<PAGE> 1
As filed with the Securities and Exchange Commission on October 27, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
FORM S-4
Registration Statement
Under
the Securities Act of 1933
MODTECH HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0825386
(State of Incorporation) (I.R.S. Employer Identification No.)
2830 BARRETT AVENUE, PERRIS, CALIFORNIA 92571, (909) 943-4014
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
EVAN M. GRUBER, CHIEF EXECUTIVE OFFICER
2830 BARRETT AVENUE, PERRIS, CALIFORNIA 92571, (909) 943-4014
(Name, address, including zip code, and telephone number,
including area code, of agent for service of process)
COPIES TO:
Jon R. Haddan, Esq. Kevin A. Cudney, Esq.
Haddan & Zepfel LLP Dorsey & Whitney LLP
4675 MacArthur Court, Suite 710 370 17th Street, Suite 4400
Newport Beach, California 92660 Denver, Colorado 80202
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective and the
effective time of the proposed mergers described in the enclosed Joint Proxy
Statement/Prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended
(the "Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Title of Each Class Proposed Maximum Proposed Maximum
of Securities Amount to Offering Price Aggregate Amount of
to be Registered Be Registered (1) Per Share (2) Offering Price (2) Registration Fee (2)
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<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per share 12,622,158 $17.00 $221,188,649 $61,490
Series A Preferred Stock, par value $0.01 per share 388,939
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</TABLE>
(1) Represents the estimated maximum number of shares of Modtech
Holdings, Inc. Common Stock and Series A Preferred Stock which are
issuable upon consummation of the mergers.
(2) Pursuant to Rule 457(f)(1) promulgated under the Securities Act, the
registration fee is based on the market value of the Common Stock of
Modtech, Inc. as of October 23, 1998.
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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CROSS-REFERENCE SHEET TO FORM S-4 OF
MODTECH HOLDINGS, INC.
PART I. INFORMATION REQUIRED IN THE PROSPECTUS
<TABLE>
<CAPTION>
ITEM NUMBER IN FORM S-4 LOCATION IN JOINT PROXY STATEMENT/PROSPECTUS
----------------------- --------------------------------------------
<S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Facing Page; Outside Front Cover Page of Prospectus
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Table of Contents; Where You Can Find More Information;
Pages of Prospectus
3. Risk Factors, Ratio of Earnings to Outside Front Cover Page of Prospectus; Summary; Certain
Fixed Charges and Other Information Risk Factors
4. Terms of the Transaction Summary; The Mergers; Certain Provisions of the Merger
Agreement; Directors and Officers of Holdings
Following the Mergers; Description of Holdings
Capital Stock; Comparison of Rights of Stockholders
5. Pro Forma Financial Information Summary; Unaudited Pro Forma Combined
Condensed Financial Statements
6. Material Contacts with the Company Being Summary; The Mergers; Certain Provisions of the
Acquired Merger Agreement
7. Additional Information Required for Reoffering *
by Persons and Parties Deemed to be
Underwriters.
8. Interests of Named Experts and Counsel Experts; Legal Matters
9. Disclosure of Commission Position on Indemni- *
fication for Securities Act Liabilities
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants Summary; Where You Can Find More Information
11. Incorporation of Certain Information by Reference Where You Can Find More Information
12. Information with Respect to S-2 or S-3 Registrants *
13. Incorporation of Certain Information by Reference
14. Information with Respect to Registrants Other Summary; The Mergers; The Business of Modtech; Modtech
Than S-2 or S-3 Registrants Common Stock Prices and Dividends; Modtech
Management's Discussion and Analysis of Financial
Condition and Results of Operations
</TABLE>
1
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<TABLE>
<S> <C>
C. INFORMATION ABOUT THE COMPANY BEING
ACQUIRED
15. Information with Respect to S-3 Companies *
16. Information with Respect to S-2 or S-3 *
Companies
17. Information with Respect to Companies Other Summary; The Mergers; The Business of SPI; SPI
than S-2 or S-3 Companies Management's Discussions and Analysis of
Financial Condition and Results of Operations
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authoriza- Outside Front Cover of Prospectus; Summary; Certain Risk
tions are to be Solicited Factors; The Mergers; The Special Meetings; Certain
Provisions of the Merger Agreement; Description of
Holdings Capital Stock; Comparison of Rights of
Stockholders; Where You Can Find More Information
19. Information if Proxies, Consents or Authoriza- *
tions are not to be Solicited in an Exchange
Offer
</TABLE>
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* Not applicable.
2
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MODTECH, INC. SPI HOLDINGS, INC.
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Modtech, Inc. and SPI Holdings, Inc. have both
unanimously approved the merger of Modtech and SPI. We are planning to
accomplish the combination through concurrent mergers of Modtech and SPI into
separate subsidiaries of a new holding company, named Modtech Holdings, Inc.,
which is called "Holdings" in this Joint Proxy Statement/Prospectus.
SPI stockholders will receive 1.8785 shares of Holdings Common Stock for
each share of SPI Common or Preferred Stock they own. Subject to certain
adjustments described in this Joint Proxy Statement/Prospectus, they may elect
to receive $49.4097 per share of SPI stock in place of Holdings Common Stock for
up to 5.9176% of their SPI stock. Modtech stockholders will receive 0.8508
shares of Holdings common stock and $3.7293 in exchange for each share of
Modtech Common Stock held. Subject to certain adjustments described in this
Joint Proxy Statement/Prospectus, they may elect to receive up to 3.94% of their
shares from Holdings as Series A Preferred Stock instead of Holdings Common
Stock. Holdings' Common Stock is substantially identical to the Modtech Common
Stock currently outstanding.
The merger cannot be completed unless the stockholders of both companies
approve the merger agreement. We have each scheduled special meetings for our
stockholders to vote on the merger agreement. The Boards of Directors of Modtech
and SPI have unanimously determined that the merger of their respective
companies is in the best interest of their stockholders, and each Board
unanimously recommends that you vote FOR approval of the merger agreement. YOUR
VOTE IS VERY IMPORTANT.
IN DECIDING HOW TO VOTE, YOU SHOULD CONSIDER VARIOUS RISKS WHICH ARE
DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS UNDER THE HEADING, "CERTAIN
RISK FACTORS," BEGINNING AT PAGE 15.
Whether or not you plan to attend your meeting, please vote by completing
the enclosed proxy card and mailing it to us. If you sign, date, and mail your
proxy card without indicating how you want to vote, your proxy will be counted
as a vote in favor of the proposals submitted at your meeting. If your shares
are held in "street name," you must instruct your broker in order to vote. If
you fail to return your proxy card or fail to instruct your broker, you will in
effect vote against the merger agreement.
The date, times and places of the special meetings are as follows:
FOR MODTECH STOCKHOLDERS:
___________, December __, 1998, 10:00 a.m.
Sheraton Newport Hotel
4545 MacArthur Boulevard
Newport Beach, California 92660
FOR SPI STOCKHOLDERS:
___________, December __, 1998, 10:00 a.m.
9550 Hermosa Avenue
Rancho Cucamonga, California 91730
This Joint Proxy Statement/Prospectus provides you with detailed
information about the proposed merger. Again, we encourage you to read it
carefully and understand it before you vote. You may obtain additional
information about Modtech from documents that it has filed with the Securities
and Exchange Commission.
___________________________________ _____________________________________
Evan M. Gruber Patrick Van Den Bossche
Chief Executive Officer President and Chief Executive Officer
Modtech, Inc. SPI Holdings, Inc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE SECURITIES TO BE ISSUED IN THIS TRANSACTION OR
DETERMINED THAT THIS JOINT PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Joint Proxy Statement/Prospectus is dated October _____, 1998 and is
first being sent or given to stockholders on or about __________, 1998.
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MODTECH, INC.
2830 BARRETT AVENUE
PERRIS, CALIFORNIA 92571
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO THE STOCKHOLDERS OF MODTECH, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of the Stockholders of
Modtech, Inc., a California corporation ("Modtech"), will be held at 10:00 a.m.,
on December __, 1998, at the Sheraton Newport Beach Hotel, 4545 MacArthur
Boulevard, Newport Beach, California 92660, for the following purposes:
1. Mergers. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Reorganization and Merger, dated as of September 28, 1998
(the "Merger Agreement"), between SPI Holdings, Inc., a Colorado corporation
("SPI"), and Modtech, and the mergers contemplated therein. The Merger Agreement
provides for the merger of Modtech with a subsidiary of Modtech Holdings, Inc.
("Holdings"), a newly formed Delaware corporation (the "Modtech Merger"), and
the concurrent merger of SPI with a separate subsidiary of Holdings (the "SPI
Merger" and, together with the Modtech Merger, the "Mergers"). Pursuant to the
Mergers, both SPI and Modtech will become wholly owned subsidiaries of Holdings.
At the effective time of the Mergers, each outstanding share of Modtech Common
Stock other than shares owned by SPI, Modtech or their respective subsidiaries,
will be converted into the right to receive $3.7293 and 0.8508 of a share of
Holdings Common Stock. Subject to adjustments described in the Merger Agreement,
each Modtech stockholder may elect to receive 0.8508 shares of Holdings Series A
Preferred Stock in place of Holdings Common Stock at the same 0.8508 exchange
ratio for up to 3.94% of their shares of Modtech Common Stock.
Details of the Mergers and other important information concerning
Holdings, SPI and Modtech are more fully described in the accompanying Joint
Proxy Statement/Prospectus, which includes a copy of the Merger Agreement.
Please review this material carefully.
2. Other Business. To transact such other business as may properly come
before the Special Meeting or any postponements or adjournments thereof.
The Board of Directors has fixed the close of business on ________________
_______, 1998 as the record date for the determination of the holders of Modtech
Common Stock entitled to notice of, and to vote at, the Special Meeting. Only
stockholders of record at the close of business on such date are entitled to
notice of and to vote at the Special Meeting and any adjournment or postponement
thereof. The affirmative vote of a majority of the outstanding shares of Modtech
Common Stock entitled to vote thereon is necessary for approval and adoption of
the Merger Agreement and approval of the Mergers.
All stockholders are cordially invited to attend the Special Meeting in
person; however, to ensure your representation at the Special Meeting, you are
urged to mark, sign, date and return the enclosed proxy card as promptly as
possible in the postage prepaid envelope enclosed for that purpose.
THE VOTE OF ALL HOLDERS OF MODTECH COMMON STOCK IS IMPORTANT. WHETHER OR
NOT YOU ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN THE
ACCOMPANYING PROXY CARD IN THE POSTAGE PREPAID ENVELOPE AS SOON AS POSSIBLE.
YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE ACCOMPANYING
JOINT PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE
SPECIAL MEETING.
IF YOU ATTEND THE SPECIAL MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE YOUR
SHARES OF MODTECH COMMON STOCK IN PERSON.
The Board of Directors unanimously recommends that the holders of Modtech
Common Stock vote for approval and adoption of the Merger Agreement and the
Mergers.
Sincerely,
/s/ EVAN M. GRUBER
-----------------------------------
Evan M. Gruber
CHIEF EXECUTIVE OFFICER
Perris, California
November __, 1998
HOLDERS OF MODTECH COMMON STOCK SHOULD NOT SEND IN THEIR STOCK CERTIFICATES WITH
THEIR PROXY CARD AT THIS TIME. RECORD HOLDERS OF MODTECH COMMON STOCK AT THE
EFFECTIVE TIME OF THE MERGER WILL RECEIVE A LETTER OF TRANSMITTAL WITH WHICH TO
MAKE AN ELECTION TO RECEIVE A PORTION OF THE MERGER CONSIDERATION IN PREFERRED
STOCK.
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SPI HOLDINGS, INC.
9550 HERMOSA AVENUE
RANCHO CUCAMONGA, CALIFORNIA 91730
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO THE STOCKHOLDERS OF SPI HOLDINGS, INC:
Notice is hereby given that a Special Meeting of the Stockholders of SPI
Holdings, Inc., a Colorado corporation ("SPI"), will be held at 10:00 a.m.,
December __, 1998, at 9550 Hermosa Avenue, Rancho Cucamonga, California 91730,
for the following purposes:
1. Mergers. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Reorganization and Merger dated as of September 28, 1998
(the "Merger Agreement"), between SPI and Modtech, Inc., a California
corporation ("Modtech"), and the mergers contemplated therein. The Merger
Agreement provides for the merger of SPI with a subsidiary of Modtech Holdings,
Inc. ("Holdings"), a newly formed Delaware corporation (the "SPI Merger"), and
the concurrent merger of Modtech with a separate subsidiary of Holdings (the
"Modtech Merger" and, together with the SPI Merger, the "Mergers"). Pursuant to
the Mergers, both SPI and Modtech will become wholly owned subsidiaries of
Holdings. At the effective time of the Mergers, each outstanding share of SPI
Common Stock, and each outstanding share of SPI's several series of preferred
stock ("SPI Preferred Stock" and, together with SPI Common Stock, "SPI Capital
Stock"), other than shares owned by SPI, Modtech or their respective
subsidiaries, will be converted into the right to receive 1.8785 shares of
Holdings Common Stock. Each SPI stockholder may elect to receive in place of
Holdings Common Stock $49.4097 per share for up to 5.9176% of their shares of
SPI Capital Stock. If such elections do not total $8,076,133, additional shares
will be converted to cash, first pro rata among those SPI stockholders who
elected to receive cash and then pro rata among those SPI stockholders who did
not make such an election, until the cash being paid equals $8,076,133.
Details of the proposed Mergers and other important information concerning
Holdings, SPI and Modtech are more fully described in the accompanying Proxy
Statement/Prospectus, which includes a copy of the Merger Agreement. Please
review this material carefully.
2. Other Business. To consider and act upon any other matters that may
properly come before the Special Meeting or any postponement or adjournment
thereof.
The SPI Board of Directors has fixed the close of business on ___________,
1998 as the record date for determining the stockholders having the right to
vote at the meeting or any adjournment thereof. Only stockholders of record at
the close of business on that date are entitled to notice of and to vote at the
Special Meeting and any postponement or adjournment thereof. The affirmative
vote of 70% of the outstanding shares of SPI Common Stock and SPI Preferred
Stock entitled to vote thereon, voting together as a single class, is required
to approve and adopt the Merger Agreement and the Mergers.
THE VOTE OF ALL HOLDERS OF SPI COMMON STOCK AND PREFERRED STOCK IS
IMPORTANT. WHETHER OR NOT YOU ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND RETURN THE ACCOMPANYING PROXY CARD IN THE POSTAGE PREPAID ENVELOPE AS
SOON AS POSSIBLE.
YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE ACCOMPANYING
JOINT PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE
SPECIAL MEETING.
IF YOU ATTEND THE SPECIAL MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE YOUR
SHARES OF SPI COMMON STOCK OR PREFERRED STOCK IN PERSON.
The Board of Directors unanimously recommends that the holders of SPI
Common Stock and Preferred Stock vote for approval and adoption of the Merger
Agreement and the Mergers at the SPI Special Meeting.
Sincerely,
/s/ PATRICK VAN DEN BOSSCHE
-----------------------------------
Patrick Van Den Bossche,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Rancho Cucamonga, California
November __, 1998
SPI STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARD AT
THIS TIME. RECORD HOLDERS OF SPI COMMON OR PREFERRED STOCK AT THE EFFECTIVE TIME
OF THE MERGER WILL RECEIVE A LETTER OF TRANSMITTAL WITH WHICH TO MAKE AN
ELECTION TO RECEIVE COMMON STOCK OR A COMBINATION OF COMMON STOCK AND CASH.
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE
MODTECH/SPI MERGER...............................................1
SUMMARY.....................................................................6
The Companies....................................................6
The Special Meetings.............................................7
Record Date; Voting Power........................................7
Nasdaq Listing of Holdings Common Stock..........................7
Share Ownership of Management and Certain
Stockholders...................................................7
Conflicts of Interest............................................8
Board of Directors Following the Mergers.........................8
Comparative Per Share Market Price
Information....................................................8
Approvals........................................................8
Conditions to the Mergers........................................8
Termination of the Merger Agreement..............................9
Termination Fee..................................................9
Dissenters' Rights...............................................9
Opinion of Modtech's Financial Advisor..........................10
Forward-Looking Statements May Prove
Inaccurate....................................................10
Comparative Historical and Pro Forma
Per Share Data................................................11
Modtech Selected Financial
Data..........................................................12
SPI Selected Financial Data.....................................13
Modtech and SPI Selected Unaudited
Pro Forma Combined Condensed
Financial Information.........................................14
CERTAIN RISK FACTORS.......................................................15
Risks Related to Mergers........................................15
Risks Related to Modtech........................................17
Risks Related to SPI............................................18
THE MERGERS................................................................20
General.........................................................20
Background of the Mergers.......................................20
Reasons for the Mergers; Recommen-
dations of the Boards of Directors............................22
Form of the Mergers.............................................24
Merger Consideration............................................24
Opinion of Modtech's Financial Advisor..........................25
Procedures for Election of Merger
Consideration and Surrender of Stock
Certificates; Fractional Shares...............................28
Effective Time..................................................29
Effect on SPI Stock Plan........................................29
Effect on SPI Warrants..........................................30
Effect on Modtech Stock Plans...................................30
Certain Federal Income Tax Consequences.........................30
Conflicts of Interest...........................................34
Accounting Treatment............................................36
Approvals and Consents..........................................36
Nasdaq Listing..................................................37
Resales of Stock................................................37
Dissenters' Rights..............................................37
Cautionary Statement Concerning Forward-
Looking Statements............................................40
THE SPECIAL MEETINGS.......................................................42
Purpose, Time and Place.........................................42
Record Date; Voting Power.......................................42
Votes Required..................................................43
Share Ownership of Management and Certain
Stockholders..................................................43
Voting of Proxies...............................................43
Revocability of Proxies.........................................44
Solicitation of Proxies.........................................44
CERTAIN PROVISIONS OF THE MERGER
AGREEMENT.......................................................45
Conditions to Consummation of the
Mergers.......................................................45
Conduct of Business Pending the Mergers.........................46
Termination.....................................................46
Termination Fee.................................................47
Certain Representations and Warranties..........................48
Indemnification.................................................48
Fees and Expenses...............................................49
Amendment and Waiver............................................49
THE BUSINESS OF HOLDINGS...................................................51
THE BUSINESS OF MODTECH....................................................52
MODTECH MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................................59
MODTECH COMMON STOCK PRICES
AND DIVIDENDS............................................................63
THE BUSINESS OF SPI........................................................64
SPI MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................68
UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL
STATEMENTS......................................................74
DIRECTORS AND OFFICERS OF HOLDINGS
FOLLOWING THE MERGERS...........................................84
Directors.......................................................84
</TABLE>
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<TABLE>
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Compensation of Holdings' Directors
and Committees of the Board of
Directors......................................................87
Holdings' Executive Officers....................................87
Compensation of Holdings Executive
Officers......................................................87
Compensation of Modtech's Directors
and Executive Officers........................................87
Compensation of SPI's Directors and
Executive Officers............................................87
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT OF HOLDINGS..........................................91
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT OF MODTECH...........................................93
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT OF SPI...............................................95
DESCRIPTION OF HOLDINGS CAPITAL
STOCK...........................................................97
COMPARISON OF RIGHTS OF
STOCKHOLDERS....................................................99
EXPERTS...................................................................104
LEGAL MATTERS.............................................................104
OTHER MATTERS.............................................................104
WHERE YOU CAN FIND MORE
INFORMATION....................................................104
INDEX TO FINANCIAL STATEMENTS.............................................F-1
ANNEXES
Annex I - Agreement and Plan of
Reorganization and Merger
Annex II - Opinion of Donaldson, Lufkin &
Jenrette Securities Corporation
Annex III - Chapter 13 of the California General
Corporation Law Relating to
Dissenters' Rights
Annex IV - Article 113 of the Colorado Business
Corporation Act Relating to
Dissenters' Rights
</TABLE>
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QUESTIONS AND ANSWERS
ABOUT THE MODTECH/SPI MERGER
1. Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
A: Modtech and SPI believe that their combination will create value for
both companies' stockholders through:
- Product diversification -- At present, Modtech makes modular
relocatable classrooms and SPI makes commercial and light industrial
modular buildings.
- Geographic expansion -- Modtech currently does business primarily in
California and also in Nevada and Arizona. SPI currently does
business in California, Arizona, Nevada, Colorado, Texas, New Mexico
and other neighboring states.
- Greater efficiencies in operation -- We plan to consolidate certain
manufacturing and administrative functions of both companies. We
will seek purchasing, shipping and other efficiencies as a result of
the Mergers.
- Liquidity -- Modtech stockholders will receive a total of
$39,923,742 in cash. SPI stockholders will receive publicly traded
stock in Holdings in exchange for their investment in SPI, which is
a privately held company. SPI stockholders will also receive a total
of $8,076,133 in cash.
2. Q: HOW ARE THE COMPANIES MERGING?
A: They are merging through concurrent mergers with separate
subsidiaries of Holdings.
3. Q: HOW DOES HOLDINGS DIFFER FROM MODTECH?
A: Once the Mergers occur, Holdings will be the holding company owning
both Modtech and SPI. Holdings will be a Delaware corporation.
Modtech is a California corporation. Holdings common stock will be
substantially the same as Modtech's existing common stock. The
Holdings Board of Directors will consist of nine members, including
four current directors of Modtech (Evan M. Gruber, Charles C.
McGettigan, Myron A. Wick III, and Daniel J. Donahoe III); three
current directors of SPI, (Patrick Van Den Bossche, Charles A.
Hamilton and Charles R. Gwirtsman); and two outside directors who
have not yet been selected. Evan M. Gruber, Chief Executive Officer
of Modtech, will serve as the Chief Executive Officer of Holdings,
and Michael G. Rhodes, Chief Operating Officer of Modtech, will
serve as Chief Operating Officer and Chief Financial Officer of
Holdings. They will be joined by Patrick Van Den Bossche, President
of SPI, who will hold the same position at Holdings.
4. Q: WHAT WILL I RECEIVE FOR MY STOCK?
A: Modtech stockholders will receive $3.7293 and 0.8508 shares of
Holdings Common Stock for each share of Modtech Common Stock they
own at the time of the Mergers. In place of shares of Holdings
Common Stock, Modtech stockholders may elect to receive the same
number of shares of Holdings Series A Preferred Stock for up to
3.94% of their shares of Modtech Common Stock. The number of shares
of Holdings Series A Preferred Stock that Modtech stockholders may
elect to receive will be
1
<PAGE> 10
adjusted in accordance with the Merger Agreement.
SPI stockholders will receive 1.8785 shares of Holdings Common Stock
for each share of SPI Common or Preferred stock that they own. Each
SPI stockholder may elect to receive, in place of Holdings Common
Stock, $49.4097 per share of SPI stock for up to 5.9176% of the
total shares of SPI Common Stock and SPI Preferred Stock they own.
The cash to be paid and the shares to be issued in the Mergers is
sometimes referred to in this Joint Proxy Statement/Prospectus as
the "Merger Consideration." With respect to the Modtech Merger, the
cash and shares is sometimes referred to as the "Modtech Merger
Consideration," and, with respect to the SPI Merger, as the "SPI
Merger Consideration."
5. Q: WILL HOLDINGS COMMON STOCK BE LISTED FOR TRADING ON THE NASDAQ
NATIONAL MARKET?
A: Yes, Holdings Common Stock will be listed on the Nasdaq National
Market, but Holdings Series A Preferred Stock will not be listed.
6. Q: HOW DO I ELECT TO RECEIVE CASH FOR A PORTION OF MY SHARES?
A: SPI Stockholders: You will make your election on the letter of
transmittal we will send to you through ChaseMellon Shareholder
Services LLC, our Exchange Agent for the Mergers. In order for your
election to be effective, you must send in your SPI stock
certificates along with the letter of transmittal. You may make
different elections for each share of SPI Common or Preferred Stock
(collectively, "SPI Capital Stock") that you own. If you do not make
an election on the letter of transmittal, you will receive 1.8785
shares of Holdings Common Stock for each share of SPI Capital Stock
that you own.
Modtech Stockholders: You may not make an election to receive a
different proportion of cash and securities. You will receive
$3.7293 and 0.8508 shares of Holdings Common Stock for each share of
Modtech Common Stock you own. However, you may elect to receive
Holdings Series A Preferred Stock in place of Holdings Common Stock
for up to 3.94% of your shares of Modtech Common Stock. You will
make your elections when you send in your Modtech stock certificate
with the letter of transmittal that the Exchange Agent will send to
you shortly after the Mergers are completed.
7. Q: WHY ARE MODTECH STOCKHOLDERS BEING OFFERED THE RIGHT TO SELECT
HOLDINGS SERIES A PREFERRED STOCK IN PLACE OF HOLDINGS COMMON STOCK?
A: Holdings Series A Preferred Stock is being offered in order for the
Modtech Merger to meet the requirements of Section 351 of the
Internal Revenue Code and is being offered to all Modtech
stockholders because California law requires all stockholders in a
merger be offered the same consideration. Because the Holdings
Series A Preferred Stock does not have voting rights and will not be
listed on any exchange (See "Description of Holdings Capital
Stock"), it is anticipated that no Modtech stockholders, other than
Proactive Partners, L.P. and Lagunitas Partners, will select
Holdings Series A Preferred Stock in place of Holdings Common Stock.
Proactive Partners, L.P., and Lagunitas Partners have agreed to
accept all of Holdings Series A Preferred Stock offered in order for
the Modtech Merger to meet the requirements
2
<PAGE> 11
of Section 351 of the Internal Revenue Code.
8. Q: IF I AM AN SPI STOCKHOLDER AND ELECT TO RECEIVE $49.4097 A SHARE FOR
UP TO 5.9176% OF MY SHARES, CAN I BE REQUIRED TO ACCEPT MORE CASH?
A: Yes. The Merger Agreement requires that the total cash elected by
SPI stockholders must equal $8,076,133. If the total cash does not
equal $8,076,133, additional shares of SPI Common and Preferred
Stock will be converted to cash at $49.4097 per share pro rata among
SPI stockholders who elected to receive cash for some of their
shares until the total cash to be paid for SPI Capital Stock equals
$8,076,133. In such a case, stockholders who elected to receive cash
for less than 5.9176% of the shares, as well as stockholders who
elected to receive cash for 5.9176% of their shares, may be required
to accept more cash.
9. Q: IF I AM AN SPI STOCKHOLDER, CAN I ELECT TO RECEIVE $49.4097 A SHARE
FOR MORE THAN 5.9176% OF MY SHARES?
A: No. You may not voluntarily elect to receive cash for more than
5.9176% of your shares, although you may be required to accept cash
for more shares as stated in the preceding answer.
10. Q: IF I AM AN SPI STOCKHOLDER AND DO NOT ELECT TO RECEIVE $49.4097 A
SHARE FOR ANY OF MY SHARES, CAN I BE REQUIRED TO ACCEPT CASH?
A: Yes. If all those SPI stockholders who elected to convert a portion
of their shares to cash have all of their remaining shares converted
to cash and the total cash to be paid for shares of SPI Capital
Stock is still less than $8,076,133, then stockholders who did not
elect to have any shares converted to cash will have their shares
converted to cash pro rata based on all remaining shares not yet
converted to cash until the total cash to be paid equals $8,076,133.
11. Q: HOW WILL FRACTIONAL SHARES BE HANDLED?
A: Holdings will not issue fractional shares. Instead, Holdings will
pay cash to each SPI stockholder and Modtech stockholder who would
otherwise be entitled to receive a fractional share of Holdings
Common Stock. The payment will be based on the closing price of
Modtech Common Stock on the last trading day on the Nasdaq National
Market prior to the completion of the Mergers. Each Modtech
stockholder who would otherwise be entitled to receive a fractional
share of Holdings Series A Preferred Stock will receive shares of
Holdings Series A Preferred Stock rounded upward to the nearest
number of whole shares.
12. Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGERS?
A: We have been advised by tax counsel that (1) the cash received in
the Mergers will be taxable to the stockholders, and (2) the shares
of Holdings Common Stock and Holdings Series A Preferred Stock will
be received tax free.
Tax matters are very complicated and the tax consequences of the
Mergers will depend on the facts of your own situation. You should
consult your tax advisors for a full understanding of the tax
consequences of the Mergers to you. See "The Mergers -- Certain
Federal Income Tax Consequences."
3
<PAGE> 12
13. Q: SHOULD I SEND IN MY SPI OR MODTECH STOCK CERTIFICATES NOW?
A: No. After the Mergers are completed, the Exchange Agent will send
SPI stockholders and Modtech stockholders written instructions for
exchanging their stock certificates.
14. Q: WHAT DO I NEED TO DO NOW?
A: Please mail your signed proxy card in the enclosed postage prepaid
return envelope as soon as possible, so that your shares may be
represented and voted at the appropriate stockholders' meeting. YOUR
VOTE IS VERY IMPORTANT.
If you sign and send in your proxy and do not indicate how you want
to vote, your proxy will be counted as a vote in favor of the
proposals. If you do not vote or you abstain, it will have the
effect of a vote against the proposals. You may withdraw your proxy
up to and on the day of your stockholders' meeting by following the
directions on page 44.
Modtech's meeting will take place on ___________, December __, 1998
at 10:00 a.m. and SPI's meeting will take place on ___________,
December __, 1998 at 10:00 a.m. You should sign and mail your proxy
card even if you are planning to attend your meeting as you can
still withdraw your proxy, change your vote or attend your meeting
and vote in person.
15. Q: WHAT AM I BEING ASKED TO VOTE UPON?
A: SPI stockholders: You are being asked to approve the Merger
Agreement which provides that SPI will become, through merger, a
wholly owned subsidiary of Holdings. It is intended that you will
receive Holdings' Common Stock tax free, but you will be taxed on
any cash you may receive. You are urged to consult your own tax
advisors.
Modtech stockholders: You are being asked to approve the Merger
Agreement which provides that Modtech will become, through merger, a
wholly owned subsidiary of Holdings. It is intended that you will
receive Holdings Common Stock and, if you elect, Holdings Series A
Preferred Stock, tax free. You will be taxed on any cash you
receive. You are urged to consult your own tax advisors.
16. Q: HOW MANY SHARES OF HOLDINGS STOCK WILL BE OUTSTANDING AFTER THE
MERGERS ARE COMPLETED?
A: After the Mergers, Holdings is expected to have approximately
14,844,519 shares outstanding on a fully diluted basis. This
includes approximately 12,622,158 shares of Common Stock, 388,939
shares of Series A Preferred Stock and options to acquire 1,833,422
shares of Common Stock. The options will be currently exercisable
for approximately 1,325,851 shares.
17. Q: WHAT VOTE IS REQUIRED FOR APPROVAL?
A: The Mergers must be approved:
- by holders of 70% of the votes entitled to be cast by holders of the
outstanding shares of SPI Common Stock and SPI's Series A-1, A-2,
A-3, A-4, A-5 and A-6 Preferred Stock, with the Common and Preferred
Stock voting together as a single class, and
- by holders of a majority of the votes entitled to be cast by holders
of the outstanding shares of Modtech Common Stock.
4
<PAGE> 13
18. Q: WHAT DO THE MODTECH AND SPI BOARDS OF DIRECTORS RECOMMEND?
A: Each Board of Directors unanimously approved the Merger Agreement
and recommends that their company's stockholders vote FOR the
proposal to approve the Merger Agreement and the Mergers.
19. Q: WHAT RISKS SHOULD I CONSIDER?
A: The exchange ratios of cash and Holdings shares for SPI and Modtech
shares are fixed. These exchange ratios will not change even if the
market price of Modtech Common Stock decreases before the Mergers
occur. Accordingly, the value of the Holdings stock and cash you
receive when the Mergers occur may be lower than the current market
value of Modtech's Common Stock. You should review "Certain Risk
Factors" on pages 15 through 19, as well as the countervailing
factors considered by each company's Board of Directors described
under "The Mergers--Reasons for the Mergers; Recommendations of the
Boards of Directors."
20. Q: WHEN ARE THE MERGERS EXPECTED TO OCCUR?
A: We are working to complete the Mergers by the end of 1998.
21. Q: WHAT WILL HOLDINGS DIVIDEND POLICY BE?
A: Holdings will continue Modtech's dividend policy. Modtech has not
declared a cash dividend to common stockholders since 1990 and has
no present intention to pay a dividend in the future.
22. Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions
on how to vote. Otherwise, without instructions, your shares will
not be voted. Shares that are not voted will have the effect of
votes against the proposals.
5
<PAGE> 14
SUMMARY
The Mergers described in this document are complex. This summary
highlights selected information from this document, but may not contain all the
information that is important to you. For a more complete understanding of the
Mergers and for a more complete description of the legal terms of the Mergers,
you should read this entire document carefully, as well as the additional
documents we refer you to. See "Where You Can Find More Information" (page 104).
THE COMPANIES
MODTECH, INC.
2830 Barrett Avenue
Perris, California 92571
(909) 943-4014
Modtech designs, manufactures, markets and installs modular relocatable
classrooms. Based upon 1997 net sales, Modtech believes that it is the largest
manufacturer of modular relocatable classrooms in California. Modtech's
classrooms are sold primarily to California school districts directly and to
third parties and the State of California primarily for lease to California's
school districts. Modtech's classrooms are engineered and constructed in
accordance with structural and seismic safety specifications adopted by the
California Department of State Architects which regulates all school
construction on public land. These standards are more rigorous than the
requirements for other portable units.
Modtech currently operates a total of seven production lines at five
plants, which serve Arizona and the Northern and Southern California markets.
Organized in 1982, Modtech maintains an Internet Web site that contains
information concerning its products and personnel and copies of its most recent
press releases at the address "http://www.modt.com."
SPI HOLDINGS, INC.
9550 Hermosa Avenue
Rancho Cucamonga, California 91730
(909) 484-4280
SPI is a leading designer, manufacturer and wholesaler of commercial and
light industrial modular buildings in the United States. Through its four
manufacturing plants, SPI designs and builds modular buildings to customer
specifications for a wide array of uses, including corporate and professional
office space; governmental, educational, recreational and religious facilities;
and construction site offices. SPI's end users include a number of Fortune 500
companies. SPI's modular buildings serve as temporary, semi-permanent and
permanent facilities and can function as free-standing buildings or additions to
existing structures.
SPI's modular buildings range in size and complexity from a basic
720-square foot module to a 50,000-square foot building combining several
structures and may contain multiple stories. SPI distributes its products
through national dealers, such as GE Capital Modular Space and Williams
Scotsman, and through multiple regional and local dealers. These dealers lease
(or, less frequently, sell) modular buildings to a diverse end user market.
SPI's operations and sales are presently concentrated in the State of California
and the Southwestern United States.
SPI's predecessor was founded in 1972. Since August 1997, SPI, through its
operating subsidiary, SPI Manufacturing, Inc., has completed three strategic
6
<PAGE> 15
acquisitions. In its first acquisition, the Company converted the manufacturing
facility of a mobile home builder to a fully operational modular construction
facility to provide additional manufacturing capacity in California. It then
acquired Office Master of Texas, Inc., located in Glen Rose, Texas, and Rosewood
Enterprises, Inc., located in Phoenix, Arizona, both of which are leading
modular building manufacturers in their respective regional markets.
MODTECH HOLDINGS, INC.
2830 Barrett Avenue
Perris, California 92571
(909) 943-4014
Holdings is a newly formed Delaware corporation. Holdings has not yet
conducted any business. Following the Mergers, Modtech stockholders will own
about 65.9% of Holdings Common Stock and SPI stockholders will own about 34.1%
of Holdings Common Stock. Since Modtech and SPI will become wholly-owned
subsidiaries of Holdings through the Mergers, the business of Holdings will
consist of the businesses of Modtech and SPI. Holdings will be a leading
manufacturer of modular classrooms and commercial and light industrial modular
buildings. Holdings will seek to achieve increased product and geographic
diversification, as well as increased operating efficiencies. Over the next
several years, Holdings will selectively pursue acquisition opportunities in
high-growth geographic areas of the United States.
THE SPECIAL MEETINGS (PAGE 42)
The Special Meeting of Modtech Stockholders will be held at the Sheraton
Newport Hotel, 4545 MacArthur Boulevard, Newport Beach, California, on
___________, December __, 1998 at 10:00 a.m. At the meeting, Modtech
stockholders will be asked to approve the Merger Agreement and the Mergers.
The Special Meeting of SPI Stockholders will be held at 9550 Hermosa
Avenue, Rancho Cucamonga, California 91730, on _________, ___________, 1998 at
10:00 a.m. At the meeting, SPI stockholders will be asked to approve the Merger
Agreement and the Mergers.
RECORD DATE; VOTING POWER (PAGE 42);
You are entitled to vote at your stockholders' meeting if you owned shares
as of the close of business on ___________, 1998, the Record Date.
On the Record Date, there were ___________ shares of SPI Capital Stock
entitled to vote at the Meeting of SPI Stockholders. Holders of SPI Capital
Stock each are entitled to one vote for each share of SPI Capital Stock held of
record on the Record Date .
On the Record Date, there were __________ shares of Modtech Common Stock
entitled to vote at the Special Meeting of Modtech Stockholders. Holders of
Modtech Common Stock are entitled to one vote for each share of stock held of
record on the Record Date.
NASDAQ LISTING OF HOLDINGS COMMON STOCK (PAGE 37)
Holdings will apply to list the Holdings Common Stock to be issued in
connection with the Mergers on the Nasdaq National Market. Holdings Series A
Preferred Stock will not be listed on any exchange.
SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN STOCKHOLDERS (PAGE 43)
On the Record Date, directors and executive officers of Modtech owned and
will be entitled to vote ____________ shares of Modtech Common Stock, or
approximately _____% of the voting power of the Modtech Common Stock outstanding
on the Record Date.
7
<PAGE> 16
On the Record Date, directors and executive officers of SPI owned and will
be entitled to vote __________ shares of SPI Capital Stock , or approximately
_______% of the voting power of SPI voting stock outstanding on the Record Date.
CONFLICTS OF INTEREST (PAGE 34)
Directors and executive officers of SPI and Modtech have interests in the
Mergers as employees and/or directors that are different from, or in addition
to, yours as a stockholder, including transaction advisory fees, employment
agreements, stock options, and other employment benefits.
The Board of Directors of Modtech and SPI each independently determined
that these conflicts of interest did not affect the benefits of the Mergers to
their company and stockholders.
BOARD OF DIRECTORS FOLLOWING THE MERGERS (PAGE 86)
The Board Directors of Holdings will be comprised of Evan M. Gruber,
Charles C. McGettigan, Myron A. Wick, Daniel J. Donahoe III (all of whom are
currently members of the Modtech Board), Patrick Van Den Bossche, Charles A.
Hamilton and Charles R. Gwirtsman (all of whom are currently members of the SPI
Board), and two outside directors to be nominated at a later date.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (PAGE 63)
Shares of Modtech Common Stock are listed on the Nasdaq National Market.
On September 28, 1998, the last full trading day on the Nasdaq National Market
prior to the public announcement of the Mergers, the last reported sales price
was $20.125. On ___________, 1998, the last full trading day prior to the date
of first mailing of this Joint Proxy Statement/Prospectus, the last reported
sales price was $_________ a share. The shares of SPI Capital Stock are
privately held. There were no reported sales of these shares during 1998.
APPROVALS (PAGE 36)
We are prohibited by U.S. antitrust laws from completing the Mergers until
after we have furnished certain information and materials to the Antitrust
Division of the Department of Justice and the Federal Trade Commission and a
required waiting period has ended. We each filed the required forms and
accompanying information and requested early termination of the waiting period.
On __________1998, the Federal Trade Commission granted our request and the
waiting period expired.
CONDITIONS TO THE MERGERS (PAGE 45)
We will complete the Mergers only if we satisfy several conditions,
including the following:
- - holders of 70% of the voting power of the SPI Capital Stock and holders of
a majority of the voting power of the Modtech Common Stock vote to adopt
the Merger Agreement and the Mergers;
- - no legal restraints or prohibitions prevent the consummation of the
Mergers;
- - all material approvals and authorizations are received;
- - not more than 5% of the Modtech or SPI stockholders exercise their
dissenters' rights.
- - certain agreements relating to the employment of key employees, the
registration and temporary restriction of resale of shares of Holdings
held by affiliates and the engagement of, and payment of fees to, certain
financial advisors are executed; and
- - our lawyers deliver certain tax opinions.
