 8.5(i) of
the Credit Agreement for its fiscal year ending September 30, 2008 (with
notice thereof to the Borrower either not being required under clause (c) of
Section 9.1 of the Credit Agreement or, if required thereunder, such
notice having been received by the Borrower or such requirement of such notice
having been waived by the Borrower) and, as a consequence thereof, an Event of
Default has occurred and is continuing under clause (c) of Section 9.1
of the Credit Agreement.

 

8.               The Borrower has not provided the
Administrative Agent and the Lenders with the information required by Section 8.5(n) of
the Credit Agreement (with notice thereof to the Borrower either not being
required under clause (c) of Section 9.1 of the Credit Agreement or,
if required thereunder, such notice having been received by the Borrower or
such requirement of such notice having been waived by the Borrower) and, as a
consequence thereof, an Event of Default has occurred and is continuing under
clause (c) of Section 9.1 of the Credit Agreement.

 

9.               The Borrower has failed to timely notify
the Administrative Agent and the Lenders of some or all of the Credit Agreement
Defaults pursuant to Section 8.5(k) or otherwise (with notice thereof
to the Borrower either not being required under clause (c) of Section 9.1
of the Credit Agreement or, if required thereunder, such notice having been
received by the Borrower or such requirement of such notice having been waived
by the Borrower) and, as a consequence thereof, an Event of Default has
occurred and is continuing under clause (b) of Section 9.1 of the
Credit Agreement.

 

10.         The Borrower has not provided the
Administrative Agent and the Lenders with the certificate required by Section 8.5(m) in
respect of its September 30, 2007 financial statements (with notice
thereof to the Borrower either not being required under clause (c) of Section 9.1
of the Credit Agreement or, if required thereunder, such notice having been
received by the Borrower or such requirement of such notice having been waived
by the Borrower) and, as a consequence thereof, an Event of Default has
occurred and is continuing under clause (c) of Section 9.1 of the
Credit Agreement.

 

11.         The
Borrower has entered into agreements in the ordinary course of business with
providers of surety bonds that may have resulted or may in the future result in
the creation of a Lien on Property of the Borrower and the related filing of
UCC financing statements in violation of 
Section 8.8 of the Credit Agreement, and, as a consequence thereof,
(x) if such a Lien has been created on the Property of the Borrower (with
notice thereof to the Borrower either not being required under clause (d) of
Section 9.1 of the Credit Agreement or, if required thereunder, such
notice having been received by the Borrower or such requirement of such notice
having been waived by the Borrower) an Event of Default has occurred and is
continuing and (y) if a Lien may in the future result in the creation of a
Lien on the Property of the Borrower, a Default may have occurred and may be
continuing under clause (d) of Section 9.1 of the Credit Agreement.

 

 

 

12.         Due
to the existence of some or all of the Credit Agreement Defaults and the other
matters expressly contemplated by this Waiver Agreement, the Borrower may have
breached certain representations in connection with previous advances,
continuations and conversions of Loans and, if such breach has occurred, an
Event of Default has occurred and is continuing under clause (e) of Section 9.1
of the Credit Agreement.

 

13.         The Borrower
has (i) breached one of more of the covenants in Section 8.22 of the
Credit Agreement for the fiscal quarter ending September 30, 2007, (ii) breached
one of more of the covenants in Section 8.22 of the Credit Agreement for
the fiscal quarter ending December 31, 2007 and (iii) breached clause
(g) of Section 8.22, and will continue to fail to satisfy such clause
(iii) until the Termination Date, and as a consequence thereof, an Event
of Default has occurred and is continuing under clause (b) of Section 9.1
of the Credit Agreement.

 

14.         The
Borrower has not complied with Section 8.7(d) with respect to Special
Project Subsidiaries of the Credit Agreement and, as a consequence thereof, an
Event of Default has occurred and is continuing under clause (b) of Section 9.1
of the Credit Agreement.

 

15.         The Borrower
has not complied with Section 8.7(h) or Section 8.9(j) of
the Credit Agreement, and will continue to fail to satisfy Section 8.7(h) and
Section 8.9(j) until the Termination Date, due to recent reductions
in Tangible Net Worth and, as a consequence thereof, an Event of Default has
occurred and is continuing under clause (b) of Section 9.1 of the
Credit Agreement.

