Document:

Exhibit
10.1

SUBSCRIPTION
AGREEMENT

SUBSCRIPTION
AGREEMENT (this “Agreement”) is made and entered into as of September
12, 2006 (the “Effective Date”), by and among Kimball Hill, Inc.,
an Illinois corporation (the “Corporation”) and Equity Investments III,
LLC, a Delaware limited liability company (the “Subscriber”).

W I T N E S S E T H:

WHEREAS, the
Corporation is authorized to issue up to 10,000,000 shares of common stock, no
par value, (the “Common Stock”), of which 3,885,746.545 shares were
issued and outstanding as of June 30, 2006;

WHEREAS, the
parties desire that the Subscriber subscribe for, and that the Corporation
issue to the Subscriber, an aggregate of 952,380 shares of Common Stock of the
Corporation, on the terms and conditions hereinafter provided.

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

1.     Subscription for Shares.  Subscriber hereby subscribes for nine hundred
fifty-two thousand three hundred eighty (952,380) shares of Common Stock (the “Shares”)
and agrees to pay one hundred nine million nine hundred ninety-nine thousand
eight hundred ninety dollars ($109,999,890.00) (“Subscriber’s Investment”)
for the Shares.  The subscription price
for the Shares shall be payable in full by the Subscriber concurrently with the
execution of this Agreement.

2.     Investment Representations of
Subscribers.

(a)           The Subscriber hereby acknowledges
that it is aware that the Shares have not been registered (i) under the
Securities Act of 1933, as amended (the “Securities Act”), (ii) under
the Investment Company Act of 1940, as amended, or (iii) under any similar
state laws.  The Subscriber further
understands and acknowledges that its representations and warranties contained
in this Section 2 may be relied upon by the Corporation as the basis for
the exemption of the Subscriber’s Shares from the registration requirements
under all such federal and state laws. 
The Subscriber further acknowledges that the Corporation will not have
and has no obligation to recognize any sale, transfer or assignment of all or
any part of its Shares to any person unless and until the provisions of this Section
2 have been fully satisfied or waived.

(b)           The Subscriber hereby acknowledges
that (i) it has such knowledge and experience in financial and business matters
that it is capable of evaluating the merits and risks of its investment in the Shares;
(ii) it is able to bear the complete loss of its investment in the

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Shares; and (iii) that no
guarantees have been made or can be made with respect to the future value, if
any, of the Shares, or the profitability or success of the Corporation’s
business.

(c)           The Subscriber has received and read the
financial information provided by the Corporation and has had an opportunity to
discuss the Corporation’s business, management and financial affairs with the
officers and other management personnel of the Corporation, and has had the
opportunity to review the Corporation’s operations and has had full access to
such other information concerning the Corporation as it has requested.  The Subscriber has also had the opportunity
to ask questions of and receive answers from the Corporation and its management
regarding the risks, terms and conditions of its investment in the Shares.  The Subscriber acknowledges that it has
conducted to its satisfaction an independent investigation of the financial
condition, results of operations, assets, liabilities and properties of the
Corporation and its Subsidiaries, and, in making its determination to proceed
with the transactions contemplated by this Agreement, the Subscriber has relied
on the results of its own independent investigation and the representations and
warranties of the Corporation expressly and specifically set forth in Section
3.

(d)           The Subscriber does hereby
acknowledge that it (i) has reviewed with its own tax advisors the federal,
state, local and foreign tax consequences of an investment in Shares and the
transactions contemplated by this Agreement, (ii) is relying solely on such
advisors and not on any statements or representations of the Corporation or any
of its agents, and (iii) understands that the Subscriber (and not the
Corporation) shall be responsible for its own tax liability that may arise as a
result of this investment in the Shares or the transactions contemplated by
this Agreement.

(e)           The Subscriber hereby represents and
warrants to the Corporation that:

(i)            the
Subscriber is duly organized and validly existing and is in good standing under
the laws of Delaware, with the requisite power and authority to execute and
deliver this Agreement and the Investor Rights Agreement of even date herewith
between the Corporation and the Subscriber (the “Investor Rights Agreement”),
to purchase the Shares hereunder and to perform its obligations hereunder;

(ii)           the
execution, delivery and performance of this Agreement and the Investor Rights
Agreement, and the purchase of the Shares by the Subscriber (x) has been duly
authorized by all requisite action and (y) except such as have been obtained,
no authorization, approval or consent of, 
or filing with, any court, governmental body, regulatory agency,
self-regulatory organization, or stock exchange or market or the stockholders
of the Subscriber is required to be obtained or made by the Subscriber.  This Agreement constitutes the legal, valid
and binding obligation of the Subscriber enforceable in accordance with its terms,
except as enforceability may be limited by the remedies applicable to
bankruptcy, insolvency, fraudulent conveyance, moratorium, reorganization or
similar laws relating to or affecting the enforcement of creditors’ rights or
by general equitable principles (whether considered in a proceeding in equity
or law);

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(iii)          The
execution, delivery and performance of this Agreement and the Investor Rights
Agreement and compliance with the provisions hereof and thereof by the
Subscriber does not conflict with, or result in a breach or violation of the
terms, conditions or provisions of, or constitute a default (or an event with
which the giving of notice or passage of time, or both could result in a
default) under, or result in the creation or imposition of any lien pursuant to
the terms of the organizational documents of the Subscriber, any statute, law
rule or regulation or any order judgment decree, indenture, mortgage, lease or
other agreement or instrument to which the Subscriber, or any of its
properties, is subject, except where such conflict, breach, default or
violation would not reasonably be expected to, individually or in the
aggregate, have a material adverse effect on the Subscriber;

(iv)          the
Subscriber is an “accredited investor” as that term is defined in Rule
501(a)(3) under the Securities Act;

(v)           the
Subscriber is acquiring the Shares for investment for its own account and not
with a view to distributing all or any part thereof in any transaction which
would constitute a “distribution” within the meaning of the Securities Act or a
violation of any other federal securities laws or any applicable state statute;
and

(vi)          the
Subscriber is aware that (A) none of the Shares have been registered under the
Securities Act and, except as provided in the Investor Rights Agreement, the
Corporation is under no obligation to file a registration statement with the
Securities and Exchange Commission with respect to any Shares, and (B) the
Shares must be held indefinitely unless they are subsequently registered under
the Securities Act or an exemption from such registration is available.  The Subscriber has been advised or is aware
of the provisions of Rule 144 promulgated under the Securities Act, which
permits limited resale of shares purchased in a private placement subject to
the satisfaction of certain conditions, including, among other things:  the availability of certain current public
information about the Corporation, the resale occurring not less than one year
after a party has purchased and paid for the security to be sold, the sale
being through an unsolicited “broker’s transaction” or in transactions directly
with a market maker (as said term is defined under the Exchange Act) and the
number of shares being sold during any three-month period not exceeding
specified limitations.

3.     Representations and Warranties of the
Corporation.  Except as disclosed in
a publicly available final registration statement, prospectus, report, form or
schedule filed since April 1, 2006, by the Corporation with the Securities and
Exchange Commission pursuant to the Securities Act or the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), and prior to the date hereof (the
“SEC Reports”), but excluding any risk factor disclosure contained in any such
SEC Reports under the heading “Risk Factors”, “Cautionary Note Regarding
Forward-Looking Statements” or “Cautionary
Factors That May Affect Future Results”,  the Corporation represents
and warrants to the Subscriber as follows:

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(a)           Organization and Standing.

(i)            Each
of the Corporation and each of the entities the Corporation owns one hundred
percent (100%) of the equity interests of or manages (a “Controlled
Subsidiary,” and together, the “Controlled Subsidiaries”) have been
duly incorporated or organized, and each of the Corporation and each Controlled
Subsidiary is validly existing and is in good standing under the laws of its
jurisdiction of incorporation or organization, with the requisite corporate
power and authority to own and lease property and to conduct its business as
presently conducted and is qualified as a foreign corporation in good standing
in all other jurisdictions where the ownership or leasing of its properties or
the conduct of its business requires such qualification, except where such
failure to qualify or have such power and authority could not reasonably be
expected to have a material adverse effect on the business, properties,
operations, financial condition or results of operations of the Corporation and
the Subsidiaries, taken as a whole, or the validity or enforceability of, or the
ability of the Corporation to perform its obligations under, this Agreement (“Material
Adverse Effect”).  The Corporation,
as of the date hereof, has no Controlled Subsidiaries other than as listed on Exhibit
A hereto.

(ii)           Each
of the entities the Corporation owns less than one hundred percent (100%) of
the equity interests of and does not manage (the “Noncontrolled
Subsidiaries”) have, to the actual knowledge of the Corporation’s Chief
Executive Officer, Chief Financial Officer, General Counsel and Controller (the
“Designated Officers”), been duly incorporated or organized, and, to the
actual knowledge of the Designated Officers, each of the Noncontrolled
Subsidiaries is validly existing and is in good standing under the laws of its
jurisdiction of incorporation or organization, with the requisite corporate
power and authority to own and lease property and to conduct its business as
presently conducted and is qualified as a foreign corporation in good standing
in all other jurisdictions where the ownership or leasing of its properties or
the conduct of its business requires such qualification, except where such
failure to qualify would not have a Material Adverse Effect.  The Corporation, as of the date hereof, has
no Noncontrolled Subsidiaries other than as listed on Exhibit B
hereto.  The Controlled Subsidiaries and
Noncontrolled Subsidiaries are referred to collectively herein as the “Subsidiaries”.

(b)           Capitalization.

(i)            The
authorized capital stock of the Corporation is as set forth in the recitals
hereto.  The outstanding shares have been
duly authorized and validly issued, and are fully paid and nonassessable.  Except as set forth on Exhibit C
hereto, there are no options, warrants or other rights to purchase any of the
Corporation’s capital stock.  As of the
Effective Date, and prior to giving effect to the Subscriber’s purchase of the
Shares hereunder, the Corporation will have no more than 3,928,131.545
outstanding shares of Common Stock.

(ii)           The
outstanding shares of capital stock or membership or partnership interests, as
the case may be, of each Controlled Subsidiary have been, where 

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applicable, duly authorized and validly issued, and are fully paid and
nonassessable.  There are no options,
warrants or other rights to purchase any of the shares of capital stock or
membership or partnership interests of the Controlled Subsidiaries.

(c)           Authorization.  The execution, delivery and performance of
the Investor Rights Agreement, this Agreement and the authorization, sale,
issuance and delivery of the Shares by the Corporation (x) has been duly
authorized by all requisite corporate action and (y) except such as have been
obtained, no authorization, approval or consent of, or filing with, any court,
governmental body, regulatory agency, self-regulatory organization, or stock
exchange or market or the stockholders of the Corporation is required to be
obtained or made by the Corporation, any of the Controlled Subsidiaries, or to
the actual knowledge of the Designated Officers, any of the Noncontrolled Subsidiaries.  This Agreement constitutes the legal, valid
and binding obligation of the Corporation enforceable in accordance with its
terms, except as enforceability may be limited by the remedies applicable to
bankruptcy, insolvency, fraudulent conveyance, moratorium, reorganization or
similar laws relating to or affecting the enforcement of creditors’ rights or
by general equitable principles (whether considered in a proceeding in equity
or law).

(d)           Corporate Power.  The Corporation has all requisite legal and
corporate power and authority to execute and deliver the Investor Rights
Agreement and this Agreement and to sell and issue the Shares hereunder.

(e)           Non-contravention.  The execution and delivery of the
Investor Rights Agreement and this Agreement by the Corporation and the
consummation by the Corporation of the transactions contemplated by the
Investor Rights Agreement and this Agreement do not and will not, with or
without the giving of notice or the lapse of time, or both, (i) result in any
violation of any provision of the articles of incorporation or by-laws or
similar instruments of the Corporation or any Controlled Subsidiary, (ii)
conflict with or result in a breach by the Corporation or any Controlled
Subsidiary of any of the terms or provisions of, or constitute a default under,
or result in the modification of, or result in the creation or imposition of
any lien, security interest, charge or encumbrance upon any of the properties
or assets of the Corporation or any Controlled Subsidiary pursuant to, any
indenture, mortgage, deed of trust or other agreement or instrument to which
the Corporation or any Controlled Subsidiary is a party or by which the
Corporation or any Controlled Subsidiary or any of their respective properties
or assets are bound or affected, in any such case which would have a Material
Adverse Effect, (iii) violate or contravene any applicable law, rule or
regulation or any applicable decree, judgment or order of any court, United
States federal or state regulatory body, administrative agency or other
governmental body having jurisdiction over the Corporation or any Controlled
Subsidiary or any of their respective properties or assets which would have a
Material Adverse Effect, or (iv) have any Material Adverse Effect on any permit,
certification, registration, approval, consent, license or franchise necessary
for the Corporation or any Controlled Subsidiary to own or lease and operate
any of its properties and to conduct any of its business or the ability of the
Corporation or any Controlled Subsidiary to make use thereof.

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(f)            Shares.  The Shares, when issued pursuant to the terms
of this Agreement, will be validly issued, fully paid and nonassessable, and
will be free of any liens or encumbrances whatsoever and with no restrictions
on the voting rights thereof and other incidents of beneficial ownership
pertaining thereto, in each case, other than pursuant to the Investor Rights
Agreement and the by-laws of the Corporation; provided,
however, that the Shares shall be
subject to restrictions on transfer under state and/or federal securities laws
and as set forth in the Investor Rights Agreement.  The Shares are not subject to any preemptive
rights or rights of first refusal, except as set forth in the Investor Rights
Agreement.

(g)           Title to Real and Personal
Property.