8
<PAGE> 17
Unless prohibited by law, either SPI or Modtech could waive a condition
that has not been satisfied and complete the Mergers anyway.
TERMINATION OF THE MERGER AGREEMENT PAGE 46)
We can jointly agree to call off the Mergers at any time before completing
them. Either of us can call off the Mergers if:
- - the other party's stockholders fail to approve the Mergers;
- - the Mergers have not been completed by March 28, 1999;
- - any government or court issues an order or takes another action enjoining
or prohibiting one or both of the Mergers;
- - the other party materially breaches any of its representations, warranties
or agreements under the Merger Agreement, and such breach is not cured
within 10 days; or
- - the other party's Board of Directors withdraws or adversely modifies its
approval or recommendation of the Merger Agreement or the Mergers.
Either party may call off the Mergers in order to pursue another merger or
similar transaction proposed by a third party before completion of the Mergers,
if that party's Board of Directors determines the third-party proposal is
superior to the Mergers.
TERMINATION FEE (PAGE 47)
If either party terminates the Merger Agreement to enter into an agreement
with a third party to sell or to merge with another company, it must pay to the
other party to the Merger Agreement, a termination fee of $2 million and must
reimburse the other party's transaction expenses. If either party terminates the
Merger Agreement because
- - the other party's stockholders fail to approve the Mergers;
- - the other party materially breaches any of its representations, warranties
or agreements under the Merger Agreement and the breach is not cured
within 10 days; or
- - the other party's Board of Directors withdraws or adversely modifies its
approval or recommendation of the Merger Agreement or the Mergers,
the other party must pay to the terminating party a fee of $2 million and must
reimburse the terminating party's expenses.
DISSENTERS' RIGHTS (PAGE 37)
As a stockholder of Modtech or SPI, you may have dissenters' rights as
described below. If you are considering whether to assert dissenters' rights,
you should be aware that the value for your shares could be determined under
applicable law to be greater than, equal to, or less than the consideration you
would receive in the Mergers if you did not elect to assert dissenters' rights.
MODTECH
Modtech is organized under California law. Modtech stockholders who
properly "dissent" from the Mergers by not voting in favor of the Mergers and
otherwise following the procedures required by California law will have the
right to have their shares purchased for their "fair market value" instead of
participating in the Mergers, but only if either their shares are subject to
restrictions on transfer imposed by Modtech or by law or regulation, or if the
holders of 5% or more of Modtech's Common Stock dissent.
SPI
9
<PAGE> 18
SPI is organized under Colorado law. SPI stockholders who properly
"dissent" from the Mergers will have the right to have their shares purchased
for their "fair value" rather than participating in the Mergers. SPI
stockholders may dissent by not voting in favor of the Mergers and by otherwise
following the procedures required by Colorado law.
OPINION OF MODTECH'S FINANCIAL ADVISOR (PAGE 25)
In deciding to approve the Mergers, the Modtech Board considered an
opinion from its financial advisor, Donaldson, Lufkin & Jenrette Securities
Corporation, as to the fairness of the consideration to be received by the
Modtech stockholders under the Merger Agreement from a financial point of view.
This opinion is attached as Annex II to this Joint Proxy Statement/Prospectus.
We encourage you to read and consider this opinion carefully, as well as the
information under "The Mergers -- Opinion of Modtech's Financial Advisor." SPI
did not obtain a fairness opinion.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (PAGE 40)
Modtech and SPI have each made forward-looking statements in this document
(and in documents that are incorporated by reference) that are subject to risks
and uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations of Modtech, SPI or Holdings.
Also, when we use words such as "believes," "expects," "anticipates," "intends,"
"plans," "estimates" or similar expressions, we are making forward-looking
statements. Stockholders should note that actual events and results may differ
materially from those expressed in forward-looking statements due to a number of
factors, including changes in legislation relating to funding for modular
classrooms, changes in building code laws or regulations, changes in Federal
income tax laws and general economic and market factors.
10
<PAGE> 19
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
The table below sets forth (a) the historical earnings per share, cash
dividends per share and book value per share data of Modtech for the six months
ended June 30, 1998 (unaudited) and the year ended December 31, 1997, and (b)
the unaudited pro forma per share data of SPI for the six months ended June 30,
1998 and the year ended December 31, 1997. It also sets forth the unaudited pro
forma combined per share data of Modtech and SPI for the six months ended June
30, 1998 and for the year ended December 31, 1997. The data should be read in
conjunction with the historical financial statements and notes thereto and the
selected historical financial data elsewhere in this Joint Proxy
Statement/Prospectus. The data should also be read in conjunction with the
Unaudited Pro Forma Combined Condensed Financial Statements included elsewhere
in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
MODTECH - HISTORICAL: DECEMBER 31, 1997 JUNE 30, 1998
- --------------------- ----------------- ----------------
<S> <C> <C>
Earnings per share................ $1.47 $0.93
Cash dividends per share.......... - -
Book value per share.............. $5.43 $5.78
YEAR ENDED SIX MONTHS ENDED
SPI - PRO FORMA DECEMBER 31, 1997 JUNE 30, 1998
- --------------- ----------------- ----------------
Earnings per share................ $1.05 $0.47
Cash dividends per share.......... - -
Book value........................ 5.29 5.7
MODTECH AND SPI PRO FORMA
COMBINED GIVING EFFECT YEAR ENDED SIX MONTHS ENDED
TO THE MERGERS DECEMBER 31, 1997 JUNE 30, 1998
- ------------------------- ----------------- ----------------
Earnings per share................ $1.09 $0.74
Cash dividends per share.......... - -
</TABLE>
<TABLE>
<CAPTION>
MODTECH AND SPI
COMBINED PRO FORMA
BOOK VALUE PER SHARE
FOR SIX MONTHS ENDED
JUNE 30, 1998
-------------------
<S> <C>
$6.96(A)
</TABLE>
- -----------
(A) Includes goodwill of approximately $8.37 per share.
11
<PAGE> 20
MODTECH SELECTED FINANCIAL DATA
The selected financial data which follows should be read in conjunction
with the audited financial statements and accompanying notes, the unaudited
condensed financial statements and accompanying notes of Modtech and "Modtech
Management's Discussion and Analysis of Results of Operations and Financial
Condition" included elsewhere in this Joint Proxy Statement/Prospectus. The
condensed consolidated financial statements of Modtech as of June 30, 1998 and
1997 and for the periods then ended are unaudited; however, in Modtech's
opinion, they reflect all adjustments, consisting only of normal recurring
items, necessary for a fair presentation of the financial position and results
of operations for such periods. See "Where You Can Find More Information."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- ---------------------
INCOME STATEMENT DATA: 1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ................................... $ 19,658 $ 20,355 $ 19,386 $ 49,886 $ 134,050 $ 58,906 $ 75,876
Cost of goods sold........................... 21,764 17,766 16,401 42,629 107,367 47,688 58,675
--------- --------- --------- --------- --------- --------- ---------
16,401
Gross profit (loss) ......................... (2,106) 2,589 2,985 7,257 26,683 11,218 17,201
Selling, general & administrative expenses .. 1,871 1,554 1,613 2,345 5,156 2,182 2,741
Restructuring charge (A) .................... 2,470 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations ............... (6,447) 1,035 1,372 4,912 21,527 9,036 14,460
Interest income (expense), net .............. (565) (471) (387) (422) (909) (549) 389
Other income (expense) ...................... 47 42 (1) (13) 92 64 15
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ........... (6,965) 606 984 4,477 20,711 8,551 14,864
Provision for income taxes .................. (1) (4) (19) (208) 7,703 3,356 5,649
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) ........................... (6,966) 602 965 4,269 13,008 5,195 9,215
========= ========= ========= ========= ========= ========= =========
Net income (loss) available for Common
Stock (B) ................................. $ (6,966) $ 602 $ 799 $ 4,221 $ 13,008 $ 5,195 $ 9,215
========= ========= ========= ========= ========= ========= =========
Basic earnings (loss) per share (C) ......... $ (2.02) $ 0.19 $ 0.25 $ 0.77 $ 1.47 0.60 0.93
Weighted average shares outstanding (C) ..... 3,455 3,209 3,170 5,461 8,854 8,670 9,856
Diluted earnings (loss) per common
share (C)(G) ............................. $ (2.02) $ 0.11 $ 0.14 $ 0.47 $ 1.31 0.55 0.83
Weighted average shares outstanding (C) ..... 3,455 5,294 6,712 $ 9,041 9,898 9,370 11,100
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
--------------------------------------------------------- ---------------------
BALANCE SHEET DATA: 1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital ............................. $ 3,063 $ 4,403 $ 4,383 $ 14,069 $ 36,417 $ 26,647 $ 44,473
Total assets ................................ 16,620 15,919 15,154 34,029 68,220 58,387 83,536
Total liabilities ........................... 11,889 7,900 6,411 18,716 20,177 37,800 26,563
Long-term debt, excluding current portion (D) 6,506 4,400 3,590 7,844 -- 15,132 --
Stockholders' equity ........................ 4,732 8,019 8,743 15,313 48,043 20,587 56,973
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- ---------------------
SELECTED OPERATING DATA: 1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross margin ................................ (10.7%) 12.7% 15.4% 14.5% 19.9% 19.0% 22.7%
Operating margin ............................ (32.8%) 5.1% 7.1% 9.8% 16.1% 15.3% 19.1%
Standard classrooms sold (E) ................ 680 698 605 1,610 4,514 2,066 2,600
Backlog at period end (F) ................... $ 6,000 $ 7,000 $ 4,100 $ 58,000 $ 71,000 $ 80,400 $ 60,100
</TABLE>
- ----------
(A) Reflects the write-off of intangible assets related to the Company's 1989
purchase of "Del-Tec", which manufactured more extensively customized,
higher priced units. Del Tec's operations were discontinued in the third
quarter of 1993.
(B) After deduction of preferred stock dividends paid or accrued of $166,000
and $48,000 for the years ended December 31, 1995 and 1996, respectively.
No shares of the Company's preferred stock were outstanding during the six
months ended June 30, 1997, and no shares currently are outstanding. See
Note 11 of Notes to Modtech's Financial Statements.
(C) Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share." All prior periods have
been restated accordingly.
(D) For a description of the Company's long-term debt, see Notes 5 and 6 of
Notes to Modtech's Financial Statements.
(E) Determined by dividing the total square footage of floors sold during the
year or six months by 960 square feet, the floor area of a standard
classroom. See "The Business of Modtech--General."
(F) The Company manufactures classrooms to fill existing orders only, and not
for inventory. Backlog consists of sales orders scheduled for completion
during the next 12 months.
12
<PAGE> 21
SPI SELECTED FINANCIAL DATA
The selected financial data which follows should be read in conjunction
with the audited financial statements and accompanying notes of SPI, the
unaudited condensed financial statements and accompanying notes of SPI, and the
"SPI Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Joint Proxy Statement/Prospectus. The
condensed consolidated financial statements of SPI as of June 30, 1998 and for
the three months ended June 30, 1997 and 1998 are unaudited; however, in SPI
management's opinion, they reflect all adjustments, consisting of only normal
recurring items, necessary for a fair presentation of the financial position and
results of operations for such periods. The information presented below does not
give pro forma effect to acquisitions completed by SPI during any of the periods
presented.
<TABLE>
<CAPTION>
PREDECESSOR SPI (A)
-----------------------------------------------------------------------------------------------------
Two Three
Months Year Months
YEAR ENDED Ended Ended Ended
JANUARY 31, March 27, March 31, June 30, June 30,
------------------------------------------------- ----------- ----------- ----------- -----------
1994 1995 1996 1997 1997 1998 1997 1998
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(dollars in thousands, except per share data and operating data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ................ $ 8,873 $ 17,132 $ 13,429 $ 24,113 $ 6,033 $ 42,180 $ 9,837 $ 20,925
Cost of sales ............ 7,378 13,113 10,541 19,035 4,106 32,458 7,526 16,588
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit (B) ......... 1,495 4,019 2,888 5,078 1,927 9,722 2,261 4,337
Selling, general and
administrative expenses. 1,312 2,383 2,609 1,644 507 2,667 499 1,183
Management and monitoring
fees ................... -- -- -- -- -- 225 56 84
Depreciation and
amortization ........... 26 43 49 78 13 1,751 306 667
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations ... 157 1,593 230 3,356 1,407 5,079 1,400 2,403
Interest income (expense),
net .................... 10 21 80 78 21 (1,439) (382) 835
Other income (expense) .. -- -- 34 (6) 90 36 2 (1)
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income
taxes .................. 167 1,614 344 3,428 1,518 3,676 1,020 1,569
Income tax provision ..... 57 518 141 1,409 660 1,580 439 550
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) ........ $ 110 $ 1,096 $ 203 $ 2,019 $ 858 $ 2,096 $ 581 $ 1,019
========== =========== =========== =========== =========== =========== =========== ===========
PER SHARE DATA (C):
Basic net income
per share............... $ 1.30 $ .36 $ .47
=========== =========== ===========
Diluted net income per
share .................. $ 1.12 $ .31 $ .40
=========== =========== ===========
Number of shares used in
computing basic net
income per share ....... 1,612,785 1,600,000 2,190,616
Number of shares used in
computing diluted net
income (loss)
per share............... 1,877,928 1,856,931 2,527,088
SELECTED OPERATING DATA:
Number of structures sold
during period .......... 505 1,165 879 1,560 404 2,659 632 1.295
Average price per
structure .............. $ 17,570 $ 4,705 $ 15,277 $ 15,457 $ 14,933 $ 15,863 15,565 16,284
BALANCE SHEET DATA:
Working capital
(deficit)............... $ 842 $ 1,920 $ 1,701 $ 3,671 $ 4,547 $ 1,170 $ 531 $ (1,138)
Total assets ............. 1,921 3,517 4,511 7,648 9,250 25,768 19,483 53,271
Long-term debt, net ...... -- -- -- 13 -- 11,624 9,691 26,023
Total stockholders'
equity.................. 1,062 2,158 2,361 4,380 5,238 6,702 4,700 13,157
</TABLE>
- ----------
(A) SPI applied purchase accounting upon its acquisition by management and an
investor group on March 27, 1997. Accordingly, the financial statements of
SPI are not comparable to its statements prior to the acquisition. Also,
SPI adopted a March 31 year-end upon consummation of the acquisition.
(B) SPI's historical presentation and allocation of expenses is not consistent
with the presentation of Modtech's gross profit. SPI has not adjusted its
gross profit calculation to conform with Modtech's presentation.
(C) Per share data is computed in accordance with SFAS No. 128. See Note 2 to
SPI's Consolidated Financial Statements.
13
<PAGE> 22
MODTECH AND SPI SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION
The summary unaudited pro forma combined condensed financial
information has been derived from, or prepared on a basis consistent with, the
unaudited pro forma combined condensed financial statements of Modtech and SPI
included elsewhere in this Joint Proxy Statement/Prospectus. This data is
presented for illustrative purposes only and is not necessarily indicative of
the combined results of operations or financial position that would have
occurred if the Mergers had occurred at the beginning of each period presented
or on the dates indicated, nor is it necessarily indicative of future operating
results or financial position of the combined companies.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
YEAR ENDED 1998 OR AS OF
DECEMBER 31, JUNE 30,
1997 1998
----------- -----------
(dollars in thousands, except
per share data)
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues ..................................................... $ 214,547 $ 117,802
Net income ................................................... $ 13,830 $ 9,361
Basic earnings per share ..................................... $ 1.09 $ 0.74
Diluted earnings per share ................................... $ 0.93 $ 0.63
BALANCE SHEET DATA:
Total assets ................................................. $ 183,584
Borrowings under investment agreements and other debt ........ $ 61,510
Stockholders' equity ......................................... $ 87,907
Book value per share ......................................... $ 6.96(A)
</TABLE>
- -----------
(A) Includes goodwill of approximately $8.37 per share.
14
<PAGE> 23
CERTAIN RISK FACTORS
In considering whether to approve and adopt the Merger Agreement, the
stockholders of SPI and Modtech should consider, among other risk factors, the
following:
RISKS RELATED TO THE MERGERS
FIXED MERGER CONSIDERATION DESPITE POTENTIAL CHANGE IN MODTECH STOCK PRICE
The share exchange ratios and the cash payment price to be paid in the
Modtech Merger and the SPI Merger as described elsewhere in this Joint Proxy
Statement/Prospectus (See "The Mergers -- Merger Consideration") will not be
adjusted despite any increase or decrease in the price of Modtech Common Stock.
The price of Modtech Common Stock when the Mergers occur may vary from its price
at the date of this Joint Proxy Statement/Prospectus and at the date of the
Special Meetings. For example, during the 12-month period ending on September
30, 1998, 1998, the closing price of Modtech Common Stock varied from a low of
$11.625 to a high of $29.750 and ended that period at $17.500. (See "Modtech
Common Stock Prices and Dividends" for further information). Further variations
in the price of Modtech's Common Stock from the date of this Joint Proxy
Statement/Prospectus may be the result of changes in the business or operations
of Modtech or the prospects of its businesses, changes in market assessments of
Modtech or SPI's business, operations, or prospects, or in market assessments of
the effects of the Mergers, or the likelihood they will be consummated, the tax
effects of the Mergers, and the timing thereof, as well as general market and
economic conditions and other factors. At the time of the SPI Special Meeting
and the Modtech Special Meeting, the holders of Modtech and SPI shares will not
know the exact value of the Holdings shares that they will receive when the
Mergers are completed. Modtech and SPI stockholders are urged to obtain current
market quotations for Modtech Common Stock.
INTEGRATION OF OPERATIONS
For the Mergers to result in the anticipated long-term strategic benefits,
the management of Holdings must integrate the administrative, production,
engineering and accounting functions of the two companies and coordinate their
separate sales and marketing systems in a profitable manner. SPI has not yet
fully integrated the operations of its recent acquisitions, Rosewood
Enterprises, Inc. and Office Master of Texas, Inc. Any difficulties encountered
in integrating the businesses of Modtech and SPI, or in completing the
integration of Rosewood and Office Master, could adversely impact the operations
of one or both companies.
DECREASE IN CASH AND INCREASE IN DEBT
As of June 30, 1998, Modtech had about $25 million in cash and no
long-term debt. Almost all of Modtech's cash reserves will be used to partially
pay the cash portion of the Merger Consideration to Modtech and SPI
stockholders. Following the Mergers, Modtech's assets, together with the assets
of SPI, will be encumbered by approximately $45 million of new debt. The
proceeds from this debt will be used to pay the balance of the cash portion of
the Merger Consideration, refinance SPI's existing debt, pay transaction
expenses of the Mergers and fund working capital needs. As a result of the
decrease in cash, the debt must be serviced by cash from operations. If current
levels of operations of Modtech or SPI decrease, cash from operations may not be
sufficient to service Holdings' debt.
CHANNELS OF DISTRIBUTION
Modtech has historically sold most of its products through its direct
sales force, while SPI has historically sold most of its products through its
independent dealer network. There is a conflict between these two channels of
distribution. While SPI does not intend to alter its relationship with its
15
<PAGE> 24
independent dealers, it must be able to assure its dealers that they will not be
displaced by Modtech's internal sales force. The failure to provide such
assurances, or the perception by one or more significant independent dealers
that SPI will rely on Modtech's direct sales force, could adversely affect SPI's
future sales.
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon completion of the Mergers, the current executive officers and
directors of Modtech and the current executive officers and directors of SPI
will, together, continue to own or have voting control over about 36.2% of the
shares of Holdings Common Stock then outstanding. See "Security Ownership of
Certain Beneficial Owners and Management of Holdings." They will be able to
substantially control the outcome of all matters presented to the stockholders
for approval if they choose to vote together. These matters include election of
directors, mergers, consolidations or the sale of all or substantially all of
the assets of Holdings.
POTENTIAL FOR TAXATION OF MERGER CONSIDERATION
Neither Modtech nor SPI have asked the Internal Revenue Service ("IRS") to
rule on the tax consequences of the Mergers. Modtech and SPI are relying on the
opinions of their tax lawyers that the Mergers will not be taxable to the
Modtech or SPI stockholders, except for the cash received. A lawyer's tax
opinion is not binding on the IRS. If the IRS disagrees with the tax position
taken by Modtech and SPI, it may assess taxes (plus penalties and interest), in
addition to the taxes described in the opinion of tax counsel. Modtech's and
SPI's position might not be upheld by the courts if challenged by the IRS. See
"The Mergers-- Certain Federal Income Tax Consequences."
DEPENDENCE ON KEY PERSONNEL
Holdings will be dependent upon its executive officers, Evan M. Gruber,
Patrick Van Den Bossche and Michael G. Rhodes. Although Holdings has employment
agreements with each of these individuals, any of its executive officers can
terminate their employment if they choose to do so. If this occurred, operations
could be disrupted.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 12,622,158 shares of Holdings Common Stock to be outstanding
immediately following the Mergers, approximately 8,466,676 shares will be held
by "affiliates" as determined under Rule 145 of the Securities Act of 1933. The
exact number of shares held by affiliates will be determined by the elections
the SPI stockholders make in the type of Merger Consideration they wish to
receive. See "The Mergers -- Merger Consideration." Certain affiliates have
executed "lock up" agreements which would restrict their ability to resell
approximately 8,172,676 shares received in the Mergers for a period of 90 days
following the closing of the Mergers. Following the expiration of such 90-day
period, the parties to these lock-up agreements, in addition to any other
affiliates, subject to Rule 145, may immediately resell their shares subject to
the volume limitations of Rule 144. In addition to their Rule 145 resale rights,
Holdings has granted these affiliates "piggyback" registration rights, which
entitle them to have a portion of their shares included in any future registered
offerings Holdings may make. Finally, there will be 1,833,422 shares of Holdings
Common Stock registered for sale upon exercise of stock options granted and to
be granted under the stock option plans Holdings will adopt in connection with
the Mergers.
Sales of substantial amounts of shares of Holdings Common Stock, or even
the potential for such sales, could lower the market price of the Common Stock
and impair the ability of Holdings to raise capital through the sale of equity
securities.
16
<PAGE> 25
RISKS RELATED TO MODTECH
LEGISLATION AND SCHOOL FUNDING
The demand for modular relocatable classrooms in California is affected by
various statutes which, among other things, prescribe the way in which all
school classrooms to be constructed on public lands must be designed and
engineered, the methods by which Modtech's customers, primarily individual
school districts, obtain funding for the construction of new facilities, and the
manner in which available funding is spent. As a result, Modtech's business is
heavily dependent upon the legislative and educational policies and financial
condition of the State of California. Funding for new school construction and
rehabilitation of existing schools by California school districts currently is
provided primarily at the State level, through annual allocations of funds
derived from general revenue sources and statewide bond issues. In addition,
school districts obtain funding for the purchase or lease of school facilities
through the imposition of developers' fees and local bond issuances. The
availability of this funding is subject to financial and political
considerations which vary from district to district. The use of funding provided
by the State is also affected by the legislative policies of the State of
California. For example, existing legislation requires, with certain exceptions,
that 30% of new classroom space added using state funds must be relocatable
structures. Modtech's classroom units qualify as relocatable structures. There
are, however, alternative structures that are less relocatable in nature than
Modtech's classrooms that may also satisfy this legislative requirement.
Shortages of financial resources at either State or local levels, or changes in
the legislative or educational policies of the State of California, could have a
material adverse effect upon Modtech. A bill recently passed the California
Legislature, which, if approved by the voters, will eliminate the requirement
that 30% of all classroom space added using California state funds be
relocatable classrooms. The legislation would replace this provision with a
requirement that, in order for school districts to increase the amount of funds
to be received from developers in excess of the statutory level, school
districts must show that 20% of all classroom space, not just space to be added,
consists of relocatable classrooms.
CYCLICAL INDUSTRY
Modtech's modular classrooms are purchased predominately by school
districts in California. The ability of California school districts to finance
the acquisition of Modtech's products is largely dependent upon the level of
funding available from the State, which is not tied to demand. Despite a growing
student population, Modtech reported losses from 1991 through 1993 when certain
school districts experienced budget shortfalls.
CONCENTRATION OF CUSTOMERS
Modtech's sales to date have been limited almost exclusively to customers
in California. Modtech markets and sells its modular classrooms primarily to
California school districts, as well as to the State of California and leasing
companies who lease the classrooms to school districts. During the year ended
December 31, 1997, approximately 98.1% of Modtech's net sales was attributable
to the sale of classrooms, with sales of classrooms to individual school
districts and third party lessors to school districts representing approximately
90.2% of Modtech's net sales, and sales of classrooms to the State of California
accounting for approximately 7.9% of net sales for the year.
PRODUCT SPECIFICATIONS AND REGULATION
Most of Modtech's contracts require Modtech to build classrooms which meet
certain established state mandated function and manufacturing specifications.
Under such contracts, which are typically fixed-price contracts, Modtech assumes
the liability for
17
<PAGE> 26
correcting, without additional compensation, any deficiencies which cause its
classrooms to fail inspection and certification tests. Modtech relies upon its
experience and expertise to evaluate the potential for such liability and to
price its bids accordingly. In addition, Modtech attempts to minimize the risk
of additional exposure by adopting strict quality control standards and
subjecting its units under construction to extensive testing under the
supervision of inspectors hired by Modtech's customers. To date, Modtech's
operating performance has not been materially impacted by such potential
liability. However, should Modtech incur such liability significantly in excess
of that estimated, its profitability would be adversely affected.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
Modtech's quarterly revenue typically has been highest in the second and
third quarters of the year when school districts generally place a large number
of orders for modular classrooms to be delivered in time for the upcoming school
year. Additionally, first and fourth quarter revenues are typically lower due to
a greater number of holidays and days of inclement weather during such periods.
RISKS RELATED TO SPI
ABSENCE OF COMBINED OPERATING HISTORY
The SPI pro forma combined financial results cover periods during which
Office Master and Rosewood were not under common control or management with SPI
and, therefore, may not be indicative of SPI's future financial or operating
results. The success of SPI will depend on management's ability to complete the
integration of Office Master and Rosewood. The inability of SPI to successfully
integrate Office Master and Rosewood and to coordinate and integrate certain
operational, administrative, and accounting functions and computer systems would
have a material adverse effect on SPI.
RELIANCE ON INDEPENDENT DEALERS
SPI's products are sold primarily through a network of independent
dealers. SPI has few formal marketing or other agreements with its dealers, and
substantially all of SPI's dealers also market and sell products of other
manufacturers. During the pro forma 12-month period ended December 31, 1997, one
of SPI's dealers, GE Capital Modular Space, accounted for about 48.9% of SPI's
revenues, and another dealer, Williams Scotsman, accounted for about 20.3% of
SPI's revenues. GE Capital Modular Space accounted for about 33.1% of SPI's
revenues during the pro forma six-month period ended June 30, 1998, and Williams
Scotsman accounted for about 30.2% of SPI's revenues during the same period. The
pro forma revenues of SPI include all revenues of SPI, Rosewood and Office
Master for the referenced periods. Product demand from any specific dealer may
fluctuate. Any prolonged downturn in demand from one major dealer, or a
coincidental downturn from a combination of dealers could have a material
adverse effect on SPI. In addition, an adverse change in SPI's relationship with
any of its major dealers, any change in the manner in which any of these dealers
conduct business with SPI, including increased pricing pressures from SPI's
larger dealers, or any exclusive or preferred provider arrangements between
these dealers and any of SPI's competitors, could have a material adverse effect
on SPI.
LOW BARRIERS TO ENTRY
The barriers to entry into the commercial and light industrial modular
building industry are relatively low, consisting primarily of capital required
to develop manufacturing facilities and the availability of a qualified labor
pool. Manufacturers of other modular buildings, including housing and
classrooms, who possess a skilled work force and manufacturing facilities, could
easily adapt their
18
<PAGE> 27
manufacturing facilities to produce modular structures, and might choose to do
so, during an economic downturn in their industry.
AVAILABILITY OF MANUFACTURING EMPLOYEES
SPI's assembly line process requires a significant number of manufacturing
employees, many of whom are employed at relatively low wages. In periods of low
unemployment, SPI has experienced difficulty in finding suitable replacements
for its workforce when turnover occurs. Additionally, the remote location of
SPI's Office Master facility in Glen Rose, Texas, may make it difficult to hire
employees at that facility. SPI's inability to hire and retain sufficient
numbers of manufacturing employees at any of its operating facilities could have
a material adverse effect on SPI.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
Historically, SPI's quarterly sales in the fourth calendar quarter
(October through December) are lowest, and quarterly sales in the third calendar
quarter (July through September) are highest. Fourth quarter revenues typically
are lower due to customer budget and fiscal constraints and as a result of the
reduction in demand due to adverse weather conditions during such period.
19
<PAGE> 28
THE MERGERS
GENERAL
Modtech, Inc., a California corporation ("Modtech"), and SPI Holdings,
Inc., a Colorado corporation ("SPI"), are furnishing this Joint Proxy
Statement/Prospectus to holders of shares of (i) SPI common stock, no par value
("SPI Common Stock"), (ii) SPI Series A-1, A-2, A-3, A-4, A-5, and A-6
Convertible Preferred Stock, no par value ("SPI Preferred Stock" and, together
with the SPI Common Stock, "SPI Capital Stock"), in connection with the
solicitation of proxies by the Board of Directors of SPI (the "SPI Board") for
use at the special meeting of stockholders of SPI to be held on December __,
1998, or any adjournment or postponement thereof (the "SPI Special Meeting"),
and to holders of shares of Modtech Common Stock, no par value ("Modtech Common
Stock"), in connection with the solicitation of proxies by the Board of
Directors of Modtech (the "Modtech Board") for use at the special meeting of
stockholders of Modtech to be held on December __, 1998, or any adjournment or
postponement thereof (the "Modtech Special Meeting" and, together with the SPI
Special Meeting, the "Special Meetings").
At the Special Meetings, holders of Modtech Common Stock and SPI Capital
Stock will be asked to vote upon proposals to approve and adopt
- - the Agreement and Plan of Reorganization and Merger, dated as of September
28, 1998, between Modtech and SPI (the "Merger Agreement"), which
provides, among other things, that Modtech and SPI will each merge with
separate subsidiaries of Modtech Holdings, Inc., a Delaware corporation
("Holdings");
- - in the case of the Modtech Special Meeting, the merger of a wholly owned
subsidiary of Holdings, "Modtech Merger Sub" into Modtech (the "Modtech
Merger"); and
- - in the case of the SPI Special Meeting, the merger of another wholly owned
subsidiary of Holdings, "SPI Merger Sub" into SPI (the "SPI Merger").
The mergers contemplated by the Merger Agreement are referred to herein as the
"Mergers." As a result of the Mergers, Modtech and SPI will each become a
wholly-owned subsidiary of Holdings.
This Joint Proxy Statement/Prospectus also serves as a prospectus of
Holdings with respect to the shares of its Common Stock, par value $0.01 per
share ("Holdings Common Stock"), and its Series A Preferred Stock, par value
$0.01 per share ("Holdings Series A Preferred Stock") that will be issued to (1)
holders of outstanding shares of Modtech Common Stock upon completion of the
Modtech Merger and (2) holders of outstanding shares of SPI Capital Stock upon
completion of the SPI Merger. See "The Mergers--Merger Consideration."
BACKGROUND OF THE MERGERS
Following completion of its second public offering of shares of common
stock in November 1997, Modtech has sought to increase its sales of
non-classroom products and to expand outside of the California marketplace. Its
initial goal was to commence operations in Arizona as soon as possible, and, in
January and February 1998, its Chief Executive Officer, Evan M. Gruber, met with
the management of Rosewood Enterprises, Inc., a
20
<PAGE> 29
modular commercial builder located in Phoenix, Arizona, concerning Modtech's
potential acquisition of that company. However, unknown to Modtech at the time,
Rosewood was already in acquisition discussions with SPI. In March 1998, Modtech
completed the purchase of Trac Modular Manufacturing, Inc., a modular commercial
builder located in Glendale, Arizona. SPI closed the acquisition of Rosewood in
April 1998.
Following SPI's acquisition of Rosewood, Evan Gruber called Patrick Van
Den Bossche, President of SPI, to introduce himself. This led to a meeting on
May 4, 1998 at SPI's facility in Rancho Cucamonga, California. At the meeting,
Mr. Gruber and Mr. Van Den Bossche discussed the modular building industry in
general. Mr. Gruber mentioned the possibility of a merger between the two
companies. Mr. Gruber and Mr. Van Den Bossche discussed operating philosophies
and objectives and the potential strategic benefits to the two companies of a
business combination. They agreed to give additional thought to such a
combination and to meet again in the near future.
On May 22, 1998, Mr. Gruber and two directors of Modtech, Charles
McGettigan and Myron Wick III, met with Mr. Van Den Bossche and four directors
of SPI, Mark King, Bruce Rogers, Charles Gwirtsman, and Charles Hamilton, in San
Francisco, California, to further discuss a possible business combination. A
number of proposals were considered, but none were seriously pursued. SPI
informed Modtech that SPI intended to proceed with an initial public offering
that had been in preparation since the end of April 1998.
While SPI continued to pursue a possible public offering, Modtech and SPI
continued to discuss a business combination on a periodic basis through early
July 1998. In the second week of July, SPI was informed by its underwriters that
market conditions were not conducive to the completion of SPI's public offering.
Based on these discussions, SPI and its underwriters decided to postpone its
offering.
On July 13, 1998, a senior management team from SPI, including two
directors, met with Modtech's senior management, including two directors, at
Modtech's headquarters in Perris, California to further discuss terms of a
potential merger and to initiate SPI's due diligence review of Modtech. The
following day, a senior management team from Modtech traveled to SPI's
headquarters in Rancho Cucamonga, California to commence Modtech's due diligence
review of SPI. Negotiations and due diligence reviews, including on-site visits
of each company's facilities by the other company's management team, continued
through late July 1998.
On August 11, 1998, SPI's attorneys delivered a draft form of the Merger
Agreement to Modtech and its attorneys. On August 19, 1998, senior management
and certain directors of Modtech and SPI, and the attorneys for SPI and Modtech
met to negotiate certain specific terms of the Merger Agreement. Further
negotiations continued into early September 1998.
During this period, Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") was asked by Modtech to advise it in connection with the proposed
transaction and to render a fairness opinion.
On September 9, 1998, the Modtech Board of Directors and Modtech's
attorneys met and discussed in detail the terms of the proposed business
combination, the exchange ratio and cash consideration to be paid, the reasons
for the transaction, and the due diligence findings by Modtech's management
concerning SPI. Representatives from DLJ participated in a portion of the
meeting by telephone during which Modtech's Board of Directors discussed with
them the fairness of the proposed transaction to the Modtech stockholders.
Modtech's Board authorized senior management to proceed with further
negotiations.
On September 10, 1998, the SPI Board of Directors and SPI's attorneys met
and discussed in detail the terms of the proposed business
21
<PAGE> 30
combination, the exchange ratio and cash consideration to be paid, the reasons
for the transaction, and the due diligence findings by SPI's management
concerning Modtech. SPI's Board unanimously approved the terms of the Merger
Agreement and Mergers presented to it, subject to final changes to the merger
documentation and completion of the due diligence by management.
The merger documentation and due diligence were completed in late
September. On September 28, 1998, Modtech's Board of Directors held a special
telephonic meeting to further consider and vote on the proposed transaction.
Representatives of DLJ reviewed with the Board certain financial analyses
relating to the transaction and rendered an oral fairness opinion, which it
confirmed in writing later that day. After considering and discussing the
various presentations at the meeting, and at prior meetings, the Modtech Board
of Directors unanimously approved the Merger Agreement and the Mergers. The
Merger Agreement was signed and delivered that evening by both Modtech and SPI
after the close of business. The signing was publicly announced shortly after
the opening of the securities markets on September 29, 1998.
REASONS FOR THE MERGERS; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
Modtech and SPI believe that their combination will create value for both
companies' stockholders by providing opportunities to achieve substantial
benefits that would not be available to either company alone. Specifically, the
combination allows for substantial synergy in three identified areas:
- - Product Diversification. Modtech currently manufactures modular
relocatable classrooms. SPI makes commercial and light industrial modular
buildings. The Mergers move Modtech towards accomplishing its goal of a
decreased dependency on the California Public School System. Additionally,
the Mergers enhance Modtech's capability for the production of other types
of modular structures for commercial customers.
- - Geographic Diversification. At present, Modtech manufactures modular
relocatable classrooms, of which approximately 98% are sold to California
public schools. Modtech's strategy for the past few years has been to
increase its efforts to expand the market for its classrooms to include
neighboring states. SPI currently does business in California, Arizona,
Nevada, Colorado Texas, New Mexico and other neighboring states.
- - Operating Efficiencies. Modtech and SPI plan to consolidate certain of the
manufacturing and administrative functions of both companies.
Additionally, efficiencies in purchasing and shipping may be realized due
to increased levels of production.
The Boards of Directors of each company also considered various other
factors that contributed to their approval and recommendation of the Merger
Agreement and the Mergers. Those factors include: (1) the terms and conditions
of the Merger Agreement, including an exchange ratio that provides certainty
about the number of shares to be issued and received in the Mergers; and (2) the
expected, although not certain, treatment of the Mergers as tax-free exchanges
of stock, with only the cash received being taxable.
The SPI Board also considered the advantages of obtaining liquidity for
its stockholders through the merger with Modtech, a publicly-traded company, and
also reducing the risk to its stockholders in the combined company. Immediately
following the Mergers, Holdings will have a lower debt to historical operating
cash flow ratio than SPI had on a stand-alone basis.
The Modtech Board also considered a number of other items and factors,
including, without limitation, the following:
22
<PAGE> 31
- - the financial presentation of DLJ to the Modtech Board and that firm's
opinion that the Modtech Merger Consideration to be received by the
stockholders of Modtech pursuant to the Merger Agreement is fair to such
stockholders from a financial point of view;
- - Modtech's business, management, financial performance and condition,
strategic objectives, prospects and competitive position, and the
recommendations of Modtech's management;
- - a review of strategic alternatives, including other possible business
combinations and, based on such review, the belief that a transaction with
another company may not offer terms with advantages comparable to those of
a business combination with SPI;
- - the value of the cash component of the Modtech Merger Consideration on a
per share basis, after adjustments for the number of shares of Holdings
Common Stock and Holdings Series A Preferred Stock to be received by
Modtech stockholders in the Modtech Merger;
- - the ability of the stockholders of Modtech to continue to participate in
Modtech's business as part of Holdings after the Mergers and to benefit
from the potential appreciation of Holdings Common Stock;
- - due diligence review of the financial condition, results of operations and
business prospects of SPI;
- - the terms and conditions of the Merger Agreement and the parties'
respective representations, warranties, covenants, agreements and
conditions to their respective obligations, including the condition that
the Mergers be approved by Modtech's stockholders; and
- - the risk that benefits sought in the Mergers would not be obtained, the
risk that the Mergers would not be consummated, the fact that, with a
fixed exchange ratio, the relative values of Modtech and SPI are fixed by
the parties in advance and would not take into account subsequent changes
or changed market perceptions, and the effect of the public announcement
of the Mergers on the trading price of the Modtech Common Stock.
The Modtech Board also considered the factors set forth in the section
entitled "Certain Risk Factors."
Each company's Board determined that the potential advantages of the
Mergers far outweighed the disadvantages. Each company's Board concluded that
the Mergers would result in its company's stockholders realizing greater value
than its company could deliver to them alone. Based on the consideration of
these and other relevant matters, each company's Board unanimously determined
that the Merger Agreement and the Mergers are in the best interests of its
company and its company's stockholders.
The foregoing discussion of the factors considered by each company's Board
is not intended to be exhaustive, but is believed to include all material
factors considered by each company's Board. In reaching its decision to approve
the Merger Agreement and the Mergers, neither company's Board quantified or
assigned any relative weights to the factors considered, or considered any one
factor to be determinative, and individual directors may have given different
weight to different factors.
THE MODTECH BOARD OF DIRECTORS AND THE SPI BOARD OF DIRECTORS HAVE EACH
UNANIMOUSLY CONCLUDED THAT THE MERGERS ARE IN THE BEST INTERESTS OF THEIR
RESPECTIVE STOCKHOLDERS, AND EACH UNANIMOUSLY RECOMMENDS THAT ITS STOCKHOLDERS
VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
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AGREEMENT AND THE MERGERS. SEE "THE MERGERS -- CONFLICTS OF INTERESTS."