 

16.         The Borrower is a Guarantor under the
Credit Agreement (the “Kyle Canyon Credit Agreement”), dated as of July 20,
2005, by and among Kyle Acquisition Group, LLC (“Kyle Canyon”), a Nevada
limited liability company, Wachovia Bank, National Association, as
Administrative Agent (the “Kyle Canyon Administrative Agent”), LaSalle Bank National
Association, National City Bank and The Royal Bank of Scotland PLC, as
Documentation Agents, and Wachovia Capital Markets, LLC, as Sole Bookrunner and
Sole Lead Arranger (as amended, “Kyle Canyon Credit Agreement”).  In connection with the Kyle Canyon Credit
Agreement, the Borrower provided a pro rata Repayment Guaranty and certain
related performance and limited guarantees (the “Kyle Canyon Guaranty”) in
favor of the Kyle Canyon Administrative Agent. 
It constitutes an “Event of Default” under Section 9.01(m) of
the Kyle Canyon Credit Agreement if the Borrower, as a Guarantor thereunder,
does not meet its Parent Guarantor Financial Covenants (as defined in the Kyle
Canyon Credit Agreement), which currently are the same covenants set forth in Section 8.22
of the Credit Agreement.  The Kyle Canyon
Administrative Agent has not provided Kyle Canyon or the Borrower with notice
of this “Event of Default” under Section 9.01(m) of the Kyle Canyon
Credit Agreement; however, such “Event of Default,” if not cured as set forth
in the Kyle Canyon Credit Agreement, could result in the acceleration of
obligations under the Kyle Canyon Credit Agreement and the related Kyle Canyon
Guaranty and, as a consequence of such acceleration, if the Administrative
Agent, acting at the direction of the Required Lenders, terminates the Limited
Duration Waiver Agreement by giving notice to the Borrower and the Guarantors,
an Event of Termination shall exist.

 

 

 

17.         Section 21(a) of the Kyle
Canyon Guaranty requires that the Borrower deliver to the Kyle Canyon
Administrative Agent its audited annual financial statements without a “going
concern” qualification.  Breach of such
covenant constitutes an “Event of Default” under the Kyle Canyon Credit
Agreement, and, if not cured as set forth in the Kyle Canyon Credit Agreement,
could result in the acceleration of obligations under the Kyle Canyon Credit
Agreement and the related Kyle Canyon Guaranty. 
As a consequence of any such acceleration, if the Administrative Agent,
acting at the direction of the Required Lenders, terminates the Limited
Duration Waiver Agreement by giving notice to the Borrower and the Guarantors,
an Event of Termination shall exist.

 

18.         The Kyle Canyon Administrative Agent has
sent Kyle Canyon notice that defaults exist under the Kyle Canyon Credit
Agreement, including as a result of non-compliance with (a) Section 5.01
(“Performance and Completion of Project”),
(b) Section 5.07 (“Compliance With
Agreements”), (c) Section 6.01 (“Financial Statements and Other Information”)
and (d) Section 6.02 (“Notice of
Material Events”). In addition, the notice of default asserted that
Kyle Canyon was in default of Section 9.01(m) of the Kyle Canyon
Credit Agreement, due to certain cessations of the construction of Improvements
(as defined therein).  The 9.01(m) default
and breach of the Section 5.01 obligations constitute an Event of Default
for which no cure period exists, and which could result in the acceleration of
obligations under the Kyle Canyon Credit Agreement and the related Kyle Canyon
Guaranty.  In addition, the Sections
5.07, 6.01 and 6.02 defaults, if not cured as set forth in the Kyle Canyon
Credit Agreement, could result in the acceleration of obligations under the
Kyle Canyon Credit Agreement and the related Kyle Canyon Guaranty.  As a consequence of any such acceleration, if
the Administrative Agent, acting at the direction of the Required Lenders,
terminates the Limited Duration Waiver Agreement by giving notice to the Borrower
and the Guarantors, an Event of Termination shall exist.

 

19.         The Borrower is a Guarantor under the
Amended & Restated Credit Agreement (the “South Edge Credit Agreement”),
dated as of March 9, 2007, by and among South Edge, LLC, a Delaware
limited liability company, JPMorgan Chase Bank, N.A., as Administrative Agent
(the “South Edge Administrative Agent”), The Royal Bank of Scotland PLC, as
Documentation Agent, and J.P. Morgan Securities Inc. as Sole Bookrunner and
Sole Lead Arranger (as amended, the “South Edge Credit Agreement”).  In connection with the South Edge Credit
Agreement, the Borrower provided a Repayment Guaranty (the “South Edge Guaranty”)
in favor of the South Edge Administrative Agent.   In connection with the South Edge Credit
Agreement, the Borrower provided a pro rata Repayment Guaranty and certain
related performance and limited guarantees (the “South Edge Guaranty”) in favor
of the South Edge Administrative Agent. 
It constitutes an “Event of Default” under Section 9.01(m) of
the South Edge Credit Agreement if the Borrower, as a Guarantor thereunder,
does not meet its Parent Guarantor Financial Covenants (as defined in the South
Edge Credit Agreement), which currently are the same covenants set forth in Section 8.22
of the Credit Agreement.  On January 22,
2008, the South Edge Administrative Agent provided South Edge with notice of
this “Event of Default” under Section 9.01(m) of the South Edge
Credit Agreement.  Such “Event of
Default,” if not cured as set forth in the South 