(i)            The
Corporation and the Controlled Subsidiaries have good and marketable title in
fee simple to, or have valid rights to lease or otherwise use, all items of
real and personal property material to the respective businesses of the
Corporation and the Controlled Subsidiaries, in each case free and clear of all
liens, encumbrances, claims and defects and imperfections of title (other than
in the case of those that do not materially interfere with the use made and proposed
to be made of such property by the Corporation and the Controlled
Subsidiaries), mortgaged properties and those that could not reasonably be
expected, individually or in the aggregate, to have a Material Adverse Effect.

(ii)           To
the actual knowledge of the Designated Officers, the Noncontrolled Subsidiaries
have good and marketable title in fee simple to, or have valid rights to lease
or otherwise use, all items of real and personal property material to the
respective businesses of the Noncontrolled Subsidiaries, in each case free and
clear of all liens, encumbrances, claims and defects and imperfections of title
(other than in the case of those that do not materially interfere with the use
made and proposed to be made of such property by the Noncontrolled
Subsidiaries), mortgaged properties and those that could not reasonably be
expected, individually or in the aggregate, to have a Material Adverse Effect.

(h)           Information Provided.

(i)            The
Corporation has timely filed all SEC Reports required to be filed under the
Exchange Act.  All SEC Reports complied
as to form, when filed, in all material respects, with all applicable
requirements of the Securities Act and the Exchange Act.

(ii)           As
of the date hereof, each of the Corporation’s representations and warranties
contained in Section 3 of this Agreement, and, as of its filing date, each
of the SEC Reports does not or did not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.

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(iii)          To
the actual knowledge of the General Counsel of the Corporation, the Corporation’s
written response to the Subscriber’s due diligence request and all documents
and information referenced therein and/or otherwise provided to the Subscriber
constitutes, in all material respects, a complete response to the Subscriber’s
due diligence request.

(i) No Material Change.  Except
as set forth in the SEC Reports, and except as disclosed by the Corporation on
its teleconference with investors on August 8, 2006 (such transcript of which
is publicly available), and except for the transaction expressly contemplated
hereby, since June 30, 2006:

(i)            there has been no material adverse
change in or affecting the business, properties, operations, financial
condition or in the results of operations of the Corporation and the
Subsidiaries, whether or not arising in the ordinary course of business;

(ii)           other than this Agreement and the
Investor Rights Agreement, there have been no transactions entered into by the
Corporation other than those in the ordinary course of business, which are
material with respect to the Corporation; and

(iii)          there has been no dividend or
distribution of any kind declared, paid or made by the Corporation on any class
of its capital stock.

(j) Absence of Certain Proceedings.  Except
as disclosed in the SEC Reports or on Schedule 3(j) hereto, there is no action,
suit, proceeding, inquiry or investigation before or by any court, public board
or body, or governmental agency pending or, to the actual knowledge of the
Chief Executive Officer, Chief Financial Officer, General Counsel and
Controller of the Corporation and any Controlled Subsidiary after due inquiry,
threatened against or affecting the Corporation or any Controlled Subsidiary
wherein an unfavorable decision, ruling or finding would have a Material
Adverse Effect; and to the best of the Corporation’s knowledge there is not
pending or contemplated any, and there has been no, investigation by the SEC
involving the Corporation or any director or officer of the Corporation.

(k) Liabilities.  Except as and to the
extent disclosed or reserved against in the financial statements of the
Corporation and the notes thereto included in the SEC Reports or on Schedule
3(k) hereto, neither the Corporation nor any Controlled Subsidiary has any
liability, debt or obligation, whether accrued, absolute, contingent or
otherwise, and whether due or to become due which, individually or in the
aggregate, are material to the Corporation and the Subsidiaries, taken as a
whole.  Subsequent to June 30, 2006 or as
otherwise disclosed in Schedule 3(k) hereto, neither the Corporation nor any
Controlled Subsidiary has incurred any liabilities, debts or obligations of any
nature whatsoever which are, individually or in the aggregate, material to the
Corporation and the Subsidiaries, taken as a whole, other than those incurred
in the ordinary course of its business and other than as disclosed in the SEC
Reports.

(l) Intellectual Property.  Except
as disclosed in the SEC Reports, each of the Corporation and each Controlled
Subsidiary (i) to the actual knowledge of the Chief Executive 

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Officer, Chief Financial Officer, General Counsel and Controller of the
Corporation and any Controlled Subsidiary, owns, or possesses adequate rights
to use, all patents, patent rights, inventions, trade secrets, know-how,
proprietary techniques, including processes and substances, trademarks, service
marks, trade names and copyrights described or referred to in the SEC Reports
or owned or used by it or which are necessary for the conduct of its business,
except for failure to own or possess any such rights as would not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect,
and (ii) has not received any written notice of any claim, that the conduct of
its business will conflict with any such rights of others which conflict or
claim is material to the business, properties, operations, financial condition
or results of operations of the Corporation and the Controlled Subsidiaries,
taken as a whole.

(m) Compliance with Law.

(i)            Neither the Corporation nor
any Controlled Subsidiary is in violation of or has any liability under any
applicable statute, law, rule, regulation, ordinance, decision or order of any
governmental agency or body or any court, domestic or foreign, including,
without limitation, those relating to the use, operation, handling,
transportation, disposal or release of hazardous or toxic substances or wastes
or relating to the protection or restoration of the environment or human
exposure to hazardous or toxic substances or wastes, except where such
violation or liability would not individually or in the aggregate reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect;

(ii)           to the actual
knowledge of the Designated Officers, no Noncontrolled Subsidiary is in
violation of or has any liability under any applicable statute, law, rule,
regulation, ordinance, decision or order of any governmental agency or body or
any court, domestic or foreign, including, without limitation, those relating
to the use, operation, handling, transportation, disposal or release of
hazardous or toxic substances or wastes or relating to the protection or
restoration of the environment or human exposure to hazardous or toxic
substances or wastes, except where such violation or liability would not
individually or in the aggregate reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect; and

(iii)          to the actual
knowledge of the Chief Executive Officer, Chief Financial Officer, General
Counsel and Controller of the Corporation and any Controlled Subsidiary, there
is no pending investigation which would reasonably be expected to lead to such
a claim.

(n) Tax Matters.  The Corporation and each Controlled
Subsidiary has timely filed all federal and material state and local income and
franchise tax returns required to be filed, and all such returns were true and
complete in all material respects.  The
Corporation and each Controlled Subsidiary has paid all taxes shown by such
returns to be due.  No tax deficiency has
been determined adversely to the Corporation or any Controlled Subsidiary which
has had (nor does the Corporation or any Controlled Subsidiary have any
knowledge of any audit or other proceeding by a taxing authority which, if
determined adversely to the Corporation or any 

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Controlled Subsidiary, might have) a Material Adverse
Effect.  All taxes that the Corporation
and the Controlled Subsidiaries are or were required by law to withhold or
collect have been duly withheld or collected and, to the extent required, have
been paid to the appropriate taxing authority. 
Except as with respect to each other, neither the Corporation nor any of
the Controlled Subsidiaries has any transferee or secondary liability for any tax
(whether by law, contractual agreement, tax sharing agreement or otherwise) or
any liability for any tax as a result of being a member of any affiliated,
consolidated, combined or unitary group. 
Neither the Corporation nor any of its Controlled Subsidiaries
has participated in any “reportable transaction” within the meaning of Treasury
Regulation Section 1.6011-4(b)(2), (3), (4) or (7).

(o) Investment Company.  Neither
the Corporation nor any Controlled Subsidiary is an “investment company” within
the meaning of such term under the Investment Company Act of 1940, as amended,
and the rules and regulations of the SEC thereunder.

(p)    ERISA.  Except for matters that would not reasonably
be expected to have a Material Adverse Effect, (a) each employee benefit plan
(as such term is defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”) maintained or sponsored by
the Corporation or Controlled Subsidiary has been maintained in material
compliance with all applicable laws, including but not limited to ERISA and the
Internal Revenue Code of 1986, as amended (the “Code”); (b) neither the
Corporation nor any Controlled Subsidiary has any material liability with
respect to any employee benefit plan which is subject to Title IV of ERISA; (c)
to the knowledge of the Corporation, no fact exists which could result in any
material excise tax or other penalty being imposed on the Corporation or any
Controlled Subsidiary under ERISA or the Code.

4.             Survival of Representations and Warranties.  The
representations and warranties of the Corporation hereunder shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of the Subscriber and shall survive delivery of, and payment for,
the Shares solely for purposes of Section 5 hereof (other than with respect to
fraud or willful misconduct):  (i)
indefinitely, in the case of the representations and warranties contained in
Section 3(a), 3(b), 3(c), 3(d), and 3(f); (ii) until the expiration of the
statute of limitations applicable to the matters covered thereby, in the case
of the representations and warranties contained in Section 3(n) and 3(p); and
(iii) until the close of business on the date that is eighteen months following
the Effective Date in all other cases. 
The obligations of the Corporation to indemnify and hold harmless the
Subscriber in respect of a breach of a representation or warranty shall
terminate when the applicable representation or warranty terminates pursuant to
the terms hereof.

5.             Indemnification.  The Corporation agrees to indemnify and hold
harmless each Subscriber from and against any and all claims, demands,
liabilities, losses, damages (including loss of Subscriber’s Investment and any
damages which could be deemed consequential damages; provided however, that consequential damages shall only be
included if such consequential damages are directly or indirectly suffered or
incurred in connection with, arising out of or resulting from or incident to
any inaccuracy or breach of any of the representations or warranties of the
Corporation as a result of fraud or willful misconduct and otherwise available 

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under common law), injuries, settlements, awards, fines, penalties,
deficiencies, assessments, judgments, remediations and costs, fees and expenses
(including reasonable attorney, consultant and expert fees and expenses) (“Losses”)
directly or indirectly suffered or incurred in connection with, arising out of,
or resulting from or incident to any inaccuracy or breach of any of the
representations or warranties of the Corporation under this Agreement; provided however, that, except in the case
of fraud or willful misconduct as referenced above, the maximum aggregate amount for which the Corporation shall be liable
for Losses pursuant to this Section 5 shall be the Subscriber’s Investment; further provided, that, except in the case
of fraud or willful misconduct as referenced above, the Subscriber shall not
seek, nor be entitled to, indemnification from the Corporation pursuant to this
Section 5 until the aggregate amount of losses incurred exceeds one million one
hundred thousand dollars ($1,100,000) (the “Indemnification Threshold Amount”).  Once the aggregate amount of such losses
exceeds the Indemnification Threshold Amount, then (i) the Indemnification
Threshold Amount, plus (ii) the full amount by which such losses exceed
the Indemnification Threshold Amount, plus (iii) the amount of all
future losses resulting from claims by the Subscriber shall be fully
reimbursable, subject to the limitations set forth in this Section 5.  The Subscriber acknowledges and agrees that
its sole and exclusive remedy against the Corporation with respect to any and
all Losses (other than Losses with respect to fraud or willful misconduct)
directly or indirectly suffered or incurred in connection with, arising out of,
or resulting from or incident to the subject matter of this Agreement and the
purchase of the Shares hereunder shall be pursuant to the provisions set forth
in this Section 5.

6.             Successors and Assigns.  Except as otherwise provided herein or in the
Investor Rights Agreement (it being understood that the terms of the Investor
Rights Agreement shall supersede this Agreement with respect to transferability
and assignment), the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, permitted assigns under the Investor Rights Agreement,
heirs, executors, and administrators of the parties hereto.  Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
by this Agreement.

7.             Governing Law.  This Agreement shall be governed in all
respects by the laws of the State of Illinois without regard to choice of laws
or conflict of laws provisions thereof.

8.             Consent to Jurisdiction.  Each party hereto hereby irrevocably agrees
that any suit, action, proceeding or claim against it arising out of or in any
way relating to this agreement or any of the related agreements, or any judgment
entered by any court in respect thereof, may be brought or enforced in the
state or federal courts located in Chicago, Illinois, and each party hereto
hereby irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the venue of any proceeding
brought in Chicago, Illinois and further irrevocably waives any claims that any
such proceeding has been brought in an inconvenient forum.

9.             Waiver of Jury Trial.  Each party hereto hereby expressly waives any
right to a trial by jury in any action or proceeding to enforce or defend any
right, power, or remedy under or in connection with this agreement or any of
the related agreements or under or in connection 

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with any
amendment, instrument, document, or agreement delivered or which may in the
future be delivered in connection herewith or therewith or arising from any
relationship existing in connection with this agreement or any related
agreement, and agree that any such action shall be tried before a court and not
before a jury.  The terms and provisions
of this section constitute a material inducement for the parties entering into
this agreement.

10.           Remedies.  Each of the parties to this Agreement will be
entitled to enforce its rights under this Agreement specifically, to recover
damages by reason of any breach of any provision of this Agreement and to
exercise all other rights existing in its favor.  The parties hereto agree and acknowledge that
money damages may not be an adequate remedy for any breach of the provisions of
this Agreement and that any party shall be entitled to immediate injunctive
relief or specific performance without bond or the necessity of showing actual
monetary damages in order to enforce or prevent any violations of the provisions
of this Agreement.

11.           Severability.  If any provision of this Agreement becomes or
is declared by a court of competent jurisdiction to be illegal, unenforceable,
or void, portions of such provision, or such provision in its entirety, to the
extent necessary, shall be severed from this Agreement and the balance of this
Agreement shall be enforceable in accordance with its terms as if such
provision had never been contained herein.