FORM OF THE MERGERS
If the approval of the holders of Modtech Common Stock is obtained and all
other conditions to the Modtech Merger are satisfied or waived, pursuant to the
Modtech Merger Agreement, the Modtech Merger Sub will be merged with and into
Modtech, with Modtech being the surviving corporation after the Modtech Merger
and a wholly owned subsidiary of Holdings. If the approval of the holders of SPI
Capital Stock is obtained and all other conditions to the SPI Merger are
satisfied or waived, pursuant to the SPI Merger Agreement, the SPI Merger Sub
will be merged into SPI, with SPI being the surviving corporation after the SPI
Merger and a wholly owned subsidiary of Holdings. The date on which the closing
of the Mergers occurs is referred to herein as the "Closing Date."
MERGER CONSIDERATION
SPI.
Except for the shares owned by SPI or any of its subsidiaries, at the time
when the Mergers are completed by the filing of Certificates of Merger with the
appropriate Secretaries of State (the "Effective Time"), each share of SPI
Capital Stock will be converted into the right to receive 1.8785 shares of
Holdings Common Stock. Each SPI stockholder on the Record Date may elect to
receive $49.4097 per share for up to 5.9176% of the SPI Capital Stock instead of
shares of Holdings Common Stock. If SPI stockholders do not elect to receive a
total of $8,076,133 in cash in place of shares of Holdings Common Stock, those
SPI stockholders who have elected to receive cash for some of their SPI Capital
Stock, including those who have elected to receive cash for the maximum 5.9176%
of their SPI Capital Stock, will have all or a portion of their remaining SPI
Capital Stock converted into cash until the cash being paid for SPI Capital
Stock equals $8,076,133. The conversion will be pro rata among such stockholders
electing to receive cash based on the shares of SPI Capital Stock held by them
that they did not voluntarily elect to convert to cash. If all such shares are
converted to cash and the total cash being paid still does not equal $8,076,133,
then all SPI stockholders who did not elect to have any of their shares
converted to cash will have their shares converted to cash pro rata based on the
number of shares held by each of them until the total cash being paid for shares
of SPI Capital Stock equals $8,076,133.
Any shares of SPI Capital Stock owned by SPI, or any of its subsidiaries,
will automatically be cancelled and retired at the Effective Time and will cease
to exist, and no Holdings Common Stock or other consideration will be delivered
in exchange therefor.
MODTECH.
Except for shares owned by Modtech or any of its subsidiaries, at the
Effective Time, without any action on the part of any Modtech stockholder, each
issued and outstanding share of Modtech Common Stock will be converted into the
right to receive $3.7293 and 0.8508 shares of Holdings Common Stock. Each
Modtech stockholder as of the Record Date may elect to receive, in place of
Holdings Common Stock, 0.8508 shares of Holdings Series A Preferred Stock for
each share of Modtech Common Stock in an amount up to 3.94% of their shares of
Modtech Common Stock. If Modtech stockholders do not elect to receive a total of
388,939 shares of Holdings Series A Preferred Stock in place of Holdings Common
Stock, two major Modtech stockholders, Lagunitas Partners and Proactive
Partners, L.P. will be allocated shares of Holdings Series A Preferred Stock pro
rata based on their total shares of Modtech Common Stock, until the total number
of shares of Holdings Series A Preferred Stock to be received by Modtech
stockholders in the Modtech Merger equals 388,939. The number of shares of
Holdings Series A Preferred Stock to be
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received by Modtech stockholders will be adjusted upward or downward to the
extent necessary to comply with the minimum requirements of Section 351 of the
Internal Revenue Code.
Any shares of Modtech Common Stock owned by Modtech or any of its
subsidiaries will automatically be cancelled and retired at the Effective Time
and will cease to exist, and no Holdings Common or Preferred Stock or other
consideration will be delivered in exchange therefor.
OPINION OF MODTECH'S FINANCIAL ADVISOR
On September 28, 1998, Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") rendered an oral opinion to the Modtech Board to the effect that, as of
such date and based upon the qualifications and assumptions made and matters
considered by DLJ described in its written opinion dated September 28, 1998 (the
"Fairness Opinion"), the Merger Consideration to be received in the Mergers by
holders of shares of Modtech Common Stock pursuant to the Merger Agreement is
fair from a financial point of view to such holders.
THE FULL TEXT OF THE FAIRNESS OPINION IS ATTACHED HERETO AS ANNEX II. THE
SUMMARY OF THE FAIRNESS OPINION SET FORTH IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IS QUALIFIED BY REFERENCE TO THE FULL TEXT OF THE FAIRNESS
OPINION. MODTECH STOCKHOLDERS ARE URGED TO READ THE FAIRNESS OPINION CAREFULLY
AND IN ITS ENTIRETY FOR THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, OTHER MATTERS
CONSIDERED AND LIMITS OF THE REVIEW BY DLJ IN CONNECTION WITH SUCH FAIRNESS
OPINION.
The Fairness Opinion was prepared for the Modtech Board of Directors and
was directed only to the fairness from a financial point of view, as of the date
thereof, of the consideration to be received by the holders of Modtech Common
Stock pursuant to the Merger Agreement. DLJ expressed no opinion in the Fairness
Opinion as to the prices at which Holdings Common Stock or Holdings Series A
Preferred Stock would actually trade at any time. DLJ was not asked to opine as
to the underlying business decision of the Modtech Board to proceed with the
Mergers, and the Fairness Opinion does not address this decision. The Fairness
Opinion does not constitute a recommendation to any stockholder as to how such
stockholder should vote on the Mergers.
As part of its investment banking business, DLJ is regularly engaged in
the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
The Modtech Board was informed that DLJ had previously advised SPI and certain
of its stockholders with respect to possible transactions with Modtech and other
financing alternatives.
In arriving at the Fairness Opinion, DLJ reviewed the Merger Agreement and
certain exhibits thereto. DLJ also reviewed financial and other information that
was publicly available or furnished to DLJ by Modtech and SPI, including
information provided during discussions with their respective managements.
Included in the information provided during such discussions were certain
financial projections of Modtech prepared by the management of Modtech and
certain financial projections of SPI prepared by the management of SPI. In
addition, DLJ compared certain financial and/or securities data of Modtech and
SPI with publicly available information concerning various companies whose
securities are traded in public markets, reviewed the historical stock prices
and trading volumes of Modtech Common Stock, reviewed prices and premiums paid
in certain other business combinations and conducted such other financial
studies, such as discounted cash flow analysis and contribution analysis, and
investigations as DLJ deemed appropriate for purposes of rendering the Fairness
Opinion.
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In rendering the Fairness Opinion, DLJ relied upon and assumed the
accuracy and completeness of all of the financial and other information that was
available to it from public sources, that was provided to it by Modtech or SPI
or their respective representatives, or that was otherwise reviewed by DLJ. With
respect to the financial projections supplied to DLJ, DLJ assumed that they were
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the managements of Modtech and SPI as to the future operating
and financial performance of Modtech and SPI, respectively. DLJ did not assume
responsibility for making any independent evaluation of the assets or
liabilities of Modtech or SPI, or for making any independent verification of the
information reviewed by DLJ. DLJ also assumed that the cash portion of the
consideration to be received by the holders of Modtech Common Stock would not
otherwise be received by such holders in the ordinary course of business.
The Fairness Opinion was necessarily based on economic, market, financial
and other conditions as they existed on, and on the information made available
to DLJ as of, the date of the Fairness Opinion. The Fairness Opinion was based,
in part, on publicly available information as of September 23, 1998. Although
subsequent developments may affect its Fairness Opinion, DLJ does not have any
obligation to update, revise or reaffirm its opinion.
The following is a summary of the presentation made by DLJ to the Modtech
Board of Directors at its September 28, 1998 meeting, in connection with
rendering the Fairness Opinion.
Stock Price History. To provide contextual data and comparative market
data, DLJ reviewed the daily closing prices for the 12-month period ending
September 22, 1998 of Modtech Common Stock and compared such closing stock
prices with the closing stock prices of two publicly traded modular building
companies, Butler Manufacturing Company and Miller Building Systems, Inc. and
the Russell 2000 Index. The two modular building companies were the only two
directly comparable companies identified by DLJ which were publicly traded. This
information was presented solely to provide the Modtech Board with background
information regarding the stock prices of Modtech Common Stock relative to its
peers and an appropriate index.
Comparable Publicly Traded Company Analysis. DLJ believed that this form
of analysis was not meaningful because of an insufficient number of publicly
traded companies in the modular building industry.
Comparable Merger & Acquisition Transaction Analysis. DLJ believed that
this form of analysis was not meaningful because of an insufficient number of
recent merger and acquisition transactions in the modular building industry.
Earnings Per Share Impact. DLJ analyzed the earnings per share impact of
the Mergers to holders of Modtech Common Stock. For the latest 12-month period
ending June 30, 1998, and the projected fiscal years ending December 1998, 1999
and 2000, the Mergers resulted in accretion (dilution) of (22.7%) or ($0.36) per
share, (11.3%) or ($0.18) per share, 4.3% or $0.08 per share and 4.5% or $0.10
per share, respectively. In arriving at these accretion (dilution) results, DLJ
compared Holdings' pro forma earnings per share estimates with First Call's
estimates of Modtech's earnings per share, and assumed the Mergers would not
result in any synergies.
Comparable Premiums Paid Analysis. DLJ determined the implied premium over
the common stock trading prices for one day, one week and four weeks prior to
the announcement date of 293 selected domestic merger or acquisition
transactions involving companies not necessarily comparable to Modtech, ranging
from $200 million to $400 million in transaction value and completed from
January 1995 through September 17, 1998. The average premiums for the selected
transactions over the common stock trading prices for : (i) one day prior to the
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announcement date was 29.0%; (ii) one week prior to the announcement date was
33.1%; and (iii) four weeks prior to the announcement date was 44.3%. Applying
the above average comparable premiums to the closing price of the Modtech Common
Stock on one day, one week and four weeks prior to September 22, 1998 implies a
valuation per share of Modtech Common Stock of $25.32, $23.79 and $27.96,
respectively, as compared to the closing prices of the Modtech Common Stock one
day, one week and four weeks prior to September 22, 1998 of $19.63, $17.88 and
$19.38, respectively.
Contribution Analysis. DLJ analyzed the relative contributions of Modtech
and SPI to the pro forma combined entity based on selected financial data,
assuming no synergies. In this analysis, DLJ compared the 65.6% fully diluted
ownership interest that holders of Modtech Common Stock will have in the pro
forma combined entity with the relative contribution of Modtech to certain
financial data for the pro forma combined entity, including revenue, earnings
before interest, taxes, depreciation and amortization ("EBITDA") and earnings
before interest and taxes ("EBIT") for the fiscal years ending December 31, 1998
("Fiscal Year 1998") and December 31, 1999 ("Fiscal Year 1999"). In each case,
the financial data for the pro forma combined entity was determined by adding
the financial data for Modtech and SPI. This analysis indicated that Modtech
would contribute: (i) 64.5% and 64.9% of the pro forma combined entity's sales
for Fiscal Year 1998 and Fiscal Year 1999, respectively; (ii) 69.5% and 67.9% of
the pro forma combined entity's EBITDA for Fiscal Year 1998 and Fiscal Year
1999, respectively; and (iii) 71.4% and 68.9% of the pro forma combined entity's
EBIT for Fiscal Year 1998 and Fiscal Year 1999, respectively.
DLJ also compared the 65.6% ownership interest that holders of Modtech
Common Stock will have in the pro forma combined entity with the relative
contribution of Modtech to the estimated net income of the pro forma combined
entity (determined by adding the net income of Modtech and SPI for Fiscal Year
1998 and Fiscal Year 1999). This analysis indicated that Modtech would
contribute 73.5% and 70.2% of the net income of the pro forma combined entity
for Fiscal Year 1998 and Fiscal Year 1999, respectively.
Discounted Cash Flow Analysis. DLJ performed a discounted cash flow
analysis (i.e., an analysis of the present value of projected cash flows using
the discount rates and terminal year EBITDA multiples indicated below) of
Modtech, SPI and Holdings using projections and assumptions provided by the
management of Modtech. The discounted cash flow for all three entities was
estimated using discount rates ranging from 9% to 12% and terminal multiples of
estimated EBITDA for each entity's fiscal year ending December 31, 2003 ranging
from 6.0x to 8.0x. This analysis assumed no synergies and yielded an implied
common equity value range for Holdings of $28.70 to $32.29 per fully diluted
share of Holdings, and an implied equity value range per share (including the
cash distribution) for Modtech of $28.16 to $31.22 as compared to the price of
September 23, 1998 of $20.50.
The summary set forth above does not purport to be a complete description
of the analyses performed by DLJ but describes, in summary form, the material
elements of the presentations made by DLJ to the Modtech Board of Directors on
September 28, 1998. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Each of the analyses conducted by DLJ was carried out in order to
provide a different perspective on the transaction and to add to the total mix
of information available. DLJ did not form a conclusion as to whether any
individual analysis, considered in isolation, supported or failed to support an
opinion as to fairness from a financial point of view. Rather, in reaching its
conclusion, DLJ considered the results of the analyses in light of each other
and ultimately
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reached its opinion based on the results of all analyses taken as a whole.
Accordingly, notwithstanding the separate factors summarized above, DLJ has
indicated to Modtech that it believes that its analyses must be considered as a
whole and that selecting portions of its analyses and the factors considered by
it, without considering all analyses and factors, could create an incomplete
view of the evaluation process underlying its opinion. The analyses performed by
DLJ are not necessarily indicative of actual values or future results, which may
be significantly more or less favorable than suggested by such analyses.
Pursuant to the terms of an engagement agreement dated September 25, 1998,
Modtech agreed to pay DLJ a fee of $750,000, irrespective of the conclusion
reached therein. In addition, Modtech has agreed to reimburse DLJ promptly for
all out-of-pocket expenses (including the reasonable fees and expenses of
counsel) incurred by DLJ in connection with the Fairness Opinion and to
indemnify DLJ and certain related persons against certain liabilities in
connection with its engagement, including liabilities under U.S. federal
securities laws.
In the ordinary course of business, DLJ and its affiliates may own or
actively trade the securities of Modtech for their own accounts and for the
accounts of their customers and, accordingly, may at any time hold a long or
short position in Modtech securities.
PROCEDURES FOR ELECTION OF MERGER CONSIDERATION AND SURRENDER OF STOCK
CERTIFICATES; FRACTIONAL SHARES
SPI. In order to receive the SPI Merger Consideration (See "The Mergers --
Merger Consideration -- SPI"), SPI stockholders must surrender to ChaseMellon,
the Exchange Agent, whose address is 400 South Hope Street, 4th Floor, Los
Angeles, California 90071, the certificate or certificates for their shares of
SPI Capital Stock. As soon as feasible, after the Effective Time, the Exchange
Agent will send to each SPI stockholder a letter of transmittal and instructions
for use in surrendering their certificates and making an election to receive
cash at $49.4097 per share in place of Holdings Common Stock for up to 5.9176%
of their shares, if they so desire. The method of making adjustments to
stockholder elections as described above (See "The Mergers -- Merger
Consideration -- SPI") will be set forth in the letter of transmittal. Any
necessary adjustments to stockholder elections will be made by the Exchange
Agent.
SPI stockholders will not receive any fractional shares of Holdings Common
Stock. Instead, they will be paid cash equal to the closing price of a share of
Modtech Common Stock on the Nasdaq National Market on the last business day
prior to the closing of the Mergers, multiplied by the fraction of a share they
otherwise would have received.
After the Effective Time, there will be no further transfer on the records
of SPI or its transfer agent of certificates representing shares of SPI Capital
Stock, and, if such certificates are presented to SPI for transfer, they will be
cancelled against delivery of the SPI Merger Consideration pursuant to the
Merger Agreement. Until surrendered in accordance with the Merger Agreement,
each certificate for shares of SPI Capital Stock will be deemed at any time
after the Effective Time to represent only the right to receive upon such
surrender the SPI Merger Consideration pursuant to the Merger Agreement. No
interest will be paid or will accrue on any cash payable as consideration in the
Mergers or in lieu of any fractional shares of Holdings Common Stock.
HOLDERS OF SPI CAPITAL STOCK SHOULD NOT SEND ANY OF THEIR STOCK CERTIFICATES TO
SPI OR THE EXCHANGE AGENT AT THIS TIME.
Modtech. In order to receive the Modtech Merger Consideration, Modtech
stockholders must surrender to ChaseMellon, the Exchange Agent, whose address is
400 South Hope Street, 4th Floor,
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Los Angeles, California 90071, the certificate or certificates, representing
their shares of Modtech Common Stock. As soon as feasible after the Effective
Time, the Exchange Agent will send to each Modtech stockholder a letter of
transmittal and instructions for use in surrendering their certificates and
making an election to receive Holdings Series A Preferred Stock for up to 3.94%
of their Modtech Common Stock. NO MODTECH STOCKHOLDER IS REQUIRED TO ELECT TO
RECEIVE HOLDINGS SERIES A PREFERRED STOCK, SINCE TWO MAJOR MODTECH STOCKHOLDERS,
LAGUNITAS PARTNERS AND PROACTIVE PARTNERS, L.P., HAVE AGREED TO ACCEPT ALL THE
SHARES OF HOLDINGS SERIES A PREFERRED STOCK TO BE ISSUED IN THE MODTECH MERGER.
The method of making adjustments to stockholder elections and the amount of
Holdings Series A Preferred Stock to be allocated as described above (See, "The
Mergers -- Merger Consideration -- Modtech") will be set forth in the letter of
transmittal. Any necessary adjustments to stockholder elections or the number of
shares of Holdings Series A Preferred Stock to be allocated will be made by the
Exchange Agent.
Modtech stockholders will not receive any fractional shares of Holdings
Common Stock or Holdings Series A Preferred Stock. Instead, they will be paid
cash equal to the closing price of a share of Modtech Common Stock on the Nasdaq
National Market on the last trading day prior to the closing of the Mergers
multiplied by the fraction of a share of Holdings Common Stock they otherwise
would have received. Shares of Holdings Series A Preferred Stock will be rounded
upward to the nearest whole number of shares.
After the Effective Time of the Merger, there will be no further transfer
on the records of Modtech or its transfer agent of certificates representing
shares of Modtech Common Stock, and, if such certificates are presented to
Modtech for transfer, they will be cancelled against delivery of the Modtech
Merger Consideration pursuant to the Merger Agreement. Until surrendered in
accordance with the Merger Agreement, each certificate for shares of Modtech
Common Stock will be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender the Modtech Merger Consideration
pursuant to the Merger Agreement. No interest will be paid or will accrue on any
cash payable as consideration in the Mergers or in lieu of any fractional shares
of Holdings Common Stock.
HOLDERS OF MODTECH COMMON STOCK SHOULD NOT SEND ANY OF THEIR STOCK CERTIFICATES
TO MODTECH OR THE EXCHANGE AGENT AT THIS TIME.
EFFECTIVE TIME
On the Closing Date, the parties will file certificates of merger or other
appropriate documents (in any such case, the "Certificates of Merger") and will
make all other filings or recordings required under the Delaware General
Corporation Law ("DGCL"), the California General Corporation Law and the
Colorado Business Corporation Act. The Mergers will become effective at such
time as the Certificate of Mergers are duly filed with the Secretary of State of
the State of Delaware, or at such later time as Modtech and SPI specify in the
Certificates of Merger (the time the Mergers become effective being the
"Effective Time"). Such filing will be made as promptly as practicable after
satisfaction or waiver of the conditions to the Mergers set forth in the Merger
Agreement.
EFFECT ON SPI STOCK PLAN
The Merger Agreement provides that, as a result of the Mergers, the
vesting of all options outstanding under SPI's Second Amended and Restated 1997
Stock Option Plan ("SPI Options") that are not then at least 75% vested will be
accelerated pro rata based on the unvested portion of such options until all SPI
Options are in the aggregate 75% vested. An option is considered 75% vested if
the number of shares purchased under any prior exercise of the option, plus the
number of shares the option is exercisable for immediately prior to the
completion of the
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Mergers, equals 75% of the total number of shares covered by the original grant
of the option. 5.9176% of the shares covered by the vested portion of each SPI
Option will be converted into the right to receive $49.4097 per share in cash,
less the applicable per share exercise price of each SPI Option. Each remaining
SPI Option will be converted into and become a right to acquire 1.8785 shares of
Holdings Common Stock for each share of SPI Common Stock previously covered by
the converted SPI Option.
EFFECT ON SPI WARRANTS
The Merger Agreement provides that all outstanding warrants to purchase
SPI Common Stock ("SPI Warrants") will be deemed exercised immediately prior to
the Effective Time. At the Effective Time, 5.9176% of the SPI Warrants held by
each warrant holder will be converted into the right to receive $49.4097 per
share in cash, less the applicable exercise price of the SPI Warrants. Each
remaining SPI Warrant will be converted into the right to receive 1.8785 shares
of Holdings Common Stock upon payment of the adjusted warrant exercise price.
EFFECT ON MODTECH STOCK PLANS
The Merger Agreement provides that, as a result of the Mergers, all
outstanding options to purchase Modtech Common Stock ("Modtech Options") that
are not then at least 75% vested will be accelerated pro rata based on the
unvested portion of such options until all Modtech Options are in the aggregate
75% vested. An option is considered 75% vested if the number of shares purchased
under any prior exercise of the option, plus the number of shares the option is
exercisable for immediately prior to the completion of the Mergers, equals 75%
of the total number of shares covered by the original grant of the option.
14.6709% of the shares covered by the vested portion of each Modtech Option will
be converted into the right to receive $25.00 per share in cash, less the
applicable per share exercise price. Each remaining Modtech Option will be
converted into and become a right to acquire 0.8508 shares of Holdings Common
Stock for each share of Modtech Common Stock previously covered by the converted
Modtech Option.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States federal income
tax considerations generally applicable to holders of Modtech Common Stock and
holders of SPI Capital Stock who, pursuant to the Mergers, exchange such stock
holdings for the Merger Consideration. Consummation of the Modtech Merger is
conditioned upon the receipt by Modtech of an opinion of Gibson, Dunn & Crutcher
LLP, special tax counsel to Modtech, based upon requested representation letters
and dated the Closing Date, to the effect that the Modtech Merger will qualify
as an exchange governed by Section 351 of the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"). Consummation of the SPI Merger is
conditioned upon the receipt by SPI of an opinion of Dorsey & Whitney LLP,
counsel to SPI, based upon requested representation letters and dated the
Closing Date, to the effect that the SPI Merger will qualify as a reorganization
under Section 368 of the Internal Revenue Code. The summary below assumes that
the Modtech Merger and the SPI Merger will be treated for United States federal
income tax purposes in accordance with those opinions.
This summary is based upon the current provisions of the Internal Revenue
Code, currently applicable Treasury regulations thereunder, judicial decisions,
and current administrative decisions and rulings. There can be no assurance that
the Internal Revenue Service ("IRS") will not take a contrary view, and no
ruling from the IRS has been or will be sought regarding tax treatment of the
Modtech Merger and the SPI Merger. Future legislative, judicial or
administrative changes or interpretations could alter or modify the statements
and conclusions set forth in this summary, and any such change or
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interpretations could be retroactive and could affect the tax consequences to
the stockholders of Modtech and SPI.
The following summary does not address all aspects of federal income
taxation that may be important to particular stockholders in light of their
personal investment circumstances or to stockholders subject to special
treatment under the federal income tax laws (including life insurance companies,
foreign persons, tax-exempt entities, and holders who acquired their Modtech
Common Stock or SPI Capital Stock pursuant to the exercise of employee stock
options or otherwise as compensation) and does not address any aspect of state,
local or foreign taxation. This summary also assumes that the Modtech Common
Stock and the SPI Capital Stock will be held as capital assets on the Closing
Date.
Treatment of Holders of Modtech Common Stock. Except as discussed below
under "Cash in Lieu of Fractional Shares," a holder of Modtech Common Stock will
recognize gain realized in the transaction but will not recognize any loss
realized in the transaction. The amount of gain that is recognized will be equal
to the lesser of (i) the amount of gain realized in the transaction (i.e., the
excess of (a) the sum of the amount of cash and the fair market value of
Holdings Common Stock and Holdings Series A Preferred Stock received over (b)
the tax basis of the Modtech Common Stock relinquished) and (ii) the amount of
cash received. The amount of such recognized gain will be subject to federal
income tax at capital gain rates or ordinary income rates depending upon whether
the receipt of cash is viewed as a redemption of stock or as a dividend
distribution under the rules discussed below.
Because the Modtech stockholders will, as a group, possess more than 50%
of the total value of shares of all classes of stock of Holdings following the
Mergers, the treatment of any gain recognized by a Modtech stockholder as
capital gain or as dividend income must be determined by applying the rules of
Section 302 of the Internal Revenue Code. As to each Modtech stockholder, this
is determined by viewing Holdings as redeeming a portion of a Modtech
stockholder's Modtech Common Stock for the amount of cash received by such
stockholder in the Modtech Merger. To determine whether the redemption is
treated as a dividend distribution or as a redemption of the stockholder's
Modtech Common Stock, a Modtech stockholder must compare his or her
proportionate, percentage interest in Modtech prior to the Modtech Merger with
such stockholder's indirect proportionate, percentage interest in Modtech after
the Modtech Merger by reason of such stockholder's direct ownership of Holdings
Common Stock and Holdings Series A Preferred Stock. Such comparison should take
into account the Holdings Common Stock issued to the SPI stockholders in the SPI
Merger.
The cash distribution received by a Modtech stockholder will be treated as
a redemption of such stockholder's stock rather than a dividend if, under the
redemption tests of Section 302 of the Internal Revenue Code, such distribution
(i) is "not essentially equivalent to a dividend" with respect to the
stockholder, or (ii) results in a "substantially disproportionate" redemption of
such stockholder's equity interest in Modtech (the "Section 302 Tests").
A redemption will be "substantially disproportionate" if (i) after the
redemption the stockholder owns less than 50% of the total combined voting power
of all classes of stock of Modtech entitled to vote, and (ii) the percentage
ownership of Modtech "common stock" and "voting stock" immediately after the
redemption is less than 80% of the stockholder's percentage ownership in such
stock immediately before the redemption. If the redemption from a Modtech
stockholder fails to satisfy the "substantially disproportionate" test, such
stockholder may nonetheless satisfy the "not essentially equivalent to a
dividend" test.
Under the principles established in United States v. Davis, 397 U.S. 301
(1970), a distribution to a
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Modtech stockholder will not be "essentially equivalent to a dividend" if it
results in a "meaningful reduction" in such stockholder's proportionate stock
interest in Modtech. If a stockholder with a relatively minimal stock interest
in Modtech and no exercise of control over corporate affairs suffers a reduction
in his proportionate interest in Modtech as a result of the redemption, that
stockholder should be regarded as having suffered a meaningful reduction of his
or her interest in Modtech. For example, the IRS has held in a published ruling
that in the case of a less than 1% stockholder who does not have management
control over the corporation, any reduction in proportionate interest will
constitute a "meaningful reduction."
In applying the Section 302 Tests, the constructive stock ownership rules
of Internal Revenue Code Section 318 apply and require that each Modtech
stockholder take into account not only the Modtech Common Stock directly owned
by the stockholder, but also Modtech Common Stock owned by certain of the
stockholder's family members, stock owned by partnerships, trusts, corporations
and other entities in which the stockholder has an interest, as well as Modtech
Common Stock the stockholder has a right or option to acquire.
If none of the redemption tests under Section 302 of the Internal Revenue
Code is satisfied, the cash received by a Modtech stockholder will be treated as
a dividend to the extent of such stockholder's allocable portion of the earnings
and profits (as determined for federal income tax purposes) of Modtech and
Holdings. If the amount of cash exceeds a Modtech stockholder's allocable
portion of earnings and profits, the excess will be treated first as a return of
capital to the extent of such stockholder's tax basis in his or her shares and
then as capital gain.
Because the determination of whether cash received in the Modtech Merger
will be treated as the distribution of a dividend generally will depend upon the
particular facts and circumstances of each Modtech stockholder, each Modtech
stockholder is strongly advised to consult their own tax advisor regarding the
tax treatment of cash received pursuant to the Modtech Merger.
Treatment of Holders of SPI Capital Stock. Except as discussed below under
"Cash in Lieu of Fractional Shares," a holder of SPI Capital Stock that only
receives Holdings Common Stock will not recognize gain or loss. A holder of SPI
Capital Stock that receives a combination of Holdings Common Stock and cash will
recognize gain realized in the transaction but will not recognize any loss
realized in the transaction. The amount of gain that is recognized will be
calculated separately for each block of SPI Capital Stock, in an amount equal to
the lesser of (i) the amount of gain realized with respect to such block (i.e.,
the excess of (a) the sum of the amount of cash and the fair market value of
Holdings Common Stock received that is allocable to such block over (b) the tax
basis of the block of SPI Capital Stock relinquished) and (ii) the amount of
cash received that is allocable to such block. The amount of such recognized
gain will be subject to federal income tax at capital gain rates or ordinary
income rates depending upon whether the receipt of cash is viewed as a
redemption of stock or as a dividend distribution under the rules discussed
below.
The determination of whether the exchange of SPI Capital Stock for cash
pursuant to the SPI Merger has the effect of a distribution of a dividend will
be made by applying the Section 302 Tests that are described above under
"Treatment of Holders of Modtech Common Stock," and by also taking into account
any shares of Holdings Common Stock considered to be owned by such SPI
stockholder by reason of the constructive ownership rules of Internal Revenue
Code Section 318 that are also described above under "Treatment of Holders of
Modtech Common Stock."
Pursuant to the principles established in Clark v. Commissioner, 489 U.S.
726 (1989), the Section 302
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Tests are applied to an SPI stockholder by comparing the proportionate,
percentage interest of an SPI stockholder in Holdings after the SPI Merger with
the proportionate, percentage interest in Holdings such stockholder would have
had if such stockholder had received solely Holdings Common Stock in the SPI
Merger. This comparison is made as though Holdings had issued solely Holdings
Common Stock to such stockholder in the SPI Merger and in a hypothetical
redemption Holdings had then redeemed a portion of its Holdings Common Stock for
the amount of cash the stockholder actually received in the SPI Merger. In
making this comparison, it is likely that the effect of the Modtech Merger would
be taken into account as though Holdings had issued solely Holdings Common Stock
in the Modtech Merger and in a hypothetical redemption Holdings had then
redeemed a portion of its Holdings Common Stock for the amount of cash received
by the Modtech stockholders.
If receipt of cash by an SPI stockholder has the effect of a distribution
of a dividend, the gain recognized will be treated as a dividend to the extent
of the stockholder's ratable share of SPI's undistributed earnings and profits,
as determined for federal income tax purposes. If the amount of cash exceeds an
SPI stockholder's ratable share of earnings and profits, the excess will be
treated first as a return of capital to the extent of such stockholder's tax
basis in his or her shares and then as capital gain. Any gain that does not have
the effect of a distribution of a dividend will be a capital gain.
Because the determination of whether cash received in the SPI Merger will
be treated as the distribution of a dividend generally will depend upon the
particular facts and circumstances of each SPI stockholder, each SPI stockholder
is strongly advised to consult their own tax advisor regarding the tax treatment
of cash received pursuant to the SPI Merger.
The Merger Agreement provides that, subject to the limits therein, each
SPI stockholder may elect which of such stockholder's SPI Capital Stock, if any,
will be exchanged for cash in the SPI Merger. In the event the receipt of cash
by an SPI stockholder is not treated as a dividend, as explained above, the tax
treatment of the cash may be different depending on which shares of SPI Capital
Stock are deemed to be exchanged for cash and which shares are deemed to be
exchanged for Holdings Common Stock. While there is some authority suggesting
that a stockholder's allocation of stock and cash to certain shares of SPI
Capital Stock should be respected, there can be no assurance that the IRS will
not take a contrary position. Because of the absence of definitive authority,
SPI stockholders are strongly advised to consult with their own tax advisors.
Basis and Holding Period of the Holdings Common Stock and Holdings Series
A Preferred Stock. The basis of the Holdings Common Stock (including any
fractional shares for which cash is received described below) received by a
Modtech stockholder or an SPI stockholder in the Mergers will equal the basis of
the Modtech Common Stock or SPI Capital Stock surrendered by such stockholder in
the respective Merger, decreased by the amount of cash received by such
stockholder, and increased by the amount of capital gain recognized by such
stockholder and the amount treated as a dividend to such stockholder. As to any
Modtech stockholder that receives both Holdings Common Stock and Holdings Series
A Preferred Stock, such basis amount shall be allocated to each class of stock
based upon the relative fair market value of each class. As to SPI stockholders,
the basis of the Holdings Common Stock received in the SPI Merger will be
determined separately with respect to each block of SPI Capital Stock
surrendered in the SPI Merger.
The holding period of the Holdings Common Stock and the Holdings Series A
Preferred Stock will include the period during which the Modtech Common Stock or
SPI Capital Stock surrendered in the Mergers was held.
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Cash in Lieu of Fractional Shares. Cash received by a Modtech stockholder
or SPI stockholder in lieu of a fractional share interest of Holdings Common
Stock will be treated as having been received as a distribution in full payment
in exchange for the fractional share interest in Holdings Common Stock which
such stockholder would otherwise be entitled to receive, and will qualify as
capital gain or loss, or as a dividend under the Section 302 Tests discussed
above.
Conversion of Holdings Series A Preferred Stock. A holder of Holdings
Series A Preferred Stock will not recognize income, gain or loss upon the
conversion of such stock into Holdings Common Stock. A holder's basis in the
Holdings Common Stock received upon conversion will equal the basis of the
Holdings Series A Preferred Stock so converted, and the holding period of the
Holdings Common Stock received upon conversion will include the holding period
of the Holdings Series A Preferred Stock so converted.
Reporting Requirements and Backup Withholding. Each Modtech stockholder
and SPI stockholder will be required to retain records and file with such
holder's United States federal income tax return a statement setting forth
certain facts relating to the Modtech Merger and the SPI Merger.
Backup withholding at the rate of 31% may apply with respect to certain
payments unless the recipient (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A stockholder who does not provide Holdings with
its correct taxpayer identification number may be subject to penalties imposed
by the IRS. Any amounts withheld under the backup withholding rules may be
allowed as a refund or credit against the stockholder's federal income tax
liability, provided that certain required information is furnished to the IRS.
Holdings will report to stockholders of Holdings and to the IRS the amount
of "reportable payments" and any amount withheld with respect to Holdings Common
Stock and Holdings Series A Preferred Stock during each calendar year.
THIS FEDERAL INCOME TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY AND MAY
NOT APPLY TO ALL HOLDERS OF MODTECH COMMON STOCK OR ALL HOLDERS OF SPI CAPITAL
STOCK. SUCH HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES OF THE MERGERS.
CONFLICTS OF INTEREST
In considering the respective recommendations of the Modtech Board and the
SPI Board with respect to the Mergers, stockholders of Modtech and SPI should be
aware that, as described below, certain members of SPI's and Modtech's
management and Boards may have interests in the Mergers that are different from,
or in addition to, the interests of stockholders of Modtech and SPI, and that
may create potential conflicts of interest. The Modtech Board and the SPI Board
have each considered these interests, among other matters, in approving and
adopting the Merger Agreement and the Mergers.
Holdings Board of Directors. Four of the eight current directors of
Modtech, Evan M. Gruber, Charles C. McGettigan, Myron A. Wick III and Daniel J.
Donahoe III, will become directors of Holdings. Three of the six current
directors of SPI, Patrick Van Den Bossche, Charles A. Hamilton and Charles R.
Gwirtsman, will become directors of Holdings.
Holdings Executive Officers. Evan M. Gruber, Chief Executive Officer of
Modtech, Patrick Van Den Bossche, President of SPI, and Michael G. Rhodes, Chief
Operating Officer and Chief Financial Officer of Modtech, will each hold the
same
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positions with Holdings as they presently hold with SPI or Modtech. In
connection with the Merger Agreement, Holdings will enter into employment
agreements with these officers. See "Directors and Executive Officers of
Holdings Following the Mergers -- Compensation of Executive Officers."
Transaction Fees. KRG Capital Partners, LLC ("KRG"), Infrastructure and
Environmental Private Equity Management III, LLC ("IEPEM"), Argentum Capital
Partners II, L.P. ("Argentum") and NationsCredit Commercial Corporation
("NationsCredit"), which control in the aggregate approximately 96.1% of the
voting power of SPI, will receive a total of $1,250,000 in transaction fees in
connection with the Mergers. At the closing of the Mergers, $750,000 of the
transaction fees will be paid and allocated as follows: KRG - $573,170; IEPEM -
$126,525; Argentum - $25,305; and NationsCredit - $25,000. The remaining
$500,000 balance of the fees will be paid to KRG over two years in equal monthly
installments. Upon the closing of a business acquisition by Holdings, during
each of the first and second years after the closing of the Mergers, all
remaining monthly payments of the transaction fees for that year will become
immediately due and payable. KRG will also be retained by Holdings for a period
of three years to provide transaction advisory services in connection with any
future acquisitions of Holdings following completion of the Mergers. This
agreement may be renewed by the parties on a year-to-year basis for a maximum of
two additional years. Holdings may terminate the transaction advisory services
agreement at any time after its second anniversary upon 90 days' prior written
notice. Under the transaction advisory agreement, KRG will receive a fee of
$75,000 for acquisitions under $5 million, a fee of $100,000 for acquisitions
greater than $5 million but less than $15 million, and a fee of not less than
$100,000 for acquisitions in excess of $15 million. During the third year of the
agreement and any subsequent extension, KRG will receive an annual base advisory
fee of $250,000.
The principals of KRG, Mark M. King, Bruce L. Rogers, and Charles R.
Gwirtsman, are presently directors of SPI. Mr. Gwirtsman will serve as a
director of Holdings following the Mergers.
McGettigan, Wick & Co., Inc. will receive a $1,250,000 fee in connection
with the completion of the Mergers. The fee will be payable over not more than
two years, with $750,000 paid at the completion of the Mergers, $250,000 paid
upon the earlier of the closing of the first business acquisition following the
Mergers or the first anniversary of the Mergers, and $250,000 paid upon the
earlier of the closing of the second business acquisition following the Mergers
or the second anniversary of the Mergers.
The principals of McGettigan, Wick & Co., Inc. are Charles C. McGettigan
and Myron A. Wick III, who are also principals of Proactive Partners, L.P.,
which beneficially controls about 23.6% of the voting power of Modtech. Mr.
McGettigan and Mr. Wick are directors of Modtech and will be directors of
Holdings.
Indemnification. The Merger Agreement also provides that, from and after
the Effective Time, Holdings and SPI will indemnify, defend, protect and hold
harmless the present and former officers and directors of SPI, subject to
certain limitations, for all claims arising as a result of their service to SPI
or relating to the Merger Agreement and the Mergers. See "Certain Provisions of
The Merger Agreement--Indemnification."
Registration Rights Agreement. After the completion of the Mergers, the
current executive officers and directors of Modtech and the beneficial owners of
more than 5% of Modtech Common Stock (See "Security Ownership of Certain
Beneficial Owners and Management of Modtech"), the current executive officers
and directors of SPI and the beneficial owners of more than 5% of SPI's Capital
Stock (See, "Security Ownership of Certain Beneficial Owners and Management of
SPI"), and certain individual stockholders of SPI or such
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beneficial owners, will be entitled to have their shares of Holdings Common
Stock registered for resale to the public under certain conditions. Under a
Registration Rights Agreement between Holdings and these stockholders, in the
event that Holdings determines to register, under the Securities Act of 1933,
any of its equity securities for its own account, these stockholders will be
entitled to notice of Holdings' registration and will be entitled to include in
the registration their shares of Holdings Common Stock specified in a written
request to Holdings.
These "piggyback" registration rights are subject to certain conditions
and limitations, including the right of Holdings not to include any of these
stockholders' shares among the securities covered by a registration statement if
the aggregate market value of such shares is less than $1 million, or the Board
of Directors of Holdings determines in good faith that including such shares
among the securities covered by the registration statement would have a
materially detrimental effect on the offering and would therefore not be in the
best interest of Holdings. If the offering is underwritten, the underwriter may
also exclude some or all of the shares of these stockholders from the
registration statement, if it determines marketing factors require a limitation
on the number of shares to be underwritten.