 

 

 

Edge Credit
Agreement, could result in the acceleration of obligations under the South Edge
Credit Agreement and the related South Edge Guaranty.  As a consequence thereof, if the
Administrative Agent, acting at the direction of the Required Lenders, terminates
the Limited Duration Waiver Agreement by giving notice to the Borrower and the
Guarantors, an Event of Termination shall exist.

 

20.         Section 21(a) of the South Edge
Guaranty requires that the Borrower deliver to the South Edge Administrative
Agent its audited annual financial statements without a “going concern”
qualification.  Breach of such covenant
constitutes an “Event of Default” under the South Edge Credit Agreement, and,
if not cured as set forth in the South Edge Credit Agreement, could result in
the acceleration of obligations under the South Edge Credit Agreement and the
related South Edge Guaranty.  As a
consequence of any such acceleration, if the Administrative Agent, acting at
the direction of the Required Lenders, terminates the Limited Duration Waiver
Agreement by giving notice to the Borrower and the Guarantors, an Event of
Termination shall exist.

 

21.         The Borrower is a Guarantor under the
Amended and Restated Development Loan Agreement (the “SRAV Loan “), dated October 31,
2007 between KH SRAV I, LLC and Wachovia Bank, N.A.  Pursuant to Section 5.3 and Rider A of
the related Amended and Restated Guaranty (the “SRAV Guaranty”), the Borrower,
as Guarantor, must meet the obligations set forth under Section 8.22 of
the Credit Agreement.  Failure to meet
the obligations set forth in Section 5.3 and Rider A of the SRAV Guaranty
constitute an “Event of Default” under Section 6.1(b) and (c) of
the SRAV Loan.  In addition, under Section 6.1(c) and
(x) of the SRAV Loan, certain of the Credit Agreement Defaults (including
failure to comply with corresponding reporting requirements under the SRAV
Guaranty) and the Borrowed Money Defaults constitute an “Event of Default”
under the SRAV Loan, which in turn, constitutes a Credit Agreement
Default.  As a consequence thereof, if
the Administrative Agent, acting at the direction of the Required Lenders,
terminates the Limited Duration Waiver Agreement by giving notice to the
Borrower and the Guarantors, an Event of Termination shall exist.

 

22.         The
repurchase of the Borrower’s common stock from Mr. Eugene Rowehl is a
breach of Section 8.9(k) and, as a consequence thereof, an Event of
Default has occurred and is continuing under clause (b) of Section 9.1.  Such repurchase may have been a Default under
Section 8.12 of the Credit Agreement to the extent that a Default existed
at the time of such repurchase, in which case, an Event of Default has occurred
and is continuing under clause (b) of Section 9.1 of the Credit
Agreement.

 

23.         The Borrower’s retention of $5,000,000 per year of
Net Cash Proceeds from Dispositions pursuant to Section 1.9(b) may
have been an Event of Default under the Credit Agreement to the extent that a
Default existed at the time of such Disposition or Dispositions, in which case, an Event of Default has
occurred and is continuing under clause (b) of Section 9.1 of the
Credit Agreement.

 

24.         Any
item set forth in Schedule 2 or Schedule 3 is hereby incorporated by reference
into this Schedule 1.

 

 

 

SCHEDULE 2

 

BORROWED MONEY DEFAULTS

 