12.           Titles and Subtitles.  The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

13.           Entire Agreement.  This Agreement and the other documents
delivered pursuant hereto constitute the full and entire understanding and
agreement among the parties with regard to the subjects hereof and
thereof.  Subject to the provisions of Section 8.10 below, neither this
Agreement nor any term hereof may be amended, waived, discharged or terminated
other than by a written instrument signed by the party against whom enforcement
of any such amendment, waiver, discharge or termination is sought, unless
otherwise provided.

14.           Notices, Etc.  All notices and other communications required
or permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, return receipt requested, or otherwise
delivered by hand or by messenger, or by telecopier (facsimile) addressed as
follows:

	
  

  	
  If to the Corporation:

  	
  KIMBALL HILL, INC.

  
	
   

  	
   

  	
  5999 New Wilke Road

  
	
   

  	
   

  	
  Suite 504

  
	
   

  	
   

  	
  Rolling Meadows, Illinois 60008

  
	
   

  	
   

  	
  Attn: Chief Executive Officer

  
	
   

  	
   

  	
  Telephone No.: (847) 981-2981

  
	
   

  	
   

  	
  Facsimile No.: (847) 439-0875

  

 

 11
 

 

 

	
  

  	
  With a copy to:

  	
  KIMBALL HILL, INC.

  
	
   

  	
   

  	
  5999 New Wilke Road

  
	
   

  	
   

  	
  Suite 504

  
	
   

  	
   

  	
  Rolling Meadows, Illinois 60008

  
	
   

  	
   

  	
  Attn: Office of the General Counsel

  
	
   

  	
   

  	
  Telephone No.: (847) 981-2981

  
	
   

  	
   

  	
  Facsimile No.: (847) 981-2980

  
	
   

  	
   

  	
   

  
	
   

  	
  With a copy to:

  	
  KIRKLAND & ELLIS LLP

  
	
   

  	
   

  	
  200 East Randolph

  
	
   

  	
   

  	
  Chicago, Illinois 60601

  
	
   

  	
   

  	
  Attn: Robert M. Hayward

  
	
   

  	
   

  	
  Telephone No.: (312) 861-2133

  
	
   

  	
   

  	
  Facsimile No.:  (312) 861-2200

  
	
   

  	
   

  	
   

  
	
   

  	
  If to the Subscriber:

  	
  EQUITY INVESTMENTS III, LLC

  
	
   

  	
   

  	
  8400 Normandale Lake Blvd. Ste.
  250

  
	
   

  	
   

  	
  Minneapolis, MN 55437

  
	
   

  	
   

  	
  Attn: Laura Mollet

  
	
   

  	
   

  	
  Telephone No.:
  (952) 857-6911

  
	
   

  	
   

  	
  Facsimile No.:  (952) 857-6949

  
	
   

  	
   

  	
   

  
	
   

  	
  With a copy to:

  	
  EQUITY INVESTMENTS III, LLC

  
	
   

  	
   

  	
  7501 Wisconsin Avenue, Suite 900

  
	
   

  	
   

  	
  Bethesda, MD 20814

  
	
   

  	
   

  	
  Attn: Tad MacDonnell

  
	
   

  	
   

  	
  Telephone No.: (301) 215-6215

  
	
   

  	
   

  	
  Facsimile No.:  (301) 215-7210

  
	
   

  	
   

  	
   

  
	
   

  	
  With a copy to:

  	
  LATHAM & WATKINS LLP

  
	
   

  	
   

  	
  233 S. Wacker Drive, Suite 5800

  
	
   

  	
   

  	
  Chicago, Illinois 60606

  
	
   

  	
   

  	
  Attn: Richard S. Meller

  
	
   

  	
   

  	
  Telephone No.: (312) 876-6521

  
	
   

  	
   

  	
  Facsimile No.:  (312) 993-9767

  

 

The Corporation or the Subscriber may change its
address for notices hereunder by a notice given pursuant to this Section
14.  Unless specifically stated
otherwise, if notice is provided by mail, it shall be deemed given on the third
business day next succeeding the day on which it is sent if sent by registered
or certified mail, if notice is delivered by hand or by messenger, it shall be
deemed given upon actual delivery, and if notice is given by facsimile, it
shall be deemed given upon facsimile confirmation that such notice was
received.

15.           Dispute Resolution Fees.  If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable 

 12
 

 

attorney’s fees, costs, and disbursements in addition to any other
relief to which such party may be entitled.

16.           Execution in Counterparts.  This Agreement may be executed in any number
of counterparts and signatures may be delivered by facsimile, each of which may
be executed by less than all parties, each of which shall be enforceable
against the parties actually executing such counterparts, and all of which
together shall constitute one instrument.

17.           Expenses.  The Corporation and the Subscriber shall each
be responsible for their respective expenses that they incur in connection with
this Agreement (including, without limitation, the expenses associated with all
other agreements and documentation necessary in connection with the execution
and delivery of this Agreement and the issuance of the shares of Common Stock).

18.           No
Strict Construction.  The language
used in this Agreement shall be deemed to be the language chosen by the parties
hereto to express their mutual intent, and no rule of strict construction shall
be applied against any party.

[Signature
pages to follow.]

 13

 

IN WITNESS
WHEREOF, the undersigned have executed this Subscription Agreement as of the
day and year first above written.

	
   

  	
  CORPORATION:

  
	
   

  	
   

  	
   

  
	
   

  	
  KIMBALL HILL, INC.,

  
	
   

  	
  an Illinois corporation

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ David K. Hill

  	
   

  
	
   

  	
  Name:

  	
   David K. Hill

  	
   

  
	
   

  	
  Title:

  	
   Chairman and Chief Executive Officer

  	
   

  
					

 

(Signature Page to Subscription
Agreement)

 

 

	
  

  	
  SUBSCRIBER:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  EQUITY INVESTMENTS III, LLC

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Tad MacDonnell

  	
   

  
	
   

  	
  Name:

  	
   Tad MacDonnell

  	
   

  
	
   

  	
  Title:

  	
   Vice PresidentExhibit
10.2

KIMBALL
HILL, INC.

INVESTOR RIGHTS AGREEMENT

September
12, 2006

 

TABLE OF
CONTENTS

	
  1.

  	
  Definitions

  	
   

  	
  1

  
	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
  Effective Date

  	
   

  	
  5

  
	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
  Board of Directors

  	
   

  	
  5

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  3.1

  	
  Board Composition

  	
   

  	
  5

  
	
   

  	
  3.2

  	
  Expiration

  	
   

  	
  5

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
  Protective Provisions.

  	
   

  	
  5

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.1

  	
  Required Investor Approval

  	
   

  	
  5

  
	
   

  	
  4.2

  	
  Board Review and Approval

  	
   

  	
  6

  
	
   

  	
  4.3

  	
  Affiliate Transactions.

  	
   

  	
  7

  
	
   

  	
  4.4

  	
  Expiration of Protective Provisions

  	
   

  	
  9

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
  Information Rights

  	
   

  	
  9

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  5.1

  	
  Financial Information

  	
   

  	
  9

  
	
   

  	
  5.2

  	
  Confidentiality.

  	
   

  	
  10

  
	
   

  	
  5.3

  	
  Termination of Rights

  	
   

  	
  11

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.

  	
  Investor Rights

  	
   

  	
  11

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.1

  	
  Preemptive Rights

  	
   

  	
  11

  
	
   

  	
  6.2

  	
  Drag Along and Tag Along Rights

  	
   

  	
  13

  
	
   

  	
  6.3

  	
  Termination of Investor Rights

  	
   

  	
  14

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  7.

  	
  Right of First Refusal

  	
   

  	
  14

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  7.1

  	
  Company and Stockholder Right

  	
   

  	
  14

  
	
   

  	
  7.2

  	
  Termination of Right of First Refusal

  	
   

  	
  15

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8.

  	
  Restrictions on Transferability; Registration Rights

  	
   

  	
  15

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  8.1

  	
  Restrictions

  	
   

  	
  15

  
	
   

  	
  8.2

  	
  Demand Registrations

  	
   

  	
  16

  
	
   

  	
  8.3

  	
  Company Registration

  	
   

  	
  19

  
	
   

  	
  8.4

  	
  Registration Procedures

  	
   

  	
  20

  
	
   

  	
  8.5

  	
  Information by Investor

  	
   

  	
  21

  
	
   

  	
  8.6

  	
  Indemnification

  	
   

  	
  22

  

 

 

 

	
  

  	
  8.7

  	
  Expenses of Registration

  	
   

  	
  24

  
	
   

  	
  8.8

  	
  Rule 144 Reporting

  	
   

  	
  24

  
	
   

  	
  8.9

  	
  Transfer of Registration Rights

  	
   

  	
  25

  
	
   

  	
  8.10

  	
  Limitations on Subsequent Registration Rights

  	
   

  	
  25

  
	
   

  	
  8.11

  	
  Procedure for Underwriter Cutbacks

  	
   

  	
  25

  
	
   

  	
  8.12

  	
  Lock-up Provisions

  	
   

  	
  26

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  9.

  	
  Miscellaneous

  	
   

  	
  26

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  9.1

  	
  Governing Law

  	
   

  	
  26

  
	
   

  	
  9.2

  	
  Transfers; Successors and Assigns

  	
   

  	
  26

  
	
   

  	
  9.3

  	
  Entire Agreement

  	
   

  	
  27

  
	
   

  	
  9.4

  	
  Notices, Etc.

  	
   

  	
  27

  
	
   

  	
  9.5

  	
  Delays or Omissions

  	
   

  	
  29

  
	
   

  	
  9.6

  	
  Dispute Resolution Fees

  	
   

  	
  29

  
	
   

  	
  9.7

  	
  Counterparts

  	
   

  	
  29

  
	
   

  	
  9.8

  	
  Severability

  	
   

  	
  29

  
	
   

  	
  9.9

  	
  Titles and Subtitles

  	
   

  	
  29

  
	
   

  	
  9.10

  	
  Amendment and Waiver

  	
   

  	
  29

  
	
   

  	
  9.11

  	
  Rights of Investors

  	
   

  	
  29

  
	
   

  	
  9.12

  	
  Aggregation of Stock

  	
   

  	
  30

  
	
   

  	
  9.13

  	
  No Strict Construction

  	
   

  	
  30

  

 

 

INVESTOR RIGHTS AGREEMENT

This Investor Rights
Agreement (the “Agreement”)
is made as of September 12, 2006, by and among Kimball Hill, Inc.,
an Illinois corporation (the “Company”)
and Equity Investments III, LLC, a Delaware limited liability company (“Equity Investments”).

RECITALS

WHEREAS, the Company and
Equity Investments have entered into a Subscription Agreement (the “Subscription Agreement”) of even
date herewith, pursuant to which the Company wants to sell to Equity
Investments and Equity Investments wants to purchase from the Company shares of
the Company’s Common Stock;

WHEREAS, as a condition
to Equity Investments’ obligation to purchase shares of the Company’s Common
Stock under the Subscription Agreement, the Company and Equity Investments have
agreed to enter into this Agreement in order to provide for matters pertaining
to the management and corporate governance of the Company, including the
composition of the Board, and to impose certain restrictions and obligations
on, and grant certain rights to Equity Investments as more specifically set
forth herein (including, without limitation, certain protective provisions,
certain rights to receive information pertaining to the Company, certain
preemptive rights and certain rights to register shares of the Company’s Common
Stock); and

WHEREAS, the Company
wants to induce Equity Investments to purchase shares of the Company’s Common
Stock pursuant to the Subscription Agreement by agreeing to the terms and
conditions set forth herein.

NOW, THEREFORE, in consideration
of the foregoing and the mutual covenants contained herein and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:

1.             Definitions.

1.1           As
used in this Agreement, the following terms have the following respective
meanings:

“Affiliate”
of any Person means any other Person which directly or indirectly controls or
is controlled by, or is under direct or indirect common control with, the
referent Person.  For purposes of Section 4.3, Affiliates shall be
deemed to include, with respect to any Person, any other Person (1) which
beneficially owns or holds, directly or indirectly, 10% or more of any class of
the voting stock of the referent Person, (2) of which 10% or more of the
voting stock is beneficially owned or held, directly or indirectly, by the
referenced Person or (3) with respect to an individual, any immediate
family member of such Person.  For purposes of this definition, “control”
of a Person shall mean the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise.

“Board” means the board of
directors of the Company.

 1
 

 

“Closing”
refers to the date hereof.

“Commission” means the Securities
and Exchange Commission or any other federal agency at the time administering
the Securities Act.

“Common Stock”
means the common stock of the Company.

“Controlled
Affiliate” means any Affiliate of the Investor (i) of which 50% or more of
the voting interests are beneficially owned or held, directly or indirectly, by
the Investor or (ii) which is under direct or indirect common control with
Investor by a Person which beneficially owns or holds, directly or indirectly,
50% or more of the voting interests of both the Affiliate and the Investor.

“Controlling
Affiliate” means (i) the sole member of Equity Investments on September 12,
2006 (“Parent”) and (ii) any Person that, directly or indirectly, owns
or has acquired 50% or more of the voting interests or all or substantially all
of the assets of, or has otherwise gained control of, Parent.

“Exchange Act” means the Securities
Exchange Act of 1934, as amended, or any similar successor federal statute, and
the rules and regulations thereunder, all as the same shall be in effect from
time to time.

“Investor” means (i) Equity
Investments, so long as Equity Investments is holding Registrable Securities,
and (ii) any other Person holding Registrable Securities to whom the rights
under this Agreement have been transferred in accordance with Sections 8.9 and
9.2 hereof.

“Investor
Shares” shall mean the 952,380 shares of Common Stock purchased by the
Investor pursuant to the Subscription Agreement.