ACCOUNTING TREATMENT
The SPI Merger will be accounted for under the purchase method of
accounting, in accordance with generally accepted accounting principles. Under
the purchase method of accounting, the purchase price of SPI, including direct
costs of the Mergers, will be allocated among the assets acquired and
liabilities assumed based upon their estimated fair values, with the excess
purchase consideration allocated to goodwill. The conversion of Modtech Common
Stock into Holdings Common Stock and Series A Preferred Stock will be treated as
a reorganization, with no change in the recorded amount of Modtech's assets and
liabilities. The financial statements of Modtech will become the financial
statements of Holdings. The results of Holdings' operations will include the
results of operations of SPI commencing at the Closing Date.
The Unaudited Pro Forma Combined Condensed Financial Statements appearing
elsewhere in this Joint Proxy Statement/Prospectus are based upon certain
assumptions and allocate the purchase price to assets and liabilities based upon
preliminary estimates of their respective fair values. The unaudited pro forma
adjustments and combined amounts are included for informational purposes only.
If the Mergers are consummated, then Holdings's financial statements will
reflect effects of acquisition adjustments only from the Closing Date. THE
ACTUAL ALLOCATION OF THE PURCHASE PRICE MAY DIFFER SIGNIFICANTLY FROM THE
ALLOCATION REFLECTED IN THE UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS.
APPROVALS AND CONSENTS
The Merger Agreement provides that SPI and Modtech will use their best
efforts and cooperate with one another (i) in promptly determining whether any
filings are required to be made or consents, approvals, waivers, permits or
authorizations are required to be obtained under any applicable law or
regulation or from any governmental authorities or third parties in connection
with the Mergers, and (ii) in promptly making any such filings, in furnishing
information required in connection therewith and in timely seeking to obtain any
such consents, approvals, waivers, permits or authorizations.
Under applicable federal anti-trust law, certain acquisitions may not be
consummated unless notice has been given and certain information furnished to
the Antitrust Division of the United States Department of Justice (the
"Antitrust Division") and the Federal Trade Commission ("FTC") and specified
waiting period requirements have been satisfied, unless earlier termination has
been granted. SPI, Modtech, Proactive Partners, L.P., and Lagunitas Partners
L.P., each filed with the Antitrust Division
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and the FTC a Notification and Report Form with respect to the Mergers. SPI's
filing was made October 8, 1998, and the filing of the other three parties were
made on October 20, 1998. On November 19, 1998, the waiting period will expire.
NASDAQ LISTING
Holdings will use its best efforts to cause the shares of Holdings Common
Stock issued in the Mergers to be approved for listing on the Nasdaq National
Market, subject to notice of issuance, prior to the Closing Date. This listing
is a condition to closing the Mergers. Holdings does not intend to list the
Holdings Series A Preferred Stock.
Effective at the Closing Date, Modtech Common Stock will be delisted from
the Nasdaq National Market and deregistered under the Securities Exchange Act of
1934.
RESALES OF STOCK
Shares of Holdings Common Stock and Holdings Series A Preferred Stock to
be issued in connection with the Mergers will be registered under the Securities
Act of 1933 (the "Securities Act"). Such shares will be freely transferable,
except that shares received by any person who may be deemed to be an affiliate
of SPI or Modtech within the meaning of Rule 145 of the Securities Act may not
be resold except in mergers permitted by such Rule or as otherwise permitted
under the Securities Act. While the shares of Holdings Common Stock will be
listed on the Nasdaq National Market, the shares of Holdings Series A Preferred
Stock will not be listed. There will be no market for Holdings Series A
Preferred Stock and one is not likely to develop.
DISSENTERS' RIGHTS
SPI Stockholders
You, as a record holder of shares of SPI Capital Stock, will be entitled
to assert dissenters' rights under Article 113 of the Colorado Business
Corporation Act in connection with the Mergers. The following discussion is not
a complete statement of the law pertaining to dissenters' rights under the
Colorado Business Corporation Act and is qualified in its entirety by reference
to the full text of Article 113 reprinted as Annex IV to this Joint Proxy
Statement/Prospectus.
If you do not wish to accept the SPI Merger Consideration, Article 113
authorizes you to dissent from the Mergers and obtain payment of the "fair
value" for your shares of SPI Capital Stock. To assert dissenters' rights, you
must: (i) provide written notice to SPI, before the vote is taken on the
proposed Mergers, of your intention to demand payment of the fair value for your
shares if the Mergers are completed; and (ii) not vote your shares in favor of
the Mergers. If you do not satisfy these requirements, you will not be entitled
to receive payment for your shares under Article 113.
"Fair value," with respect to your shares of SPI Capital Stock, means the
value of your shares immediately before the Closing Date of the Mergers,
excluding any appreciation or depreciation in anticipation of the Mergers,
unless such exclusion would be inequitable. Interest will accrue on the fair
value from the Closing Date of the Mergers to the date of payment at the average
rate currently paid by SPI on its principal bank loans.
You should be aware that the fair value of your shares of SPI Capital
Stock as determined under Colorado law could be greater than, equal to, or less
than the consideration you would receive if you did not elect to assert
dissenters' rights.
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If the Mergers are authorized at the SPI Special Meeting, SPI will mail to
you, and all other stockholders who complied with the requirements of Article
113 and are entitled to demand payment of the fair value for their shares of SPI
Capital Stock, a written dissenters' notice. The notice will be given no later
than 10 days after the Closing Date of the Mergers and will be accompanied by a
copy of Article 113. The notice will also (i) state that the Mergers were
authorized and state the Closing Date of the Mergers; (ii) state an address at
which SPI will receive payment demands and the address of a place where
certificates for certificated shares of SPI Capital Stock must be deposited;
(iii) supply a form for demanding payment, which form will request that you
state an address where you would like your payment to be made; (iv) set the date
by which SPI must receive your payment demand and certificates for certificated
shares of SPI Capital Stock, which date will not be less than 30 days after the
date your notice is given; and (v) state all other information that is required
to be given to you under Colorado law.
In the event that you still wish to assert your dissenters' rights after
receiving your notice from SPI, you must: (i) deliver a completed payment demand
to SPI, which may be on the payment demand form supplied to you by SPI, and (ii)
deposit your certificates for certificated shares of SPI Capital Stock with SPI.
You will still retain all rights of a stockholder, except the right to transfer
your shares of SPI Capital Stock, until the Closing Date of the Mergers. After
the Closing Date of the Mergers, however, you will have only the right to
receive payment of the fair value for your shares of SPI Capital Stock. Except
as described below, both your demand for payment and deposit of certificates are
irrevocable. If you fail to make your payment demand and deposit the share
certificates by the date set in the dissenters' notice delivered by SPI, you
will not be entitled to payment under Article 113.
Upon the Closing Date of the Mergers or upon SPI's receipt of your payment
demand, whichever is later, SPI will pay to you, and each other dissenter who
complied with the procedures to demand payment under Colorado law, at the
address you provided in your payment demand, the amount SPI estimates to be the
fair value of your shares of SPI Capital Stock, plus accrued interest. Your
payment will be accompanied by SPI's audited balance sheet for the year ended
March 31, 1998, an audited income statement for that year, and an audited
statement of cash flow for that year, as well as the latest available unaudited
financial statements, if any, for the interim period. Also included with your
payment will be a statement of SPI's estimate of the fair value of your shares,
an explanation of how the interest on your payment was calculated, and a
statement of your right to demand additional payment under Article 113. In
addition, SPI will again provide you with a copy of the full text of Article 113
of the Colorado Business Corporation Act.
If the Closing Date of the Mergers has not occurred within 60 days after
the date set by which SPI must receive your payment demand, SPI will return your
deposited certificates. If, however, the Closing Date of the Mergers
subsequently occurs, then SPI will send to you a new dissenters' notice, and all
of the provisions of Article 113 summarized above will again be applicable.
As mentioned above, you may have the right under Colorado law to demand
additional payment for your shares of SPI Capital Stock. If you believe that the
amount paid or offered by SPI for your shares is less than the fair value or
that the interest due was incorrectly calculated, or if SPI fails to make
payment within 60 days after the date set by which SPI must receive your payment
demand, or if SPI fails to return the deposited certificates as required under
Article 113, you may give written notice to SPI of your estimate of the fair
value of your shares, and of the amount of interest due, and you may demand
payment of such estimate, less any payment already made by SPI. You will waive
your right to demand payment of your estimate unless you deliver your demand to
SPI within 30 days after SPI made or
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offered payment of the fair value of your shares of SPI Capital Stock.
If your demand for additional payment remains unresolved, SPI may, within
60 days after receiving your demand, commence a court proceeding and petition
the District Court for Denver County, Colorado, to determine the fair value of
your shares, plus accrued interest. If SPI does not commence the proceeding
within the 60-day period, it shall pay to you, and each other dissenter whose
demand for additional payment remains unresolved, the amount demanded. The court
may assess the costs of the court proceedings between the parties as it deems
equitable.
Under Colorado law, if you decide to dissent and obtain payment of the
fair value for your shares of SPI Capital Stock, you may not challenge the
Mergers, unless the Mergers are unlawful or fraudulent with respect to the
stockholders of SPI.
Modtech Stockholders
Since Modtech's Common Stock is traded on the Nasdaq National Market, you
will not be entitled to dissenters' rights if you object to the Mergers, unless
your shares are subject to restrictions on transfer imposed by Modtech or by law
or regulation, or unless the holders of at least 5% of Modtech's outstanding
Common Stock make appropriate demands under Chapter 13 of the California General
Corporation Law (the "California Corporations Code"). The following discussion
is not a complete statement of the law pertaining to the rights of such
"dissenting stockholders" under the California Corporations Code and is
qualified in its entirety by reference to the full text of Chapter 13, which is
reprinted as Annex III to this Joint Proxy Statement/Prospectus.
Under the California Corporations Code, if you do not wish to accept the
Modtech Merger Consideration upon completion of the Merger, you may elect to
receive payment for the fair market value of your shares if: (1) you meet the
requirements of the preceding paragraph; (2) your shares were outstanding on the
Record Date; (3) your shares were not voted in favor of the Mergers; (4) you
make a written demand that Modtech purchase your shares of Modtech Common Stock
at fair market value; and (5) you submit your stock certificates for
endorsement. Your shares will then be considered "Dissenting Shares."
The fair market value of your Dissenting Shares is determined as of the
day before the first announcement of the terms of the Mergers, excluding any
appreciation or depreciation as a consequence of the proposed Mergers, but
adjusted for any stock split, reverse stock split or stock dividend that becomes
effective thereafter.
Within 10 days following approval of the Mergers by Modtech stockholders,
Modtech must mail to you and each other holder of shares of Modtech Common Stock
on the Record Date not voted in favor of the Mergers, a notice of the approval
of the Mergers, a statement of the price determined by Modtech to represent the
fair market value of the Dissenting Shares (which shall constitute an offer by
Modtech to purchase such Dissenting Shares at such stated price), and a
description of the procedures for you and such holders to exercise your rights
under Chapter 13 of the California Corporations Code as dissenting stockholders.
Within 30 days after the date on which the notice of the approval of the
Mergers by the outstanding shares of Modtech Common Stock is mailed to you, you
must demand that Modtech repurchase your Dissenting Shares in a statement
setting forth the number and class of Dissenting Shares held of record by you
that you are demanding that Modtech purchase, and a statement of what you claim
to be the fair market value of the Dissenting Shares as of the day before the
announcement of the proposed Mergers. The statement of fair market value in your
demand will be treated as an offer by you to sell the Dissenting Shares at such
price to Modtech. You
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must also submit to Modtech certificates representing any Dissenting Shares that
you demand Modtech purchase, so that such Dissenting Shares may either be
stamped or endorsed with the statement that the shares are Dissenting Shares or
exchanged for certificates of appropriate denomination so stamped or endorsed.
If, upon your surrender of the certificates representing the Dissenting
Shares, Modtech and you agree upon the price to be paid for the Dissenting
Shares and agree that such shares are Dissenting Shares, then the agreed price
is required by law to be paid to you within the later of 30 days after the date
of such agreement or 30 days after any statutory or contractual conditions to
the consummation of the Mergers are satisfied or waived.
If Modtech and you disagree on the price for such Dissenting Shares or
disagree as to whether such shares are entitled to be classified as Dissenting
Shares, you have the right to bring an action in California Superior Court to
resolve the dispute. The action must be brought within six months after the date
on which the notice of the approval of the Mergers by Modtech stockholders is
first mailed. In such action, the California Superior Court may determine
whether the shares of Modtech Common Stock held by you are Dissenting Shares,
the fair market value of such shares, or both.
You should assume that Modtech will not take any action to perfect your
dissenters' rights. To exercise your dissenters' rights, you should strictly
comply with the procedures set forth in Chapter 13 of the California
Corporations Code. You should consult with your legal advisor before electing or
attempting to exercise your dissenters' rights. Failure to follow any Chapter 13
procedures may result in termination or waiver of dissenters' rights under
Chapter 13.
The California Corporations Code provides, among other things, that you
may not withdraw the demand for payment of the fair market value of your
Dissenting Shares unless Modtech consents to such request for withdrawal. If you
perfect your dissenters' rights you will not be entitled to surrender your
Modtech Common Stock for payment of the Modtech Merger Consideration.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Modtech and SPI have each made forward-looking statements in this document
(and in certain documents that are incorporated by reference in this Joint Proxy
Statement/Prospectus) that are subject to risks and uncertainties. These
statements are based on the beliefs and assumptions of the respective company's
management, and on information currently available to such management.
Forward-looking statements include the information concerning possible or
assumed future results of operations of Modtech, SPI and Holdings set forth
under "Summary," "The Mergers--Background of the Mergers," "The Mergers--Reasons
for the Mergers; Recommendations of the Boards of Directors" and "Unaudited Pro
Forma Condensed Combined Financial Statements," and statements preceded by,
followed by, or that include the words "believes," "expects," "anticipates,"
"intends," "plans," "estimates" or similar expressions.
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Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and stockholder values
of the combined companies following the Mergers may differ materially from those
expressed in these forward-looking statements. Many of the factors that will
determine these results and values are beyond Modtech's, SPI's, and Holdings'
ability to control or predict. Stockholders are cautioned not to place undue
reliance on any forward-looking statements. In addition, Modtech, SPI and
Holdings do not have any intention or obligation to update forward-looking
statements after they distribute this Joint Proxy Statement/Prospectus, even if
new information, future events or other circumstances have made them incorrect
or misleading.
Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The
principal important risk factors that could cause the combined companies' actual
performance and future events and actions to differ materially from such
forward-looking statements, include, but are not limited to, changes in
legislation relating to funding for modular classrooms, changes in building code
laws or regulations, and changes in general economic and market factors that
affect the prices of securities or the industries in which Modtech and SPI do
business.
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THE SPECIAL MEETINGS
PURPOSE, TIME AND PLACE
This Joint Proxy Statement/Prospectus is being furnished to stockholders
of Modtech in connection with the solicitation of proxies by the Modtech Board
for use at the Modtech Special Meeting and to stockholders of SPI in connection
with the solicitation of proxies by the SPI Board for use at the SPI Special
Meeting.
SPI. The SPI Special Meeting is to be held on December __, 1998, at 10:00
a.m., at 9550 Hermosa Avenue, Rancho Cucamonga, California 91730. At the SPI
Special Meeting, holders of SPI Common Stock and SPI Preferred Stock will be
asked to consider and vote upon a proposal to approve the Merger Agreement and
the Mergers, and such other matters as may properly come before the SPI Special
Meeting.
MODTECH. The Modtech Special Meeting is to be held on December __, 1998,
at 10:00 a.m., at the Sheraton Newport Hotel, 4545 MacArthur Boulevard, Newport
Beach, California 92660. At the Modtech Special Meeting, holders of Modtech
Common Stock will be asked to consider and vote upon a proposal to approve and
adopt the Merger Agreement and the Mergers, and such other matters as may
properly come before the Modtech Special Meeting.
RECORD DATE; VOTING POWER
SPI. The SPI Board has fixed the close of business on _________, 1998 (the
"Record Date") as the record date for determining the holders of SPI Capital
Stock entitled to notice of, and to vote at, the SPI Special Meeting. Only
holders of record of SPI Capital Stock at the close of business on the Record
Date will be entitled to notice of, and to vote at, the SPI Special Meeting.
At the close of business on the Record Date, (i) __________ shares of SPI
Common Stock were issued and outstanding and entitled to vote at the SPI Special
Meeting; and (ii) _________ shares of SPI Preferred Stock were issued and
outstanding and entitled to vote at the SPI Special Meeting. Holders of record
of SPI Common Stock and SPI Preferred Stock are entitled to one vote for each
share of SPI Common Stock held of record on the Record Date and one vote for
each share of SPI Preferred Stock held of record on the Record Date on any
matter which may properly come before the SPI Special Meeting. Votes may be cast
at the SPI Special Meeting in person or by proxy. See "The Special
Meetings--Voting of Proxies."
The presence at the SPI Special Meeting, either in person or by proxy, of
the holders of a majority of the voting power represented by the SPI Common
Stock and SPI Preferred Stock (voting together and not as separate classes of
stock) is necessary to constitute a quorum in order to transact business at the
SPI Special Meeting. In the event that a quorum is not present at the SPI
Special Meeting, such meeting will be adjourned or postponed in order to solicit
additional proxies.
MODTECH. The Modtech Board has fixed the close of business on _________,
1998 as the record date for determining the holders of Modtech Common Stock
entitled to notice of, and to vote at, the Modtech Special Meeting. Only holders
of record of Modtech Common Stock at the close of business on the Record Date
will be entitled to notice of, and to vote at, the Modtech Special Meeting.
At the close of business on the Record Date, (i) _________ shares of
Modtech Common Stock were issued and outstanding and entitled to vote at the
Modtech Special Meeting. Holders of record of Modtech Common Stock are entitled
to one vote per share on any matter which may properly come before the Modtech
Special Meeting. Votes may be cast at
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the Modtech Special Meeting in person or by proxy. See "The Special
Meetings--Voting of Proxies."
The presence at the Modtech Special Meeting, either in person or by proxy,
of the holders of a majority of the outstanding Modtech Common Stock entitled to
vote, is necessary to constitute a quorum of the Modtech Common Stock, in order
to transact business at the Modtech Special Meeting. In the event that a quorum
is not present at the Modtech Special Meeting, it is expected that such meeting
will be adjourned or postponed in order to solicit additional proxies.
VOTES REQUIRED
SPI. Approval of the proposal to adopt the Merger Agreement and the
Mergers, including the SPI Merger, will require the affirmative vote of 70% of
the combined voting power of the outstanding shares of SPI Common Stock and SPI
Preferred Stock entitled to vote thereon. Under applicable Colorado law, in
determining whether the proposal to approve and adopt the Merger Agreement and
the Mergers has received the requisite number of affirmative votes, abstentions
will be counted and have the same effect as a vote against the proposals.
MODTECH. Approval of each of the proposals to adopt the Merger Agreement
and the Mergers, including the Modtech Merger, will require the affirmative vote
of the majority of the voting power of the outstanding shares of Modtech Common
Stock entitled to vote thereon. Under applicable California law, in determining
whether either proposal has received the requisite number of affirmative votes,
abstentions will be counted and have the same effect as a vote against the
proposals. Brokers who hold shares of Modtech Common Stock as nominees, in the
absence of instructions from the beneficial owners thereof, will not have
discretionary authority to vote such shares for the approval and adoption of the
Merger Agreement and the Mergers. Any shares which are not voted because the
nominee-broker lacks such discretionary authority will be counted and have the
same effect as a vote against the proposals.
SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN STOCKHOLDERS
SPI. As of the close of business on the Record Date, SPI's directors and
executive officers and their affiliates had the right to vote _______
outstanding shares of SPI Common Stock and _________ outstanding shares of SPI
Preferred Stock (collectively representing approximately ______% of the voting
power of all classes of SPI Capital stock).
MODTECH. As of the close of business on the Record Date, Modtech's
directors and executive officers and their affiliates had the right to vote
________________ outstanding shares of Modtech Common Stock (collectively
representing approximately % of the voting power of the Modtech Common Stock).
VOTING OF PROXIES
Shares represented by properly executed proxies received in time for the
Modtech or SPI Special Meeting will be voted at the meeting in the manner
specified by such proxies. You should be aware that, if your proxy is properly
executed but does not contain voting instructions, your proxy will be voted FOR
approval of the Merger Agreement, including the Mergers. It is not expected that
any matter other than as described herein will be brought before the Modtech
Special Meeting or the SPI Special Meeting. If other matters are properly
presented before either of these meetings, the persons named in your proxy will
have authority to vote on such matters without consulting you. These matters may
include a proposal to adjourn or postpone the meeting in order to solicit
additional votes in favor of the Merger Agreement and the Mergers.
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REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed Modtech or SPI proxy card does not
preclude a stockholder from voting in person. A stockholder of SPI may revoke a
proxy at any time prior to its exercise by:
- - delivering, prior to the SPI Special Meeting, to SPI, 9550 Hermosa Avenue,
Rancho Cucamonga, California 91730, Attention: Secretary, a written notice
of revocation bearing a later date or time than the proxy;
- - delivering to the Secretary of SPI a duly executed proxy bearing a later
date or time than the revoked proxy; or
- - attending the SPI Special Meeting and voting in person.
A stockholder of Modtech may revoke a proxy at any time prior to its
exercise by:
- - delivering, prior to the Modtech Special Meeting, to the Secretary of
Modtech, James D. Goldenetz, Modtech, Inc., 2830 Barrett Avenue, Perris,
California 92571, a written notice of revocation bearing a later date or
time than the proxy;
- - delivering to the Secretary of Modtech a duly executed proxy bearing a
later date or time than the revoked proxy; or
- - attending the Modtech Special Meeting and voting in person.
Attendance at the Modtech Special Meeting or the SPI Special Meeting will
not by itself constitute revocation of a proxy. Neither Modtech nor SPI expects
to adjourn their Special Meeting for a period of time long enough to require the
setting of a new Record Date for the meeting. If an adjournment occurs, it will
have no effect on the ability of either Modtech's or SPI's stockholders of
record as of the Record Date to exercise their voting rights or to revoke any
previously delivered proxies.
SOLICITATION OF PROXIES
Modtech will pay 68% of the costs of preparing, filing, printing and
mailing this Joint Proxy Statement/Prospectus, including filing fees, and SPI
will pay 32% of such costs. Each company shall bear 100% of any additional costs
incurred by it in soliciting proxies from its stockholders. Arrangements will be
made with brokerage houses and other custodians, nominees and fiduciaries for
the forwarding of solicitation material to the beneficial owners of Modtech
Common Stock held of record by such persons, and Modtech will reimburse such
company's custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in connection therewith. In addition to solicitation by
mail, the directors, officers and employees of each company and their
subsidiaries may solicit proxies from their stockholders by telephone, telegram
or in person.
Neither Modtech nor SPI have retained any third party to assist them in
soliciting proxies in connection with the Modtech Special Meeting or the SPI
Special Meeting.
DO NOT SEND STOCK CERTIFICATES IN WITH YOUR PROXY CARD.
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CERTAIN PROVISIONS OF THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, which is attached as Annex I to this Joint Proxy Statement/Prospectus
and incorporated herein by reference. Other provisions of the Merger Agreement
are summarized elsewhere in this Joint Proxy Statement/Prospectus. These
summaries are qualified in their entirety by reference to the Merger Agreement.
CONDITIONS TO CONSUMMATION OF THE MERGERS
Each party's obligation to complete the Mergers is subject to a number of
conditions which must be met or waived by the Closing Date. These conditions
include:
- - The approval of the Merger Agreement and the Mergers by the Modtech and
SPI stockholders;
- - The approval for listing on the NASDAQ National Market, subject to
official notice of issuance, of the shares of Holdings Common Stock to be
issued in the Mergers;
- - The expiration or early termination of the waiting period that applies to
the Mergers under applicable federal anti-trust laws;
- - The receipt of all licenses, permits, consents, approvals, authorizations,
qualifications and orders of governmental authorities and other third
parties as are necessary in connection with the Mergers contemplated by
the Merger Agreement, except where failure to obtain them would not
materially dilute the aggregate benefits of the Mergers to SPI and
Modtech;
- - The representations and warranties of the other party in the Merger
Agreement shall be accurate;
- - The registration statement of which this Joint Proxy Statement/Prospectus
is a part shall be effective, and not subject to a stop order or any
proceedings or threats to suspend its effectiveness;
- - The receipt of all necessary approvals under state securities laws
relating to the issuance of Holdings Common Stock;
- - Holdings shall have a credit facility mutually agreeable to SPI and
Modtech, of which about $45 million will be used to refinance SPI's
existing credit facility and pay part of the cash portion of the Merger
Consideration and transaction expenses;
- - No more than 5% of the shares of Modtech Common Stock and no more than 5%
of the shares of SPI Capital Stock can have exercised, and not withdrawn,
their dissenters' rights;
- - The absence of any governmental order, rule or injunction, or any law or
regulation prohibiting the Mergers or impairing Holdings' ability to
operate the business of Modtech and SPI on a consolidated basis;
- - The absence of any action or proceeding challenging the Mergers or seeking
material damages in connection with the Mergers;
- - The execution of (1) a Registration Rights Agreement providing certain
piggyback registration rights to certain affiliates of Modtech and SPI,
(2) a Transaction Advisory Agreement with KRG retaining it as Holdings
advisor in connection with future acquisitions following the completion of
the Mergers for a period of three years, and (3) Employment Agreements
with Evan M. Gruber, Patrick Van Den Bossche and Michael G. Rhodes; and
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- - Each party must have performed and complied in all material respects with
all of its material obligations under the Merger Agreement by the Closing
Date;
SPI's obligation to complete the Mergers is subject to the following
additional condition:
- - The receipt of a tax opinion that the SPI Merger will qualify as a
reorganization under Internal Revenue Code Section 368.
Modtech's obligation to complete the Mergers is subject to the following
additional condition:
- - The receipt of a tax opinion that the Modtech Merger, together with the
SPI Merger, will qualify as an exchange under Internal Revenue Code
Section 351.
CONDUCT OF BUSINESS PENDING THE MERGERS
Modtech and SPI have each agreed in the Merger Agreement to take or
refrain from taking certain actions from the date of the Merger Agreement until
the completion of the Mergers. Subject to certain exceptions set forth in the
Merger Agreement, they have agreed as follows:
Interim Operations. They will (1) conduct and cause each of their
subsidiaries to conduct their businesses according to their ordinary and usual
course; and (2) use and cause their subsidiaries to use their best efforts to
preserve intact their business organizations and good will in all material
respects, keep available the services of their officers and employees as a
group, and maintain satisfactory relationships with lessees, suppliers,
distributors, customers, banks and others having business relationships with
them.
Capital Stock. They will not (1) declare or pay any dividends on their
outstanding shares of capital stock; (2) amend their organizational documents;
(3) issue any shares of capital stock (except upon exercise of warrants and
options issued and outstanding on the date of the Merger Agreement); (3) split
their stock; (4) issue any debt securities or borrow any money (other than bank
borrowings in the ordinary course of business consistent with past practices);
(5) purchase or redeem any shares of their capital stock; (6) grant any options,
warrants or other securities; (7) enter into any agreements that would require
them to acquire any shares of their capital stock, except pursuant to employee
benefit plans, programs or arrangements in existence on the date of the Merger
Agreement; or (8) otherwise change their capitalization.
Communication and Notification. They will confer on a frequent basis to
report on material operational matters and the general status of ongoing
operations. Each will notify the other party of any emergency or other changes
in the normal course of its business or the businesses of its subsidiaries or
any governmental actions which would have a material adverse effect on its
business and that of their subsidiaries, taken as a whole.
Agreements. They will not enter into or materially amend any employment,
severance or similar agreement or any agreement with respect to any business
combination, other than the Mergers and one potential acquisition by SPI
previously disclosed to Modtech's Chief Executive Officer, any acquisition or
disposition of a material amount of assets or securities, or any release of any
material contract rights not in the ordinary course of business.
Further Assurances. They will use all reasonable efforts to take all other
actions necessary to complete the Mergers.
TERMINATION
The Merger Agreement may be terminated and abandoned at any time prior to
the Effective Time, whether before or after approval of the Mergers by the
stockholders of SPI and Modtech:
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- - by mutual written consent of Modtech and SPI;
- - by either party if (a) any court or other United States governmental body
has taken any action enjoining, restraining or otherwise prohibiting one
or both of the Mergers; (b) the Mergers have not been completed by March
28, 1999 (other than due to the breach of the Merger Agreement by the
party seeking to terminate the Merger Agreement); (c) any required
approval of the stockholders of either party has not been obtained; or (d)
if the other party materially breaches its representations, warranties or
agreements under the Merger Agreement and fails to perform any of its
material obligations under this Agreement and such breach has not been
cured within 10 days after receipt of written notice of such failure;
- - by either party if the other party's Board withdraws or adversely modifies
its recommendation to approve the Merger Agreement or the Mergers, or
resolves to do any of the foregoing;
- - by Modtech or SPI if they receive a proposal from a third party to merge,
consolidate, or enter into a similar transaction , or to sell all or any
significant portion of its assets or equity securities ("Third Party
Acquisition Proposal") and their Board decides that the Third Party
Acquisition Proposal is a "Superior Proposal" by determining: (1) in good
faith that the Third Party Acquisition Proposal is more favorable to their
stockholders than the Mergers; and (2) upon the advice of their legal
counsel that to continue to recommend that their stockholders vote in
favor of the Mergers after receipt of the Third Party Acquisition Proposal
would not be consistent with their fiduciary duties. After making the
foregoing determinations, the terminating party's Board must give the
other party three days prior written notice of its intent to terminate the
Merger Agreement. The notice must include a detailed summary of the terms
and conditions of the Superior Proposal.
Upon termination, the Merger Agreement will become void and have no
effect, without any liability or obligation on the part of Modtech or SPI, other
than the payment of expenses as described in "Certain Provisions of the Merger
Agreement -- Fees and Expenses" below, and the payment of the termination fee
described below. Termination will not relieve any party from any breach of the
representations, warranties, covenants or agreements set forth in the Merger
Agreement prior to termination.
TERMINATION FEE
If Modtech satisfies all conditions to completion of the Mergers within
its control and does not take any action to prevent or unreasonably delay
completion of the Mergers, it will be entitled to a termination fee from SPI if
SPI terminates the Merger Agreement because of its receipt of a Superior
Proposal, or if Modtech terminates the Merger Agreement because:
- - SPI materially breaches any of its representations, warranties or
agreements under the Merger Agreement and fails to cure the breach within
ten days after receipt of notice of the breach;
- - the required approval of the SPI stockholders has not been obtained; or
- - the SPI Board has withdrawn or adversely modified its recommendation of
approval of the Merger Agreement or the Mergers.
The termination fee to be paid by SPI will be equal to Modtech's fees and
expenses related to the Mergers, plus $2 million.
If SPI satisfies all conditions to completion of the Mergers within its
control and does not take any action to prevent or unreasonably delay completion
of the Mergers, it shall be entitled to a termination
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fee from Modtech if Modtech terminates the Merger Agreement because of its
receipt of a Superior Proposal, or if SPI terminates the Merger Agreement
because:
- - Modtech materially breaches any of its representations, warranties or
agreements under the Merger Agreement and fails to cure the breach within
ten days after receipt of notice of the breach;
- - the required approval of the Modtech stockholders has not been obtained;
or
- - the Modtech Board has withdrawn or adversely modified its recommendation
of approval of the Merger Agreement or the Mergers.
The termination fee to be paid by Modtech will be equal to SPI's fees and
expenses related to the Mergers plus $2 million.
The termination fees are the sole remedy of Modtech and SPI if the Merger
Agreement is terminated for any of the reasons described above.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary and reciprocal representations and
warranties by SPI and Modtech relating to, among other things, to:
- - their organization, good standing and corporate power and that of their
subsidiaries;
- - ownership of subsidiaries;
- - capital structure;
- - corporate power to enter into, and due authorization, execution and
delivery of the Merger Agreement;
- - the execution and delivery of the Merger Agreement not violating their
charter documents, applicable law, and certain material agreements;
- - accuracy of certain reports and financial statements supplied by them and,
in the case of Modtech filed with the Securities and Exchange Commission;
- - the absence of undisclosed liabilities;
- - the accuracy of information supplied by them in connection with this Joint
Proxy Statement/Prospectus;
- - the absence of certain changes or events since the date of the most recent
financial statements provided;
- - the absence of pending or threatened litigation, certain labor matters and
compliance with all applicable laws;
- - benefit plans and other matters relating to the Employee Retirement Income
Security Act of 1974, as amended, and employment matters;
- - filing of tax returns and payment of taxes;
- - environmental matters;
- - good title to properties and assets free of liens;
- - insurance matters; and
- - brokers' fees and expenses.
INDEMNIFICATION
The Merger Agreement provides that, after the Effective Time, Holdings
will indemnify, defend and hold harmless the current and former directors,
officers and employees of Modtech, SPI and their respective subsidiaries (each,
an "Indemnified Party")
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against all costs or expenses (including reasonable attorneys' fees), judgments,
fines, losses, claims, damages or liabilities incurred in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of actions or omissions occurring
at or prior to the Closing Date (including, without limitation, the Mergers) to
the fullest extent that such persons are indemnified under the laws of the
States of California or Colorado and the certificates of incorporation and
bylaws, as in effect on the date thereof, of Modtech, SPI and their respective
subsidiaries or any existing indemnification agreement with either Modtech or
SPI. In the event of any such loss, expense, claim, damage or liability,
Holdings will cooperate in the defense of any such matter and any determination
required to be made with respect to whether an officer's or director's conduct
complies with the standards set forth under applicable law and any such
certificate of incorporation or bylaws will be made by independent counsel
(which will not be counsel that provides material services to Holdings or its
subsidiaries) selected by Holdings and reasonably acceptable to such officer or
director; provided, that in the absence of applicable judicial precedent to the
contrary, such counsel, in making such determination, will presume such
officer's or director's conduct complied with such standard and Holdings will
have the burden to demonstrate that such officer's or director's conduct failed
to comply with such standard.
In addition, the Merger Agreement provides that, for a period of six years
after the Effective Time, Holdings will maintain officers' and directors'
liability insurance covering those of the Indemnified Parties who are covered,
in their capacities as current or former officers and directors of Modtech, by
Modtech's existing officers' and directors' liability insurance policies, and
those of the Indemnified Parties who are covered in their capacities as current
or former officers and directors of SPI, by SPI's existing officers' and
directors' liability insurance policies, on terms substantially no less
advantageous to such Indemnified Parties than such existing insurance.
Additionally, Holdings is required to keep in effect provisions in its and
Modtech's and SPI's organizational documents providing for exculpation of
director and officer liability and its indemnification of the indemnified
parties to the fullest extent permitted under the Delaware, California or
Colorado corporate statutes, as applicable, which provisions will not be amended
except as required by applicable law or except to make changes permitted by law
that would enlarge the indemnified parties' right of indemnification.
FEES AND EXPENSES
Whether or not the Mergers are consummated, all costs and expenses
incurred in connection with the Merger Agreement and the Mergers contemplated
thereby will be paid by the party incurring the expenses, except that the
following expenses will be paid 68% by Modtech and 32% by SPI for:
- - the filings made under applicable anti-trust laws for Modtech, SPI and
their affiliates;
- - the Securities and Exchange Commission's filing fee for the registration
statement for Holdings Common Stock on Form S-4 of which this Joint Proxy
Statement/Prospectus is a part; and
- - the expenses incurred in preparing, printing and mailing the registration
statement and the Joint Proxy Statement/Prospectus.
In addition, SPI will reimburse Modtech for 32% of the fee paid by Modtech
to DLJ for the Fairness Opinion.
AMENDMENT AND WAIVER
The Merger Agreement may be amended by the parties at any time before or
after required approval of the Mergers by the stockholders of SPI and of
Modtech; except that after such approvals,
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changes to the amount of cash and Holdings Common Stock to be received by the
Modtech stockholders or the SPI stockholders may not be made without further
approval by such stockholders. Prior to the Effective Time, the parties may (i)
extend the time for the performance of any obligation or other act of any other
party to the Merger Agreement, (ii) waive any inaccuracies in the
representations and warranties contained in the Merger Agreement or in any
document delivered pursuant thereto and (iii) waive compliance with any of the
agreements or conditions contained in the Merger Agreement. All waivers must be
in writing.
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THE BUSINESS OF HOLDINGS
Following the Mergers, Holdings will be one of the leading modular
building manufacturers in the country with substantial product and geographic
diversification. It will be the leading provider of modular classrooms in the
State of California and a leading provider of modular buildings to customers in
California, Nevada, Arizona, New Mexico, Utah, Colorado and Texas and other
neighboring states.
The Mergers will create a company with pro forma revenues of approximately
$215 million for the 12 months ended December 31, 1997 and with the size and
scope to allow for purchasing efficiencies and other manufacturing and marketing
synergies. The Mergers will also strengthen and deepen the management team of
the combined enterprise.
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THE BUSINESS OF MODTECH
GENERAL
Modtech's modular relocatable classrooms are designed, engineered and
manufactured in accordance with structural and seismic safety specifications
adopted by the California Department of State Architects. These standards are
more rigorous than the requirements for other portable units, and supersede all
local building codes. Modtech subcontracts with structural engineering firms to
interface with each school district's architect or engineer to process project
specifications through the Department of State Architects.
Conventional school facilities constructed by school districts using funds
from the State Office of Public School Construction typically require two to
three years for approval and funding. Standardized factory-built school
classrooms like Modtech's, based on pre-approved plans and specifications, can
be approved by the State for construction in as little as 90 days. In all cases,
continuous on-site inspection by a licensed architect or structural engineer is
required during actual manufacturing of the classrooms, with the school district
obligated to reimburse the Department for the costs of such inspection.
In addition to its standard largely pre-fabricated classrooms, Modtech
also manufactures and installs relocatable customized classrooms which are
modular in design but assembled on-site using components manufactured by
Modtech, together with components purchased from third-party suppliers.
Modtech's classrooms vary in size from two modular units containing a total of
960 square feet to 20 units that can be joined together to produce a facility
comprising 9,600 square feet. Larger configurations are also possible. Typical
prices for Modtech's standard classrooms range from $29,000 to $34,000, while
prices for a custom classroom generally exceed $50,000, depending upon the
extent of customization required.
CLASSROOM CUSTOMERS
Modtech markets and sells its modular classrooms primarily to California
school districts. Modtech also sells its classrooms to the State of California
and leasing companies, both of which lease the classrooms principally to
California school districts. Sales of classrooms accounted for 94.2%, 98.1% and
98.9% of Modtech's total net sales for the years ended December 31, 1996 and
1997 and the six months ended June 30, 1998, respectively. Modtech's customers
typically pay cash from general operating funds or the proceeds of local bond
issues, or lease classrooms through banks, leasing companies and other private
funding sources.
Sales of classrooms to individual California school districts accounted
for approximately 74.5%, 71.1% and 73.2%, respectively, of Modtech's net sales
during the years ended December 31, 1996 and 1997 and the six months ended June
30, 1998, with sales of classrooms to third-party lessors to California school
districts during these periods accounting for approximately 7.2%, 19.1% and
14.2%, respectively, of Modtech's net sales. The mix of school districts to
which Modtech sells its products varies somewhat from year to year. Sales of
classrooms directly to the State of California during the six months ended June
30, 1998 represented approximately 11.5% of Modtech's net sales for the period,
compared to approximately 7.9% of Modtech's 1997 net sales and approximately
12.5% of Modtech's 1996 net sales. Sales of classrooms to private schools, day
care providers and out-of-state customers accounted for less than 1%of Modtech's
net sales during the years ended December 31, 1996 and 1997 and the six months
ended June 30, 1998. One of the lessors to which Modtech sells classrooms for
lease to California school districts is affiliated with Modtech through common
ownership by two of Modtech's directors. During the years ended December 31,
1996 and 1997 and the six months ended June 30, 1998, sales of classrooms to
this affiliated leasing
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company comprised approximately 2.9%, 2.2% and 2.7, respectively, of Modtech's
net sales. See "Where You Can Find More Information."
OTHER PRODUCTS
In addition to modular relocatable classrooms, Modtech also manufactures
modular, portable buildings which can be used as office facilities and
construction trailers and for other commercial purposes. During the years ended
December 31, 1996 and 1997 and the six months ended June 30, 1998, sales of such
modular, portable buildings to commercial customers accounted, in the aggregate,
for approximately 5.8%, 1.9% and 1.1%, respectively, of Modtech's net sales.