1.               The Borrower is a Guarantor under the
Kyle Canyon Credit Agreement.  In
connection with the Kyle Canyon Credit Agreement, the Borrower provided the
Kyle Canyon Guaranty in favor of the Kyle Canyon Administrative Agent.  It constitutes an “Event of Default” under Section 9.01(m) of
the Kyle Canyon Credit Agreement if the Borrower, as a Guarantor thereunder,
does not meet its Parent Guarantor Financial Covenants (as defined in the Kyle
Canyon Credit Agreement), which currently are the same covenants set forth in Section 8.22
of the Credit Agreement.  The Kyle Canyon
Administrative Agent has not provided Kyle Canyon or the Borrower with notice
of this “Event of Default” under Section 9.01(m) of the Kyle Canyon
Credit Agreement; however, such “Event of Default,” if not cured as set forth
in the Kyle Canyon Credit Agreement, could result in the acceleration of
obligations under the Kyle Canyon Credit Agreement and the related Kyle Canyon
Guaranty and, as a consequence of such acceleration, if the Administrative
Agent, acting at the direction of the Required Lenders, terminates the Limited
Duration Waiver Agreement by giving notice to the Borrower and the Guarantors,
an Event of Termination shall exist.

 

2.               The Kyle Canyon Administrative Agent has
sent Kyle Canyon notice that defaults exist under the Kyle Canyon Credit
Agreement, including as a result of non-compliance with (a) Section 5.01
(“Performance and Completion of Project”),
(b) Section 5.07 (“Compliance With
Agreements”), (c) Section 6.01 (“Financial Statements and Other Information”)
and (d) Section 6.02 (“Notice of
Material Events”). In addition, the notice of default asserted that
Kyle Canyon was in default of Section 9.01(m) of the Kyle Canyon
Credit Agreement, due to certain cessations of the construction of Improvements
(as defined therein).  The 9.01(m) default
and breach of the Section 5.01 obligations constitute an Event of Default
for which no cure period exists, and which could result in the acceleration of
obligations under the Kyle Canyon Credit Agreement and the related Kyle Canyon
Guaranty.  In addition, the Sections
5.07, 6.01 and 6.02 defaults, if not cured as set forth in the Kyle Canyon
Credit Agreement, could result in the acceleration of obligations under the
Kyle Canyon Credit Agreement and the related Kyle Canyon Guaranty.  As a consequence of any such acceleration, if
the Administrative Agent, acting at the direction of the Required Lenders,
terminates the Limited Duration Waiver Agreement by giving notice to the
Borrower and the Guarantors, an Event of Termination shall exist.

 

3.               Section 21(a) of the Kyle
Canyon Guaranty requires that the Borrower deliver to the Kyle Canyon
Administrative Agent its audited annual financial statements without a “going
concern” qualification.  Breach of such
covenant constitutes and “Event of Default” under the Kyle Canyon Credit
Agreement, and, if not cured as set forth in the Kyle Canyon Credit Agreement,
could result in the acceleration of obligations under the Kyle Canyon Credit
Agreement and the related Kyle Canyon Guaranty. 
As a consequence of any such 

 

 

 

acceleration, if
the Administrative Agent, acting at the direction of the Required Lenders,
terminates the Limited Duration Waiver Agreement by giving notice to the
Borrower and the Guarantors, an Event of Termination shall exist.

 

4.               The Borrower is a Guarantor under the
South Edge Credit Agreement.  In
connection with the South Edge Credit Agreement, the Borrower provided the
South Edge Guaranty in favor of the South Edge Administrative Agent.   In connection with the South Edge Credit Agreement,
the Borrower provided the South Edge Guaranty in favor of the South Edge
Administrative Agent.  It constitutes an “Event
of Default” under Section 9.01(m) of the South Edge Credit Agreement
if the Borrower, as a Guarantor thereunder, does not meet its Parent Guarantor
Financial Covenants (as defined in the South Edge Credit Agreement), which
currently are the same covenants set forth in Section 8.22 of the Credit
Agreement.  On January 22, 2008, the
South Edge Administrative Agent provided South Edge with notice of this “Event
of Default” under Section 9.01(m) of the South Edge Credit
Agreement.  Such “Event of Default,” if
not cured as set forth in the South Edge Credit Agreement, could result in the
acceleration of obligations under the South Edge Credit Agreement and the
related South Edge Guaranty.  As a
consequence of any such acceleration, if the Administrative Agent, acting at
the direction of the Required Lenders, terminates the Limited Duration Waiver Agreement
by giving notice to the Borrower and the Guarantors, an Event of Termination
shall exist.

 

5.               Section 21(a) of the South Edge
Guaranty requires that the Borrower deliver to the South Edge Administrative
Agent its audited annual financial statements without a “going concern”
qualification.  Breach of such covenant
constitutes and “Event of Default” under the South Edge Credit Agreement.  Breach of such covenant constitutes and “Event
of Default” under the South Edge Credit Agreement, and, if not cured as set
forth in the South Edge Credit Agreement, could result in the acceleration of
obligations under the South Edge Credit Agreement and the related South Edge
Guaranty.  As a consequence of any such
acceleration, if the Administrative Agent, acting at the direction of the
Required Lenders, terminates the Limited Duration Waiver Agreement by giving
notice to the Borrower and the Guarantors, an Event of Termination shall exist.