“IPO” means the first public
offering of the Common Stock of the Company (or its successor) to the general
public that is affected pursuant to a registration statement filed with, and
declared effective by, the Commission under the Securities Act.

“Note Indenture”
refers to that certain Indenture, dated as of December 19, 2005, by and among
the Company, the Guarantors named therein and U.S. Bank National Association,
pursuant to which the Company issued $203,000,000 101⁄2% Senior Subordinated
Notes due 2012.

“Other Stockholders” means Persons
other than the Investor who, by virtue of agreements with the Company, are
entitled to include their securities in certain registrations hereunder.

“Permitted
Holder” means (i) David K. Hill, Diane G. Hill, their immediate family
members (as defined by the New York Stock Exchange’s listing requirements) or
the respective spouses and former spouses (including widows and widowers),
heirs or lineal descendants of any of the foregoing; (ii) an estate, trust
(including a revocable trust, declaration of trust or a voting trust),
guardianship, other legal representative relationship or custodianship for the
primary benefit of one or more individuals described in clause (i) above or
controlled by 

 2
 

 

one or more individuals
described in clause (i) above; (iii) a corporation, partnership, limited
liability company, foundation, charitable organization or other entity if a
majority of the voting power and, if applicable, a majority of the value of the
equity ownership of such corporation, partnership, limited liability company,
foundation, charitable organization or other entity is directly or indirectly
owned by or for the primary benefit of one or more individuals or entities
described in clauses (i) or (ii) above; and (iv) a corporation, partnership,
limited liability company, foundation, charitable organization or other entity
controlled directly or indirectly by one or more individuals or entities
described in clauses (i), (ii) or (iii) above.

“Person”
means any individual, corporation, partnership, limited liability company,
joint venture, incorporated or unincorporated association, joint-stock company,
trust, unincorporated organization or government or other agency or political
subdivision thereof or other entity of any kind.

“Pro Rata Portion” means the ratio
that (x) the sum of the number of shares of the Company’s Common Stock held by
the Investor immediately prior to the issuance of New Securities, assuming full
exercise and/or conversion of all Company securities (including options,
warrants, stock units and similar instruments) exercisable and/or convertible
into the Company’s Common Stock then held by such Investor, bears to (y) the
sum of the total number of shares of the Company’s Common Stock then
outstanding, assuming full exercise and/or conversion of all Company securities
(including options, warrants, stock units and similar instruments) exercisable
and/or convertible into the Company’s Common Stock then outstanding.

The terms “register”, “registered” and “registration” refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.

“Registration
Blackout Period” shall mean a period of time declared by the Company, not
to exceed 120 days, during which the Investor may not exercise its registration
rights under Section 8 of this Agreement because of the occurrence of material
developments that would otherwise be required to be disclosed in the
registration statement.

“Registration Expenses” shall mean
all expenses incurred by the Company in complying with a registration for the
Investor pursuant to Sections 8.2, and 8.3 hereof, including, without
limitation, all registration, qualification, listing and filing fees, printing
expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, and the
expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Company which shall
be paid in any event by the Company), but shall not include Selling Expenses.

“Registrable Securities” shall mean
(i) all Investor Shares and (ii) any Common Stock of the Company issued as a
dividend or other distribution with respect to or in exchange for or in
replacement of the shares referenced in clause (i) above; provided,
however, that shares of Common Stock (including the Investor Shares)
or other securities shall cease to be Registrable Securities upon (A) their
registration under the Securities Act, (B) their sale to the public either
pursuant to an effective registration statement under the Securities Act or
Rule 144, 

 3
 

 

(C) their sale in a
private transaction, or (D) their eligibility for sale without restriction
under Rule 144 within any ninety- (90-) day period.

“Restricted Securities” shall mean
the securities of the Company required to bear the legend set forth in Section
8.1(b) hereof.

“Rule 144” means Rule 144 as
promulgated by the Commission under the Securities Act, as such Rule may be
amended from time to time, or any similar successor rule that may be
promulgated by the Commission.

“Rule 145” means Rule 145 as
promulgated by the Commission under the Securities Act, as such Rule may be
amended from time to time, or any similar successor rule that may be
promulgated by the Commission.

“Securities Act” shall mean the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.

“Selling Expenses” shall mean all
underwriting discounts, stock transfer taxes, fees and disbursements of legal
counsel for the Investor and any other holders registering securities in any
given registration, and selling commissions applicable to the securities
registered by the Investor.

“Shares” means the Company’s Common Stock, including the
Investor Shares, and any other equity securities of the Company.

“Significant
Subsidiary” shall mean a subsidiary of the Company meeting the conditions
set forth in Rule 1-02(w) of Regulation S-X.

“Subsidiary”
shall have the meaning set forth in the Note Indenture.

1.2           The
following terms shall have the meanings defined for such terms in the Sections
set for below:

	
  Defined Term

  	
   

  	
  Section

  
	
   

  	
   

  	
   

  
	
  Affiliate
  Transaction

  	
   

  	
  Section 4.3(a)

  
	
  Agreement

  	
   

  	
  Preamble

  
	
  Company

  	
   

  	
  Preamble

  
	
  Equity
  Investments

  	
   

  	
  Preamble

  
	
  Excluded
  Securities

  	
   

  	
  Section 6.1(d)

  
	
  Indemnified
  Party

  	
   

  	
  Section 8.6(c)

  
	
  Indemnifying Party

  	
   

  	
  Section 8.6(c)

  
	
  Lock-up Period

  	
   

  	
  Section 8.12

  
	
  New Securities

  	
   

  	
  Section 6.1(a)

  
	
  Other Shares

  	
   

  	
  Section 8.11

  
	
  Right of First
  Refusal

  	
   

  	
  Section 7.1

  
	
  Subscription
  Agreement

  	
   

  	
  Recitals

  

 

 4
 

 

2.             Effective
Date.  For purposes of Equity
Investments’ income recognition only, the effective date of this Agreement
shall be September 1, 2006.

3.             Board
of Directors.

3.1           Board
Composition.

(a)           As
of the Closing, the Board shall be comprised of eight (8) members as follows:
David K. Hill, Isaac Heimbinder, C. Kenneth Love, Larry H. Dale, Kent W.
Colton, Roy Humphreys, Bruce I. McPhee and Greg Schultz.

(b)           From
and after the Closing and prior to the IPO, the Investor shall have the right
to designate one (1) member of the Board. 
After the consummation of the IPO, the Company will use its reasonable
best efforts to nominate one (1) director designated by the Investor for
election by the Company’s stockholders at their annual meeting.

(c)           Any
designation made by the Investor pursuant to Section 3.1(b) shall only be made
after consultation with the Company’s Chairman and Chief Executive
Officer.  Such designated member shall
meet any and all minimum criteria applicable to all of the Company’s director
nominees.

(d)           If
the Investor fails to designate a representative to fill a directorship
pursuant to the terms of this Section 3, the election of an individual to such
directorship shall be accomplished by the Board in accordance with the Company’s
bylaws and applicable law until such time as the Investor exercises such
designation right.

3.2           Expiration.  The provisions of this Section 3 shall expire
at such time as the Investor no longer holds ten percent (10%) or more of the
issued and outstanding Common Stock.

4.             Protective
Provisions.

4.1           Required
Investor Approval.  The Company hereby
covenants and agrees that it will not, without the prior written approval of
the Investor, do or commit to do any of the following actions (either directly
or by amendment, merger, consolidation or otherwise):

(a)           prior
to and after the consummation of the IPO, neither the Company nor any
Subsidiary will incur any indebtedness for borrowed money or grant, create or
permit the imposition of any lien, charge, security interest or other
encumbrance upon any of the assets or properties of the Company or any
Subsidiary or guaranty or provide surety for the obligations of any third party
with a value greater than $100,000,000, other than as permitted under the Note
Indenture, as amended or supplemented from time to time, and/or other
indentures entered into by the Company with respect to new senior or
subordinated public debt;

 5
 

 

(b)           prior
to the IPO,

(i)            amend
or modify the certificate of incorporation or by-laws of the Company;

(ii)           voluntarily
liquidate, wind-up, dissolve or commence any bankruptcy, insolvency,
reorganization, debt arrangement or other case or proceeding under any
bankruptcy or insolvency law or make a general assignment for the benefit of
creditors of the Company or a Significant Subsidiary;

(iii)          sell
all of the Company or any Significant Subsidiary, in a single transaction or in
a series of related transactions, whether by sale of equity interests, merger
(other than a reincorporation merger or a merger in which the Company or such
Significant Subsidiary is the surviving entity and no change of control occurs
as a result of such merger), or the sale or disposition of all or substantially
all of the assets of the Company or any Significant Subsidiary, in each case
for a value less than 1.5x the Company’s or such Significant Subsidiary’s book
value (measured as of the end of the most recently completed fiscal quarter);
and

(c)           after
the consummation of the IPO, amend or modify the certificate of incorporation
or by-laws of the Company in a manner adverse to the Investor’s rights as a
holder of Common Stock.

4.2           Board
Review and Approval.  The Company
shall not take any of the following actions prior to or after the consummation
of the IPO unless, prior to taking such action, the
action was submitted to the Board for review and was approved by the Board in
accordance with the Company’s by-laws:

(a)           sell
all of the Company, whether by sale of equity interests, merger or the sale or
other disposition of all or substantially all of the assets of the Company;

(b)           make
any acquisitions of land in a single transaction or series of related
transactions by the Company or any Subsidiary in excess of $50,000,000;

(c)           make
any payment on account of, or set aside any assets for a sinking or other
analogous fund for, the purchase, redemption, defeasance, retirement or other
acquisition of any equity interest of the Company, except (1) redemptions from
officers, directors or employees or former officers, directors or employees (or
their transferees, estates or beneficiaries under their estates), upon their
death, disability, retirement, severance or termination of employment or
service and (2) repurchases of equity interests deemed to occur upon the
exercise of stock options if the equity interests represent a portion of the
exercise price thereof and repurchases of equity interests deemed to occur upon
the withholding of a portion of the equity interests issued, granted or awarded
to an employee, director or consultant in respect of the payment of taxes
payable by such employee, director or consultant upon such issuance, grant or
award;

 6
 

 

(d)           voluntarily
liquidate, wind-up, dissolve or commence any bankruptcy, insolvency,
reorganization, debt arrangement or other case or proceeding under any
bankruptcy or insolvency law or make a general assignment for the benefit of
creditors of the Company;

(e)           settle
any litigation or similar action which is specifically disclosed in the Company’s
filings with the Commission;

(f)            engage
in any business other than a “Permitted Business” (as defined in the Note
Indenture);

(g)           increase
the size of the Board of the Company beyond nine (9) directors;

(h)           subject
to Section 6.1, issue any stock in connection with any business combination or
acquisition transaction;

(i)            subject
to Section 6.1, issue any stock to financial institutions, commercial lenders,
brokers or finders or any similar party, or their respective designees, in
connection with the incurrence or guarantee of indebtedness by the Company;

(j)            declare
any cash dividends made payable to Company stockholders; and

(k)           amend
or modify the certificate of incorporation or by-laws of the Company.

4.3           Affiliate
Transactions.

(a)           The
Company shall not directly or indirectly, in one transaction or in a series of
related transactions, sell, lease, transfer or otherwise dispose of any of its
assets to, or purchase any assets from, or enter into any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate involving aggregate consideration in excess of $120,000 (an “Affiliate
Transaction”), unless:

(i)            such
Affiliate Transaction is on terms that are not materially less favorable to the
Company than those that may have been obtained in a comparable transaction at
such time on an arm’s-length basis by the Company from a Person that is not an
Affiliate of the Company; and

(ii)           the
Company delivers to the Investor:

(A)          with
respect to any Affiliate Transaction involving aggregate value in excess of
$10,000,000, an Officers’ Certificate certifying that such Affiliate
Transaction complies with clause (1) above and either (i) if there are one or
more members of the Board Company who qualify as independent directors, a
Secretary’s Certificate which sets forth and authenticates a resolution that
has been adopted by the Board and a majority of the independent directors of
the Company approving such Affiliate Transaction or (ii) a written opinion or
appraisal of the types described in clause (b) below; and

 7
 

 

(B)           with
respect to any Affiliate Transaction involving aggregate value of $25,000,000
or more, the certificates described in the preceding clause (a) and (x) a
written opinion as to the fairness of such Affiliate Transaction to the Company
from a financial point of view or (y) a written appraisal supporting the value
of such Affiliate Transaction, in either case, issued by an independent
financial advisor.

(b)           The
foregoing restrictions set forth in this Section 4.3 shall not apply to:

(i)            transactions
exclusively between or among (a) the Company and one or more Subsidiaries or
(b) Subsidiaries or entities that become Subsidiaries as a result of such
transaction; provided, in each case, that no Affiliate of the Company (other
than another Subsidiary) owns equity interests of any such Subsidiary;

(ii)           reasonable
director, officer, employee and consultant compensation (including bonuses) and
other benefits (including retirement, health, stock and other benefit plans),
including compensation and benefits consistent with past practice, and
indemnification arrangements;

(iii)          loans
and advances permitted by clause (3) of the definition of “Permitted
Investments” (as defined in the Note Indenture);

(iv)          any
agreement in effect as of December 19, 2005 or any extension, amendment or
modification thereto (so long as any such extension, amendment or modification
satisfies the requirements set forth in clause (1) of the first paragraph
above) or any transaction contemplated thereby;

(v)           any
transaction with a Person that would otherwise constitute an Affiliate
Transaction solely because the Company or a Subsidiary owns an equity interest
in or otherwise controls such Person; provided, however, that no Affiliate of
the Company or any of its Subsidiaries other than the Company or a Subsidiary
shall have a beneficial interest in such Person;

(vi)          Restricted
Payments of the type described in clause (1), (2) or (4) of the definition of “Restricted
Payment” (as defined in the Note Indenture) and which are made in accordance
with Section 4.08 of the Note Indenture; or

(vii)         issuances
or sales of Qualified Equity Interests (as defined in the Note Indenture) by
the Company to an Affiliate.