Modtech also manufactures a small number of modular structures that house and
shelter electronic equipment used in the wireless telecommunications industry.
During the years ended December 31, 1996 and 1997 and the six months ended June
30, 1998, sales of modular telecommunications equipment shelters accounted for
less than 1.0% of Modtech's net sales for each period.
SALES AND MARKETING
Modtech's classroom sales force is currently divided into three marketing
regions: Northern, Central and Southern California. Modtech currently employs
three classroom salespersons, each of whom is compensated on a commission basis.
These salespersons maintain contact with the individual school districts in
their respective marketing regions on a quarterly basis. They are also in
contact with architects and building inspectors employed by the school
districts, as well as school officials who may be in a position to influence
purchasing decisions.
Most of Modtech's contracts are awarded on an open bid basis. The
marketing process for many of Modtech's contracts begins prior to the time the
bid process begins. After Modtech selects bids or contracts that it desires to
pursue, Modtech's marketing and engineering personnel interface directly with
various school boards, superintendents or architects during the process of
formulating bid or contract specifications. Modtech prepares its bids or
proposals using various criteria, including current material prices, historical
overhead costs and a targeted profit margin. Substantially all of Modtech's
contracts are turnkey, including engineering and design, manufacturing,
transportation, installation and necessary site work. Open bid contracts are
normally awarded to the lowest responsible bidder.
A fourth salesperson is charged with increasing Modtech's sales of
buildings to the commercial and telecommunications markets. In addition, Modtech
has two salespeople who focus on the sale of classrooms in Nevada and Arizona,
and to private schools and day care operators in California.
MANUFACTURING AND ON-SITE INSTALLATION
Modtech uses an assembly line approach in the manufacture of its
standardized classrooms.
Modtech is vertically integrated in the manufacture of its standardized
modular classrooms, in that Modtech fabricates substantially all of its own
metal components at its facility in Perris, California. Modtech believes that
the ability to fabricate its own metal components helps it reduce the costs of
its products and to control their quality and delivery schedules. Modtech
maintains a quality control system throughout the manufacturing process, under
the supervision of its own quality control personnel and inspectors engaged by
its customers.
Modtech oversees installation of its modular classrooms on-site, using its
own employees for job supervision as a general contractor and, whenever
possible, for utility hook-ups and other tasks. In many custom projects, Modtech
performs or supervises subcontracted electrical, plumbing, grading, paving and
foundation work, landscaping and other site preparation work and services.
Subcontractors are typically used for larger utility, grading, concrete and
landscaping jobs. Modtech has a general contractor's license in the State of
California.
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In addition to approvals by the Department of State Architects, licensed
inspectors representing various school districts are on-site at each
manufacturing facility of Modtech to continuously inspect the construction of
classrooms for structural integrity. On-site inspections after installation are
also made by local fire departments for purposes of determining adequate
accessibility.
Modtech currently has five manufacturing facilities. Two are located in
Perris, California, which is approximately 60 miles east of Los Angeles. Modtech
has two additional facilities near Lathrop, California. Lathrop is located
approximately 75 miles east of San Francisco. Modtech's fifth facility is
located in Glendale, Arizona, approximately ten miles from Phoenix. Modtech
currently has a total of eight production lines in operation. A ninth production
line is scheduled to be added at the Lathrop plant in late 1998.
WARRANTIES
The standard contractual warranty for Modtech's modular relocatable
classrooms is one year, although it may be varied by contract specifications.
Purchased equipment installed by Modtech, such as air conditioning units, carry
the manufacturers' standard warranty. Warranty costs have not been material in
the past.
SUPPLIES
Modtech believes that there are multiple sources of supplies available for
all raw materials and equipment used in manufacturing its classrooms, most of
which are standard construction items such as steel, plywood and wallboard.
BACKLOG
Modtech manufactures classrooms to fill existing orders only, and not for
inventory. As of December 31, 1997, the backlog of sales orders was
approximately $71.0 million, up from approximately $4.1 million at December 31,
1995 and $58.0 million at December 31, 1996. Backlog at June 30, 1998 was $60.1
million, compared to backlog of $80.4 million at June 30, 1997. Only orders
which are scheduled for completion during the following 12-month period are
included in Modtech's backlog. The rate of booking new contracts can vary from
month to month, and customer changes in delivery schedules can occur. For these
reasons, among others, Modtech's backlog as of any particular date may not be
representative of actual sales for any succeeding period.
COMPETITION
The modular relocatable classroom business is highly competitive. Based on
1997 net sales, Modtech believes that it is the largest modular relocatable
classroom manufacturer in California. The primary competitors of Modtech for
standardized classrooms are believed to be Aurora Modular Industries in Southern
California and American Modular Systems in Northern California. Profiles
Structures in Southern California and Design Mobile Systems in Northern
California are Modtech's primary competitors in the market for higher-priced,
customized classrooms. Each of these four competitors is a privately-owned
company. Modtech believes that additional competitors may enter the market in
the future, some of whom may have significantly greater capital and other
resources than are available to Modtech, and that competition may therefore
increase.
Modtech believes its vertically integrated, assembly line approach to
manufacturing enables it to be one of the low-cost producers of standardized,
modular relocatable classrooms in California. Unlike many of its competitors,
Modtech manufactures most of its own metal components, which allows Modtech to
maintain quality control over these components and to produce them at a lower
average cost than that at which they could be obtained from outside sources.
Modtech also believes that the quality and appearance of its buildings, and its
reputation for reliability in completion of its contracts, enable it to maintain
a favorable position among its competition.
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Beyond a radius of approximately 300 miles, Modtech believes that
transportation costs typically will either significantly increase the prices at
which it bids for given projects, or will substantially erode Modtech's gross
profit margins.
PERFORMANCE BONDS
A substantial portion of Modtech's sales require that Modtech provide
bonds to ensure that the contracts will be performed and completed in accordance
with contract terms and conditions, and to assure that subcontractors and
materialmen will be paid. In determining whether to issue a performance bond on
behalf of Modtech, bonding companies consider a variety of factors concerning
the specific project to be bonded, as well as Modtech's levels of working
capital, stockholders' equity and outstanding indebtedness. From time to time,
Modtech has had difficulty in obtaining bonding for a given project. It may
encounter such difficulty again in the future.
REGULATION OF CLASSROOM CONSTRUCTION
In 1933, the California Legislature adopted the Field Act, which generally
provides that school facilities must be constructed in accordance with more
rigorous structural and seismic safety specifications than are applicable to
general commercial buildings. Under the Field Act, the Department of General
Services, through the Department of State Architects, has prescribed extensive
regulations regarding the design and construction of school facilities, and
reviews all plans for the construction of material modifications to any school
building. Construction authorization is not given unless the school district's
architect certifies that a proposed project satisfies construction cost and
allowable area standards. In addition, the Field Act provides for the submittal
of complete plans, cost estimates, and filing fees by the school district to the
Department of General Services, for the adoption of regulations setting minimum
qualifications for the preparation of plans and specifications, and the
supervision of school construction by a licensed architect or structural
engineer.
FUNDING
The demand for modular relocatable classrooms in California is affected by
various statutes. These statutes prescribe the methods by which Modtech's
customers, primarily individual school districts, obtain funding for the
construction of new school facilities, and the manner in which available funding
is to be spent by the school districts.
Financing for new school construction and rehabilitation of existing
schools by California school districts is currently provided, at the state
level, by funds derived from general revenue sources or statewide bond issues.
At the local level, financing is provided by local bond issues and fees imposed
on the developers of residential, commercial and industrial real property.
Historically, the primary source of financing for the purchase or lease of
relocatable classrooms has been state funding.
Class Size Reduction Program. In November 1996, California implemented the
Class Size Reduction Program in response to overcrowding in classrooms in the
state. Under this program, public schools that reduce class size to 20 students
in kindergarten through third grade receive additional funds. New classrooms may
be added by reconfiguring existing space, building new conventional classrooms,
or purchasing or leasing modular relocatable classrooms.
General Obligation Bonds. Until the adoption of the Class Size Reduction
Program in 1996, the most important source of funding at the State level for new
school facilities was through the issuance and sale of statewide general
obligation bonds which must be placed on statewide ballots and approved by the
voters.
Bond Financing. Under the School Building Lease - Purchase Law of 1976,
the State Allocation Board is empowered to purchase or lease school facilities
using funds from the periodic issuance of general obligation bonds of the State
of California. These purchased or leased school facilities may be made available
by the State Allocation Board to school districts. Certain matching funds,
usually
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derived from fees imposed on real estate developers, are required to be supplied
by the school districts seeking state funded facilities. If the school districts
acquire relocatable structures using these developer fees, the amount of the
required matching funds is reduced by the cost of such facilities. This
reduction in matching funds is intended to provide an incentive for school
districts to lease relocatable classrooms. As a condition of funding any project
under this program, at least 30% of new classroom space to be added must be
comprised of relocatable structures, unless relocatable structures are not
available or special conditions of terrain, climate or unavailability of space
make the use of relocatable structures impractical. In addition, State funds
under this program are not available to school districts which are determined to
have an adequate amount of square footage available for their student
population.
Senate Bill 50, which was recently passed by the California Legislature,
revised the School Building Lease -- Purchase Law of 1976 by eliminating the
requirement that at least 30% of all new classroom space being added using
California state funds must be relocatable classrooms. In general, it replaced
this provision with a requirement that, in order for school districts to
increase the amount of funds to be received from developers in excess of the
current statutory level, the school districts must show that 20% of all
classroom space in the district, not just new space to be added, consists of
relocatable classrooms. The bill also placed a $9.2 billion bond issue on the
November 1998 ballot. The bill will not become operative unless the $9.2 billion
bond issue is approved by a majority of the California voters. The bill
allocates from the bond issue $2.9 billion for growth and new construction, and
$2.2 billion for modernization and reconstruction through the year 2001. In
addition, it allocates $700 million for class-size reductions to fully implement
the program from kindergarten through third grade. The costs to implement the
foregoing will include land acquisition costs, hiring of new teachers,
remodeling of existing structures and construction of new permanent and
relocatable structures. The bill does not designate the specific usage of funds,
and the actual amount spent on relocatable classrooms will vary among school
districts.
California Emergency Classroom Law of 1979. Under the California Emergency
Classroom Law of 1979, the State Allocation Board may spend up to $35 million
per year from available funds to purchase relocatable classrooms to be leased to
school districts. Relocatable classrooms are not available to school districts
under this program if the school district has available local bond proceeds that
could be used to purchase classroom facilities, unless the district has approved
projects pending under the School Building Lease-Purchase Law of 1976. The State
has, in the past, funded this program primarily from the proceeds of statewide
bond issues approved by voters.
Budget Allocations. Proposition 98, which was approved in 1988, requires
the State to allocate annually from the State's budget, for the support of
school districts and community college districts, a minimum amount equal to the
same percentage of funds as was appropriated for the support of those
institutions in fiscal year 1986-87. While this requirement may be suspended for
a given year by emergency legislation, it has the effect of limiting the ability
of the California legislature to reduce the level of school funding from that in
existence in 1986-87. The State raises the necessary funds through proceeds from
the sale of statewide bond issues, income tax revenues and other revenues. A
recent reduction in California's corporate tax rates, and a proposed reduction
of personal income tax rates might affect future levels of the State's income
tax revenues.
Local Funding. Local school districts in California have the ability to
issue local general obligation bonds for the acquisition and improvement of real
property for school construction. These bond issues require the approval of
two-thirds of the voters in the district and are repaid using the proceeds of
increases in local property taxes. A local school district may also levy
developer fees on new development projects in the district, subject to a maximum
rate set by state law. The developer fees can only be levied if the project can
be shown to contribute to the need for additional school facilities and the fee
levied is reasonably related to such need. In addition, California law provides
for the issuance
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of bonds by Community Facilities Districts which can be formed by a variety of
local government agencies, including school districts. These districts, known as
"Mello-Roos" districts, can have flexible boundaries and the tax imposed to
repay the bonds can be based on property use, acreage, population density or
other factors.
OTHER LEGISLATION
California legislation adopted in 1989 provides that school districts
which currently lease any building which does not meet the prescribed structural
standards must have replaced nonconforming buildings with conforming ones by
September 1, 1990. However, any district has the right to request a one-time
waiver for a maximum of three years upon presentation of satisfactory evidence
to the State Allocation Board that the district is proceeding in a timely
fashion with a program that will eliminate the need for the nonconforming
facilities within that time period. The State has authorized districts to renew
these waivers through 2000. Modtech understands that a number of school
districts have requested and been granted such waivers. Based upon information
received by the State Allocation Board from school districts and provided to
Modtech, it is believed that there are more than 4,500 trailers currently being
used as classrooms by school districts throughout California that eventually
must be replaced with conforming facilities by these school districts.
California has taken steps to encourage local school districts to adopt
year-round school programs to help increase the use of existing school
facilities and reduce the need for additional school facilities. School
districts requesting state funding under the School Building Lease-Purchase Law
of 1976 or the Emergency Classroom Law of 1979 discussed above must submit a
study examining the feasibility of implementing in the district a year-round
educational program that is designed to increase pupil capacity in the district
or in overcrowded high school attendance areas. The feasibility study
requirement is waived, however, if the district demonstrates that emergency or
urgent conditions exist in the district that necessitate the immediate need for
relocatable buildings. The demand for new school facilities, including
relocatable classrooms, will be adversely affected if a significant number of
California school districts implement year-round school programs. In addition, a
significant increase in the level of voluntary or mandatory busing of students
from overcrowded schools to schools with excess capacity could adversely affect
demand for new school facilities.
LITIGATION
Modtech from time to time is involved in various lawsuits related to its
ongoing business operations, primarily collection actions or vendor disputes. In
the opinion of management, no pending lawsuit will result in any material
adverse effect upon Modtech.
ENVIRONMENTAL MATTERS
Modtech is subject to a variety of federal, state and local governmental
regulations related to the storage, use and disposal of any hazardous materials
used by Modtech in connection with the manufacture of its products. Both the
governmental regulations and the costs associated with complying with such
regulations are subject to change in the future.
EMPLOYEES
At September 30, 1998, Modtech had 845 employees, including 793 in
manufacturing, 6 in sales, 17 in operations and 29 in general management and
administration. Modtech's employees are not represented by a labor union, and it
has experienced no work stoppages. Modtech believes that its employee relations
are good.
PROPERTIES
Modtech's principal executive and administrative facilities are located in
approximately 11,400 square feet of modular buildings at its primary
manufacturing facility located in Perris, California. This manufacturing
facility occupies 25 acres, with approximately 200,000 square feet of covered
production space under roof, pursuant to a lease expiring in 2014. A second
facility in Perris
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occupies approximately 30 acres, with approximately 120,000 square feet of
covered production space under roof, pursuant to a lease expiring in 2014. This
second facility also includes approximately 80,000 square feet under roof used
as a metal working facility. Modtech's third plant consists of a 400,000 square
foot manufacturing facility on a 30-acre site in Lathrop, California that is
leased through 2019. The fourth plant, which was purchased in 1997, consists of
approximately 50,000 square feet of manufacturing areas on a four-acre site in
Patterson, California. Modtech's fifth plant is approximately 80,000 square feet
on a three-acre site in Glendale, Arizona, that is leased through December 1999.
Each of Modtech's current facilities, other than the Patterson and Glendale
plants, is leased from an affiliate. See "Where You Can Find More Information."
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MODTECH MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
of net sales represented by certain items in Modtech's statements of operations.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------- ----------------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales .......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ...................... 84.6 85.5 80.1 81.0 77.3
------ ------ ------ ------ ------
Gross profit ....................... 15.4 14.5 19.9 19.0 22.7
Selling, general &
administrative expenses ......... 8.3 4.7 3.8 3.7 3.6
------ ------ ------ ------ ------
Income from operations ............. 7.1 9.8 16.1 15.3 19.1
Interest income (expense), net ..... (2.0) (0.8) (0.7) (0.9) 0.5
Other income ....................... -- -- -- 0.1 --
------ ------ ------ ------ ------
Income before income taxes ......... 5.1 9.0 15.4 14.5 19.6
Provision for income taxes ......... 0.1 0.4 5.7 5.7 7.5
------ ------ ------ ------ ------
Net income ......................... 5.0% 8.6% 9.7% 8.8% 12.1%
====== ====== ====== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net sales for the six months ended June 30, 1998 increased to $75.9
million, an increase of $17.0 million, or approximately 28.8%, from $58.9
million for the six months ended June 30, 1997. The increase is attributable to
the growth in the school population, the Class Size Reduction Program, and
product line diversification.
Gross profit was $17.2 million for the six months ended June 30, 1998, an
increase of about $6 million, or 54%, over gross profit of $11.2 million for the
same period in 1997. Gross profit as a percentage of net sales increased to
22.7% for the six months ended June 30, 1998, compared to 19.0% for the same
period in 1997. The increase was due principally to the fuller utilization of
manufacturing efficiencies.
Selling, general and administrative expenses totaled $2.7 million for the
six months ended June 30, 1998, representing an increase of $559,000 in selling,
general and administrative expenses incurred for the six months ended June 30,
1997. The increase is primarily due to the increase in sales expense, as well as
the increase in the number of employees. As a percentage of sales, selling,
general, and administrative expenses for the six months ended June 30, 1998 was
3.6%. The percentage was 3.7% for the same period in 1997.
Due to a higher cash balance and reduced line of credit borrowing, the six
months ended June 30, 1998 reflects net interest income of $389,000, compared to
net interest expense of $549,000 for the same period in 1997, a favorable
increase of $938,000, or 170.9%.
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On March 20, 1998, Modtech purchased an 80% interest in Trac Modular
Manufacturing, Inc. ("Trac"). The purchase price approximated the fair value of
net assets on the purchase date. Trac is based in Glendale, Arizona. The
financial activity for this subsidiary has been included in Modtech's financial
statements for the second quarter of 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales for the year ended December 31, 1997 increased to $134.0
million, an increase of $84.1 million, or approximately 169%, from $49.9 million
in 1996. The increase in 1997 was due principally to the continuing amelioration
of the State of California budget deficit and the implementation during the year
of the Class Size Reduction Program for kindergarten through third grade classes
in California's public elementary schools.
For the year ended December 31, 1997, gross profit was $26.7 million, an
increase of $19.4 million, or approximately 266%, over 1996 gross profit of $7.3
million. Gross profit percentage of net sales increased to 19.9% in 1997 from
14.5% in 1996. The increase in gross profit as a percentage of net sales was
primarily attributable to the increased volume, utilization of a previously idle
facility, and the realization of manufacturing efficiencies.
In 1997, selling, general and administrative expenses increased to $5.2
million from $2.3 million, due to increases in the number of employees and an
increase in selling costs. However, as a percentage of net sales, selling,
general and administrative expenses decreased to 3.8% in 1997 from 4.7% in 1996.
Due to increased volume and average borrowings outstanding, net interest
expense increased from $422,000 in 1996 to $909,000 for 1997.
Income tax expense was $7.7 million for the year ended December 31, 1997,
compared to $208,000 for 1996. Modtech's effective tax rate increased to 37.2%
for the year ended December 31, 1997 from 4.6% for the year ended December 31,
1996. The effective tax rate in both periods was positively impacted by the
utilization for federal income tax purposes of net operating loss carryforwards
generated in prior years.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales for the year ended December 31, 1996 increased to $49.9 million,
an increase of $30.5 million, or approximately 157% from $19.4 million in 1995.
The increase in 1996 was due principally to the amelioration of the State of
California budget deficit and the implementation during the year of the Class
Size Reduction Program for kindergarten through third grade classes in
California's public elementary schools.
For the year ended December 31, 1996, gross profit was $7.3 million, an
increase of $4.3 million, or approximately 143%, over 1995 gross profit of 3.0
million. However, as a percentage of net sales, gross profit declined to 14.5%
in 1996, from 15.4% in 1995. The decline of gross profit as a percentage of net
sales was primarily attributable to a change in product mix as Modtech focused
its resources on manufacturing more standardized classrooms which could be sold
in greater numbers.
In 1996, selling, general and administrative expenses increased to $2.3
million from $1.6 million, due to increases in the number of employees and an
increase in selling costs. However, because net sales increased substantially
during the year, selling, general and administrative expenses as a percentage of
net sales decreased to 4.7% in 1996 from 8.3% in 1995.
For the year ended December 31, 1996, net interest expense increased by
$35,000, from $387,000 in 1995 to $422,000 in 1996, due to slightly higher
borrowings to finance growing levels of accounts receivables and
work-in-progress inventories attributable to the large 1996 increase in net
sales.
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The provision for income taxes was $208,000 for the year ended December
31, 1996, compared to $19,000 for the year ended December 31, 1995. Modtech's
effective tax rate increased to 4.6% for the year ended December 31, 1996, from
1.9% for the year ended December 31, 1995, due to differences between financial
and tax accounting treatment of certain items, primarily accrued liabilities.
The effective tax rate in both periods was positively impacted by the
utilization for federal income tax purposes of net operating loss carryforwards
generated in prior years.
INFLATION
Modtech does not believe that inflation had a material effect on its
result of operations during the past two years. However, there can be no
assurance that Modtech's business will not be affected by inflation in the
future.
LIQUIDITY AND CAPITAL RESOURCES
To date, Modtech has generated cash to meet its needs from operations,
bank borrowings and public offerings. At June 30, 1998, Modtech had $25,426,000
in cash. Most of Modtech's cash reserves will be used to partially pay the cash
portion of the Merger Consideration. During the six months ended June 30, 1998,
Modtech provided about $17,000,000 in cash from operating activities.
Modtech has a revolving loan facility that expires in September 2000.
Modtech is entitled to borrow from time to time up to $20,000,000, with actual
borrowings limited to specified percentages of eligible accounts receivables,
equipment and inventories. On June 30, 1998, no amounts were outstanding under
this loan.
Holdings is currently in negotiations for a new credit facility to be
effective upon the closing of the Mergers. Modtech and SPI will be co-borrowers
under the credit facility, which will replace both companies' existing credit
facilities. The borrowings from the new credit facility will be used to pay the
balance of the cash portion of the Merger, transaction expenses of the Mergers,
and fund working capital needs.
Management believes Modtech's existing product lines and manufacturing
capacity will enable it to generate sufficient cash through operations,
supplemented by periodic use of Holdings anticipated bank line of credit, to
finance its business at current levels over the next 12 months. Additional cash
resources may be required, if Modtech is able to expand its business beyond
current levels. For example, it will be necessary for Modtech to construct or
acquire additional manufacturing facilities in order for it to compete
effectively in new market areas or states which are beyond a 300-mile radius
from one of its production facilities. The construction or acquisition of new
facilities would require significant additional capital. For these reasons,
among others, Modtech may need additional debt or equity financing in the
future. There can be, however, no assurance that Modtech will be successful in
obtaining such additional financing, or that any such financing will be
available on terms acceptable to it.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS 130
requires all items that are required to be recognized under accounting standards
as components of comprehensive income to be reported in a financial statement
that is displayed with the same prominence as other financial statements. SFAS
130 does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income for
the period covered by that financial statement. SFAS 130 requires an enterprise
to (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital
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<PAGE> 70
in the equity section of a statement of financial position. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. Management has
determined the adoption of SFAS 130 will not have a material impact on Modtech's
combined financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for public business enterprises to
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS 131 requires, among other items, that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets, information about the revenues derived from the enterprise's
products or services, and major customers. SFAS 131 also requires that the
enterprise report descriptive information about the way that the operating
segments were determined and the products and services provided by the operating
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS 131 need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. Management has not determined whether the adoption of SFAS 131
will have a material impact on Modtech's segment reporting.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132"). SFAS 132 revises employers' disclosures
about pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. SFAS 132 is effective for fiscal
years beginning after December 15, 1997. SFAS 132, requiring only additional
information disclosures, is effective for Modtech's fiscal year ending December
31, 1998.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. SFAS 133 is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Application of SFAS 133 is not
expected to have a material impact on the Company's financial position, results
of operations or liquidity.
YEAR 2000
The "year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from the
application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions.
Modtech is in the process of correcting this defect in its program, and it
expects the defect will be corrected without material cost before the year 2000.
Modtech's customers, suppliers and service providers may use computer programs
which are not "year 2000" compliant. To the extent this defect is not corrected,
it could adversely affect Modtech's operations, such as the receipt of supplies,
services, purchase orders and payments of account receivable.
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MODTECH COMMON STOCK PRICES AND DIVIDENDS
Modtech's Common Stock is currently traded on the Nasdaq National Market
under the symbol "MODT." The following table sets forth on a per share basis the
high and low closing sales prices per share for Modtech's Common Stock on the
Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
1996 HIGH LOW
---- ------ ------
<S> <C> <C>
First Quarter ............................... 3.625 2.250
Second Quarter .............................. 6.250 2.875
Third Quarter ............................... 9.625 3.500
Fourth Quarter .............................. 9.500 6.875
1997
First Quarter ............................... 13.875 7.875
Second Quarter .............................. 13.000 10.625
Third Quarter ............................... 25.250 11.625
Fourth Quarter .............................. 29.750 17.500
1998
First Quarter ............................... 29.125 19.125
Second Quarter .............................. 23.688 18.500
Third Quarter ............................... 20.500 16.000
Fourth Quarter (through October 23) ......... 17.250 13.000
</TABLE>
On September 28, 1998, the last full day prior to Modtech's
announcement of the signing of the Merger Agreement, the closing price on the
Nasdaq National Market for Modtech's Common Stock was $20.125 per share.
On _________, 1998, the last trading day for which information was
available prior to the date of the first mailing of this Joint Proxy
Statement/Prospectus, the closing price on the Nasdaq National Market for a
share of Modtech's Common Stock was $______.
On the Record Date, there were approximately ________ holders of
record of Modtech Common Stock.
DIVIDEND POLICY
Modtech has not paid cash dividends on its Common Stock since 1990.
Modtech's Board of Directors has no present intention of changing this policy.
Holdings' Board of Directors intends to follow Modtech's dividend policy.
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THE BUSINESS OF SPI
GENERAL
SPI is a leading designer, manufacturer and wholesaler of commercial and
light industrial modular buildings in the United States. Through its four
manufacturing plants, SPI designs and builds modular buildings to customer
specifications for a wide array of uses, including governmental, healthcare,
educational, airport and correctional facilities; office and retail space;
daycare centers; libraries; churches; construction trailers; golf clubhouses;
police stations; convenience stores; fast food restaurants; and sales offices.
SPI's single-unit modular buildings are typically 720 square feet in size,
while multi-unit modular buildings range in size from 1,440 square feet to
50,000 square feet and may consist of multiple stories. The price at which SPI's
modular buildings are sold to dealers ranges from $10,000 to $25,000 per module.
SPI's modular buildings serve as temporary, semi-permanent and permanent
facilities and can function as free standing buildings or additions to existing
structures.
SPI conducts its business through three operating subsidiaries, SPI
Manufacturing, Inc., Rosewood Enterprises, Inc. and Office Master of Texas,
Inc.
INDUSTRY OVERVIEW
According to data compiled by Automated Builder, a leading industry trade
publication, the nonresidential modular construction market, including SPI, had
approximately $350 million in annual revenues in 1997, and an 8% growth rate is
expected for 1998. Automated Builder estimates that the five largest
nonresidential modular building manufacturers, which includes SPI, accounted for
sales of approximately $177 million during 1997, while the remaining 22
manufacturers reported by Automated Builder generated approximately $173 million
of sales during the same period. SPI's pro forma consolidated net sales for the
year ended December 31, 1997 were $80.5 million.
Much of the growth in the nonresidential modular market has resulted from
the widespread acceptance of modular structures as an alternative to traditional
site construction and the increasing number of applications for modular
buildings across a broad spectrum of industries.
Because modular buildings are constructed in a factory using an assembly
line process, construction is typically not subject to the delays caused by
weather and site conditions. Modular buildings can, therefore, generally be
built faster than conventional buildings, at a lower cost and with more
consistent quality. Modular buildings can generally be relocated more easily to
meet the changing needs of end users and be quickly joined to other modular
buildings to meet increased space requirements.
DISTRIBUTION AND MARKETING
SPI sells its modular buildings to users through a network of sales and
leasing companies to a wide range of end users. SPI's dealers include national
dealers such as GE Capital Modular Space and Williams Scotsman, and multiple
regional and local dealers. Management believes that larger dealers are becoming
increasingly more inclined to do business with fewer manufacturers and to place
their orders with manufacturers who have a history of consistent performance.
Certain dealers, such as GE Capital Modular Space, have developed stringent
quality control programs for the modular buildings they distribute. Management
believes SPI's products currently meet or exceed existing dealer quality control
standards.
Certain states require SPI's dealers to be licensed to sell or lease SPI's
products. Historically, these dealers have had sufficient capital resources to
support the purchase of modular structures and the maintenance of the structures
retained in their lease fleets. Typically, dealers arrange for, and bear the
cost of, transporting and installing structures purchased from SPI.
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Because of its strong dealer relationships, SPI does not maintain an
extensive internal sales force. Instead, SPI maintains an internal marketing and
estimating staff whose primary responsibility is to maintain contact with the
dealer community and to respond to requests from dealers for price quotations
("RFQs") for production of modular buildings for end-users. As a preferred
supplier to many of its dealers, it is common for SPI to receive RFQs from a
number of dealers for the same end-user. SPI does not intend to change its
distribution methods as a result of the Mergers.
In the past, the majority of SPI's business has been in California and
Nevada, with some distribution in Arizona, New Mexico, Utah and Colorado. The
February 1998 acquisition of Office Master expanded SPI's markets to include
Texas and contiguous states in the South and Southwest. The April 1998
acquisition of Rosewood further strengthened SPI's markets and increased SPI's
market share in Arizona, Utah, Colorado, Nevada and New Mexico. Typically, SPI
does not seek to distribute its product beyond a radius of approximately 400
miles from each manufacturing facility due to increased transportation costs.
DESIGN AND ENGINEERING
The modular buildings manufactured by SPI are typically planned and
designed by company engineers using computer aided design technology. This
allows SPI to produce complete cost data and renderings for most of the modular
buildings manufactured by SPI. SPI uses a relational database system which
compiles pricing information, thereby eliminating the time-consuming process of
pricing modular buildings on a component-by-component basis. The system also
enables SPI to rapidly design modular buildings and to respond quickly to dealer
RFQs, while pricing projects in a manner that helps SPI achieve desired profit
margins. SPI employs a staff of engineers and draftsmen to enable SPI to respond
quickly to dealer and end-user needs at each of its manufacturing facilities.
SPI's engineering department develops engineering design and construction
drawings to fulfill dealer and end-user order requirements. The engineering
department ensures that the order, the drawings and the RFQ are in conformity.
Change orders are developed to correct any discrepancies and to address any
changes after the order is received. The project is then engineered to meet
applicable building code requirements, job specific characteristics and customer
specifications. The construction drawings are forwarded to the manufacturing
plant and become the basis for the manufacture of each modular building.
MANUFACTURING AND PRODUCTION
SPI operates four manufacturing facilities, two in Southern California
(Rancho Cucamonga and Ontario), one in Glen Rose, Texas, which is located
outside the Dallas-Fort Worth metropolitan area, and one in Phoenix, Arizona.
Each of SPI's manufacturing facilities is designed to allow for the production
of either single or multi-unit modular buildings.
SPI's modular buildings are produced by a continuous flow assembly line
process. In each of SPI's manufacturing facilities, multiple structures are
assembled simultaneously at various stations along the assembly line. Depending
upon the complexity of the design for a particular modular building, the average
construction time from receipt of the order to shipment ranges from 30 to 45
days. Once construction of a typical modular building commences, the building
can be completed in as few as seven to nine days.
BACKLOG
SPI manufactures modular structures for sale to dealers only after an
order has been received. As of December 31, 1997, SPI's backlog, including
backlog for the Office Master and Rosewood operations, was approximately $7.0
million. As of June 30, 1998, SPI's backlog was approximately $13.7 million. The
increase in backlog at June 30, 1998 is primarily a function of the seasonality
of SPI's business. Only contracts which are accompanied by customer purchase
orders are included in SPI's backlog calculations. Due to the
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short order to completion cycle which is required by SPI's customers and which
is prevalent in the commercial modular building industry, the backlog as of any
particular date may not be representative of actual sales for any succeeding
period.
WARRANTIES
The standard contractual warranty for SPI's modular buildings is a limited
one year warranty from the date of manufacture which covers workmanship and
materials. In addition, certain components included in SPI's modular buildings
carry additional warranty protection offered by the manufacturer of those
components. Occasionally, SPI contracts with third parties to provide warranty
service when the modular building is located a significant distance from any of
SPI's manufacturing facilities. Management believes SPI's warranty costs have
historically been lower than industry averages. Warranty costs have not been
material in the past.
SUPPLIERS
SPI believes that the materials and key components used in the
manufacturing of its modular buildings are readily available at competitive
prices from multiple sources, including local, regional and national suppliers.
SPI has supply contracts with a number of these suppliers. In the past, SPI has
been able to pass along to its customers all or a portion of the effects of
price increases by increasing the selling prices of its modular buildings.
COMPETITION
The nonresidential modular building industry is highly competitive. With
respect to highly customized modular buildings, the main competitive factor is
the ability to meet end user requirements in a timely manner, while price is the
main competitive factor for less customized structures. Because the cost of
transporting completed modular buildings is substantial, most manufacturers
limit their distribution to dealers located within a 400-mile radius of their
manufacturing facility. As a result, the nonresidential modular building
industry is highly fragmented and is composed primarily of small,
regionally-based private companies maintaining a single manufacturing facility.
SPI's main competitors include Modular Structures International, Pace Setter,
Walden Structures, International Structures, Miller Building Systems, Indicom
Building Systems and several other regional manufacturers.
REGULATORY MATTERS
SPI's modular buildings are manufactured and installed in accordance with
state building codes or building codes of local regulatory agencies. Many states
have adopted additional codes that apply specifically to the design and
manufacture of factory-built buildings, such as those manufactured by SPI. These
regulations, which vary from state to state, apply for the state that the
factory-built structure is installed regardless of where it was manufactured.
Obtaining state approvals for the structural portions of a manufactured
building is the responsibility of the manufacturer. SPI works closely with
various regulatory agencies in order to facilitate the approval process and
reduce the chance of regulatory delays. To expedite the state approval process,
SPI has on file with regulatory agencies in various states pre-approved
engineering and structural drawings, as well as plans for electrical, plumbing
and lighting systems.
Most states require dealers to be licensed in order to sell or lease
factory-built buildings. The dealer or the owner is responsible for all on-site
required approvals and permits. Additionally, certain states require a
contractor's license from entities involved in the manufacture of modular
buildings, the construction of the foundation, building installation, and other
on-site work.
PROPERTIES
SPI's principal executive and administrative facilities are located in
approximately 3,000 square feet of office space at its manufacturing facility in
Rancho Cucamonga, California. This manufacturing facility occupies six acres,
with approximately 60,000 square feet of manufacturing space. A second facility
in Ontario, California occupies approximately
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seven acres, with approximately 3,300 square feet of office space and
approximately 50,000 square feet of manufacturing space. SPI's third facility
consists of approximately 80,000 square feet of manufacturing space and
approximately 2,880 square feet of office space on a 20-acre site in Glen Rose,
Texas. The fourth facility consists of approximately 80,000 square feet of
manufacturing space and approximately 6,600 square feet of office space on a
20-acre site in Phoenix, Arizona.
SPI presently leases all of its operating facilities. The lease for the
Rancho Cucamonga facility expires March 31, 2002, and provides for two five-year
extensions thereafter; the lease for the Ontario facility expires January 31,
2002, and provides for one five-year extension thereafter; the lease for the
Glen Rose facility expires January 31, 2008; and the lease for the Phoenix
facility expires August 28, 2002, and provides for one five-year extension
thereafter. In addition to the operating facilities described above, SPI also
leases, under short-term leases, approximately two acres of land on properties
adjacent to the Phoenix facility. SPI believes that its existing facilities are
well-maintained and in good operating condition and will meet the requirements
for its immediately foreseeable business needs.
The Phoenix facility leased by SPI is located within a 25-square-mile area
listed by the Arizona Department of Environmental Quality on the state priority
list for contaminated sites. According to a recent environmental site assessment
report pertaining to the Phoenix facility and commissioned by SPI, neither SPI
nor the prior operators or owners of the property have been identified as
potentially responsible parties at this site. Additionally, the environmental
site assessment report identifies no historical activity on the property leased
by SPI that was likely to have been a source of the contaminants at the site.
EMPLOYEES
As of October 1, 1998, SPI had approximately 550 employees, consisting of
approximately 190 in California and 360 at its other facilities. Of SPI's total
employees, approximately 9 are management level employees, 475 are manufacturing
employees, 17 are employed in design and engineering positions and 49 are
employed in administrative, sales and clerical positions. SPI's employees are
not represented by a labor union or other collective bargaining unit. SPI
considers its relations with its employees to be satisfactory.
LITIGATION
SPI is, from time to time, a party to litigation arising in the normal
course of its business. SPI is not involved in any pending or threatened legal
proceeding which SPI believes could reasonably be expected to have a material
adverse effect on SPI's financial position, results of operations and business
prospects.
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SPI MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of net sales
of SPI for the fiscal years ended January 31, 1996 and 1997, the fiscal year
ended March 31, 1998 and the three months ended June 30, 1997 and 1998:
<TABLE>
<CAPTION>
FISCAL YEAR
FISCAL YEAR ENDED ENDED THREE MONTHS ENDED
JANUARY 31, MARCH 31, JUNE 30,
---------------------- ----------- ----------------------
1996 1997 1998(A) 1997 1998
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales ............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit(B) ......................... 21.5 21.1 23.0 23.0 20.7
Selling, general and administrative
expenses ............................. 19.4 6.8 6.3 5.0 5.6
Management and monitoring fees .......... -- -- 0.5 0.6 0.4
Depreciation and amortization ........... 0.4 0.3 4.2 3.1 3.2
Interest income (expense), net .......... 0.6 0.3 (3.4) (3.9) (4.0)
Other income (expense) .................. 0.3 0.0 0.1 0.0 --
Income tax provision .................... 1.1 5.8 3.8 4.5 2.6
------ ------ ------ ------ ------
Net income .............................. 1.5% 8.5% 4.9% 5.9% 4.9%
====== ====== ====== ====== ======
</TABLE>
- ----------
(A) The results of operations of SPI for the fiscal year ended March 31, 1998
and thereafter are not comparable to those of prior periods due to the
application of purchase accounting upon the acquisition of SPI by
management and an investor group in March 1997.
(B) SPI's historical presentation and allocation of expenses is not consistent
with the presentation of Modtech's gross profit. As such, SPI has adjusted
its pro forma gross profit calculation elsewhere in this Joint Proxy
Statement/Prospectus to conform with Modtech's presentation. As adjusted
to give effect to Modtech's presentation, the gross profit would be 20.5%
for the fiscal year ended March 31, 1998.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997
Net Sales. Net sales increased $11.1 million, or 112.7%, to $20.9 million
for the three-month period ended June 30, 1998 from $9.8 million for the
three-month period ended June 30, 1997. The growth in net sales for the 1998
period was the result of the inclusion of sales from Office Master, acquired in
the previous quarter, and of sales from Rosewood, acquired near the end of April
1998, for the last two months of the 1998 period.
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Gross Profit. Gross profit increased $2.0 million, or 91.8%, to $4.3
million for the three-month period ended June 30, 1998 from $2.3 million for the
three-month period ended June 30, 1997. The increase in gross profit was a
result of the increased net sales. The gross profit margin for the three months
ended June 30, 1998 was 20.7%, compared to 23.0% in the three months ended June
30, 1997. The decrease in gross profit margin for SPI was a result of lower
margins due to the higher direct labor costs of Office Master and Rosewood.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $684,000, or 137.1%, to $1.2 million in the
quarter ended June 30, 1998 from $499,000 in the quarter ended June 30, 1997.
Selling and administrative expenses as a percentage of net sales for the three
months ended June 30, 1998 increased to 5.6%, as compared to 5.1% for the three
months ended June 30, 1997. The increase in selling and administrative expenses
was primarily due to increased senior management and administrative staff to
accommodate growth and acquisitions, and to the inclusion of selling and
administrative expenses of the acquired companies.