 

6.               The Borrower is
a Guarantor under the SRAV Loan. 
Pursuant to Section 5.3 and Rider A of the SRAV Guaranty, the Borrower, as Guarantor, must meet the
obligations set forth under Section 8.22 of the Credit Agreement.  Failure to meet the obligations set forth in Section 5.3
and Rider A of the SRAV Guaranty constitute and “Event of Default” under Section 6.1(b) and
(c) of the SRAV Loan.  In addition,
under Section 6.1(c) and (x) of the SRAV Loan, certain of the
Credit Agreement Defaults (including failure to comply with corresponding
reporting requirements under the SRAV Guaranty) and the Borrowed Money Defaults
constitute an “Event of Default” under the SRAV Loan, which in turn,
constitutes a Credit Agreement Default. 
As a consequence thereof, if the Administrative Agent, acting at the
direction of the Required Lenders, terminates the Limited Duration Waiver
Agreement by giving notice to the Borrower and the Guarantors, an Event of
Termination shall exist.

 

 

 

7.               The Borrower is a Guarantor under the
Loan Agreement (the “First Bank Loan”), dated as of January 5, 2002, by
and between Kimball Hill Homes Texas, Inc. and First Bank &
Trust, a California state bank (“First Bank”). 
Under Section 6.01(B) of the First Bank Loan, the Credit
Agreement Defaults and the Borrowed Money Defaults constitute an “Event of
Default” thereunder.  As a consequence of
such “Event of Default,” First Bank may accelerate amounts due under the First
Bank Loan.  The total availability under
the First Bank Loan Agreement is $1,900,000. 
On January 15, 2008, the Company received notice from First Bank of
First Bank’s intention to accelerate obligations under the First Bank Loan on January 25,
2008 if the pending defaults under the Credit Agreement were not cured.

 

8.               Any item set forth in Schedule 1 or
Schedule 3 are hereby incorporated by reference into this Schedule 2.

 

 

 

SCHEDULE 3

 

MATERIAL AGREEMENT DEFAULTS

 

1.               The failure by the Borrower, as Guarantor
under the Kyle Canyon Credit Agreement, to meet Parent Guarantor Financial
Covenants set forth in the Kyle Canyon Credit Agreement constitutes an “Event
of Default” under Section 11.1.12 of Kyle Canyon’s Operating
Agreement.  If such an “Event of Default”
occurs, the remedies under the Kyle Canyon Operating Agreement would constitute
an Event of Default under the Credit Agreement. 
A potential remedy under the Kyle Canyon Operating Agreement would be
for the Kyle Canyon members or Kyle Canyon to purchase Kimball Hill Homes
Nevada, Inc.’s (“Kimball Hill Nevada”) (the Borrower’s subsidiary and a
Guarantor under the Credit Agreement) interest in Kyle Canyon at a price equal
to 80% of Kimball Hill Nevada’s capital contributions, which would constitute
an Event of Default under Section 8.7 of the Credit Agreement.  As a consequence thereof, if the
Administrative Agent, acting at the direction of the Required Lenders,
terminates the Limited Duration Waiver Agreement by giving notice to the
Borrower and the Guarantors, an Event of Termination shall exist.

 

2.               The failure by the Borrower, as Guarantor
under the South Edge Credit Agreement, to meet its Parent Guarantor Financial
Covenants set forth in the South Edge Credit Agreement constitutes an “Event of
Default” under Section 11.1.12 of South Edge’s Operating Agreement. If
such an “Event of Default” occurs, the remedies under the South Edge Canyon
Operating Agreement would constitute an Event of Default under the Credit
Agreement.  A potential remedy under the
South Edge Operating Agreement would be for the South Edge members or South
Edge to purchase Kimball Hill Nevada’s interest in South Edge at a price equal
to 80% of Kimball Hill Nevada’s capital contributions, which would constitute
an Event of Default under Section 8.7 of the Credit Agreement.  As a consequence thereof, acting at the
direction of the Required Lenders, terminates the Limited Duration Waiver
Agreement by giving notice to the Borrower and the Guarantors, an Event of
Termination shall exist.

 

3.               Any item set forth in Schedule 1 or
Schedule 2 are hereby incorporated by reference into this Schedule 3.

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