 8
 

 

4.4           Expiration
of Protective Provisions.  The
provisions set forth in this Section 4 shall expire at such time as the
Investor no longer holds ten percent (10%) or more of the issued and outstanding
Common Stock; provided, however, that that
Investor agrees to terminate the provisions set forth in this Section 4 in
connection with the IPO if such provisions are inconsistent with the rules of the principal exchange or market in which
the Common Stock will be listed in connection with the IPO; and provided further that if the managing underwriter(s) in
the IPO concludes that the continuation of any of such provisions following the
IPO will adversely affect the
marketability of the IPO, the Investor shall consult in good faith with the
managing underwriter(s) and the Company to make appropriate deletions or
modifications to such provisions to ensure the marketability of the IPO.

5.             Information
Rights.

5.1           Financial
Information.  The Company will furnish
to the Investor the following reports or information:

(a)           As
soon as practicable after the end of each fiscal year beginning with fiscal
year 2006, and in any event within ninety (90) days thereafter, consolidated
balance sheets of the Company and its Subsidiaries, if any applicable
Subsidiaries, as of the end of such fiscal year, and consolidated statements of
income and cash flows of the Company and its Subsidiaries, if any applicable
Subsidiaries, for such year, prepared in accordance with U.S. generally
accepted accounting principles consistently applied and setting forth in each
case in comparative form the figures for the previous fiscal year, all in
reasonable detail and certified by independent public accountants of national
standing selected by the Company;

(b)           As
soon as practicable, but in any event within forty-five (45) days after the end
of each fiscal quarter of the Company beginning with the first (1st) quarter of fiscal 2007, consolidated
balance sheets of the Company and its Subsidiaries, if any applicable
Subsidiaries, as of the end of such quarterly period, consolidated statements
of income of the Company and its Subsidiaries, if any applicable Subsidiaries,
for such quarterly periods and consolidated statements of cash flows of the Company
and its Subsidiaries, if any applicable Subsidiaries, on a year-to-date basis
through the end of such quarterly period, prepared in accordance with U.S.
generally accepted accounting principles consistently applied and setting forth
in comparative form the income and cash flow figures for the corresponding
periods of the previous fiscal year and consolidated balance sheet figures as
of the end of the previous fiscal year, subject to changes resulting from
normal year-end audit adjustments, all in reasonable detail and certified by
the principal financial or accounting officer of the Company, except such
financial statements need not contain the notes required by U.S. generally
accepted accounting principles;

(c)           Within
two (2) business days after the end of the calendar month ended September 30,
2006, and as soon as practicable, but in any event within thirty (30) days
after the end of each other calendar month which is not the last month of a
fiscal quarter, beginning with the first (1st) quarter of fiscal 2007, a good faith estimate of the
net income of the Company for such month, calculated in accordance with U.S.
generally accepted accounting principles (except such estimate need not contain
the notes required by U.S. generally accepted accounting principles) and
subject to normal revision and adjustment; and

 9
 

 

(d)           Within
two (2) business days after the end of each fiscal quarter, beginning with the
first (1st) quarter of
fiscal 2007, a good faith estimate of the net income of the Company for such
quarterly period, calculated in accordance with U.S. generally accepted
accounting principles (except such estimate need not contain the notes required
by U.S. generally accepted accounting principles) and recognized to be
preliminary and subject to normal revision.

Investor acknowledges and agrees that the financial information
provided pursuant to Sections 5.1(c) and 5.1(d) above is not prepared with a
view to public disclosure and not prepared with a view to compliance with
published guidelines of the Commission or any other regulatory or financial
body.

5.2           Confidentiality.

(a)           The Investor agrees, and agrees to cause its Affiliates, to at all
times hold in confidence and keep secret and inviolate all of the Company’s
confidential information, including, without limitation, all unpublished
matters relating to the trade secrets, specifications, designs, plans, data,
supplier names and information, prices and terms, documents, reports, financial
statements and records and employee records and data of the Company (regardless
of whether such information is marked as proprietary or confidential or is
written or oral), which the Investor or any such Affiliates may or hereafter
come to know or derive from such confidential information, and will not disclose to any other Person
any of the confidential information without the Company’s prior written
consent; provided, however, that, the Investor
and its Affiliates may disclose any such information (i) to the extent required
by applicable law or legal process, (ii) to its representatives and agents who
need to know the information contained in the confidential materials and who
the Investor or its Affiliate inform of the confidential nature of such
information, (iii) in the event such confidential information was or becomes generally
available to the public other than as a result of a disclosure by the Investor,
its Affiliates, or any representatives thereof, or (iv) in the event such
confidential information was or becomes available to the Investor, an Affiliate
or any representative thereof on a nonconfidential basis from a source other
than the Company or its representatives (provided that such source is not bound
by a confidentiality obligation to the Company).   In the case of any disclosure permitted by
subparagraph (i) above,  the Investor
shall use reasonable efforts (to the extent not prohibited by any applicable
law, court order or other legitimate governmental authority) to provide the
Company with prompt advance notice of such disclosure so that the Company shall
have the opportunity if it so desires to seek a protective order or other
appropriate remedy and, in connection with any disclosure required by the
Commission or the rules of or any stock exchange to which the Investor or any
Affiliate of the Investor is subject, the Investor shall reasonably cooperate,
at the Company’s expense, with the Company’s efforts to obtain confidential
treatment for such disclosure and the Investor shall only furnish or disclose
that portion of the confidential information as is required by law.  Investor shall be responsible for any use and
disclosure of confidential information by its representatives, agents and
Affiliates in violation of this Agreement.

 10

 

(b)           Notwithstanding the foregoing, the Investor may disclose any such
confidential information to any potential purchaser of the Investor Shares as
long as such potential purchaser agrees to be bound by the confidentiality
provisions set forth in this Section 5.2; provided, however, that
if such potential purchaser is in the homebuilding business, the Investor shall
only make such disclosure after providing prior written notice to the Company
at least five business days before disclosing any such confidential
information.

(c)           The
Investor and its Affiliates agree that such confidential information shall be
used only in connection with the business of the Company, the Investor’s equity
investment therein and any lending relationship between the Company and the
Investor, and not for any other purpose, including, without limitation, in
connection with any competitive or potentially competitive activities.  Any publicity release, advertisement, filing,
public statement or announcement made, regarding this Agreement or any of the
transactions contemplated hereby is to be first reviewed by, and must be
reasonably satisfactory to, both the Investor and the Company.

(d)           Neither
the Investor nor any of its Affiliates will purchase or sell any Shares,
including the Investor Shares, on the basis of any confidential information,
whether through a binding contract to purchase or sell any such Shares,
instructions to any person to purchase or sell any such Shares for its own
account or the account of any of its representatives or a written plan for
trading any such Shares.

5.3                Termination
of Rights.  The rights set forth in
Sections 5.1(a) and 5.1(b) above shall terminate upon the consummation of the
IPO.  The Company’s obligations to
provide monthly and quarterly estimates of the Company’s net income pursuant to
Sections 5.1(c) and 5.1(d) above shall terminate upon the earlier to occur of
(a) such time at which the estimates provided pursuant to Sections 5.1(c) or
5.1(d) would be readily ascertainable from the financial statements or other
public filings of Investor, a Controlling Affiliate or any Subsidiary of
Investor or a Controlling Affiliate or (b) the consummation of the IPO.  The obligations set forth in Section 5.2
shall survive the expiration of the rights set forth in Section 5.1 and shall
expire two years from the first date on which the Investor no longer holds any
Investor Shares.

6.     Investor
Rights.

6.1                Preemptive
Rights.

(a)           Investor
Right.  Subject to the terms and
conditions contained in this Section 6.1, in the event that the Company offers
any equity securities for sale (including, without limitation, securities
convertible into or exchangeable for equity securities of the Company) (the “New
Securities”), the Investor has the right to purchase its Pro Rata Portion
of the New Securities on the same terms and conditions as offered to any third
party.

(b)           Notice
of Right.  In the event the Company
proposes to undertake an issuance of New Securities, it shall give the Investor
written notice of its intention, describing in reasonable detail the type of
securities and the price and terms upon which the Company proposes to issue the
same. The Investor shall have ten (10) days from the date of delivery of any
such notice to agree to purchase up to its Pro Rata Portion of such New

 11
 

 

Securities, for the price and upon the terms
specified in the notice, by delivering written notice to the Company and
stating therein the quantity of New Securities to be purchased.

(c)           Lapse
and Reinstatement of Right.  The
Company shall have sixty (60) days following the ten- (10-) day period
described in Section 6.1(b) to sell
or enter into an agreement (pursuant to which the sale of New Securities
covered thereby shall be closed, if at all, within forty-five (45) days from
the date of said agreement) to sell the New Securities with respect to which
the Investor’s preemptive right was not exercised, at a price and upon terms no
more favorable to the purchasers of such securities than specified in the
Company’s notice.  In the event the Company
has not sold the New Securities or entered into an agreement to sell the New
Securities within said sixty- (60-) day period (or sold and issued New
Securities in accordance with the foregoing within forty-five (45) days from
the date of said agreement), the Company shall not thereafter issue or sell any
New Securities without first offering such securities to the Investor in the
manner provided above.

(d)           Excluded
Securities.  Notwithstanding the
foregoing, and provided that such issuances shall not result in or cause the
Investor to hold less than twenty percent (20%) of the then outstanding Common
Stock, assuming full exercise and/or conversion of all the then outstanding
Company securities (including options, warrants, stock units and similar
instruments) exercisable and/or convertible into the Company’s Common Stock,
the following issuances shall constitute “Excluded Securities” and shall
not trigger the preemptive rights set forth in Section 6.1(a) above:

(i)            the
Investor Shares;

(ii)           Common
Stock issued in connection with any stock split, stock dividend, or any
subdivision of shares of Common Stock by the Company or the conversion of
Common Stock into another class of capital stock;

(iii)          Common Stock (or options
to purchase such shares of Common Stock) issued or issuable to current, former
or future employees or directors of, or consultants to, the Company and its
Subsidiaries or in connection with any person’s employment, independent
contractor or consulting arrangements with the Company (or to such persons’
transferees, estates or beneficiaries under their estates);

(iv)          Common
Stock issued or issuable in any business combination or acquisition transaction
approved by the Board;

(v)           Common
Stock issued to financial institutions, commercial lenders, brokers or finders
or any similar party, or their respective designees, in connection with the
incurrence or guarantee of indebtedness by the Company, in each case approved
by the Board; and

(vi)          issuances
of equity securities in connection with an underwritten public offering
(including the IPO);

provided,
however, that Common Stock (or options to purchase Common
Stock) may be issued pursuant to subsections (iii), (iv) and (v) above without
being subject to the foregoing 20%

 12
 

 

restriction only to the
extent the Investor has the opportunity to purchase additional Common Stock at
fair market value as determined by the Board, in good faith in the exercise of
its reasonable business judgment, at the time of the relevant transaction so
that the Investor will own twenty percent (20%) of the then outstanding Common
Stock assuming full exercise and/or conversion of all the then outstanding
Company securities (including options, warrants, stock units and similar
instruments) exercisable and/or convertible into the Company’s Common Stock.

6.2                Drag
Along and Tag Along Rights.

(a)           Drag
Along Rights.  If any Permitted
Holder or group of Permitted Holders desires to sell fifty percent (50%) of
more of the outstanding capital stock of the Company, in the aggregate, to an
unaffiliated purchaser or purchasers in a single transaction or a series of
related transactions, the Permitted Holder(s) and/or the Company shall have the
right to require the Investor to sell or transfer its pro rata portion of the
Investor Shares to such unaffiliated purchaser, which transfer shall be made on
the same terms and conditions applicable, and for the same type and amount of
consideration payable (excluding any consideration that the Company’s
directors, officers or managers may receive from employment, consulting or
non-competition agreements with the unaffiliated purchaser to the extent such
consideration is properly allocable as consideration under such agreements), to
such selling Permitted Holder(s); provided that
the consideration payable to the Investor for its pro rata portion of the
Investor Shares shall be no less than 1.5x the book value of those shares
(measured as of the end of the most recently completed fiscal quarter).  Investor shall take all necessary actions
reasonably requested by the Permitted Holder(s) or the Company in connection
with and to facilitate the purpose of this Section 6.2(a), provided that
Investor shall not be required to share in any indemnification or other
obligations that the Permitted Holder(s) agrees to provide in connection with a
transfer other than as provided for in Section 6.2(c).

(b)           Tag
Along Rights.  If any Permitted
Holder proposes to transfer equity securities representing fifteen percent
(15%) or more of the outstanding capital stock of the Company to an
unaffiliated purchaser or purchasers in a single transaction or a series of
related transactions, the Investor shall have the right to require the purchase
of a number of the Investor Shares equal to the product of (i) the quotient
determined by dividing the percentage of Shares owned by the Investor by the
aggregate percentage of shares owned by such Permitted Holder(s), the Investor
and the other stockholders participating in such sale and (ii) the number of
Shares to be sold in the contemplated transfer. 
Such sale shall be on the same terms and conditions applicable, and for
the same type and amount of consideration payable (excluding any consideration
that the Company’s directors, officers or managers may receive from employment,
consulting or non-competition agreements with the unaffiliated purchaser to the
extent such consideration is properly allocable as consideration under such
agreements), to the Permitted Holder(s).