Management and Monitoring Fees. Pursuant to the management agreement with
KRG, SPI paid a management fee of $75,000 for the three months ended June 30,
1998, as compared with $50,000 for the three months ended June 30, 1997. An
additional $9,000 in monitoring fees were paid pursuant to an agreement with the
fund managers of certain of SPI's equity investors for the three months ended
June 30, 1998, as compared to $6,000 for the three months ended June 30, 1997.
Depreciation and Amortization. Depreciation and amortization increased
$361,000, or 117.6%, to $667,000 for the three months ended June 30, 1998 from
$306,000 for the three months ended June 30, 1997. The increase was primarily
attributable to the amortization of goodwill, and consulting and non-compete
agreements arising from the acquisitions.
Interest Income (Expense), Net. Net interest expense increased $453,000,
or 118.6%, to $835,000 for the three months ended June 30, 1998 from $382,000
for the three months ended June 30, 1997. The increase in interest expense was
principally the result of the use of senior and subordinated debt to fund the
Office Master and Rosewood acquisitions during 1998. Interest income was
immaterial in both periods.
Net Income. Net income increased $438,000, or 75.4%, to $1.0 million for
the three months ended June 30, 1998 from $581,000 for the three months ended
June 30, 1997. Net income, as a percentage of net sales was 4.9%, as compared to
5.9% for the three-month period ended June 30, 1997. The increase in net income
was primarily related to the increased net sales. The decrease in net income as
a percentage of net sales reflects the effect of lower gross profit margins for
the acquisitions.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO THE FISCAL YEAR ENDED JANUARY 31,
1997
Following the acquisition of SPI by management and an investor group in
March 1997, SPI adopted a March 31, fiscal year end, which first ended March 31,
1998. The Office Master acquisition was completed in February 1998.
Net Sales. Net sales increased to $42.2 million in the year ended March
31, 1998 from $24.1 million in the year ended January 31, 1997, an increase of
$18.1 million, or 74.9%. Net sales increased as a result of the increase in
product demand from SPI's dealers. The addition of production capacity in
California in August 1997 contributed $8.3 million, or 45.7% of the increase and
the inclusion of Office Master for the last month of 1998 contributed $1.1
million, or 6.1% of the increase. See "The Business of SPI."
Gross Profit. The major components of cost of sales are materials and to a
lesser extent, direct labor and overhead costs. SPI's gross profit increased to
$9.7 million in the year ended March 31, 1998 from $5.1 million in the year
ended January 31, 1997, an increase of $4.6 million, or 90.2%. As a percentage
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of net sales, gross profit increased to 23.0% in the year ended March 31, 1998
from 21.1% in the year ended January 31, 1997. The increase in gross profit is
primarily the result of a reduction in raw material costs as a percent of net
sales, as SPI benefitted from volume purchasing discounts, partially offset by
an increase in overhead costs associated with the addition of the new Office
Master manufacturing facility.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include executive salaries, group insurance premiums,
legal and accounting fees and various other overhead costs. Selling and
administrative expenses increased to $2.7 million in the year ended March 31,
1998 from $1.6 million in the year ended January 31, 1997, an increase of $1.1
million, or 68.8%. The addition of senior management and administrative staff to
accommodate growth, the completed Office Master acquisition, and the Rosewood
acquisition in progress, contributed to an increase of $568,000 in salaries and
wages, or 45.5% of the increase. As a percent of net sales, selling and
administrative expenses decreased to 6.3% in the year ended March 31, 1998 from
6.8% in the year ended January 31, 1997. This decrease was primarily due to the
significant growth in net sales.
Management and Monitoring Fees. Management and monitoring fees were
incurred in connection with the financing of the management buyout of SPI and
SPI's acquisition of Office Master following the buyout. Pursuant to the
management agreement with KRG, SPI paid a management fee of $200,000 in the
fiscal year ended March 31, 1998. An additional $25,000 in monitoring fees were
paid pursuant to an agreement with the fund managers of certain of SPI's equity
investors. During the fiscal year ended March 31, 1998, SPI capitalized a total
of $350,000 in transaction closing fees in conjunction with the SPI management
buyout and the subsequent acquisition of Office Master.
Depreciation and Amortization. Depreciation and amortization increased to
$1.8 million in the year ended March 31, 1998 from $78,000 in the year ended
January 31, 1997, an increase of $1.7 million, or 2,144.9%. The increase was
primarily attributable to the amortization of goodwill, and consulting and
non-compete agreements arising from the management buyout of SPI and subsequent
acquisition of Office Master by SPI. Depreciation expense increased primarily
due to the addition of fixed assets as a result of these acquisitions which both
occurred during the fiscal year ended March 31, 1998.
Interest Income (Expense), Net. Net interest expense increased to a net
interest expense of $1.4 million in the year ended March 31, 1998 from a net
interest income of $0.1 million for the year ended January 31, 1997. The
increase in interest expense was principally the result of the use of senior and
subordinated debt to fund the management buyout of SPI in March 1997 and SPI's
subsequent acquisition of Office Master during the fiscal year ended March 31,
1998.
Other Income and Expense. Other income and expense increased to a net
income of $36,000 in the fiscal year ended March 31, 1998 from a net other
expense of $6,000 in the fiscal year ended January 31, 1997. The net other
income in fiscal 1998 was entirely due to miscellaneous income. In the prior
fiscal year, the net other expense was due to penalties and interest on income
taxes payable by the former owners of SPI prior to the management buyout in the
amount of $117,000, partially offset by miscellaneous income totaling $111,000
primarily from a gain on sale of fixed assets.
Net Income. Net income increased $77,000, or 3.8%, to $2.1 million for the
fiscal year ended March 31, 1998 from $2.0 million for the fiscal year ended
January 31, 1997. Net income as a percentage of net sales was 4.9%, as compared
to 8.5% for the fiscal year ended January 31, 1997. The increase in net income
reflects the increase in gross profit, offset by the increase in operating
expenses and provision for income taxes and the increase in net interest
expense.
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FISCAL YEAR ENDED JANUARY 31, 1997 COMPARED TO THE FISCAL YEAR ENDED JANUARY 31,
1996
Net Sales. Net sales increased to $24.1 million in the year ended January
31, 1997 from $13.4 million in the year ended January 31, 1996, an increase of
$10.7 million, or 79.6%. Net sales increased as a result of an increase in
product demand by SPI's dealers. In order to meet the increasing product
demands, SPI moved to its current facility in Rancho Cucamonga, California in
late 1995.
Gross Profit. The major components of cost of sales are materials and, to
a lesser extent, direct labor and overhead costs. SPI's gross profit increased
to $5.1 million in the year ended January 31, 1997 from $2.9 million in the year
ended January 31, 1996, an increase of $2.2 million, or 75.9%. Gross profit as a
percentage of net sales decreased to 21.1% in the fiscal year ended January 31,
1997 from 21.5% in the fiscal year ended January 31, 1996. This decrease was
primarily the result of higher direct labor and overhead costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include executive salaries, group insurance premiums,
legal and accounting fees and various other overhead costs. Selling and
administrative expenses decreased to $1.6 million in the year ended January 31,
1997, from $2.6 million in the year ended January 31, 1996, a decrease of $1.0
million, or 62.5%. Selling and administrative expenses decreased as a percent of
net sales to 6.8% from 19.4% in the year ended January 31, 1996. Selling and
administrative expenses decreased primarily due to lower bonuses paid to
executive management of SPI in the year ended January 31, 1997. Other selling
and administrative expenses also decreased in the year ended January 31, 1997,
including sales salaries, automobile and travel expenses, outside services and
legal and accounting fees.
Depreciation and Amortization. Depreciation and amortization increased to
$78,000 in the year ended January 31, 1997 from $49,000 in the year ended
January 31, 1996, an increase of $29,000, or 59.2%. Depreciation and
amortization increased as a result of a full year of depreciation in fiscal 1997
from fixed assets acquired late in fiscal 1996 in connection with the move to
the Rancho Cucamonga facility. As a percentage of net sales, depreciation and
amortization decreased to 0.3% in the year ended January 31, 1997 from 0.4% in
the in the year ended January 31, 1996, primarily due to the increase in net
sales.
Interest Income (Expense), Net. Net interest income decreased to $78,000
in the year ended January 31, 1997 from $80,000 in the year ended January 31,
1996. The decrease in net interest income was a result of the substantial growth
in the business requiring the use of available cash.
Other Income and Expense. Other income of $34,000 in the fiscal year ended
January 31, 1996 was replaced by a net expense of $6,000 in the fiscal year
ended January 31, 1997. The net expense in fiscal 1997 resulted primarily from
penalties and interest on income taxes payable by the former owners of SPI in
the amount of $117,000, partially offset by miscellaneous income totaling
$111,000 primarily from a gain on sale of fixed assets.
Net Income. Net income increased $1.8 million to $2.0 million for the
fiscal year ended January 31, 1997 from $203,000 for the fiscal year ended
January 31, 1996. Net income as a percentage of net sales was 8.5%, as compared
to 1.5% for the fiscal year ended January 31, 1996. The increase in net income
reflects the increase in gross profit and decrease in operating expenses, offset
by the increase in the provision for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
SPI's primary capital needs have historically been to fund (i) the working
capital requirements necessitated by its sales growth, and (ii) the acquisition
and operation of acquired companies. SPI's primary sources of financing have
been senior and subordinated debt, cash from operations and the sale of
preferred equity. SPI anticipates that its cash flows from operations and
available lines of credit to be obtained by Holdings in connection with the
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Mergers will be adequate to support its operations for at least the next 12
months.
SPI's existing credit facility will be retired upon completion of the
Mergers. A new credit facility will be entered into by Holdings upon completion
of the Mergers. The terms of the existing credit facility are described below.
Under the terms of the existing credit facility, SPI has available the
following: (i) a secured revolving loan of up to $2.3 million; (ii) a secured
term loan of $21.9 million; and (iii) an unsecured term loan of $8.6 million.
Revolving loans under the existing credit facility bear interest at 4.00% over
the agent bank's commercial paper rate. Secured term loans under the existing
credit facility bear interest at 4.25% over the agent bank's commercial paper
rate, and unsecured term loans under the existing credit facility bear interest
at 6.25% over the agent bank's commercial paper rate. The interest rate was
9.525% on the revolving loan, 9.775% on the secured term loan and 11.775% on the
unsecured term loan at September 30, 1998. The existing credit facility also
contains certain financial covenants which require SPI to maintain a minimum
debt coverage ratio and positive net income, to refrain from capital
expenditures in excess of certain amounts and to limit the payment of dividends.
SPI is in compliance with these financial covenants and expects to continue to
be in compliance with these covenants until completion of the Mergers. A portion
of the proceeds from the new line of credit to be obtained by Holdings pursuant
to the Mergers will be used to repay and terminate the above described credit
facility.
SPI provided net cash from operating activities of $1.4 million for the
fiscal year ended March 31, 1998, compared to net cash provided from operating
activities of $0.8 million and $0.9 million for the fiscal years ended January
31, 1997 and January 31, 1996, respectively. During the fiscal year ended March
31, 1998, net cash from operating activities resulted from adjustments to
reconcile net income to net cash, primarily depreciation and amortization,
partially offset by the decrease in income taxes payable.
SPI invested approximately $4.1 million, $1.6 million and $0.4 million in
the fiscal years ended March 31, 1998, January 31, 1997 and January 31, 1996,
respectively. The cash used in investing activities during the fiscal year ended
March 31, 1998 was utilized primarily for capital expenditures, including the
purchase of a leasehold interest in a manufacturing facility and certain assets
from a mobile home manufacturer and the acquisition of Office Master.
Capital expenditures other than for acquisitions were approximately
$200,000, $200,000 and $400,000 in the fiscal years ended March 31, 1998,
January 31, 1997 and January 31, 1996, respectively. SPI expects to spend
approximately $700,000 on capital expenditures for its existing operations,
primarily for the purchase of manufacturing equipment, during the fiscal year
ending March 31, 1999.
SPI's external sources of liquidity include debt and, if required, equity
financing. During the fiscal year ended March 31, 1998, approximately $2.2
million in net borrowings was provided from SPI's existing credit facility and
$700,000 resulted from the issuance of SPI's capital stock and warrants in
connection with the asset purchase and the transactions discussed above.
YEAR 2000 COMPLIANCE
The "year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from the
application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions. SPI
has upgraded its information system capabilities such that it does not believe
that its systems will encounter any material "year 2000" problems. SPI's
customers, suppliers and service providers may use computer programs which are
not "year 2000" compliant. To the extent this defect is not corrected, it could
adversely affect SPI's operations, such as the receipt of supplies, services,
purchase orders and payments of accounts receivable.
72
<PAGE> 81
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS Nos. 130 and 131 "Reporting
Comprehensive Income" and "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 and No. 131 are effective for fiscal years
beginning after December 15, 1997, with earlier adoption permitted. SPI does not
believe that adoption of these standards will have a material effect on SPI. SPI
has, to date, reflected no items of comprehensive income in its statement of
stockholders' equity.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SPI does not currently have any financial
instruments addressed by SFAS No. 133.
73
<PAGE> 82
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
are based on the historical consolidated financial statements of Modtech and
SPI, combined, and are adjusted to give effect to the Mergers. In addition, pro
forma adjustments have been made, as discussed below, for the acquisitions
consummated by SPI prior to the Mergers (the "Pre-Mergers Acquisitions").
Certain reclassifications have been made to the historical financial statements
to conform with this pro forma presentation. These statements should be read in
conjunction with such historical financial statements and notes thereto, which
are included elsewhere in this Joint Proxy Statement/Prospectus. See "Where You
Can Find More Information".
The unaudited pro forma combined condensed statements of income for the
year ended December 31, 1997 and for the six months ended June 30, 1998 present
the results for Modtech and SPI as if the Mergers and Pre-Mergers Acquisitions
had occurred at the beginning of each period presented. The accompanying
unaudited pro forma combined condensed balance sheet as of June 30, 1998 gives
effect to the Mergers as of that date.
The pro forma adjustments are based upon preliminary estimates,
information currently available and certain assumptions that management believes
are reasonable under the circumstances. Holdings' actual consolidated financial
statements will reflect the effects of the Mergers on and after the Closing Date
rather than the dates indicated above. The unaudited pro forma combined
condensed financial statements neither purport to represent what the combined
results of operations or financial condition actually would have been had the
Mergers, in fact, occurred on the assumed dates, nor to project the combined
results of operations and financial position for any future period.
The SPI Merger will be accounted for by the purchase method and,
therefore, assets and liabilities of SPI will be recorded at their fair values.
The excess of the purchase cost over the fair value of net assets acquired on
the Closing Date will be recorded as goodwill. Allocations included in the pro
forma statements are based on analysis which is not yet completed. Accordingly,
the final value of the purchase price and its allocation may differ, perhaps
significantly, from the amounts included in these pro forma statements.
The conversion of Modtech Common Stock into Holdings Common Stock and
Series A Preferred Stock will be treated as a reorganization with no change in
the recorded amount of Modtech's assets and liabilities.
At the Closing Date, each issued and outstanding share of SPI Capital
Stock will be converted into the right to receive 1.8785 shares of Holdings
Common Stock. Each SPI stockholder may elect to receive $49.4097 per share of
SPI Capital Stock instead of shares of Holdings Common Stock and elections will
be adjusted, if necessary, to ensure that 164,735 shares of SPI Capital Stock
are converted into $8,076,133 in cash.
At the Closing Date, each issued and outstanding share of Modtech Common
Stock will be converted into the right to receive $3.7293 and 0.8508 shares of
Holdings Common Stock. The total cash to be received by Modtech stockholders
will equal $39,923,472. Modtech stockholders will have the right to elect to
receive 388,939 shares of Holdings Series A Preferred Stock in place of Holdings
Common Stock at the same 0.8508 exchange ratio for up to 3.94% of their Modtech
Common Stock. To the extent Modtech stockholders do not elect to receive 388,939
of Holdings Series A Preferred Stock, two Modtech stockholders, Proactive
Partners, L.P. and Lagunitas Partners, will accept such shares pro rata between
them. The number of shares of Holdings Series A Preferred Stock may be adjusted
upward or downward in order to meet the minimum requirements of Section 351 of
the Internal Revenue Code.
The total value of the common stock and stock options component of the
Merger Consideration to be received by SPI stockholders was determined using the
average closing price of Modtech Common Stock on the Nasdaq National Market for
the 10-day trading period ended October 15, 1998. The total consideration for
the transaction was $81,434,000.
74
<PAGE> 83
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 30, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
Historical
----------------------- Pro Forma Pro Forma
Modtech SPI Notes Adjustments Combined
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....... $ 25,426 $ 1,524 (B) $ (26,000) $ 950
Contracts receivable, net ....... 24,007 7,028 31,035
Costs in excess of billings ..... 16,818 -- 16,818
Inventories ..................... 1,959 3,792 5,751
Due from affiliates ............. 504 -- 504
Deferred tax asset .............. 2,094 151 2,245
Other current assets ............ 228 458 686
--------- --------- --------- ---------
Total current assets ......... 71,036 12,953 (26,000) 57,989
Property and equipment, net ........ 12,266 2.142 14,408
Other assets:
Deferred tax asset .............. 99 50 149
Other assets .................... 135 4,041 (C,D) 1,232 5,408
Costs in excess of net assets
of business acquired, net .... -- 34,085 (E) 71,545 105,630
--------- --------- --------- ---------
$ 83,536 $ 53,271 $ 46,777 $ 183,584
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities .................. $ 17,094 $ 6,854 (F) $ 750 $ 24,698
Billings in excess of costs ..... 9,469 -- 9,469
Revolving credit facility ....... -- -- (G) 16,510 16,510
Current portion of long-term
debt ......................... -- 7,237 (H,I) (1,237) 6,000
--------- --------- --------- ---------
Total current liabilities .... 26,563 14,091 16,023 56,677
Long-term debt ..................... -- 26,023 (H,I) 12.977 39,000
--------- --------- --------- ---------
Total liabilities ............ 26,563 40,114 29,000 95,677
--------- ---------
Stockholders' Equity ............... 56,973 13,157 (A,J,K,) 17,777 87,907
--------- --------- --------- ---------
$ 83,536 $ 53,271 $ 46,777 $ 183,584
========= ========= ========= =========
</TABLE>
See the accompanying notes to the unaudited pro forma combined condensed
financial statements.
75
<PAGE> 84
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical Pro Forma Pro Forma Pro Forma
Modtech SPI Notes Adjustments Combined Notes
---------- --------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales ........................ $134,050 $80,497 $ $214,547
Cost of goods sold ............... 107,367 65,321 172,688
-------- ------- ------- --------
Gross profit ............... 26,683 15,176 -- 41,859
-------- ------- ------- --------
Selling, general and admin-
istrative expenses ............. 5,156 5,238 10,394
Depreciation and amortization .... -- 2,086 (E) 1,789 3,875
-------- ------- ------- --------
Income from operations ..... 21,527 7,852 (1,789) 27,590
Interest expense, net ............ (908) (4,041) (C,D,H,L,M) (847) (5,796)
Other income ..................... 92 195 287
-------- ------- ------- --------
Income before income taxes.. 20,711 4,006 (2,636) 22,081
Income tax expense ............... 7,703 1,602 (N) (1,054) 8,251
-------- ------- ------- --------
Net income ................. $ 13,008 $ 2,404 $(1,582) $ 13,830
======== ======= ======= ========
Basic earnings per share ......... $ 1.47 $ 1.09 (O)
======== ========
Number of shares
used in computing basic
earnings per share .............. 8,854 12,622 (O)
======== ========
Diluted earnings per share ....... $ 1.31 $ 0.93 (P)
======== ========
Number of shares
used in computing diluted
earnings per share .............. 9,898 14,845 (P)
======== ========
</TABLE>
See the accompanying notes to the unaudited pro forma combined condensed
financial statements.
76
<PAGE> 85
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical Pro Forma Pro Forma Pro Forma
Modtech SPI Notes Adjustments Combined Notes
---------- --------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales ........................ $75,876 $41,926 $ $117,802
Cost of goods sold ............... 58,675 34,359 93,034
------- ------- ------- --------
Gross profit ............... 17,201 7,567 -- 24,768
------- ------- ------- ---------
Selling, general and admin-
istrative expenses .............. 2,741 2,512 5,253
Depreciation and amortization .... -- 1,326 (E) 894 2,220
------- ------- ------- --------
Income from operations ..... 14,460 3,729 (894) 17,295
Interest income (expense), net ... 389 (1,980) (C,D,H,L,M) (665) (2,256)
Other income ..................... 15 36 51
------- ------- ------- --------
Income before income taxes.. 14,864 1,785 (1,559) 15,090
Income taxes ..................... 5,649 714 (N) (624) 5,739
------- ------- ------- --------
Net income ................. $ 9,215 $ 1,071 $ (935) $ 9,351
======= ======= ======= ========
Basic earnings per share ......... $ 0.93 $ 0.74 (O)
======= ========
Number of shares
used in computing basic
earnings per share .............. 9,856 12,622 (O)
======= ========
Diluted earnings per share ....... $ 0.83 $ 0.63 (P)
======= ========
Number of shares
used in computing diluted
earnings per share .............. 11,100 14,845 (P)
======= ========
</TABLE>
See the accompanying notes to the unaudited pro forma combined condensed
financial statements.
77
<PAGE> 86
NOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
A. The unaudited pro forma combined condensed balance sheet has been prepared to
reflect the SPI Merger for an aggregate estimated merger consideration of
$81,434,000 which is subject to adjustment and expected to be incurred as
follows:
<TABLE>
<S> <C>
Holdings Common Stock and stock options offered hereby .............. $ 70,858,000
Cash paid to SPI stockholders ....................................... 8,076,000
Modtech Merger Costs ................................................ 2,500,000
------------
Total ..................................................... $ 81,434,000
============
</TABLE>
B. To record net cash distribution resulting from the following transactions:
<TABLE>
<S> <C>
Gross proceeds from New Term Loan ................................... $ 45,000,000
Gross proceeds from New Revolving Credit facility ................... 16,510,000
Cash paid to SPI Stockholders ....................................... (8,076,000)
Cash distribution to Modtech Stockholders ........................... (39,924,000)
Retirement of SPI Indebtedness ...................................... (33,260,000)
Payment of Costs of Mergers and Debt Issuance Costs ................. (6,250,000)
------------
Net cash distribution ..................................... $(26,000,000)
============
</TABLE>
C. To eliminate unamortized SPI debt issuance costs of $1,018,000 and related
amortization of debt issuance costs of $170,000 and $85,000 for the year
ended December 31, 1997 and the six months ended June 30, 1998,
respectively, associated with the retirement of SPI indebtedness.
D. To record (i) estimated debt issuance costs of $2,250,000 to be amortized
over the term of the New Term Loan and (ii) amortization of debt issuance
costs of $450,000 and $225,000 for the year ended December 31, 1997 and
the six months ended June 30, 1998, respectively.
E. To record (i) $71,545,000 for the excess of the consideration paid over
the preliminary estimate for the fair value of SPI net assets acquired,
including $2,500,000 of estimated Modtech Merger costs, to be amortized
over 40 years, and (ii) amortization of $1,789,000 and $894,000 for the
year ended December 31, 1997 and the six months ended June 30, 1998,
respectively.
F. To record the recognition of liabilities related to certain merger costs.
G. To record the assumed incurrence of $16,510,000 of indebtedness under a
New Revolving Credit Facility, with an assumed effective interest rate of
7.5% utilized to partially finance the cash portion of the Merger
Consideration and pay certain related transaction costs.
H. To eliminate the $33,260,000 of SPI indebtedness, including $7,237,000
classified as current, which will be retired by Modtech, and to eliminate
the related interest expense of $4,046,000 and $1,782,000 for the year
ended December 31, 1997 and the six months ended June 30, 1998.
I. To record the assumed incurrence of $45,000,000 of indebtedness, including
$6,000,000 classified as current, under a New Term Loan, with an assumed
effective interest rate of 7.5% utilized to partially finance the cash
portion of the Merger Consideration, retire SPI indebtedness and to pay
certain related transaction costs.
J. To eliminate the stockholders' equity of SPI of $13,157,000.
K. To record the repurchase of Modtech common stock for $39,924,000 cash in
connection with the Modtech Merger.
78
<PAGE> 87
L. To record interest expense on borrowings under the New Term Loan of
$3,375,000 and $1,688,000 for the year ended December 31, 1997 and the six
months ended June 30, 1998, respectively, using an assumed effective
interest rate of 7.5%. A 0.125% increase/decrease in the estimated
interest rate incrementally increases/decreases income before income taxes
by $56,000 and $28,000 for the year ended December 31, 1997 and the six
months ended June 30, 1998, respectively.
M. To record interest expense on borrowings under the New Revolving Credit
Facility of $1,238,000 and $619,000 for the year ended December 31, 1997
and the six months ended June 30, 1998, respectively, using an assumed
effective interest rate of 7.5%. A 0.125% increase/decrease in the
estimated interest rate incrementally increases/decreases income before
income taxes by $21,000 and $10,000 for the year ended December 31, 1997
and the six months ended June 30, 1998, respectively.
N. To record the income tax effects of the pro forma adjustments at a pro
forma effective tax rate of 40%.
O. Basic shares include 8,034,334 common shares assumed issued to former
Modtech stockholders and 4,587,824 common shares assumed issued to former
SPI stockholders. Net income is reduced by preferred dividends of $104,000
and $52,000 for the year ended December 31, 1997 and the six months ended
June 30, 1998, respectively.
P. Diluted shares include basic shares, preferred shares converted into
common shares on a one-to-one basis and exercise of stock options reduced
by number of shares purchased with proceeds.
RECONCILIATION OF CERTAIN ADJUSTMENTS TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENT ADJUSTMENTS
BALANCE SHEET:
(1) Other assets: (C) $(1,018,000); (D) $2,250,000 = $1,232,000
(2) Costs in excess of net assets of business acquired, net: common stock and
stock options component of Merger Consideration of (A) $70,858,000 plus
estimated Modtech Merger costs of (A) $2,500,000 and cash paid to SPI
stockholders of (A) $8,076,000 less net assets of SPI acquired of (J)
$(9,889,000), which includes estimated SPI Merger costs of $2,250,000 and
the elimination of unamortized debt issuance costs of (C) $1,018,000 =
$71,545,000.
(3) Current portion of long-term debt: (H) $(7,237,000); (I) $6,000,000 =
$(1,237,000)
(4) Long-term debt, less current portion: (H) $(26,023,000); (I) $39,000,000 =
$12,977,000
(5) Stockholders' equity: (A) $70,858,000; (J) $(13,157,000); (K)
$(39,924,000) = $18,235,000
INCOME STATEMENT (YEAR ENDED DECEMBER 31, 1997):
(1) Interest expense, net: (C) $170,000; (D) $450,000; (H) $4,046,000; (L)
$(3,375,000); (M) $(1,238,000) = $(847,000)
INCOME STATEMENT (SIX MONTHS ENDED JUNE 30, 1998):
(1) Interest income (expense), net: (C) $85,000; (D) $225,000; (H) $1,782,000;
(L) $(1,688,000); (M) $(619,000) = $(665,000)
79
<PAGE> 88
SPI HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Historical
------------------------------------------------------
SPI Acquisition
Predecessor SPI and Notes Pro Forma
1/1-3/27/97 3/28-12/31/97 Office Master Rosewood Consolidation (A,I) Consolidated
----------- ------------- ------------- -------- ------------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales .................... $ 9,039 $ 31,255 $ 8,328 $ 31,875 $ -- $ 80.497
Cost of goods sold ........... 6,490 23,792 7,466 26,482 1,091 (G) 65,321
-------- -------- -------- -------- -------- --------
Gross profit ............. 2,549 7,463 862 5,393 (1,091) 15,176
Selling, general and admin-
istrative expenses ......... 611 1,837 819 2,704 (901) (G, H) 5,070
Management and monitoring
fees ....................... -- 168 -- -- -- 168
Depreciation and amorti-
zation ..................... 19 1,230 17 98 722 (B, G) 2,086
-------- -------- -------- -------- -------- --------
Income (loss) from
operations ........... 1,919 4,228 26 2,591 (912) 7,852
Interest income (expense), net 42 (1,051) (40) (35) (2,957) (C) (4,041)
Other income ................. 34 5 4 152 -- 195
-------- -------- -------- -------- -------- --------
Income (loss) before pro-
vision for income taxes 1,995 3,182 (10) 2,708 (3,869) 4,006
Provision (benefit) for
income taxes ............... 851 1,424 (3) 1,077 (1,747) (F) 1,602
-------- -------- -------- -------- -------- --------
Net income (loss) ...... $ 1,144 $ 1,758 $ (7) $ 1,631 $ (2,122) $ 2,404
======== ======== ======== ======== ======== ========
Basic earnings per share ..... (D) $ 1.05
========
Number of shares used in
computing basic earnings
per share ................... (E) 2,296
========
Diluted earnings per share ... (D) $ 0.91
========
Number of shares used in
computing diluted earnings
per share ................... (E) 2,643
========
</TABLE>
- ----------
See notes on following page
80
<PAGE> 89
Notes:
(A) Acquisition adjustments assume the acquisitions occurred as of the
beginning of the period presented and the application of purchase
accounting to each of the acquisitions.
(B) Represents the purchase accounting impact of approximately $56,000,
$75,000 and $556,000 for SPI, Office Master and Rosewood, respectively,
primarily for goodwill amortization, as well as approximately $118,000,
$20,000, and $100,000, for SPI, Office Master and Rosewood, respectively,
for amortization of covenants not to compete which were entered into in
connection with the acquisition.
(C) Represents interest on the increased borrowings that financed a portion of
the purchase price of the acquisitions, and assumes payment of interest
only on indebtedness, with no reduction in principal during the period.
(D) Pro forma earnings per share is computed in accordance with SFAS No. 128.
See Note 2 to the SPI Consolidated Financial Statements.
(E) The weighted average number of shares includes actual weighted average
number of shares outstanding as well as common stock equivalents resulting
from options and warrants outstanding (applicable to diluted amounts
only).
(F) Represents an adjustment made to income tax provision as a result of the
pro forma adjustments in order to provide income tax expense at the
effective tax rate.
(G) Represents reclassification of certain salaries and production-related
depreciation expense totaling $888,000 and $203,000, respectively, from
operating expenses to cost of goods sold in order to conform with
Modtech's presentation.
(H) Represents elimination of non-recurring transaction-related expenses
related to the acquisition of SPI by management and an investor group.
(I) The pro forma adjustments do not reflect other anticipated reductions in
costs and expenses expected to result from the Mergers. Such anticipated
savings would include, but not be limited to, approximately $555,000 in
non-recurring compensation expense paid to former owners of acquired
entities.
81
<PAGE> 90
SPI HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Historical
---------------------------------------------
Acquisition
SPI Office Master Rosewood and Notes Pro Forma
Consolidated 1/1-2/24/98 1/1-4/17/98 Consolidation (A,I) Consolidated
------------ ------------ ----------- ------------- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ....................... $ 31,850 $ 1,206 $ 8,870 $ -- $ 41,926
Cost of goods sold .............. 25,255 1,039 7,532 533 (G) 34,359
-------- -------- -------- -------- --------
Gross profit .............. 6,595 167 1,338 (533) 7,567
-------- -------- -------- -------- --------
Selling, general and admin-
istrative expenses ............. 2,013 155 1,098 (894) (G,H) 2,372
Management and monitoring fees .. 140 -- -- -- 140
Depreciation and amortization ... 1,188 -- 26 112 (B,G) 1,326
-------- -------- -------- -------- --------
Income from operations .... 3,254 12 214 249 3,729
Interest income (expense), net .. (1,223) 5 (61) (701) (C) (1,980)
Other income .................... 33 -- 3 -- 36
-------- -------- -------- -------- --------
Income before income taxes ... 2,064 17 156 (452) 1,785
Income taxes .................... 876 (5) 64 (221) (F) 714
-------- -------- -------- -------- --------
Net income ................ $ 1,188 $ 22 $ 92 $ (231) $ 1,071
======== ======== ======== ======== ========
Pro forma earnings per share ... (D) $ 0.47
========
Pro forma number of shares
used in computing earnings
per share ..................... (E) 2,296
========
Pro forma diluted earnings per
share ......................... (D) $ 0.40
========
Pro forma number of shares
used in computing diluted net
earnings per share ............. (E) 2,645
========
</TABLE>
See notes on following page
82
<PAGE> 91
Notes:
(A) Acquisition adjustments assume the acquisitions occurred as of the
beginning of the period presented and the application of purchase
accounting to each of the acquisitions. The SPI historical consolidated
amounts include the operations of Office Master and Rosewood from the date
of acquisition.
(B) Represents the purchase accounting impact of approximately $11,000 and
$161,000 for Office Master and Rosewood, respectively, primarily for
goodwill amortization, as well as approximately $3,000 and $29,000 for
Office Master and Rosewood, respectively, for amortization of covenants
not to compete which were entered into in connection with the
acquisitions.
(C) Represents interest on the increased borrowings that financed a portion of
the purchase price of the acquisitions, and assumes payment of interest
only on indebtedness, with no reduction in principal during the period.
(D) Pro forma earnings per share is computed in accordance with SFAS No.
128.--See Note 2 to the Consolidated Financial Statements.
(E) The weighted average number of shares includes actual weighted average
number of shares outstanding, as well as common stock equivalents
resulting from options and warrants outstanding (applicable to diluted
amounts only).
(F) Represents an adjustment made to income tax provision as a result of the
pro forma adjustments in order to provide income tax expense at the
effective tax rate.
(G) Represents reclassification of certain salaries and production-related
depreciation expense, totaling $441,000 and $92,000, respectively, from
operating expense to cost of goods sold in order to conform with Modtech's
presentation of these items.
(H) Represents elimination of non-recurring transaction related expenses
related to the acquisition of Office Master and Rosewood by SPI.
(I) The pro forma adjustments do not reflect other anticipated reductions in
costs and expenses expected to result from the Office Master and Rosewood
acquisitions. Such anticipated savings would include, but not be limited
to, approximately $135,000 in non-recurring compensation expense paid to
former owners of acquired entities.
83
<PAGE> 92
DIRECTORS AND EXECUTIVE OFFICERS OF HOLDINGS
FOLLOWING THE MERGERS
DIRECTORS
The following table sets forth information as to the persons who are
expected to serve as directors of Holdings following the Mergers. Holdings'
management currently intends, and will use its best efforts, to nominate these
individuals for election as directors at Holdings' next three Annual Meetings of
Stockholders.
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND YEAR FIRST BECAME DURING THE PAST FIVE YEARS
A DIRECTOR OF MODTECH AGE AND OTHER INFORMATION
-------------------------- --- --------------------------
<S> <C> <C>
Evan M. Gruber (1990) 45 Chief Executive Officer of Modtech since 1990. Mr. Gruber joined
Modtech as Chief Financial Officer in 1989. Prior to joining
Modtech, Mr. Gruber worked at his own public accounting firm,
which he founded in 1978.
Charles C. McGettigan (1994) 53 Mr. McGettigan was elected to the Board of Directors of Modtech
in June of 1994 in connection with the sale of preferred stock to
several private investors in May 1994, including Proactive
Partners, L.P. Mr. McGettigan is a co-founder and managing
director of the investment banking firm of McGettigan, Wick &
Co., Inc., and a co-founder and general partner of Proactive
Investment Managers, L.P., the general partner of Proactive
Partners, L.P., a merchant banking fund formed in 1991. Prior to
founding McGettigan, Wick & Co., Inc., he was a Principal,
Corporate Finance of Hambrecht & Quist and a senior vice
president of Dillon, Read & Co. Mr. McGettigan is a director of
Onsite Energy; PMR Corporation; Sonex Research, Inc.; Cuisine
Solutions, Inc.; Tanknology-NDE and Wray-Tech Instruments, Inc.
Myron A. Wick III (1994) 54 Mr. Wick joined Modtech's Board of Directors in June 1994 in
connection with the sale of preferred stock to several private
investors in May 1994, including Proactive Partners, L.P. Mr.
Wick is currently a managing director and founder of McGettigan,
Wick & Co., Inc., an investment banking firm formed in 1988, and
a general partner of Proactive Investment Managers, L.P., the
general partner of Proactive Partners, L.P., a merchant banking
fund formed in 1991. Mr. Wick is a director of Story First
Communications, Inc.; Tanknology-NDE; Sonex Research, Inc. and
Wray-Tech Instruments, Inc.
</TABLE>
84
<PAGE> 93
<TABLE>
<S> <C> <C>
Daniel J. Donahoe III (1998) 64 Mr. Donahoe was elected to Modtech's Board of Directors in 1998.
He is a co-founder and the President of Red Rock Resorts, which
operates special, unique boutique resorts in the Western United
States. He also serves as Chairman of Daybreak Investments, a
privately-held investment company. Mr. Donahoe has been actively
involved in the commercial and residential real estate market in
the southwest over the past 25 years.
</TABLE>
85
<PAGE> 94
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND YEAR FIRST BECAME DURING THE PAST FIVE YEARS
A DIRECTOR OF MODTECH AGE AND OTHER INFORMATION
-------------------------- --- --------------------------
<S> <C> <C>
Patrick Van Den Bossche (1997) 37 Mr. Van Den Bossche has served as Chief Executive Officer,
President and a director of SPI since February 1997. Mr. Van Den
Bossche joined SPI in 1991 and was appointed to Vice President of
Operations in 1993. In such capacity, he managed the day-to- day
operations of SPI for its part-time owners/managers. Mr. Van Den
Bossche also serves a director of Modular Building Institute
("MBI"), a national trade organization for the modular building
industry, and is a member of MBI's statistics committee.
Charles A. Hamilton (1997) 50 Mr. Hamilton has been a director of SPI since February 1997. Mr.
Hamilton has over 27 years of investment experience in the fields
of securities analysis, corporate finance and venture capital. He
is currently a principal in the private equity group at
Robertson, Stephens Funds, which has been a wholly- owned
subsidiary of BancAmerica since October 1997. He had previously
served as managing director of Robertson, Stephens & Company
since 1981. Mr. Hamilton has served as a director of numerous
venture-financed companies in recent years and he is presently on
the board of White Cap Industries, Inc., a public company, and
ten private companies.
Charles R. Gwirtsman (1997) 44 Mr. Gwirtsman has been a director of SPI since March 1997. Mr.
Gwirtsman is a Managing Director of KRG Capital Partners, LLC.
Prior to joining KRG Capital in 1996, Mr. Gwirtsman served as
Senior Vice President of FCM Fiduciary Capital Management Company
from January 1994 to June 1996. Prior to this, Mr. Gwirtsman was
employed as a Corporate Vice President at PaineWebber, Incorporated
from 1988 to 1993 as a member of the Private Finance Group. Mr.
Gwirtsman serves on the Board of Directors of a number of privately
held companies. From September 1995 through January 1996, at the
request of his then employer, FCM Fiduciary Capital Management
Company, Mr. Gwirtsman served as a director of Canadian's Corp., a
women's speciality clothing retailer. This company filed for
bankruptcy protection in February 1996 and was liquidated under
Chapter 7 of the federal bankruptcy code in December 1997.
</TABLE>
The Merger Agreement provides that, at each of the first three
stockholders' meetings of Holdings, the Board of Directors will, subject to the
exercise of its fiduciary duties, use its best efforts to nominate the following
persons for election to the Board of Directors for one-year terms: (1) Evan
Gruber; (2) Patrick Van den Bossche; (3) two designees of Proactive Partners,
L.P., (4) two designees of KRG; and (5) three joint designees of Proactive
Partners, L.P. and KRG, all three of whom will be independent directors.
COMPENSATION OF HOLDINGS' DIRECTORS AND COMMITTEES OF THE BOARD OF DIRECTORS
Each non-employee director will be paid an annual retainer of $4,000,
plus $1,000 for each board and board committee meeting attended, and will be
granted an option to purchase 5,000 shares of Holdings' Common Stock at the end
of each year of service on the Board of Directors. Holdings will pay the
expenses of its non-employee directors in attending Board meetings. No
additional compensation will be paid to any employee director for serving on
Holdings' Board of Directors.