For example, if the notice contemplated the
sale of 100 Shares by the Permitted Holder, and if the Permitted Holder at such
time owns 30% of all Shares and if Investor elects to participate and owns 20%
of all Shares, the Investor would be entitled to sell 40 shares and the
Permitted Holder would be entitled to sell 60 shares.

 13
 

 

Investor and the
Permitted Holder shall take all necessary actions reasonably requested by the
other in connection with and to facilitate the purpose of this Section 6.2(b),
provided that Investor shall not be required to share in any indemnification or
other obligations that the Permitted Holder(s) agrees to provide in connection
with a transfer other than as provided for in Section 6.2(c).

(c)           The
Investor will bear its own costs associated with the sale of any Investor
Shares pursuant to Sections 6.2(a) and 6.2(b) and will bear all costs relating
to Persons hired or retained by the Investor in connection with such sale.  If Investor transfers any number of Investor
Shares pursuant to Sections 6.2(a) or 6.2(b),
it shall be obligated, on a several pro rata basis, consistent with the
Permitted Holder(s) participating in such sale, to share in any indemnification
or other obligations that the Permitted Holder(s) agrees to provide in
connection with a transfer pursuant to Sections 6.2(a) or 6.2(b) to the extent
such indemnification relates directly to representations and warranties of the
Investor regarding the Investor’s authority, authorization, title to and
ownership of the Investor Shares and non-contravention related to its ownership
of the Investor Shares and performance of the obligations Investor agrees to in
the applicable agreement (provided that Investor shall not be obligated in
connection with such transfer to agree to indemnify or hold harmless the
transferees with respect to an amount in excess of the net cash proceeds paid
to Investor in connection with such transfer).

6.3           Termination
of Investor Rights.  The rights set
forth in Sections 6.1 and 6.2 above shall terminate upon the consummation of,
and shall not be applicable to, the IPO.

7.             Right
of First Refusal.

7.1           Company
and Stockholder Right.

(a)           In
the event that the Investor wishes to sell any or all of the Investor Shares
prior to December 31, 2009, the Company and, to the extent that the Company
does not fully exercise its right of first refusal, the holders of Common Stock
shall have six (6) months to match the offer of any third party to purchase
all, but not less than all, of the Investor Shares to be transferred (the “Right
of First Refusal”).  The Investor
shall give the Company written notice of its intention to sell any or all of
the Investor Shares, describing in reasonable detail the consideration for such
Investor Shares, the terms and conditions upon which the sale is to occur and
the identity, background and ownership (if applicable) of the third party, and
such notice shall constitute a binding offer by the Investor to sell the Shares
to the Company for such consideration (or the cash equivalent thereof) and on
such terms and conditions.  In the event
the consideration specified in such written notice is payable in a form other
than cash, the value of any non-cash consideration shall be determined by a
nationally recognized investment banking firm, experienced in such valuation
matters and mutually agreed upon by the Company and the Investor, and the
Company shall pay the cash equivalent of such non-cash consideration.  All consideration shall be due and payable at
the closing of the transaction.  The Investor
and the Company shall each bear fifty percent (50%) of all costs relating to
the valuation by the investment banking firm referenced above.

(b)           The
Company shall have six (6) months from the date of delivery of any such notice
to agree to purchase all of the Investor Shares to be transferred, for the
consideration and upon the terms and conditions specified in the notice, by
delivering written

 14
 

 

notice to the Investor.  If the
Company does not elect to purchase all of the Investor Shares pursuant to this
Section 7.1 and the holders of Common Stock of the Company elect to purchase
the Investor Shares to be transferred, the Investor Shares purchased by the
holders of Common Stock of the Company shall be allocated pro rata according to
the then current number of Shares owned by each such holder.  To the extent the Company and the holders of
Common Stock elect not to purchase the Investor Shares being offered, Investor
may, within thirty (30) days after receipt of such notice from the Company or
the holders, transfer such Shares to the third party identified in the original
notice for the consideration and upon terms and conditions no more favorable to
the third party than offered to the Company and other holders of Common Stock
in the original notice.  Any Investor
Shares not transferred within such thirty (30) day period shall be re-offered
to the Company and the other holders of Common stock under this Section 7.1
prior to any subsequent transfer.

7.2           Termination
of Right of First Refusal.  The Right
of First Refusal set forth in Section 7.1 shall terminate upon the earlier to
occur of (a) December 31, 2009 or (b) the consummation of the IPO.

8.             Restrictions
on Transferability; Registration Rights.

8.1           Restrictions.

(a)           The
Investor hereby agrees not to sell, transfer, assign, pledge or otherwise
dispose of (whether with or without consideration and whether voluntarily or by
operation of law, but excluding by way of merger or consolidation) any interest
in the Registrable Securities unless and until the transferee has agreed in
writing for the benefit of the Company to be bound by this Section 8.1 and
Section 8.12, provided and to the extent such Sections are then applicable, and
(i) there is then in effect a registration statement under the Securities Act
covering such proposed transfer and such transfer is made in accordance with such
registration statement, or (ii) the Investor shall have notified the Company of
the proposed transfer and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed transfer, and, if
reasonably requested by the Company, such Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company,
that such transfer will not require registration under the Securities Act.  Each Investor consents to the Company making
a notation on its records and giving instructions to any transfer agent of the
Restricted Securities in order to implement the restrictions on transfer
established in this Section 8.1.

(b)           Each
certificate representing Registrable Securities and each certificate issued in
exchange for or upon the transfer of Registrable Securities shall be stamped or
otherwise imprinted with legends substantially in the following forms (in
addition to any legend required under applicable state securities laws or the
Company’s charter documents):

“THE SHARES REPRESENTED
BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY APPLICABLE STATE
SECURITIES LAWS.  SUCH SHARES MAY NOT BE SOLD,
TRANSFERRED, OR PLEDGED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE
COMPANY RECEIVES AN OPINION

 15
 

 

OF COUNSEL OR OTHER
EVIDENCE SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS
NOT REQUIRED AS A RESULT OF AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR
LAWS.”

“THE SHARES REPRESENTED
BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF
THAT CERTAIN INVESTOR RIGHTS AGREEMENT, DATED AS OF SEPTEMBER 12, 2006, BY AND
BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.”

(c)           The
Company shall promptly reissue unlegended certificates at the request of the
Investor holding such certificate if the Investor shall have obtained an
opinion of counsel reasonably acceptable to the Company to the effect that the
securities proposed to be disposed of may lawfully be disposed of without
registration, qualification, or legend pursuant to subsection (k) of Rule 144.

8.2           Demand
Registrations.

(a)           Long-Form
Registrations.

(i)            At
any time following the IPO, subject to any lock-up requirements of the Company’s
underwriters, the Investor shall be entitled to request registration under the
Securities Act of all or part of its Registrable Securities, the anticipated
aggregate offering price of which, net of underwriting discounts and
commissions, exceeds $25,000,000, on Form S-1 or any similar long
form-registration.

(ii)           If
the Company (or its successor) shall receive from the Investor a written
request that the Company effect any registration pursuant to Section 8.2(a)(i),
the Company (or its successor) will (A) within thirty (30) days of receipt
thereof deliver written notice of the proposed registration to any other holder
of Registrable Securities; and (B) as soon as reasonably practicable, use its reasonable
efforts to effect such registration (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws, and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
holder(s) of Registrable Securities joining in such request as are specified in
a written request delivered to the Company within twenty (20) days after
delivery of such written notice from the Company;

(iii)          The
Company shall not be obligated to take any action to effect any such
registration pursuant to this Section 8.2(a):

(A)          prior
to the termination of the Lock-up Period for the IPO;

 16
 

 

(B)           after
the Company has effected two (2)
such registrations pursuant to this Section 8.2(a), such registrations have
been declared or ordered effective, and kept effective by the Company as
required by Section 8.4(a);

(C)           during
the period starting with the date the Investor has requested a registration
under Section 8.2 hereof, and ending on a date one hundred and eighty (180)
days after the effective date of such registration; provided that the Company
is actively employing in good faith all reasonable efforts to cause such
registration statement to become effective;

(D)          during
a Registration Blackout Period; or

(E)           in
any particular jurisdiction in which the Company would be required to execute a
general consent to service of process in effecting such registration unless the
Company is already subject to service in such jurisdiction and except as may be
required by the Securities Act.

The registration
statement filed pursuant to the request of the Investor may, subject to the
provisions of Sections 8.2(c)(ii) and Section 8.11 hereof, include other
securities of the Company with respect to which registration rights have been
granted, and may include securities being sold for the account of the Company.

(b)           Short-Form
Registrations.

(i)            After
the IPO, the Company shall use its reasonable best efforts to qualify for
registration on Form S-3 or any comparable or successor form.  To that end the Company shall register
(whether or not required by law to do so) its Common Stock under the Exchange
Act in accordance with the provisions of the Exchange Act following the
effective date of the first registration of any securities of the Company on
Form S-1 or any comparable or successor form or forms.

(ii)           At
any time after the Company becomes eligible to file a registration statement
under the Securities Act on Form S-3, the Investor shall be entitled to request
registration under the Securities Act of all or part of its Registrable
Securities, the anticipated aggregate offering price of which, net of
underwriting discounts and commissions, exceeds $25,000,000, on Form S-3 or any
comparable or successor form.

(iii)          If
the Company (or its successor) shall receive from the Investor a written
request that the Company effect any registration pursuant to Section 8.2(b)(i),
the Company (or its successor) will (A) within thirty (30) days of receipt
thereof deliver written notice of the proposed registration to any other holder
of Registrable Securities; and (B) as soon as reasonably practicable, use its
reasonable efforts to effect such registration (including, without limitation,
the execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws, and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any

 17
 

 

other holder(s) of Registrable Securities
joining in such request as are specified in a written request delivered to the
Company within twenty (20) days after delivery of such written notice from the
Company;

(iv)          The
Company shall not be obligated to take any action to effect any such
registration pursuant to this Section 8.2(b):

(A)          if
the Company has already effected two (2) such registrations pursuant to this
Section 8.2(b) within the preceding twelve months, provided such registrations have been declared or ordered
effective, and kept effective by the Company as required by Section 8.4(a);

(B)           after
the Company has effected four (4)
such registrations pursuant to this Section 8.2(b), such registrations have
been declared or ordered effective, and the securities offered pursuant to such
registrations have been sold;

(C)           during
the period starting with the date the Investor has requested a registration
under Section 8.2 hereof, and ending on a date one hundred and eighty (180)
days after the effective date of such registration; provided that the Company
is actively employing in good faith all reasonable efforts to cause such
registration statement to become effective;

(D)          during
a Registration Blackout Period; or

(E)           in
any particular jurisdiction in which the Company would be required to execute a
general consent to service of process in effecting such registration unless the
Company is already subject to service in such jurisdiction and except as may be
required by the Securities Act;

(c)           General.

(i)            Underwriting.  The rights of the Investor pursuant to this
Section 8.2 shall be conditioned upon the Investor’s participation in such
underwriting and the inclusion of such Investor’s Registrable Securities in the
underwriting to the extent provided herein. 
The Investor may elect to include in such underwriting all or a part of
the Registrable Securities held by such Investor.  The underwriter(s) for any registration
statement under this Section 8.2 shall be selected by the Company after
consultation with the Investor.

(ii)           Procedures.  If the Company shall request inclusion in any
registration pursuant to this Section 8.2 of securities being sold for its own
account, or if other Persons shall request inclusion in any registration
pursuant to this Section 8.2, the Investor initiating such registration shall,
on behalf of all holders of Registrable Securities, offer to include such
securities in the underwriting and may condition such offer on their acceptance
of the applicable provisions of this Section 8. 
The Company shall (together with all holders or other Persons proposing
to distribute their securities through such underwriting) enter into and
perform its obligations under an underwriting agreement in customary form with
the managing underwriter selected for such underwriting by the Company.  Notwithstanding any other provision of this
Section 8.2, if the managing underwriter advises the Investor in writing that

 18
 

 

marketing factors require a limitation of the
number of secondary Shares to be underwritten, the number of shares to be
included in the underwriting or registration shall be allocated as set forth in
Section 8.11.  If any Person who has
requested inclusion in such registration as provided above disapproves of the
terms of the underwriting, such Person shall be excluded therefrom by written
notice delivered by the Company or the managing underwriter.  Any Registrable Securities and/or other
securities so excluded or withdrawn shall also be withdrawn from registration.

(iii)          Withdrawn
Requests.  Notwithstanding the
foregoing and subject to Section 8.7 of this Agreement, a registration will
count for purposes of Sections 8.2(a)(iii) or 8.2(b)(iv) hereof if it is closed
or withdrawn at the request of the Investor; provided,
however, a withdrawn registration shall not be counted as a
requested registration pursuant to Sections 8.2(a)(iii) and 8.2(b)(iv) hereof
if the Investor bears the Registration Expenses of such withdrawn registration
pursuant to Section 8.7.

8.3           Company
Registration.

(a)           Piggyback
Rights.  If  at any time following the IPO, the Company
shall determine to register any of its securities for the account of a security
holder or holders other than (A) a registration pursuant to Sections 8.2 or 8.3
hereof, (B) a registration on Form S-4, S-8, or any successor or similar forms,
or (C) a registration on any registration form that does not permit secondary
sales, the Company will:

(i)            within
fifteen (15) days deliver to the Investor written notice thereof; and

(ii)           use
its best efforts to include in such registration (and any related qualification
under blue sky laws or other compliance), except as set forth in Section 8.3(b)
below, and in any underwriting involved therein, all the Registrable Securities
specified in a written request or requests made by the Investor and delivered
to the Company within ten (10) days after the written notice is delivered by
the Company.  Such written request may include
all or a portion of the Investor’s Registrable Securities.

(b)           Primary
Offerings.  Nothing in this Agreement
confers upon the Investor the right to require the Company to register a
secondary offering of the Investor’s equity interest as part of the IPO or any
subsequent primary offering of the Company’s Common Stock.

(c)           Underwriting;
Procedures.  If the registration of
which the Company gives notice is for a registered public offering involving an
underwriting, the Company shall so advise the Investor as a part of the written
notice given pursuant to Section 8.3(a)(i). 
In such event, the right of the Investor to registration pursuant to
this Section 8.3 shall be conditioned upon such Investor’s participation in
such underwriting and the inclusion of Registrable Securities in the underwriting
to the extent provided herein.  The
Investor shall (together with the Company and the other holders distributing
their securities through such underwriting) enter into and perform their
obligations under an underwriting agreement in customary form with the managing
underwriter selected for such underwriting by the Company.  Notwithstanding any other provision of this
Section 8.3, if the managing underwriter determines

 19

 

that marketing factors require a limitation
of the number of shares to be underwritten, the managing underwriter may
exclude all Registrable Securities and Other Shares (but not primary Shares
offered by the Company) from, or limit the number of Registrable Securities and
Other Shares to be included in, the registration and underwriting.  The Company shall so advise all holders of
securities requesting registration, and the number of secondary Shares that are
entitled to be included in the registration and underwriting shall be allocated
as set forth in Section 8.11.  If any
Person who has requested inclusion in such registration as provided above
disapproves of the terms of the underwriting, such Person shall be excluded
therefrom by written notice delivered by the Company or the managing
underwriter.  Any Registrable Securities
and/or other securities so excluded or withdrawn shall also be withdrawn from
registration.  The underwriter(s) for any
registration statement under this Section 8.3 shall be selected by the Company.

(d)   Right
to Terminate Registration.  The
Company shall have the right to terminate or withdraw any registration
initiated by it under this Section 8.3 prior to the effectiveness of such
registration, whether or not the Investor has elected to include securities in
such registration.

8.4           Registration
Procedures.  In the case of each
registration effected by the Company pursuant to this Section 8, the Company
will keep the Investor advised in writing as to the initiation of each
registration and as to the completion thereof and, at its expense, the Company
will use its reasonable efforts to:

(a)   Prepare
and file with the Commission a registration statement with respect to such
securities and use its commercially reasonable efforts to cause such
registration statement to become and remain effective for at least ninety (90)
days or until the distribution described in the registration statement has been
completed, whichever occurs first; provided,  however, that (i) such 90-day period shall be extended for a
period of time equal to the period the Investor refrains from selling any
securities included in such registration at the request of an underwriter of
common stock or other securities of the Company, and (ii) in the case of any
registration of Registrable Securities on Form S-3 which are intended to be
offered on a continuous or delayed basis, such 90-day period shall be extended,
if necessary, up to one hundred eighty (180) days from the effective date of
the registration statement or, if earlier, until all such Registrable
Securities are sold thereunder, and provided that Rule 415, or any successor
rule under the Securities Act, permits an offering on a continuous or delayed
basis, and provided further that applicable rules under the Securities Act
governing the obligation to file a post-effective amendment permit, in lieu of
filing a post-effective amendment which (A) includes any prospectus required by
Section 10(a)(3) of the Securities Act or (B) reflects facts or events
representing a material or fundamental change in the information set forth in
the registration statement, the incorporation by reference in the registration
statement of information required to be included in (A) and (B) above to be
contained in periodic reports filed pursuant to Section 13 or 15(d) of the
Exchange Act;

(b)   Furnish
to the Investor and any other holder of Registrable Securities participating in
such registration and to the underwriters of the securities being registered
such reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus, and such other documents as such underwriters may
reasonably request in order to facilitate the public offering of such
securities;

 20
 

 

(c)   Prepare
and file with the Commission such amendments and supplements to such
registration statement and the prospectus used in connection with such
registration statements as may be necessary to comply with the provisions of
the Securities Act with respect to the disposition of all securities covered by
such registration statement for the period set forth in paragraph (a) above;

(d)           Notify
each seller of Registrable Securities covered by such registration statement at
any time when a prospectus relating thereto is required to be delivered under
the Securities Act of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or incomplete in the light of the circumstances then existing, and
at the request of any such seller, prepare and furnish to such seller a
reasonable number of copies of a supplement to or an amendment of such prospectus
as may be necessary so that, as thereafter delivered to the purchaser of such
shares, such prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or incomplete in the
light of the circumstances then existing;

(e)           Use
its commercially reasonable efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by the Investor,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions;

(f)            Cause
all such Registrable Securities to be listed on each securities exchange on
which similar securities issued by the Company are then listed;

(g)           Provide
a transfer agent and registrar for all Registrable Securities and a CUSIP
number for all such Registrable Securities, in each case not later than the
effective date of such registration;

(h)           Use
its best efforts to furnish, at the request of the Investor or any other holder
requesting registration of Registrable Securities pursuant to this Section 8,
on the date that such Registrable Securities are delivered to the underwriters
for sale in connection with a registration pursuant to this Section 8, if such
securities are being sold through underwriters, (i) an opinion, dated such
date, of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering, addressed to the underwriters, and (ii) a
letter, dated such date, from the independent certified public accountants of
the Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public
offering, addressed to the underwriters.

8.5                Information
by Investor.  The Investor and any
other holders of Registrable Securities included in any registration shall
furnish to the Company such information regarding such holder or holders, the
Registrable Securities held by them, and the distribution proposed by the
Investor and such holder or holders as the Company may request in writing and
as shall be required in connection with any registration referred to in this
Section 8, and the

 21
 

 

refusal to furnish such
information by the Investor or any holder(s) shall relieve the Company of its
obligations in this Section 8 with respect to the Investor or such holder(s),
respectively.  Furthermore, the Company
shall have no obligation with respect to any registration requested pursuant to
Section 8.2 or Section 8.3 of this Agreement if, as a result of the application
of the preceding sentence, the number of shares or the anticipated aggregate
offering price of the Registrable Securities to be included in the registration
does not equal or exceed the anticipated aggregate offering price required to
originally trigger the Company’s obligation to initiate such registration.

8.6                Indemnification.

(a)   To
the extent permitted by law, the Company will indemnify the Investor, each of
its officers, directors, and each Person controlling the Investor within the
meaning of Section 15 of the Securities Act, with respect to which registration
has been effected pursuant to this Section 8, against all expenses, claims,
losses, damages, or liabilities (or actions, proceedings, or settlements in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any registration statement,
prospectus, or preliminary prospectus, or any amendment or supplement thereto,
incident to any such registration, qualification, or compliance, or based on
any omission (or alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, or any violation by the
Company of the Securities Act or any rule or regulation promulgated under the
Securities Act applicable to the Company in connection with any such
registration, qualification, or compliance, and the Company will reimburse the
Investor, each of its officers, directors and each Person controlling the
Investor, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing, defending, or settling any such
claim, loss, damage, liability, or action, as such expenses are incurred,
provided that the Company will not be liable in any such case to the extent
that any such claim, loss, damage, liability, or expense arises out of or is
based on any untrue statement or omission or alleged untrue statement or
omission, made in reliance upon and in conformity with written information
furnished to the Company by the Investor or controlling Person and stated to be
specifically for use therein or arising out of Investor’s or controlling Person’s
failure to deliver information necessary to make accurate and true statements
in any registration statement, if such information was requested by the
Company.  It is agreed that the indemnity
agreement contained in this Section 8.6 shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld).

(b)           To
the extent permitted by law, the Investor and any other holder of Registrable
Securities will, if Registrable Securities held by the Investor or such holder
are included in the securities as to which such registration is being effected,
indemnify the Company, each of its directors, officers, each Person who
controls the Company within the meaning of Section 15 of the Securities Act,
and each other such holder and Other Stockholder, each of their officers,
directors, and partners, and each Person controlling such holder or Other
Stockholder within the meaning of Section 15 of the Securities Act, against all
claims, losses, damages, and liabilities (or actions in respect thereof)
arising out of or based on any untrue statement (or alleged untrue statement)
of a material fact contained in any such registration statement, prospectus,
offering circular, or other document, or any omission (or alleged

 22
 

 

omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and such holders, Other
Stockholders, directors, officers, Persons or control Persons for any legal or
any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability, or action, as such expenses
are incurred, in each case to the extent, but only to the extent, that such
untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering
circular, or other document in reliance upon and in conformity with written
information furnished to the Company by the Investor or such holder and stated
to be specifically for use therein, or such loss, damages or liability incurred
arose out of the Investor’s or controlling Person’s failure to deliver
information necessary to make accurate and true statements in any registration
statement, if such information was requested by the Company; provided, however, that the obligations of the Investor or
such holder hereunder shall not apply to amounts paid in settlement of any such
claims, losses, damages, or liabilities (or actions in respect thereof) if such
settlement is effected without the consent of the Investor or such holder
(which consent shall not be unreasonably withheld); and provided that that in
no event shall any indemnity under this Section 8.6 exceed the gross proceeds
received by the Investor or such holder in such offering.

(c)           Each
party entitled to indemnification under this Section 8.6 (the “Indemnified Party”) shall give written
notice to the party required to provide indemnification (the “Indemnifying Party”) promptly
after such Indemnified Party has actual knowledge of any claim as to which
indemnity may be sought, and shall permit the Indemnifying Party to assume the
defense of any such claim or any litigation resulting therefrom (provided that
a conflict of interest does not exist between the Indemnified Party and the
Indemnifying Party with respect to such claim), provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party’s expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 8 unless the failure
to give such notice is materially prejudicial to an Indemnifying Party’s
ability to defend such action.  No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.  Each Indemnified Party shall
furnish such information regarding itself or the claim in question as an Indemnifying
Party may reasonably request in writing and as shall be reasonably required in
connection with the defense of such claim and litigation resulting therefrom.

(d)           If
the indemnification provided for in this Section 8.6 is held by a court of
competent jurisdiction to be unavailable to an Indemnified Party with respect
to any claim, loss, damage, liability, or expense referred to therein, then the
Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder,
shall contribute to the amount paid or payable by such Indemnified Party as a
result of such claim, loss, damage, liability, or expense in such proportion as
is appropriate to reflect the relative fault of the Indemnifying Party on the
one hand and the Indemnified party on the other in connection with the
statements or omissions that resulted in such claim, loss, damage, liability,
or expense, as well as any other relevant equitable

 23
 

 

considerations.  The relative fault of the Indemnifying Party
and of the Indemnified Party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission to state a material fact related to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties’ relative
intent, knowledge, access to information, and opportunity to correct or prevent
such statement or omission.  The Company
and the Investor agree that it would not be just and equitable if contribution
pursuant to this Section 8.6 were based solely upon the number of entities from
whom contribution was requested or by any other method of allocation which does
not take account of the equitable considerations referred to above.  In no event shall any contribution by a
holder under this Section 8.6 exceed the gross proceeds received by such holder
in such offering.

(e)           The
amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages, and liabilities referred to above in this Section 8.6 shall be
deemed to include any legal or other expenses reasonably incurred by such
Indemnified Party in connection with investigating or defending any such action
or claim, subject to the provisions of Section 8.6(c).   No Person guilty of fraudulent misrepresentation
(within the meaning of the Securities Act) shall be entitled to contribution
from any Person who was not guilty of such fraudulent misrepresentation.

(f)            Notwithstanding
the foregoing, to the extent that the provisions on indemnification and
contribution contained in the underwriting agreement entered into in connection
with the underwritten public offering are in conflict with the foregoing
provisions, the provisions in the underwriting agreement shall control.

(g)           The
obligations of the Company and the Investor under this Section 8.6 shall
survive the completion of any offering of Registrable Securities in a
registration statement.

8.7                Expenses
of Registration.  All Registration
Expenses shall be borne by the Company (or its successor); provided,
however, that if the Investor bears the Registration Expenses for
any registration proceeding begun pursuant to Section 8.2(a) and subsequently
withdrawn by the Investor and any other holders registering shares therein,
such registration proceeding shall not be counted as a requested registration
pursuant to Sections 8.2(a)(iii) and 8.2(b)(iv) once all of the Registration
Expenses have been paid by the Investor and the other holders.  If the Investor and the other holders pay the
Registration Expenses, such expenses shall be borne by the Investor and such
other holders in proportion to the number of Shares for which such registration
was requested.  Furthermore, in the event
that a withdrawal by the Investor is based upon material adverse information relating
to the Company that is different from the information known or available (upon
request from the Company or otherwise) to the Investor requesting registration
at the time of the request for registration under Section 8.2(a), such
registration proceeding shall not be counted as a requested registration
pursuant to Section 8.2(a), even though the Investor does not bear the
Registration Expenses for such registration. 
All Selling Expenses relating to securities registered on behalf of the
Investor and any other selling holders shall be borne by the holders of the
registered securities included in such registration pro rata on the basis of
the number of shares so registered.