86
<PAGE> 95
HOLDINGS' EXECUTIVE OFFICERS
Set forth below are the names and titles of certain of the persons who are
expected to serve as executive officers of Holdings following the Mergers.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH REGISTRANT
- ---- --- ------------------------
<S> <C> <C>
Evan M. Gruber 44 Chief Executive Officer and Director
Patrick Van Den Bossche 37 President
Michael G. Rhodes 36 Chief Operating Officer and Chief
Financial Officer
</TABLE>
Each executive officer will serve, in accordance with the bylaws of
Holdings, until the first meeting of the Board of Directors following the next
annual meeting of stockholders and until his respective successor is chosen and
qualified.
COMPENSATION OF HOLDINGS' EXECUTIVE OFFICERS
Holdings has not yet paid any compensation to any of its executive
officers, but will enter into employment agreements, effective on the Closing
Date, with Mr. Gruber, Mr. Van Den Bossche and Mr. Rhodes. These agreements are
for five years, provide for early severance payments of between one and two
years and include, among other provisions, base annual salary of $300,000 for
Mr. Gruber, $250,000 for Mr. Van Den Bossche, and $200,000 for Mr. Rhodes. The
base salaries are subject to annual percentage increases and each individual is
entitled to earn bonuses of up to 100% of annual base salary. The bonuses are
based on performance and include a cash component and a stock option component
based on performance. Concurrently with the closing of the Mergers, Mr. Gruber
will receive an option to purchase 50,000 shares of Holdings Common Stock at the
closing price of Modtech's Common Stock on the day prior to the Closing Date.
The option will be immediately vested for 10,000 shares and will continue to
vest at the rate of 10,000 shares per year. The option will be credited against
the stock option component of any bonuses earned by Mr. Gruber in the first year
of the employment agreement. Mr. Gruber's new employment agreement also includes
a buy-out of his existing employment agreement with Modtech.
COMPENSATION OF MODTECH'S DIRECTORS AND EXECUTIVE OFFICERS
For information concerning the compensation paid to the directors and
executive officers of Modtech for the 1997 fiscal year, see the 1998 Proxy
Statements for Modtech, the relevant portions of which are incorporated by
reference into the Modtech's Annual Report on Form 10-K for the Year Ended
December 31, 1997. See "Where You Can Find More Information."
COMPENSATION OF SPI'S DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the cash compensation of the Chief
Executive Officer and the Senior Vice President --Manufacturing, the most highly
compensated executive officers of SPI for the fiscal year ended March 31, 1998
(the "SPI Named Executives"). No other person who served as an executive officer
of SPI during the fiscal year ended March 31, 1998 received compensation which
exceeded $100,000 for such year.
87
<PAGE> 96
SPI SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Cash Compensation (A)
----------------------------- All Other
Officers Capacities in Which Served Salary Bonus (B) Compensation (C)
-------- -------------------------- ------ --------- ----------------
<S> <C> <C> <C> <C>
Patrick Van Den Bossche President, Chief Executive $150,020 $275,000 $9,600
Officer and Director
Ronald West Senior Vice President-- 150,020 275,000 9,600
Manufacturing
</TABLE>
- ----------
(A) Amounts shown include compensation for services rendered in all capacities
to SPI during the year ended March 31, 1998.
(B) Includes all cash bonuses earned during the year ended March 31, 1998 and
paid during the year ended March 31, 1998 or subsequent thereto.
(C) Amounts shown include SPI's contribution to the named individual's profit
sharing plan.
SPI STOCK OPTION GRANTS
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following discloses options granted during the fiscal year ended
March 31, 1998 for the SPI Named Executives:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ANNUAL RATES OF STOCK PRICE
APPRECIATION FOR OPTION TERM
INDIVIDUAL GRANTS (D) (E)
---------------------------------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTION/SARS EMPLOYEES EXERCISE OR
GRANTED IN FISCAL BASE PRICE EXPIRATION 5% ANNUAL 10% ANNUAL
Name (#) YEAR ($/SH) DATE (C) GROWTH RATE GROWTH RATE
---- ------------ ------------ ------------ ------------ ------------ ------------
($) ($)
<S> <C> <C> <C> <C> <C> <C>
Patrick Van Den 5,000 (A) 8.2% $4.725 February 24, $14,858 $37,652
Bossche ....... 2008
2,538 (B) 4.1 $4.725 February 24, 1,859 2,518
------------ ------------ 2000 ------- -------
7,538 12.3% $16,717 $40,170
Ronald West ... 5,000 (A) 8.2% $4.725 February 24, $14,858 $37,652
2008
</TABLE>
- ----------
(A) Represent options granted under the 1997 Long Term Incentive Stock Option
Plan. Such options vest in equal installments over a three-year period.
88
<PAGE> 97
(B) Represent warrants granted to Mr. Van Den Bossche. Such warrants are
exercisable immediately upon grant.
(C) The options and warrants are subject to earlier termination and repurchase
upon the occurrence of certain events related to termination of
employment.
(D) The dollar amounts in these columns represent potential value that might
be realized upon exercise of the options and warrants immediately prior to
the expiration of their term, assuming that the market price of the SPI
Common Stock appreciates in value from the date of the grant at the 5% and
10% annual rates prescribed by regulation, and therefore are not intended
to forecast possible future appreciation, if any, of the price of the SPI
Common Stock.
(E) In calculating the potential realizable value, SPI used an estimated
market price of $4.725 per share as of the grant date.
SPI OPTION EXERCISES AND HOLDINGS
The following table provides certain summary information concerning the
shares of SPI Common Stock represented by outstanding warrants and stock options
held by each of the SPI Named Executives as of March 31, 1998. None of the SPI
Named Executives exercised any options or warrants during the fiscal year ended
March 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT MARCH 31, 1998 AT MARCH 31, 1998 (1)
-------------------------------- --------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Patrick Van Den Bossche.................. 152,832 30,526 $2,341,206(3) $467,950
Ronald West.............................. 86,157 30,526 $1,320,747(4) $467,950
</TABLE>
- ----------
(1) All amounts are calculated to give effect to the transactions contemplated
by the Merger Agreement.
(2) Value based on the difference between $17.00 (the closing price of Modtech
Common Stock on October 23, 1998) and the option or warrant exercise
price, multiplied by the number of shares of SPI Capital Stock subject to
such option or warrant.
(3) Does not include the cash portion of the Merger Consideration
(approximately $236,409) to be received upon the conversion of warrants
and vested options held by Mr. Van Den Bossche.
(4) Does not include the cash portion of the Merger Consideration
(approximately $133,494) to be received upon the conversion of vested
options held by Mr. West.
COMPENSATION OF SPI DIRECTORS
Members of SPI's Board of Directors serve without cash compensation.
SPI EMPLOYMENT AGREEMENTS
Van Den Bossche Employment Agreement. In March 1997, SPI and Mr. Van Den
Bossche entered into an employment agreement providing for Mr. Van Den Bossche's
employment as Chief Executive Officer and President. The initial employment
period expires in March 2002. The employment agreement provides for an initial
base salary of $150,000 plus an annual incentive bonus based upon SPI's
operating performance. In addition, SPI has taken out a key man life insurance
policy on Mr. Van Den Bossche's life payable to SPI but assigned to SPI's
lenders. Mr. Van Den Bossche's employment agreement with SPI will be terminated
concurrently with the completion of the Mergers.
SPI 1997 LONG TERM INCENTIVE STOCK OPTION PLAN
In 1997, SPI adopted its 1997 Long Term Incentive Stock Option Plan (the
"SPI Plan") designed to provide incentives to present and future officers,
employees, directors and consultants of SPI and its subsidiaries as may be
selected in the sole discretion of SPI's Board of Directors. The SPI Plan, as
amended, provides for aggregate option grants of up to
89
<PAGE> 98
254,797 shares. As of March 31, 1998, options to purchase an aggregate of
178,749 shares of SPI Common Stock at an average exercise price of $3.33 per
share were outstanding under the SPI Plan.
90
<PAGE> 99
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF HOLDINGS
The following table sets forth the anticipated beneficial ownership of
Holdings Common Stock, after giving effect to the Mergers, as to each person
expected to be a Holdings executive officer or director and each person or
entity anticipated to be the beneficial owner of more than 5% of Holdings Common
Stock. The table assumes each SPI stockholder, including the SPI stockholders
listed in the following table, elect to convert 5.9176% of their SPI Capital
Stock into cash. The table also assumes that 388,939 shares of Holdings Series A
Preferred Stock are issued in the Modtech Merger and that Proactive Partners,
L.P. receives 208,567 shares and Lagunitas Partners receives 180,372 shares.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY OF
NAME OWNED CLASS (A)
---- ------------ ---------
<S> <C> <C>
Evan M. Gruber (B)....................................... 512,748 3.7%
Patrick Van Den Bossche (C).............................. 239,077 1.7
Michael G. Rhodes (D).................................... 202,916 1.5
Daniel J. Donahoe III.................................... 6,381 *
Charles R. Gwirtsman (E)................................. 362,183 2.6
Charles A. Hamilton (F).................................. 1,771,090 12.7
Charles C. McGettigan (G)................................ 1,807,668 13.0
Myron A. Wick III (G).................................... 1,807,668 13.0
Jon D. Gruber (H)........................................ 3,528,758 25.3
Gruber & McBaine Capital Management (I).................. 1,667,914 12.0
Infrastructure and Environmental Private Equity
Fund III, L.P....................................... 1,401,161 10.0
J. Patterson McBaine (J)................................. 3,478,390 24.9
Proactive Partners, L.P. (K)............................. 1,773,002 12.7
All directors and officers as a group
(8 people).......................................... 4,936,729 35.4
</TABLE>
- ----------
* Less than one percent.
(A) In calculating beneficial and percentage ownership, all shares of Holdings
Common Stock which a named stockholder will have the right to acquire
within 60 days of the date of this Joint Proxy Statement/Prospectus upon
exercise of stock options are deemed to be outstanding for the purpose of
computing the ownership of such stockholder, but are not deemed to be
outstanding for the purpose of computing the percentage of Holdings Common
Stock owned by any other stockholder. Upon the closing of the Mergers,
approximately 12,622,158 shares of Holdings Common Stock will be
outstanding and options to acquire 1,325,851 shares of Holdings Common
Stock exercisable within 60 days of this Joint Proxy Statement/Prospectus
will be outstanding. Does not give effect to the potential issuance of
507,571 shares of Holdings Common Stock upon exercise of stock options
that have been granted but currently are not, and within 60 days of the
date of this Joint Proxy Statement/Prospectus
91
<PAGE> 100
will not be, exercisable, or of up to 1,250,000 additional shares issuable
upon exercise of options available for the future grant of options under
Holdings' stock option plans.
(B) Includes 512,748 shares issuable upon exercise of stock options, but does
not include 174,667 shares issuable upon exercise of stock options which
have been granted but currently are not exercisable. Evan M. Gruber and
Jon D. Gruber are not related.
(C) Includes 86,158 shares issuable upon exercise of stock options, but does
not include 30,525 shares issuable upon exercise of stock options which
have been granted but currently are not exercisable.
(D) Includes 188,452 shares issuable upon exercise of stock options, but does
not include 108,000 shares issuable upon exercise of stock options which
have been granted but currently are not exercisable.
(E) Includes 182,669 shares held by Capital Resources Growth, Inc., an entity
of which Mr. Gwirtsman is the sole stockholder, and 179,514 shares held
directly by Mr. Gwirtsman and his wife and trusts formed for the benefit
of their children.
(F) Includes 19,637 shares held by Mr. Hamilton, 1,401,161 shares held by
Infrastructure and Environmental Private Equity Fund III, L.P. ("IEPEF")
and 350,292 shares held by Environmental & Information Technology Private
Equity Fund III ("EITPEF"). Mr. Hamilton is a principal of one of the
members of a limited liability company that serves as general partners of
IEPEF and the investment manager of EITPEF. Mr. Hamilton disclaims
beneficial ownership of all shares held by IEPEF and the investment
manager of EITPEF except to the extent of his pecuniary interest therein.
(G) Includes 17,650 shares owned of record directly by each of Messrs.
McGettigan and Wick, and 1,773,002 shares owned of record by Proactive
Partners, L.P. and affiliates of which Messrs. McGettigan and Wick are
general partners. Also includes options to purchase 17,016 shares which
have been granted to each of Messrs. McGettigan and Wick for serving on
Modtech's Board of Directors.
(H) Includes 87,841 shares owned of record directly by Mr. Gruber, all shares
owned of record by Proactive Partners, L.P. and affiliates, of which Mr.
Gruber is a general partner, and all shares owned of record by Gruber &
McBaine Capital Management and affiliates, of which Mr. Gruber is a
general partner. Jon D. Gruber and Evan M. Gruber are not related.
(I) Includes 93,758 shares owned of record directly by Gruber & McBaine
Capital Management, all shares owned of record by Proactive Partners, L.P.
and affiliates, and all shares owned of record by Lagunitas Partners,
Gruber & McBaine International and GMJ Investments, affiliated entities.
(J) Includes 37,473 shares owned of record directly by Mr. McBaine, all shares
owned of record by Proactive Partners and affiliates, of which Mr. McBaine
is a general partner, and all shares owned of record by Gruber & McBaine
Capital Management and affiliates, of which Mr. McBaine is a general
partner.
(K) Includes 1,773,002 shares owned of record by Proactive Partners, L.P. and
all shares owned of record by Fremont Proactive Partners, an affiliated
entity.
92
<PAGE> 101
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF MODTECH
The following table sets forth the beneficial ownership of Modtech Common
Stock as of October 20, 1998, by each executive officer or director of Modtech
and each person or entity known to Modtech to be the beneficial owner of more
than 5% of Modtech's Common Stock. The beneficial ownership information set
forth below gives effect to the acceleration of the vesting of the outstanding
Modtech Options. See "The Mergers -- Effect on Modtech Stock Plans".
<TABLE>
<CAPTION>
SHARES PERCENTAGE
BENEFICIALLY OF
NAME OWNED CLASS (A)
---- ------------ ---------
<S> <C> <C>
Gerald B. Bashaw (B)..................................... 398,849 4.0%
Evan M. Gruber (C)....................................... 602,666 5.8
Michael G. Rhodes (D).................................... 238,500 2.4
Robert W. Campbell (E)................................... 19,000 -
James D. Goldenetz (F)................................... 129,531 1.3
Charles C. McGettigan (G) (N)............................ 2,369,811 24.0
Daniel J. Donahoe III.................................... 7,500 -
Myron A. Wick, III (G) (N)............................... 2,369,811 24.0
Jon D. Gruber (I) (N).................................... 4,604,721 46.6
Gruber & McBaine
Capital Management (K) (N).......................... 2,172,410 22.0
Platinum Partners, L.P. (L).............................. 522,000 5.3
Proactive Partners, L.P. (M) (N)......................... 2,329,066 23.6
All directors and officers
as a group (9 persons) (B) (C) (D) (E)
(F) (G) (H)......................................... 3,806,602 35.0
</TABLE>
- ----------
* Less than one percent.
(A) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Modtech Common
Stock subject to stock options and warrants currently exercisable or
exercisable within 60 days are deemed to be outstanding for computing the
percentage ownership of the person holding such options and the percentage
ownership of any group of which the holder is a member, but are not deemed
outstanding for computing the percentage of Modtech Common Stock owned by
any other person. Except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table
have sole voting and investment power with respect to all shares of
capital stock shown beneficially owned by them. As of September 30, 1998,
an aggregate of 9,871,409 shares of Modtech Common Stock were outstanding.
Options to acquire a total of 1,219,244 shares of Modtech Common Stock
were exercisable within 60 days. This number does not give effect to the
potential issuance of 406,415 shares of Modtech Common Stock upon exercise
of stock options that have been granted but currently are not, and within
60 days of the date of this Joint Proxy Statement/Prospectus will not be,
exercisable.
(B) Includes 20,000 shares issuable upon exercise of stock options.
93
<PAGE> 102
(C) Includes 602,666 shares issuable upon exercise of stock options, but does
not include 174,667 shares issuable upon exercise of stock options which
have been granted but currently are not exercisable. Evan M. Gruber and
Jon D. Gruber are not related.
(D) Includes 221,500 shares issuable upon exercise of stock options, but does
not include 108,000 shares issuable upon exercise of stock options which
have been granted but currently are not exercisable.
(E) Includes 20,000 shares issuable upon exercise of stock options.
(F) Includes 115,000 shares issuable upon exercise of stock options.
(G) Includes 20,745 shares owned of record directly by each of Messrs.
McGettigan and Wick, and 2,329,066 shares owned of record by Proactive
Partners, L.P. and affiliates of which Messrs. McGettigan and Wick are
general partners. Also includes options to purchase 20,000 shares which
have been granted to each of Messrs. McGettigan and Wick for serving on
Modtech's Board of Directors.
(H) All of these shares are issuable upon exercise of stock options.
(I) Includes 103,245 shares owned of record directly by Mr. Gruber, all shares
owned of record by Proactive Partners, L.P. and affiliates, of which Mr.
Gruber is a general partner, and all shares owned of record by Gruber &
McBaine Capital Management and affiliates, of which Mr. Gruber is a
general partner. Jon D. Gruber and Evan M. Gruber are not related.
(J) Includes 44,045 shares owned of record directly by Mr. McBaine, all shares
owned of record by Proactive Partners and affiliates, of which Mr. McBaine
is a general partner, and all shares owned of record by Gruber & McBaine
Capital Management and affiliates, of which Mr. McBaine is a general
partner.
(K) Includes 110,200 shares owned of record directly by Gruber & McBaine
Capital Management, all shares owned of record by Proactive Partners, L.P.
and affiliates, and all shares owned of record by Lagunitas Partners,
Gruber & McBaine International and GMJ Investments, affiliated entities.
(L) These shares are owned of record by Platinum Partners, L.P., a
Massachusetts limited partnership (the "Partnership"), and also are deemed
to be beneficially owned by Hori Capital Management, Inc., the sole
general partner of the Partnership, and by Calvin G. Hori, the sole
shareholder, director and President of Hori Capital Management, Inc., the
address of each of which is One Washington Mall, 7th Floor, Boston,
Massachusetts 02108.
(M) Includes 2,329,066 shares owned of record by Proactive Partners, L.P. and
all shares owned of record by Fremont Proactive Partners, an affiliated
entity.
(N) The address of each of Charles C. McGettigan, Myron A. Wick, III, Jon D.
Gruber, J. Patterson McBaine, Gruber & McBaine Capital Management and
Proactive Partners, L.P. is 50 Osgood Place, San Francisco, CA 94133.
94
<PAGE> 103
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF SPI
The table below sets forth certain information regarding beneficial
ownership of the SPI Capital Stock as of October 20, 1998, by each executive
officer or director of SPI and each person or entity who owns of record or
beneficially 5% or more of the Capital Stock. The beneficial ownership
information set forth below gives effect to the acceleration of the vesting of
outstanding SPI Options (see "The Mergers -- Effect on SPI Stock Plans"), but
does not give effect to the ability of SPI stockholders to elect cash for a
portion of their SPI Capital Stock in connection with the SPI Merger. See "The
Mergers -- Merger Consideration-SPI."
<TABLE>
<CAPTION>
SHARES PERCENTAGE
Beneficially of
Name (A) Owned (B) Class
--------- -----
<S> <C> <C>
Patrick Van Den Bossche (C) ............... 135,275 4.87%
Ronald West (D) ........................... 90,165 3.24
Ronald R. Procunier (E) ................... 46,185 1.66
Charles A. Hamilton (F) ................... 1,002,123 36.06
Bret R. Maxwell (G) ....................... 991,012 35.66
Mark M. King (H) (I) ...................... 1,031,997 37.13
Bruce L. Rogers (H) (J) ................... 1,031,997 37.13
Charles R. Gwirtsman (H) (K) .............. 1,031,997 37.13
KRG Capital Partners, L.L.C. (H) .......... 1,031,997 37.13
Infrastructure and Environmental
Private Equity Fund III, L.P. ........ 792,809 28.53
Environmental & Information Technology
Private Equity Fund III (L) .......... 198,203 7.13
Argentum Capital Partners II, L.P. ........ 198,203 7.13
NationsCredit Commercial
Corporation (M) ...................... 332,158 11.95
All Officers and Directors as a Group ..... 2,305,745 82.96
(8 people)
</TABLE>
- ---------------------
(A) Unless otherwise indicated, the address of the beneficial owner is c/o
SPI Manufacturing, Inc., 9550 Hermosa Avenue, Rancho Cucamonga,
California 91730.
(B) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of SPI Preferred
Stock subject to stock options and warrants currently exercisable or
exercisable within 60 days of the date of this Joint Proxy
Statement/Prospectus are deemed to be outstanding for computing the
percentage ownership of the person holding such options and the
percentage ownership of any group of which the holder is a member, but
are not deemed outstanding for computing the percentage of SPI Capital
Stock owned by any other person. Except as indicated by footnote, and
subject to community property laws where applicable, the persons named in
the table have sole voting and investment power with respect to all
shares of capital stock shown beneficially owned by them. At October 20,
1998, a total of 2,295,667 shares of SPI Capital Stock were issued and
outstanding, options to acquire a total of 162,814 shares of SPI
Preferred Stock were exercisable within 60 days and warrants to acquire a
total of 320,829 shares of SPI Preferred Stock were exercisable within 60
days.
95
<PAGE> 104
(C) Includes 48,750 shares issuable upon the exercise of immediately
exercisable options and 37,471 shares issuable upon the exercise of
immediately exercisable warrants. Does not include 16,250 shares issuable
upon the exercise of stock options which have been granted but currently
are not exercisable.
(D) Includes 48,750 shares issuable upon the exercise of immediately
exercisable options. Does not include 16,250 shares issuable upon the
exercise of stock options which have been granted but currently are not
exercisable.
(E) Includes 21,252 shares issuable upon the exercise of immediately
exercisable options. Does not include 7,084 shares issuable upon the
exercise of stock options which have been granted but currently are not
exercisable.
(F) Includes 11,111 shares held by Mr. Hamilton, 792,809 shares held by
Infrastructure and Environmental Private Equity Fund III, L.P. ("IEPEF")
and 198,203 shares held by Environmental & Information Technology Private
Equity Fund III ("EITPEF"). Mr. Hamilton is a principal of one of the
members of a limited liability company that serves as general partner of
IEPEF and the investment manager of EITPEF. Mr. Hamilton disclaims
beneficial ownership of all shares held by IEPEF and EITPEF, except to
the extent of his pecuniary interest therein.
(G) Includes 792,809 shares held by IEPEF and 198,203 shares held by EITPEF.
Mr. Maxwell is a Vice Chairman of First Analysis Corporation which is the
majority member of a limited liability company that serves as the general
partner of IEPEF and the investment manager of EITPEF. Mr. Maxwell
disclaims beneficial ownership of all shares held by IEPEF and EITPEF
except to the extent of his pecuniary interest therein.
(H) Includes 1,031,997 shares held by members of KRG Capital Investments III,
L.L.C., an investment limited liability company ("KRG III") of which KRG
is the manager. The managing directors of KRG Capital are Mark M. King,
Bruce L. Rogers and Charles R. Gwirtsman. All the shares held by members
of KRG III are subject to a voting agreement providing KRG the right to
vote all of such shares (the "KRG Voting Agreement"). The KRG Voting
Agreement will terminate upon the closing of the Mergers.
(I) Mr. King is a Managing Director of KRG Capital and as a result may be
deemed to share beneficial ownership of all shares covered by the KRG
Voting Agreement. See Note (H) above. Mr. King disclaims beneficial
ownership of all shares covered by the KRG Voting Agreement, other than
153,954 shares held directly by Mr. King, his wife, trusts formed for the
benefit of Mr. King and his wife, and a trust formed for the benefit of
their children.
(J) Mr. Rogers is a Managing Director of KRG Capital and as a result may be
deemed to share beneficial ownership of all shares covered by the KRG
Voting Agreement. See Note (H) above. Mr. Rogers disclaims beneficial
ownership of all shares covered by the KRG Voting Agreement, other than
163,864 shares held directly by Mr. Rogers and his wife, a trust formed
for the benefit Mr. Rogers' wife and a trust formed for the benefit of
their children.
(K) Mr. Gwirtsman is a Managing Director of KRG Capital and as a result may
be deemed to share beneficial ownership of all shares covered by the KRG
Voting Agreement. See Note (H) above. Mr. Gwirtsman disclaims beneficial
ownership of all shares covered by the KRG Voting Agreement, other than
103,358 shares held by Capital Resources Growth, Inc., an entity of which
Mr. Gwirtsman is the sole stockholder, and 101,573 shares held directly
by Mr. Gwirtsman and his wife and trusts formed for the benefit of their
children.
(L) All references to Environmental & Information Technology Private Equity
Fund III in this Joint Proxy Statement/Prospectus refer to Environmental
& Information Technology Private Equity Fund III, Gesellschaft
Burgarlichen Rechts (mit Haftungsbeschankung), a civil partnership with
limitation of liability established under the laws of the Federal
Republic of Germany.
(M) Includes 283,358 shares issuable upon the exercise of immediately
exercisable warrants.
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DESCRIPTION OF HOLDINGS CAPITAL STOCK
The authorized capital stock of Holdings consists of 25,000,000 shares of
common stock, par value $.01 per share ("Holdings Common Stock") and 5,000,000
shares of preferred stock, par value $.01 per share ("Holdings Preferred
Stock"), of which 585,000 have been designed Series A Preferred Stock ("Holdings
Series A Preferred Stock").
The following summary of certain provisions of the Holdings Common Stock
and Holdings Series A Preferred Stock does not purport to be complete and is
subject to, and qualified in its entirety by, the provisions of applicable law
and Holdings' Certificate
of Incorporation.
VOTING RIGHTS -- COMMON STOCK
The holders of outstanding shares of Holdings Common Stock are entitled to
one vote on all matters submitted to a vote of stockholders.
DIVIDENDS -- COMMON STOCK
Holders of Holdings Common Stock are entitled to receive ratably such
dividends as may be declared by the Holdings Board out of funds legally
available therefor. Holdings will continue Modtech's dividend policy. Modtech
has not declared a cash dividend on Modtech Common Stock since 1990 and has no
present intention to pay a dividend.
LIQUIDATION -- COMMON STOCK
In the event of the liquidation, dissolution or winding-up of Holdings,
holders of Holdings Common Stock are entitled to share ratably in all assets
remaining after the payment of all liabilities and the liquidation preference of
any outstanding Holdings Series A Preferred Stock.
PREFERRED STOCK
No shares of Holdings Series A Preferred Stock are presently outstanding.
The Holdings Series A Preferred Stock will be issued as part of the Modtech
Merger Consideration. The terms of the Holdings Series A Preferred are
as follows:
Voting Rights. The Holdings Series A Preferred Stock has no voting rights,
including, without limitation, the right to vote on the election of directors,
mergers, reorganization or a sale of all or substantially all of Holdings
assets.
Dividend Rights. Dividends will accrue on each share of Holdings Series A
Preferred Stock at the rate of $0.40 per annum. Dividends may not be paid on
Holdings Common Stock until all accrued dividends on Holdings Series A Preferred
Stock are paid or declared and set aside for payment.
Liquidation Preference. If Holdings is liquidated, the holders of Holdings
Series A Preferred Stock will have the right to a liquidation preference over
the holders of Holdings Common Stock in the amount of $5 per share, plus all
accrued but unpaid dividends, before any payment is made to holders of Holdings
Common Stock.
Conversion. Subject to proportional adjustments due to stock splits,
reverse stock splits and similar transactions, each share of Holdings Series A
Preferred Stock is convertible into one share of Holdings Common Stock. Shares
of Holdings Series A Preferred Stock may be converted into Holdings Common Stock
at any time following two years after their date of issuance. Each outstanding
share of Holdings Series A Preferred Stock will automatically be converted into
Holdings Common Stock upon the fourth anniversary date of its issuance or upon a
"change in control," whichever occurs first. A "change in control" is defined as
(i) the acquisition of Holdings by another entity by means of any
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transaction or series of related transactions; (ii) a sale of all or
substantially all of the assets of Holdings; (iii) the sale of capital stock
constituting 50% or more of Holdings' outstanding capital stock at the time of
sale; or (iv) any transaction or series of related transactions in which more
than 50% of the voting power of the corporation is disposed of.
In the future, Holdings may issue one or more additional series of
Holdings Preferred Stock. The Holdings Board is authorized to determine, with
respect to each series of Holdings Preferred Stock which may be issued, the
powers, designations, preferences, and rights of the shares of such series and
the qualifications, limitations, or restrictions thereof, including any dividend
rate, redemption rights, liquidation preferences, sinking fund terms, conversion
rights, voting rights and any other preferences or special rights and
qualifications. The effect of any issuance of the additional series of Holdings
Preferred Stock upon the rights of holders of the Holdings Common Stock depends
upon the respective powers, designations, preferences, rights, qualifications,
limitations and restrictions of the shares of the additional series of Holdings
Preferred Stock as determined by the Holdings Board. Such effects might include:
- - dilution of the voting power of the Holdings Common Stock;
- - the further subordination of the rights of holders of Holdings Common
Stock to share in Holdings' assets upon liquidation; and
- - a further reduction in the amount otherwise available for payment of
dividends on Holdings Common Stock.
ISSUANCE
All shares of Holdings Common Stock and Holdings Series A Preferred Stock
outstanding upon completion of the Mergers will be fully paid and nonassessable.
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COMPARISON OF RIGHTS OF STOCKHOLDERS
At the Effective Time, the stockholders of Modtech and SPI will become
stockholders of Holdings. As stockholders of Holdings, their rights will be
governed by the Delaware General Corporation Law ("Delaware Corporation Code")
and Holdings' Certificate of Incorporation and Bylaws. Following are summaries
of certain differences between (i) the rights of Modtech stockholders and
Holdings stockholders and (ii) the rights of SPI stockholders and Holdings
stockholders. The summaries do not purport to be complete and are qualified in
their entirety by reference to the Holdings Certificate of Incorporation and
Bylaws, Delaware law, California law and Colorado law governing corporations,
the Modtech Articles of Incorporation and Bylaws, and the SPI Articles of
Incorporation and Bylaws, as applicable. Holdings is organized as a corporation
under Delaware state law, Modtech is organized under California state law, and
SPI is organized under Colorado state law. Each corporation is subject to the
corporations code of its state of incorporation which deals with a variety of
matters, including:
- - election of directors
- - duties and liabilities of officers and directors
- - dividends and other distributions
- - meetings of stockholders
- - amendments to the articles or certificates of incorporation
- - mergers and sales of all or substantially all of the corporation's assets
- - dissolution.
Each corporation is also subject to the provisions of its Articles or
Certificate of Incorporation and Bylaws.
COMPARISON OF STOCKHOLDERS' RIGHTS WITH RESPECT TO HOLDINGS AND MODTECH
Authorized Capital. The total number of authorized shares of capital stock
of Modtech is 25,000,000 shares, consisting of 20,000,000 shares of Common
Stock, and 5,000,000 shares of Preferred Stock. The authorized capital of
Holdings is 30,000,000 shares, consisting of 25,000,000 shares of Holdings
Common Stock and 5,000,000 shares of Holdings Preferred Stock, of which 585,000
have been designated Series A Preferred Stock.
Standard of Conduct for Directors. Under Delaware law, the standards of
conduct for directors have developed through written opinions of the Delaware
courts in cases decided by them. Generally, directors of Delaware corporations
are subject to a duty of loyalty, a duty of care and a duty of full disclosure.
The duty of loyalty has been said to require directors to refrain from
self-dealing. According to the Delaware Supreme Court, the duty of care requires
"directors . . . in managing the corporate affairs . . . to use that amount of
care which ordinarily careful and prudent men would use in similar
circumstances." Later case law has established "gross negligence" as the
standard for the duty of care or liability in the process of decision-making by
directors of Delaware corporations. In addition, the duty of full disclosure
requires the full disclosure of all material facts when seeking stockholder
action.
Under California law, the standards of conduct for directors are governed
by statute. Section 309 of the California General Corporations Law ("California
Corporations Code") requires that a director of a California corporation perform
his duties in "good faith," in a manner he believes is "in the best interests of
the corporation and its stockholders" and with the care of an "ordinarily
prudent person in a like position . . . under similar circumstances."
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Number of Directors. Under the Modtech Bylaws, the Modtech Board is
comprised of between five and nine directors, the exact number to be fixed by
the Modtech Board or stockholders. The Modtech Board now consists of eight
directors. The Holdings Board will initially consist of seven directors. The
Holdings Bylaws provide that the Holdings Board will consist of nine directors,
which number may be increased or decreased pursuant to the Holdings Bylaws.
Removal of Directors. Under Section 303 of the California Corporations
Code and Modtech's charter documents, Modtech's directors may be removed without
cause by the affirmative vote of a majority of the outstanding shares entitled
to vote; provided, however, that unless the entire board is removed, no director
may be removed if the votes cast against removal would be sufficient to elect
the director if voted cumulatively at an election at which the same total number
of votes were cast. Under Holdings' charter documents, Holdings stockholders may
remove directors only for cause.
Voting Rights. Modtech stockholders have cumulative voting rights which
allows each stockholder voting at any election of directors to cast votes equal
to the number of directors to be elected multiplied by the number of shares held
by the stockholder. The ability to cumulate votes may enable minority
shareholders to elect one or more directors in situations where, absent
cumulative voting rights, they could not elect any directors. Holdings
stockholders will not have cumulative voting rights.
Vacancy on the Board of Directors. Except for a vacancy created by the
removal of a director, vacancies on the Modtech Board may be filled by approval
of a majority of the Board. If the number of directors then in office is less
than a quorum, the vacancy may be filled by (i) the unanimous written consent of
the directors then in office, (ii) the affirmative vote of a majority of the
directors then in office, or (iii) by a sole remaining director. Vacancies on
the Modtech Board created by removal of directors may be filled only by the
affirmative vote of a majority of the shares of Modtech Common Stock. The
Holdings Bylaws provide that vacancies and any newly created directorships
resulting from any increase in the number of directors may be filled by vote of
the holders of the particular class or series of stock entitled to elect such
director at a meeting called for the purpose, or by a majority of the directors
then in office, although less than a quorum, or by a sole remaining director, in
each case elected by the particular class or series of stock entitled to elect
such directors.
Limitation of Liability and Indemnification. Pursuant to the Delaware
Corporation Code and the Holdings Certificate of Incorporation, the liability of
directors of Holdings to Holdings or to any stockholder of Holdings for money
damages for breach of fiduciary duty has been eliminated except for:
- - breach of the directors' duty of loyalty to Holdings or its stockholders;
- - acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- - unlawful dividends or redemptions or purchases of stock; or
- - any transaction from which the director derived an improper personal
benefit.
In general, the liability of officers may not be eliminated or limited
under Delaware law. The Holdings Certificate of Incorporation provides that
Holdings will indemnify its officer and directors in any proceeding, except
those in which such individual was adjudicated as liable for negligence or
misconduct in the performance of his or her duty. The Holdings Bylaws also
provide for indemnification of officers and directors of Holdings, but only to
the extent that such officer or director (a) acted in good faith and in a manner
he reasonably believed to be in or not opposed
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to the best interests of Holdings (or, with respect to a criminal matter, had no
reason to believe his conduct was unlawful) and (b) was not adjudged liable to
Holdings. Under the Holdings Bylaws, the right to indemnification is subject to
a finding that the same is proper with respect to a specific proceeding, because
the officer or director involved has met the applicable standard of conduct
(described in the preceding sentence), by any of (i) a majority vote of a quorum
(consisting of directors not involved in the proceeding) of the Holdings Board,
(ii) independent legal counsel in a written opinion, or (iii) the stockholders.
The Merger Agreement also provides for the indemnification of officers and
directors. See "The Merger Agreement -- Indemnification."
As allowed by the California Corporations Code, Modtech's Articles of
Incorporation provide that the liability of the directors of Modtech for
monetary damages shall be eliminated to the fullest extent permissible under
California law. This is intended to eliminate the personal liability of a
director for monetary damages in an action brought by or in the right of Modtech
for breach of a director's duties to Modtech or its stockholders except for
liability for acts or omissions that involve intentional misconduct or knowing
and culpable violation of law, for acts or omissions that a director believes to
be contrary to the best interests of Modtech or its stockholders or that involve
the absence of good faith on the part of the director, for any transaction from
which a director derived an improper personal benefit, for acts or omissions
that show a reckless disregard for the director's duty to Modtech or its
stockholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, or a risk
of serious injury to Modtech or its stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to Modtech or its stockholders, with respect to certain
contracts in which a director has a material financial interest, and for
approval of certain improper distributions to stockholders or certain loans or
guarantees. This provision does not limit or eliminate the rights of Modtech or
any shareholder to seek non-monetary relief such as an injunction or rescission
in the event of a breach of a director's duty of care.
Modtech's Bylaws require Modtech to indemnify its officers, directors,
employees and other agents to the full extent permitted by law, including those
circumstances in which indemnification would otherwise be discretionary. In
addition, Modtech's Articles of Incorporation expressly authorize the use of
indemnification agreements and, with the approval of its stockholders, Modtech
has entered into separate indemnification agreements with each of its directors.
Modtech's Board of Directors has authorized similar indemnification agreements
for Modtech's officers. These agreements may require Modtech, among other
things, to indemnify directors and officers against certain liabilities that may
arise by reason of their status or service as directors and officers, and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified.
Annual Stockholder Meetings. The Modtech Bylaws provide that the annual
meeting of the stockholders will be held on such dates and at such times as
shall be designated by the Modtech Board. The Holdings Bylaws provide that the
annual meeting of stockholders shall be held at such place, on such date, and at
such time as the Board of Directors shall each year fix, which date shall be
within 13 months subsequent to the later of the organization of the corporation
or the last annual meeting of stockholders.
Special Stockholder Meetings. The Modtech Bylaws provide that a special
meeting of the stockholders may be called at any time by the Chairman of the
Board or president, or by the Board of Directors, or by one or more stockholders
holding at least 10% of the shares entitled to vote at the meeting. The Holdings
Bylaws provide that a special meeting of the stockholders may be called at any
time by the chairman of the Board, if any, or a majority of
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the Board of Directors. The Holdings Bylaws do not permit the stockholders to
call a special meeting.
Actions by Written Consent of Stockholders. Since the Modtech Articles of
Incorporation do not provide otherwise, any action that may be taken at a
stockholder's meeting of Modtech may be taken without a meeting, without prior
notice and without a vote, upon the written consent of the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a stockholder meeting at which all
shares entitled to vote were present and voted. The California Corporations Code
requires any action taken by written consent to elect Modtech directors to be
unanimous. Pursuant to Holdings' Certificate of Incorporation, any action
required or permitted to be taken by the stockholders must be effected at a duly
called annual or special meeting of stockholders and may not be effected by any
consent in writing in lieu of a meeting of such stockholders.
Dividends and Other Distributions. Under the Delaware Corporations Code,
dividends may be paid out of the surplus of the corporation or, if there is no
surplus, out of net profits for the year in which the dividend is declared
and/or the preceding fiscal year. The California Corporations Code allows the
payment of dividends and other distributions (including redemptions) only if (1)
the amount of retained earnings immediately before the distribution equals or
exceeds the distribution, or (2) immediately after the distribution:
- - the sum of the assets of the corporation (including goodwill, capitalized
research and development expenses, and deferred charges) is at least
equal to 1-1/4 times its liabilities (not including deferred taxes,
deferred income and other credits); and
- - the current assets of the corporation are at least equal to its current
liabilities, or the average earnings of the corporation before taxes on
income and before interest expense for the two preceding fiscal years was
less than the average of the interest expense of the corporation for
those fiscal years at least 1-1/4 times its current liabilities.
COMPARISON OF STOCKHOLDERS' RIGHTS WITH RESPECT TO HOLDINGS AND SPI
Authorized Capital. The total number of shares of capital stock of SPI is
9,262,000, consisting of 6,000,000 shares of SPI Common Stock, 1,100,000 shares
of Series A-1 Preferred Stock, 1,000,000 shares of Series A-2 Preferred Stock,
400,000 shares of Series A-3 Preferred Stock, 155,000 shares of Series A-4
Preferred Stock, 540,000 shares of Series A-5 Preferred Stock and 67,000 shares
of Series A-6 Preferred Stock.