8.8                Rule
144 Reporting.  With a view to making
available the benefits of certain rules and regulations of the Commission which
may at any time permit the sale of the

 24
 

 

Restricted Securities to
the public without registration after such time as a public market exists for
the Common Stock of the Company, the Company agrees to use its best efforts to:

(a)           Make
and keep public information available, as those terms are understood and
defined in Rule 144, at all times after the effective date that the Company
becomes subject to the reporting requirements of the Securities Act or the
Exchange Act;

(b)           File
with the Commission in a timely manner all reports and other documents required
of the Company under the Securities Act and the Exchange Act (at any time after
it has become subject to such reporting requirements); and

(c)           So
long as the Investor owns any Restricted Securities, to furnish to the Investor
forthwith upon request a written statement by the Company as to its compliance
with the reporting requirements of Rule 144 and the Exchange Act (at any time
after it has become subject to such reporting requirements), a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents of the Company and other information in the possession of or
reasonably obtainable by the Company the Investor may reasonably request in
availing itself of any rule or regulation of the Commission allowing the
Investor to sell any such securities without registration.

8.9                Transfer
of Registration Rights.  The rights
to cause the Company to register securities granted to any party hereto under
Section 8 may be assigned by the Investor only to a transferee or assignee in
accordance with the provisions of Section 9.2 hereof, provided that the Company
is given written notice prior to such assignment, stating the name and address
of the transferee or assignee and identifying the securities with respect to
which such registration rights are being assigned, and, provided further, that
the assignee of such rights assumes in writing the obligations of the Investor
under this Section 8.

8.10              Limitations
on Subsequent Registration Rights. 
If the Company grants any subsequent registration rights that are more
favorable than the registration rights granted to the Investor in this
Agreement, the Company will also grant the more favorable registration rights
to the Investor.

8.11              Procedure
for Underwriter Cutbacks.  In any
circumstance in which all of the Registrable Securities and other shares of
Common Stock of the Company with registration rights (the “Other Shares”) requested to be
included in a registration on behalf of the Investor or Other Stockholders
cannot be so included as a result of limitations of the aggregate number of
shares of Registrable Securities and Other Shares that may be so included, the
number of shares of Registrable Securities and Other Shares that may be so
included shall be allocated among the Investor and Other Stockholders
requesting inclusion of shares pro rata based upon the total number of
Registrable Securities or Other Shares held by such Investor and Other
Stockholders, respectively; provided, however,
that such allocation shall not operate to reduce the aggregate number of
Registrable Securities or Other Shares to be included in such registration if
the Investor or Other Stockholder does not request inclusion of the maximum
number of shares of Registrable Securities or Other Shares allocated to such
Investor or Other Stockholder pursuant to the above-described procedure, in
which case the remaining portion of its allocation shall be reallocated among
those requesting whose allocations did not satisfy their requests pro rata on
the basis of total number of shares of Registrable Securities and Other

 25
 

 

Shares held by such
Investor and Other Stockholders, and this procedure shall be repeated until all
shares of Registrable Securities and Other Shares which may be included in the
registration on behalf of the Investor and Other Stockholders have been so
allocated.  The Company shall not limit
the number of shares of Registrable Securities to be included in a registration
pursuant to this Agreement in order to include shares of stock issued or
issuable to employees, officers, directors, or consultants pursuant to the
Company’s equity incentive plans, or in the case of registrations under
Sections 8.2 hereof, in order to include in such registration securities registered
for the Company’s own account.  For any
holder of securities (including the Investor) which is a partnership or
corporation, the partners, stockholders, Subsidiaries, parents and Affiliates
of such holder, or the estates and family members of any such partners and
retired partners and any trusts for the benefit of any of the foregoing Persons
shall be deemed to be a single “holder,” and any pro rata reduction pursuant to
this Section 8.11 with respect to such holder shall be based upon the aggregate
amount of Shares carrying registration rights owned by all entities and
individuals included in such “holder,” as defined in this sentence.

8.12              Lock-up
Provisions.

(a)           The
Investor and any other holder of the rights to cause the Company to register securities
granted under this Section 8 hereby agree, in connection with the IPO and any
subsequent registered offering of the Company’s securities (other than a
registration of securities in a Rule 145 transaction or with respect to an
employee benefit plan), not to sell, make any short sale of, transfer, loan,
pledge or otherwise hypothecate or encumber, grant any option for the purchase
of, participate in a transaction with the same economic effect as a sale, or
otherwise dispose of any shares of the Company’s common equity (excluding those
securities included in the registration but including securities convertible
into or exchangeable for common equity) without the prior written consent of
the underwriter(s) managing such underwritten offering of the Company’s
securities, for a period of time prior to and after the IPO and a period of
time prior to and after such other registered offering, as may be requested by
such managing underwriter(s) (the “Lock-up Period”); provided that in either case all executive officers and
directors of the Company (and any “affiliate” (as defined in Rule 405 of the
Securities Act) of such executive officers and directors) enter into similar
agreement.

(b)           Any
waiver of the Investor or other holder(s)’ obligations under this Section 8.12
will be made on a pro rata basis.

(c)           Each
holder subject to Section 8.12(a) above hereby agrees to execute and deliver
any agreements as may be reasonably requested by the Company or the managing
underwriter, provided such agreements are consistent with the foregoing or are
necessary to give further effect thereto.

9.     Miscellaneous.

9.1                Governing
Law.  This Agreement shall be
governed in all respects by the laws of the State of Illinois without regard to
choice of laws or conflict of laws provisions thereof.

9.2                Transfers; Successors and
Assigns.

 26

 

(a)           Prior to December 31, 2009, the Investor shall not sell,
transfer, assign, pledge or otherwise dispose of (whether with or without
consideration and whether voluntarily or involuntarily or by operation of law,
but excluding by way of merger or consolidation) any interest in the Investor
Shares (a “Transfer”) without the prior written consent of the Company,
except pursuant to the provisions of Sections 6.2 and 7 hereof; provided, that notwithstanding the foregoing, the Investor
may Transfer any or all of the Investor Shares at any time without the prior
written consent of the Company to (i) a Controlled Affiliate or (ii) a
Controlling Affiliate.  Investor shall
not directly or indirectly seek to avoid the provisions of this Section 9.2(a)
by transferring or issuing, or permitting the transfer or issuance of, any
direct or indirect equity or beneficial interest in Investor, in a manner
designed to avoid or resulting in the avoidance of the provisions of this
Section 9.2(a).  Notwithstanding the
above provisions of this Section 9.2(a), prior written consent of the Company
is not required for any Transfer made after December 31, 2009.

(b)           In the event the Investor Transfers any or all of the
Investor Shares to another Person in accordance with the terms of this
Agreement (whether or not consent is required by the Company), such transferee
shall succeed to and agree to be bound by all rights, remedies, obligations and
liabilities of the Investor under the Agreement with respect to such Investor
Shares.  Any Transfer or attempted
Transfer in violation of any provision of this Agreement shall be void, and the
Company shall not record such Transfer on its books or treat any purported
transferee of such Investor Shares as the owner of such shares for any purpose.

(c)           Except as otherwise provided herein, the provisions hereof
shall inure to the benefit of, and be binding upon, the successors, assigns,
heirs, executors, and administrators of the parties hereto.  Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
by this Agreement.

9.3           Entire Agreement.  This Agreement and the other documents
delivered pursuant hereto constitute the full and entire understanding and
agreement among the parties with regard to the subjects hereof and thereof.  Subject
to the provisions of Section 9.10 below, neither this Agreement nor any
term hereof may be amended, waived, discharged or terminated other than by a
written instrument signed by the party against whom enforcement of any such
amendment, waiver, discharge or termination is sought, unless otherwise
provided.

9.4           Notices, Etc.  All notices and other communications required
or permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, return receipt requested, or otherwise
delivered by hand or by messenger, or by telecopier (facsimile) addressed as
follows:

 27
 

 

 

	
  If to the Company:

  	
   

  	
  KIMBALL HILL, INC.

  
	
   

  	
   

  	
  5999 New Wilke Road

  
	
   

  	
   

  	
  Suite 504

  
	
   

  	
   

  	
  Rolling Meadows, Illinois 60008

  
	
   

  	
   

  	
  Attn: Chief Executive Officer

  
	
   

  	
   

  	
  Telephone No.: (847) 981-2981

  
	
   

  	
   

  	
  Facsimile No.:  (847) 439-0875

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  KIMBALL HILL, INC.

  
	
   

  	
   

  	
  5999 New Wilke Road

  
	
   

  	
   

  	
  Suite 504

  
	
   

  	
   

  	
  Rolling Meadows, Illinois 60008

  
	
   

  	
   

  	
  Attn: Office of the General Counsel

  
	
   

  	
   

  	
  Telephone No.: (847) 981-2981

  
	
   

  	
   

  	
  Facsimile No.:  (847) 981-2980

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  KIRKLAND & ELLIS LLP

  
	
   

  	
   

  	
  200 East Randolph

  
	
   

  	
   

  	
  Chicago, Illinois 60601

  
	
   

  	
   

  	
  Attn: Robert M. Hayward

  
	
   

  	
   

  	
  Telephone No.: (312) 861-2133

  
	
   

  	
   

  	
  Facsimile No.:  (312) 861-2200

  
	
   

  	
   

  	
   

  
	
  If to the Investor:

  	
   

  	
  EQUITY INVESTMENTS III, LLC

  
	
   

  	
   

  	
  8400 Normandale Lake Blvd. Ste. 250

  
	
   

  	
   

  	
  Minneapolis, MN 55437

  
	
   

  	
   

  	
  Attn: Laura Mollet

  
	
   

  	
   

  	
  Telephone No.: (952) 857-6911

  
	
   

  	
   

  	
  Facsimile No.:  (952) 857-6949

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  LATHAM & WATKINS LLP

  
	
   

  	
   

  	
  233 S. Wacker Drive, Suite 5800

  
	
   

  	
   

  	
  Chicago, Illinois 60606

  
	
   

  	
   

  	
  Attn: Richard S. Meller

  
	
   

  	
   

  	
  Telephone No.: (312) 876-6521

  
	
   

  	
   

  	
  Facsimile No.:  (312) 993-9767

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  EQUITY INVESTMENTS III, LLC

  
	
   

  	
   

  	
  7501 Wisconsin Avenue, Suite 900

  
	
   

  	
   

  	
  Bethesda, MD 20814-6528

  
	
   

  	
   

  	
  Attn: Tad MacDonnell

  
	
   

  	
   

  	
  Telephone No.: (301) 215-6215

  
	
   

  	
   

  	
  Facsimile No.:  (301) 215-7210

  

 

If to any other holder of
any Investor Shares, at such address as such holder shall have furnished to the
Company in writing.  The Company or the
Investor may change its address for notices hereunder by a notice given
pursuant to this Section 9.4.  Unless
specifically stated

 28
 

 

otherwise, if notice is
provided by mail, it shall be deemed given on the third business day next
succeeding the day on which it is sent if sent by registered or certified mail,
if notice is delivered by hand or by messenger, it shall be deemed given upon
actual delivery, and if notice is given by facsimile, it shall be deemed given
upon facsimile confirmation that such notice was received.

9.5           Delays or Omissions.  No delay or omission to exercise any right,
power, or remedy accruing to Investor or the Company upon any breach or default
of the other under this Agreement shall impair any such right, power, or remedy
of such party, nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring.  Any waiver, permit, consent,
or approval of any kind or character on the part of any party of any breach or
default under this Agreement, or any waiver on the part of any party of any
provisions or conditions of this Agreement, must be in writing and shall be
effective only to the extent specifically set forth in such writing or as
provided in this Agreement.  All
remedies, either under this Agreement or by law or otherwise afforded to any
party, shall be cumulative and not alternative.

9.6           Dispute Resolution Fees.  If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorney’s fees, costs, and disbursements
in addition to any other relief to which such party may be entitled.

9.7           Counterparts.  This Agreement may be executed in any number
of counterparts and signatures may be delivered by facsimile, each of which may
be executed by less than all parties, each of which shall be enforceable
against the parties actually executing such counterparts, and all of which
together shall constitute one instrument.

9.8           Severability.  If any provision of this Agreement becomes or
is declared by a court of competent jurisdiction to be illegal, unenforceable,
or void, portions of such provision, or such provision in its entirety, to the
extent necessary, shall be severed from this Agreement and the balance of this
Agreement shall be enforceable in accordance with its terms as if such
provision had never been contained herein.

9.9           Titles and Subtitles.  The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

9.10         Amendment and Waiver.  Any provision of this Agreement may be
amended or waived (either generally or in a particular instance and either
retroactively or prospectively) with the written consent of the Company and the
Investor.  Any amendment or waiver
effected in accordance with this paragraph shall be binding upon the Investor and
the Company.  In addition, either party
hereto may waive performance of any obligation owing to it, by the other party,
or agree to accept alternatives to such performance, without obtaining the
consent of the Investor.

9.11         Rights of Investors.  Each party to this Agreement shall have the absolute
right to exercise or refrain from exercising any right or rights that such
party may have

 29
 

 

by reason of this
Agreement, including, without limitation, the right to consent to the waiver or
modification of any obligation under this Agreement, and such party shall not
incur any liability to any other party or other holder of any securities of the
Company as a result of exercising or refraining from exercising any such right
or rights.

9.12         Aggregation of Stock.  All shares of Common Stock of the Company
held or acquired by affiliated entities or Persons shall be aggregated for the
purpose of determining the availability of any rights under this Agreement.

9.13         No Strict Construction.  The language used in this Agreement shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied against any party.

[SIGNATURE
PAGE FOLLOWS]

 

 30

 

IN
WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.

	
   

  	
   

  
	
  

  	
  KIMBALL HILL, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ David K. Hill

  	
   

  
	
   

  	
  Its:

  	
    Chairman and Chief Executive Officer

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  EQUITY INVESTMENTS III, LLC

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Tad MacDonnell

  	
   

  
	
   

  	
  Its:

  	
    Vice President

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