Standard of Conduct for Directors. Under Colorado law, the standards of
conduct for directors have developed through written opinions of the Colorado
courts. Generally, directors of Colorado corporations are subject to a duty of
loyalty, a duty of care and a duty of full disclosure. The duty of loyalty has
been said to require directors to refrain from self-dealing. According to the
Colorado Supreme Court, the duty of care requires "directors . . . in managing
the corporate affairs . . . to use that amount of care which ordinarily careful
and prudent men would use in similar circumstances." Later case law has
established "gross negligence" as the standard for the duty of care or liability
in the process of decision-making by directors of Colorado corporations. In
addition, the duty of full disclosure requires the full disclosure of all
material facts when seeking stockholder action.
Number of Directors. Under the SPI Bylaws, the SPI Board is comprised of
no less than one or more than nine directors, the exact number as fixed by
resolution of the SPI Board. The SPI Board now consists of six directors. The
Holdings Bylaws provide that the Holdings Board will consist of nine directors.
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Removal of Directors. Under the SPI Bylaws and Colorado law, since the SPI
Articles of Incorporation are silent, the SPI stockholders may remove one or
more directors with or without cause at any meeting of the SPI stockholders
called for that purpose. Under Holdings' charter documents, the Holdings
stockholders may remove any director from office at any time, but only for
cause.
Vacancies on the Board of Directors. The SPI Bylaws provide that any
vacancy on the Board of Directors may be filled by the affirmative vote of a
majority of the stockholders or by the affirmative vote of a majority of the
directors remaining in office. The Holdings Bylaws provide that vacancies and
any newly created directorships resulting from any increase in the number of
directors may be filled by vote of the holders of the particular class or series
of stock entitled to elect such director at a meeting called for the purpose, or
by a majority of the directors then in office, although less than a quorum, or
by a sole remaining director, in each case elected by the particular class or
series of stock entitled to elect such directors.
Annual Stockholder Meetings. The SPI Bylaws provide that the annual
meeting of the stockholders shall be held at a date and time fixed by resolution
of the Board of Directors or by the president in the absence of action by the
Board of Directors. The Holdings Bylaws provide that the annual meeting of
stockholders shall be held at such place, on such date, and at such time as the
Board of Directors shall each year fix, which date shall be within 13 months
subsequent to the later of the organization of the corporation or the last
annual meeting of stockholders.
Special Stockholder Meetings. The SPI Bylaws provide that a special
meeting of the stockholders may be called at any time by the chairman of the
Board of Directors, by the president, or by resolution of the Board of
Directors. A special meeting may also be called by the holders of at least 10%
of all votes entitled to be cast on any issue proposed to be considered at the
meeting. The Holdings Bylaws provide that a special meeting of the stockholders
may be called at any time by the chairman of the Board, if any, or a majority of
the Board of Directors. The Holdings Bylaws do not permit the stockholders to
call a special meeting.
Action by Written Consent. Under the SPI Bylaws and Colorado law, since
the SPI Articles of Incorporation are silent, any action required or permitted
to be taken at a stockholders' meeting may be taken without a meeting if all of
the stockholders entitled to vote on the action consent to such action in
writing. Pursuant to Holdings' Certificate of Incorporation, any action required
or permitted to be taken by the stockholders must be effected at a duly called
annual or special meeting of stockholders and may not be effected by any consent
in writing in lieu of a meeting of such stockholders.
Dividends and Other Distributions. The Colorado Business Corporation Act
allows the payment of dividends and other distributions (including redemptions)
only if, after giving it effect: (i) the corporation will be able to pay its
debts as they become due in the usual course of business; or (ii) the
corporation's total assets will be equal to or more than the sum of its total
liabilities, plus the amount that would be needed, if the corporation were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of stockholders whose preferential rights are superior to those
receiving the distribution.
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EXPERTS
The consolidated financial statements of Modtech as of December 31, 1997
and 1996, and for each of the years in the three-year period ended December 31,
1997, included in this Joint Proxy Statement/Prospectus, have been audited by
KPMG Peat Marwick LLP, independent certified public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving such reports.
The consolidated balance sheets of SPI as of March 31, 1998, March 27,
1997 and January 31, 1997; the consolidated statements of operations,
consolidated statements of cash flows and consolidated statements of
stockholders' equity of SPI for the fiscal year ended March 31, 1998 and the
fiscal years ended January 31, 1997, January 31, 1996 and for the two months
ended March 27, 1997; the financial statements of Office Master of Texas, Inc.
as of and for the year ended December 31, 1997; and the financial statements of
Rosewood Enterprises, Inc., as of December 31, 1997 and 1996 and for each of the
three years in the period ended December 31, 1997, included in this Joint Proxy
Statement/Prospectus, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
such reports.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Holdings Common
Stock and Series A Preferred Stock to be issued pursuant to the Mergers will be
passed upon by Haddan & Zepfel LLP, and certain federal income tax consequences
of the Mergers will be passed upon by Gibson, Dunn & Crutcher LLP for Modtech.
Certain legal matters with respect to the Mergers and certain federal income tax
consequences of the Mergers will be passed upon by Dorsey & Whitney LLP for SPI.
Certain members of Dorsey & Whitney LLP, as of the date of this Joint Proxy
Statement/Prospectus, own in the aggregate 10,399 shares of SPI Capital Stock.
OTHER MATTERS
As of the date of this Joint Proxy Statement/ Prospectus, the Modtech
Board and the SPI Board know of no matters that will be presented for
consideration at the Modtech Special Meeting or the SPI Special Meeting other
than as described in this Joint Proxy Statement/Prospectus. If any other matters
shall properly come before the Modtech Special Meeting or the SPI Special
Meeting or any adjournments or postponements thereof and be voted upon, the
enclosed proxies will be deemed to confer discretionary authority on the
individuals named as proxies therein to vote the shares represented by such
proxies as to any such matters. The persons named as proxies intend to vote or
not to vote in accordance with the recommendation of the respective managements
of Modtech and SPI.
WHERE YOU CAN FIND MORE INFORMATION
Modtech files annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements or
other information that Modtech files at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Modtech
public filings are also available to the public from commercial document
retrieval services and at the Internet World Wide Web site maintained by the SEC
at "http://www.sec.gov."
Holdings has filed a Registration Statement to register with the SEC the
shares of Holdings Common Stock and Holdings Series A Preferred Stock to be
issued in the Mergers. This Joint Proxy Statement/Prospectus is
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a part of the Registration Statement and constitutes a prospectus of Holdings, a
proxy statement of Modtech for the Modtech Special Meeting and a proxy statement
of SPI for the SPI Special Meeting. As allowed by SEC rules, this Joint Proxy
Statement/ Prospectus does not contain all the information that stockholders can
find in the Registration Statement or the exhibits to the Registration
Statement.
The SEC allows us to "incorporate by reference" information into this
Joint Proxy Statement/Prospectus, which means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
Joint Proxy Statement/Prospectus, except for any information superseded by
information contained directly in the Joint Proxy Statement/Prospectus. This
Joint Proxy Statement/Prospectus incorporates by reference the documents set
forth below that Modtech has previously filed with the SEC. These documents
contain important information about Modtech and its financial condition. Because
SPI is a private company, it has not previously filed any documents with the
SEC.
<TABLE>
<CAPTION>
MODTECH SEC FILINGS PERIOD
- ------------------- ------
<S> <C>
Annual Report on Form 10-K....... Year ended December 31, 1997
Quarterly Reports on Form 10-Q... Quarters ended March 31, 1998 and June 30, 1998
</TABLE>
We are also incorporating by reference additional documents that we may
file with the SEC between the date of this Joint Proxy Statement/Prospectus and
the date of the Special Meetings.
Modtech has supplied all information contained or incorporated by
reference in this Joint Proxy Statement/Prospectus relating to Modtech and
Holdings, and SPI has supplied all such information relating to SPI.
If you are a stockholder of either company, we may have sent you some of
the documents incorporated by reference, but you can obtain any of them through
us or the SEC. Documents incorporated by reference are available from us without
charge, excluding all exhibits unless specifically incorporated by reference as
an exhibit to this Joint Proxy Statement/Prospectus. Stockholders may obtain
documents incorporated by reference in this Joint Proxy Statement/Prospectus by
requesting them in writing or by telephone from the appropriate company at the
following addresses and phone numbers:
Modtech, Inc.
2830 Barrett Avenue
Perris, CA 92571
Attention: Evan M. Gruber
(909) 943-4014
SPI Holdings, Inc.
9550 Hermosa Avenue
Rancho Cucamonga, CA 91730
Attn: Patrick Van Den Bossche
(909) 484-4280
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If you would like to request documents from either company, please do so
by ___________, 1998 to receive them before the Modtech Special Meeting and by
__________________, 1998 to receive them before the SPI Special Meeting. If you
request any incorporated documents from us we will mail them to you by
first-class mail, or other equally prompt means, within one business day of our
receipt of your request.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS JOINT PROXY STATEMENT/ PROSPECTUS TO VOTE YOUR SHARES AT THE
MODTECH SPECIAL MEETING OR SPI SPECIAL MEETING. MODTECH AND SPI HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS
CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS JOINT PROXY
STATEMENT/PROSPECTUS IS DATED ______________, 1998. YOU SHOULD NOT ASSUME THAT
THE INFORMATION CONTAINED IN THE JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE AS
OF ANY DATE OTHER THAN THAT DATE, AND NEITHER THE MAILING OF THIS JOINT PROXY
STATEMENT/PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF HOLDINGS' SECURITIES IN
THE MERGERS WILL CREATE ANY IMPLICATION TO THE CONTRARY.
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INDEX TO FINANCIAL STATEMENTS
MODTECH, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report ................................................................. F-2
Balance Sheets as of December 31, 1996 and 1997 .............................................. F-3
Statements of Income for the Years ended December 31, 1995, 1996 and 1997 .................... F-5
Statements of Shareholders' Equity for the Years ended December 31, 1995, 1996
and 1997 ............................................................................ F-6
Statements of Cash Flows for the Years ended December 31, 1995,
1996 and 1997 ....................................................................... F-7
Notes to Financial Statements ................................................................ F-9
Schedule II -- Valuation and Qualifying Accounts ............................................. F-23
Condensed Consolidated Balance Sheets as of December 31, 1997 (audited)
and June 30, 1998 (unaudited) ....................................................... F-24
Condensed Consolidated Statements of Income for the three months ended and six
months ended June 30, 1997 and 1998 (unaudited) ..................................... F-25
Condensed Consolidated Statements of Cash Flows for the three months ended and
six months ended June 30, 1997 and 1998 (unaudited) ................................. F-26
Notes to Condensed Financial Statements ...................................................... F-27
SPI HOLDINGS, INC.
Report of Independent Public Accountants ..................................................... F-31
Consolidated Balance Sheets as of January 31, 1997, March 27, 1997 and March 31,1998 ......... F-32
Consolidated Statements of Income for the years ended January 31, 1996
and 1997, the two-month period ended March 31, 1997
and the year ended March 31, 1998 ................................................... F-34
Consolidated Statements of Stockholders' Equity for the years ended January 31,
1996 and 1997, the two-month period ended March 31, 1997 and the year
ended March 31, 1998 ................................................................ F-35
Consolidated Statements of Cash Flows for the years ended January 31, 1996 and
1997, the two-month period ended March 31, 1997 and the year ended
March 31, 1998 ...................................................................... F-36
Notes to Consolidated Financial Statements ................................................... F-38
Condensed Consolidated Balance Sheet as of September 30, 1998 (unaudited) .................... F-51
Condensed Consolidated Statements of Income for six months ended June 30, 1997
and 1998 (unaudited) ................................................................ F-53
Condensed Consolidated Cash Flows for the three months ended June 30, 1997 and
1998 (unaudited) .................................................................... F-54
Notes to Condensed Consolidated Financial Statements ......................................... F-55
OFFICE MASTER OF TEXAS, INC.
Report of Independent Public Accountants ..................................................... F-58
Balance Sheet as of December 31, 1997 ........................................................ F-59
Statement of Income and Retained Earnings for the year ended December 31, 1997 ............... F-60
Statement of Cash Flows for the year ended December 31, 1997 ................................. F-61
Notes to Financial Statements ................................................................ F-62
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
Report of Independent Public Accountants ..................................................... F-65
Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 (unaudited) ............... F-66
Statements of Operations for the years ended December 31, 1995, 1996, 1997
and for the quarters ended March 31, 1997 and 1998 (unaudited) ...................... F-67
Statements of Stockholders' Equity for the years ended December 31, 1995, 1996,
1997 and for the quarters ended March 31, 1997 and 1998 (unaudited) ................. F-68
Statements of Cash Flows for the years ended December 31, 1995, 1996, 1997 and
for the quarters ended March 31, 1997 and 1998 (unaudited) .......................... F-69
Notes to Financial Statements ................................................................ F-71
</TABLE>
F-1
<PAGE> 116
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Modtech, Inc.:
We have audited the accompanying balance sheets of Modtech, Inc. as of December
31, 1996 and 1997 and the related statements of income, shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1997. In connection with our audits of the financial statements, we have also
audited the financial statement schedule as listed in the accompanying index.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Modtech, Inc. as of December
31, 1996 and 1997 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1997, in conformity
with generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG PEAT MARWICK LLP
Orange County, California
March 18, 1998
F-2
<PAGE> 117
MODTECH, INC.
Balance Sheets
December 31, 1996 and 1997
<TABLE>
<CAPTION>
ASSETS (NOTE 5) 1996 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 404,981 $11,628,851
Contracts receivable, less allowance for contract
adjustments of $413,373 in 1996 and $410,119 in 1997 10,309,861 21,510,146
(note 2)
Costs and estimated earnings in excess of billings on
contracts (notes 3 and 8) 9,102,733 16,020,986
Inventories 4,166,700 3,931,505
Due from affiliates (note 8) 754,067 1,052,634
Note receivable from affiliates (note 8) 45,212 45,212
Prepaid assets 136,960 268,295
Deferred tax asset (note 7) -- 2,094,059
Other current assets 20,305 42,274
----------- -----------
Total current assets 24,940,819 56,593,962
----------- -----------
Property and equipment, net (notes 4 and 6) 8,552,720 11,229,163
Other assets 535,235 298,258
Deferred tax asset (note 7) -- 98,874
----------- -----------
$34,028,774 $68,220,257
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 118
MODTECH, INC.
Balance Sheets
December 31, 1996 and 1997
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1997
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 6,409,422 $ 2,421,346
Accrued compensation 1,369,441 3,616,498
Accrued insurance expense 551,580 1,470,725
Other accrued liabilities 1,089,439 3,237,255
Income tax payable 204,017 1,017,027
Billings in excess of costs and estimated earnings on
contracts (notes 3 and 8) 1,148,050 6,997,350
Current note payable (note 5) -- 42,185
Current maturities of long-term debt (notes 6 and 8) 100,000 1,374,952
------------ ------------
Total current liabilities 10,871,949 20,177,338
Note payable (note 5) 5,943,853 --
Long-term debt, less current maturities (notes 6 and 8) 1,899,952 --
------------ ------------
Total liabilities 18,715,754 20,177,338
------------ ------------
Shareholders' equity:
Common stock, $.01 par. Authorized 20,000,000 shares;
issued and outstanding 8,649,436 and 9,819,959 in
1996 and 1997 (notes 10 and 11) 86,494 98,200
Additional paid-in capital 19,620,994 39,330,902
(Accumulated deficit) retained earnings (4,394,468) 8,613,817
------------ ------------
Total shareholders' equity 15,313,020 48,042,919
------------ ------------
Commitments and contingencies (notes 3, 5, 8, and 14)
------------ ------------
$ 34,028,774 $ 68,220,257
============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 119
MODTECH, INC.
Statements of Income
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales (notes 8 and 12) $ 19,386,027 $ 49,885,858 $ 134,050,485
Cost of goods sold (note 8) 16,400,588 42,628,970 107,367,035
------------- ------------- -------------
Gross profit 2,985,439 7,256,888 26,683,450
Selling, general, and administrative
expenses 1,612,792 2,345,182 5,155,987
------------- ------------- -------------
Income from operations 1,372,647 4,911,706 21,527,463
------------- ------------- -------------
Other income (expense):
Interest expense (486,323) (445,631) (1,004,198)
Interest income (note 8) 98,510 23,704 95,551
Other - net (937) (13,116) 92,103
------------- ------------- -------------
(388,750) (435,043) (816,544)
------------- ------------- -------------
Income before income taxes 983,897 4,476,663 20,710,919
Income taxes (note 7) (19,098) (207,631) (7,702,634)
------------- ------------- -------------
Net income $ 964,799 $ 4,269,032 $ 13,008,285
------------- ------------- -------------
5% Convertible preferred stock dividend
(note 11) (166,320) (47,500) --
Net income available for common
stock $ 798,479 $ 4,221,532 $ 13,008,285
============= ============= =============
Basic earnings per share $ 0.25 $ 0.77 $ 1.47
============= ============= =============
Weighted-average shares outstanding 3,169,593 5,461,007 8,853,786
============= ============= =============
Diluted earnings per share $ 0.14 $ 0.47 $ 1.31
============= ============= =============
Weighted-average shares outstanding 6,712,155 9,041,084 9,897,935
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 120
MODTECH, INC.
Statements of Shareholders' Equity
Years ended December 31, 1995, 1996 And 1997
<TABLE>
<CAPTION>
5% CONVERTIBLE STOCK (ACCUMULATED
PREFERRED STOCK COMMON STOCK PURCHASE ADDITIONAL DEFICIT)
---------------------- ------------------------- NOTES PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL EARNINGS
---------- ----------- ------------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 2,850,000 2,685,000 3,209,338 $ 32,094 $ (273,594) $ 14,989,919 $ (9,414,479)
Adjustment of stock purchase notes -- -- (155,988) (1,560) 273,594 (346,292) --
receivable
Dividend (note 11) -- -- -- -- -- -- (166,320)
Net income -- -- -- -- -- --
964,799
---------- ----------- ------------ ----------- ------------ ------------ ------------
Balance, December 31, 1995 2,850,000 2,685,000 3,053,350 30,534 -- 14,643,627 (8,616,000)
Conversion of preferred stock (2,850,000) (2,685,000) 2,850,000 28,500 -- 2,656,500 --
(note 11)
Exercise of options and warrants -- -- 2,746,086 27,460 -- 2,320,867 --
Dividend (note 11) -- -- -- -- -- -- (47,500)
Net income -- -- -- -- -- -- 4,269,032
---------- ----------- ------------ ----------- ------------ ------------ ------------
Balance, December 31, 1996 -- -- 8,649,436 86,494 -- 19,620,994 (4,394,468)
Exercise of options, including
tax benefit of -- -- 170,523 1,706 -- 1,119,890 --
$753,874 (notes 7, 10 and 11)
Secondary offering - Net (note 15) -- -- 1,000,000 10,000 -- 18,590,018
Net income -- -- -- -- -- -- 13,008,285
---------- ----------- ------------ ----------- ------------ ------------ ------------
Balance, December 31, 1997 -- -- 9,819,959 $ 98,200 $ -- $ 39,330,902 $ 8,613,817
========== =========== ============ ========== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 121
MODTECH, INC.
Statements of Cash Flows
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 964,799 $ 4,269,032 $ 13,008,285
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 563,104 540,421 1,344,098
Decrease in allowance for
contract adjustments (17,300) (5,283) 0
Loss (gain) on sale of equipment (20,084) 17,265 (9,177)
(Increase) decrease in assets:
Contracts receivable (65,105) (7,135,702) (11,200,285)
Costs and estimated earnings in
excess of billings 329,641 (7,648,812) (6,918,253)
Inventories 337,697 (3,520,404) 235,195
Amounts due from affiliates (255,607) 686,774 (298,567)
Prepaids and other assets 54,088 (12,947) 83,673
Deferred tax asset -- -- (2,192,933)
Increase (decrease) in
liabilities:
Accounts payable (436,234) 5,304,183 (3,988,076)
Accrued compensation 64,255 1,081,171 2,247,057
Accrued insurance expense (214,004) 526,813 919,145
Other accrued liabilities 166,102 465,766 2,147,816
Income tax payable 19,098 184,919 813,010
Billings in excess of costs and
estimated earnings (276,306) 388,448 5,849,300
------------ ------------ ------------
Net cash provided by
(used in) operating
activities 1,214,144 (4,858,356) 2,040,288
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of equipment 46,416 5,550 60,604
Purchase of property and
equipment (481,533) (1,958,303) (4,071,968)
------------ ------------ ------------
Net cash used in
investing activities (435,117) (1,952,753) (4,011,364)
------------ ------------ ------------
</TABLE>
(Continued)
F-7
<PAGE> 122
MODTECH, INC.
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net principal borrowings (payments)
under revolving credit lines $ (309,990) $ 4,353,843 $ (5,901,668)
Principal payments on long-term debt (502,735) -- (625,000)
(Adjustment of) stock purchase note
receivable by exchange of common (74,258) -- --
stock
Net proceeds from issuance of common -- 2,348,327 19,721,614
stock
Declared dividends (note 11) (166,320) (47,500) --
------------ ------------ ------------
Net cash provided by
(used in) financing
activities (1,053,303) 6,654,670 13,194,946
------------ ------------ ------------
Net increase (decrease)
in cash (274,276) (156,439) 11,223,870
Cash at beginning of year 835,696 561,420 404,981
------------ ------------ ------------
Cash at end of year $ 561,420 $ 404,981 $ 11,628,851
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE> 123
MODTECH, INC.
Notes to Financial Statements
December 31, 1995, 1996 and 1997
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Modtech, Inc. (the Company) designs, manufactures, markets and installs
modular relocatable classrooms.
The Company's classrooms are sold primarily to California school
districts. The Company also sells classrooms to the State of California
and to leasing companies, who lease the classrooms principally to
California school districts.
Effective October 1, 1996, the Company acquired substantially all of the
operating assets and assumed certain liabilities of Miller Structure, Inc.
- California. The Company leased the manufacturing facility from
Miller Structure (note 18).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, contracts receivable and notes receivable,
costs and estimated earnings in excess of billings on contracts, prepaid
and other assets, accounts payable, accrued liabilities, billings in
excess of estimated earnings on contracts and notes payable are measured
at cost which approximates their fair value.
CONSTRUCTION CONTRACTS
The accompanying financial statements have been prepared using the
percentage-of-completion method of accounting and, therefore, take into
account the costs, estimated earnings and revenue to date on contracts not
yet completed. Revenue recognized is that percentage of the total contract
price that cost expended to date bears to anticipated final total cost,
based on current estimates of costs to complete. Most contracts are
completed within one year.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general, and
administrative costs are charged to expense as incurred. At the time a
loss on a contract becomes known, the entire amount of the estimated
ultimate loss is recognized in the financial statements.
F-9
<PAGE> 124
MODTECH, INC.
Notes to Financial Statements, Continued
The current asset, "Costs and Estimated Earnings in Excess of Billings on
Contracts," represents revenues recognized in excess of amounts billed.
The current liability, "Billings in Excess of Costs and Estimated Earnings
on Contracts," represents billings in excess of revenues recognized.
The current contra asset, "Allowance for Contract Adjustments," is
management's estimated adjustments to contract amounts due to disputes and
or litigation.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method. Inventories, generally include
only raw materials, as any work-in-process or finished goods are accounted
for in percentage of completion allocations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
is provided using the straight-line and accelerated methods over the
following estimated useful lives:
<TABLE>
<CAPTION>
<S> <C>
Leasehold improvements 15 to 31 years
Machinery and equipment 5 to 7 years
Trucks and automobiles 3 to 5 years
Office equipment 5 to 7 years
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standard No. 121 (SFAS No. 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on January
1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair
value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount of fair value less costs to sell. Adoption of this
Statement did not have a material impact on the Company's financial
position, results of operations, or liquidity.
STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standard No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation," which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years
as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company
F-10
<PAGE> 125
MODTECH, INC.
Notes to Financial Statements, Continued
has elected to continue to apply the provision of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). This
statement replaces the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per
share amounts have been restated to conform to the SFAS No. 128
requirements.
TAXES ON INCOME
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
RECLASSIFICATION
Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.
(2) CONTRACTS RECEIVABLE
Contracts receivable consisted of customer billings for:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Completed contracts $ 7,722,927 $ 9,226,114
Contracts in progress 2,102,766 9,444,794
Retentions 897,541 3,249,357
------------ ------------
10,723,234 21,920,265
Less allowance for contract
adjustments (413,373) (410,119)
------------ ------------
$ 10,309,861 $ 21,510,146
============ ============
</TABLE>
F-11
<PAGE> 126
MODTECH, INC.
Notes to Financial Statements, Continued
(3) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON CONTRACTS
Net costs and estimated earnings in excess of billings on contracts
consisted of:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Net costs and estimated earnings on
uncompleted contracts $ 39,093,050 $ 105,465,154
Billings to date (31,173,406) (96,144,454)
------------- -------------
7,919,644 9,320,700
Net under (over) billed receivables
from completed contracts 35,039 (297,064)
------------- -------------
$ 7,954,683 $ 9,023,636
============= =============
</TABLE>
These amounts are shown in the accompanying balance sheets under the
following captions:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 8,971,196 $ 15,832,818
Costs and estimated earnings in excess of
billings on completed contracts 131,537 188,168
------------ ------------
Costs and estimated earnings in excess of
billings 9,102,733 16,020,986
------------ ------------
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,051,552) (6,512,121)
Billings in excess of costs and estimated
earnings on completed contracts (96,498) (485,229)
------------ ------------
Billings in excess of costs and estimated
earnings (1,148,050) (6,997,350)
------------ ------------
$ 7,954,683 $ 9,023,636
============ ============
</TABLE>
F-12
<PAGE> 127
MODTECH, INC.
Notes to Financial Statements, Continued
(4) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Leasehold improvements $ 7,580,830 $ 10,764,783
Machinery and equipment 3,535,623 4,347,692
Trucks and automobiles 107,024 181,001
Office equipment 222,123 364,510
Construction in progress 567,137 354,826
------------ ------------
12,012,737 16,012,812
Less accumulated depreciation
and amortization (3,460,017) (4,783,649)
------------ ------------
$ 8,552,720 $ 11,229,163
============ ============
</TABLE>
(5) NOTE PAYABLE - REVOLVING CREDIT AGREEMENT
In 1995 the Company entered into a revolving loan commitment that expires
in September 1998. The Company is entitled to borrow, from time to time,
up to $20,000,000 with actual borrowings limited to specific percentages
of eligible contracts receivable, equipment and inventories. Actual
outstanding borrowings were $5,943,853 and $42,185 at December 31, 1996
and 1997, respectively. The interest rate is calculated at the prime
lending rate (8.5% at December 31, 1997) plus three quarters of a percent
(.75%) per annum. The loan is secured by substantially all of the
Company's assets.
(6) LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Industrial development bonds $ 1,999,952 $ 1,374,952
Less current portion of long-term debt (100,000) (1,374,952)
----------- -----------
$ 1,899,952 $ --
=========== ===========
</TABLE>
In June 1990, the Industrial Development Authority of the County of San
Joaquin, California issued $4,200,000 of Industrial Development Bonds. The
net proceeds of approximately $4,000,000 were used to fund the
construction of a manufacturing facility on leased property located in
Lathrop, California. The Company fully utilized the bonds at December 31,
1991. The Company has executed financing statements covering the plant and
equipment financed, as security for repayment of the bonds. The bonds are
secured by a $1,299,275 letter of credit, and bear interest at an initial
rate of 6.75% and fluctuate weekly. The interest rate was 3.65% at
December 31, 1997. The bond agreement was amended in 1997 requiring
repayment of the balance by December 31, 1998.
F-13
<PAGE> 128
MODTECH, INC.
Notes to Financial Statements, Continued
(7) INCOME TAXES
The components of the 1995, 1996 and 1997 provision for Federal and state
income tax (expense) benefit computed in accordance with Financial
Accounting Standard No. 109 are summarized below:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ (14,210) $ (90,483) $(7,874,257)
State (4,888) (117,148) (2,021,309)
----------- ----------- -----------
(19,098) (207,631) (9,895,566)
Deferred:
Federal -- -- 1,634,085
State -- -- 558,847
----------- ----------- -----------
$ (19,098) $ (207,631) $(7,702,634)
=========== =========== ===========
</TABLE>
Income tax (expense) benefit attributable to income from operations
differed from the amounts computed by applying the U.S. Federal income tax
rate to pretax income from operations as a result of the following:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Taxes, U.S. statutory rates (34.0%) (34.0%) (35.0%)
State taxes, less Federal
benefit -- -- (4.5)
Utilization of income tax
benefit relating to
loss carryover 34.0 34.0 3.8
Other (1.9) (4.6) (1.5)
----- ----- -----
Total taxes on income (1.9%) (4.6%) (37.2%)
===== ===== =====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1996 and 1997 are as follows:
F-14
<PAGE> 129
MODTECH, INC.
Notes to Financial Statements, Continued
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals not
recognized for income tax
purposes $ 1,114,987 $ 2,490,821
Net operating loss carryforwards 209,100 --
State taxes 75,065 474,653
Other 29,117 368,579
----------- -----------
Total gross deferred tax assets 1,428,269 3,334,053
Less valuation allowance (1,158,714) (1,059,576)
----------- -----------
Net deferred tax assets $ 269,555 $ 2,274,477
=========== ===========
Deferred tax liabilities:
Revenue recognition $ (171,360) $ (73,589)
Prepaids (98,195) (7,955)
----------- -----------
Totals gross deferred tax
liabilities (269,555) (81,544)
----------- -----------
Net deferred tax assets $ -- $ 2,192,933
=========== ===========
</TABLE>
These amounts have been presented in the balance sheet as follows:
<TABLE>
<CAPTION>
1996 1997
--------------- ----------
<S> <C> <C>
Current deferred tax asset $ -- $2,094,059
Noncurrent deferred tax asset -- 98,874
--------------- ----------
Total deferred tax assets $ -- $2,192,933
=============== ==========
</TABLE>
The net change in the total valuation allowance for the year ended
December 31, 1997 was a decrease of $99,138.
The Company's net operating loss carryforward amounted to $615,000 and $0
for the years ended December 31, 1996 and 1997, respectively.
F-15
<PAGE> 130
MODTECH, INC.
Notes to Financial Statements, Continued
(8) TRANSACTIONS WITH RELATED PARTIES
SALES
The Company sells modular classrooms to certain companies and
partnerships, where shareholders and partners are either shareholders or
an officer of the Company. The buildings are then leased to various school
districts by the related companies and partnerships.
The table below summarizes the classroom sales to related parties:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Sales $ 600,228 $1,452,868 $2,942,313
Cost of goods sold 531,152 1,239,425 2,530,803
Gross profit percentage 11.51% 14.69% 13.99%
========== ========== ==========
</TABLE>
The related party purchases modular relocatable classrooms from the
Company, upon standard terms and at standard wholesale prices.
Due from affiliates includes a portion of unpaid invoices as a result of
the above transactions. As of December 31, 1996 and 1997 these amounts
totaled $431,755 and $825,963, respectively. Additional amounts arising
from these transactions are included in the following captions:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 417,780 $ 1,406,897
Billings in excess of costs and
estimated earnings on uncompleted
contracts (12,572) (65,405)
=========== ===========
</TABLE>
NOTE RECEIVABLE
At December 31, 1996 and 1997, the Company had one note receivable from a
related party partnership in the amount of $45,212. The partnership is
composed of an officer and shareholders of the Company. The note bears
interest at 10% and is payable upon demand. Unpaid interest related to
this note, and two other related party notes with principal repayment in
1996, totaled $322,312 at December 31, 1996 and $226,671 at December 31,
1997 and is included in due from affiliates. The Company has negotiated
payment terms on the accrued interest and is receiving regular interest
payments.
OPERATING LEASES
The Company leases various land at its manufacturing facilities. The
present manufacturing facility leases are with the Company's Chairman and
partnerships composed of an officer and shareholders. All related party
leases require monthly payments which aggregate $37,000. In connection
with the lease at the Lathrop facility, the Company made an $83,000
security deposit during 1990.
In 1994, due to declines in real estate values, the Company's Chairman and
partnerships reduced the monthly lease rates for the manufacturing
facilities to an aggregate of $37,000. The reduced rents will continue for
as long as real estate values remain depressed.
F-16
<PAGE> 131
MODTECH, INC.
Notes to Financial Statements, Continued
Future minimum lease payments under these leases are discussed in note 14.
Included in cost of sales is $435,000, $447,000 and $444,000 in rent
expense paid to related parties for the years ended December 31, 1995,
1996, and 1997, respectively.
(9) 401(k) PLAN
The Company has a tax deferred savings plan under Section 401(k) of the
Internal Revenue Code. Eligible employees can contribute up to 12% of
gross annual earnings. Company contributions, made on a 50% matching
basis, are determined annually. The Company's contributions were $36,937,
$53,031 and $77,016 in 1995, 1996, and 1997, respectively.
(10) STOCK OPTIONS
In 1989, the Company's shareholders approved a stock option plan (the 1989
Plan). The 1989 Plan provides for the grant of both incentive and
non-qualified options to purchase up to 400,000 shares of the Company's
common stock. The incentive stock options can be granted only to
employees, including officers of the Company, while non-qualified stock
options can be granted to employees, non-employee officers and directors,
consultants, vendors, customers and others expected to provide significant
services to the Company.
The exercise price of the stock options cannot be less than the fair
market at the date of the grant (110% if granted to an employee who owns
10% or more of the common stock).
Stock options outstanding under the 1989 Plan are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
-------- ---------
<S> <C> <C>
December 31, 1994 400,000 $ 1.92
Granted 45,000 2.125
Terminated (45,000) 3.00
-------- ---------
December 31, 1995 400,000 1.82
Exercised (114,500) 1.87
-------- ---------
December 31, 1996 285,500 1.82
Terminated (1,000) 1.50
Exercised (78,450) 2.12
-------- ---------
December 31, 1997 206,050 $ 1.70
======== =========
</TABLE>
As of December 31, 1997, 142,450 options are vested and exercisable at
prices ranging from $.625 to $10.00 per share under the 1989 Plan. With
respect to options issued pursuant to the Del-Tec acquisition, 50,000
options were exercised during 1997 and 75,000 options remained outstanding
as of December 31, 1997.
F-17
<PAGE> 132
MODTECH, INC.
Notes to Financial Statements, Continued
In March of 1994, pursuant to a vote of the Board of Directors, a
nonqualified option plan was approved (the March 1994 Plan). The March
1994 Plan provides for the grant of 200,000 options to purchase shares of
the Company's common stock. The exercise price of the stock options cannot
be less than the fair market at the date of the grant. All of these
options were granted during 1994.
Stock options outstanding at December 31, 1996, under the March 1994 Plan
are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
-------- --------------
<S> <C> <C>
December 31, 1994 200,000 $ 1.22
Exercised -- --
-------- --------
December 31, 1995 200,000 1.22
Exercised (15,000) 1.19
-------- --------
December 31, 1996 185,000 1.22
Exercised (15,900) 1.40
-------- --------
December 31, 1997 169,100 $ 1.21
======== ========
</TABLE>
As of December 31, 1997, 126,600 options are vested and exercisable at
prices ranging from $1.19 to $1.50 per share under the March 1994 Plan.
In May of 1994, in conjunction with the offering of preferred stock (note
11) the Board of Directors voted and approved an additional stock option
plan (the May 1994 Plan). The May 1994 Plan provides for the grant of both
incentive and non-qualified options to purchase up to 500,000 shares of
the Company's common stock. The incentive stock options can be granted
only to employees, including officers of the Company, while non-qualified
stock options can be granted to employees, non-employee officers and
directors, consultants, vendors, customers and others expected to provide
significant services to the Company. The exercise price of the stock
options cannot be less than the fair market at the date of the grant (110%
if granted to an employee who owns 10% or more of the common stock).
Stock options outstanding under the May 1994 Plan, are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------- ------------
<S> <C> <C>
December 31, 1994 285,000 $ 1.50
Granted 35,000 2.125
Terminated (35,000) 1.50
-------- ------------
December 31, 1995 285,000 1.60
Granted 205,000 2.59
Terminated (37,500) 1.50
Exercised (12,500) 1.50
======== ============
</TABLE>
F-18
<PAGE> 133
MODTECH, INC.
Notes to Financial Statements, Continued
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, 1996 440,000 2.06
Granted 7,500 19.50
Exercised (9,375) 3.86
-------- ------------
December 31, 1997 438,125 $ 2.32
======== ============
</TABLE>
As of December 31, 1997, 216,675 options are vested and exercisable at
prices ranging from $1.50 to $4.50 per share under the May 1994 Plan.
In July 1996, the Company's Board of Directors authorized the grant of
options to purchase up to 500,000 shares of the Company's common stock.
The non-statutory options may be granted to employees, non-employee
officers and directors, consultants, vendors, customers and others
expected to provide significant service to the Company. The exercise price
of the stock options cannot be less than the fair market value at the date
of the grant (110% if granted to an employee who owns 10% or more of the
common stock).
Stock options outstanding under the July 1996 Plan, are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
-------- --------------
<S> <C> <C>
December 31, 1995 -- $ --
Granted 110,000 4.50
-------- --------------
December 31, 1996 110,000 4.50
Granted 263,333 8.75
Terminated (4,202) 12.62
Exercised (16,798) 4.89
-------- --------------
December 31, 1997 352,333 $ 7.56
======== ==============
</TABLE>
As of December 31, 1997, 81,500 options are vested and exercisable at
prices ranging from $4.50 to $12.62 per share under the July 1996 Plan.
All stock options have a maximum term of ten years and become fully
exercisable in accordance with a predetermined vesting schedule which
varies.
The per share weighted-average fair value of stock options granted during
1996 and 1997 was $1.94 and $9.05, respectively, on the date of grant
using the Black Scholes option-pricing model with the following
weighted-average assumptions; 1995 - expected dividend yield 0%, risk-free
interest rate of 7.80%, volatility factor of 72.66%, and expected life of
four years; 1996 - expected dividend yield 0%, risk-free interest rate of
7.80%, volatility factor of 72.66%, and an expected life of four years;
1997 - expected dividend yield 0%, risk-free interest rate of 7.80%,
volatility factor of 73.06%, and an expected life of four years. The
Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the
F-19
<PAGE> 134
MODTECH, INC.
Notes to Financial Statements, Continued
Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net income
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ------------- --------------
<S> <C> <C> <C>
Net Income
As Reported $ 964,799 $ 4,269,032 $ 13,008,285
Pro Forma 862,133 3,657,659 12,044,970
=========== ============= ==============
Basic earnings per
share
As Reported $ 0.25 $ 0.77 $ 1.47
Pro forma 0.27 0.67 1.36
=========== ============= ==============
Fully diluted
earnings per share
As Reported $ 0.14 $ 0.47 $ 1.31
Pro Forma 0.13 0.40 1.22
=========== ============= ==============
</TABLE>
Pro forma net income reflects only options granted since January 1, 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period of four years and compensation cost for options
granted prior to January 1, 1995 is not considered.
(11) 5% CONVERTIBLE PREFERRED STOCK
In May of 1994, in a private transaction without registration under the
Securities Act, the Company sold 2,850,000 shares of Series A 5%
Convertible Preferred Stock. The Preferred Stock was sold at
$1.00 per share resulting in proceeds before costs and expenses of
$2,850,000. All of the Series A 5% Convertible Preferred Stock was
converted into Common Stock during 1996. In connection with this private
placement of the Series A 5% Preferred Stock, the shareholders were
granted warrants to purchase an aggregate of 1,385,000 shares of common
stock at $1.50 (subject to adjustment in certain events), as well as
warrants to purchase an aggregate of 1,375,000 additional shares at $2.00
per share (subject to adjustments in certain events). All warrants were
either exercised or expired during 1996. Dividends in the amount of
$166,320 and $47,500 were declared for the years ended December 31, 1995
and 1996, respectively.
(12) MAJOR CUSTOMER
The Company had sales to two major customers which represented the
following percentage of net sales:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- --------
<S> <C> <C> <C>
Customer A 9% 13% 4%
Customer B 0% 4% 11%
======== ======== ========
</TABLE>
F-20
<PAGE> 135
MODTECH, INC.
Notes to Financial Statements, Continued
(13) SUPPLEMENTAL CASH FLOW DISCLOSURES
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 248,443 $ 470,248 $1,058,256
========== ========== ==========
Income taxes $ -- $ 24,320 $8,400,000
========== ========== ==========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
During 1995, $273,594 of notes receivable from officer shareholders was
repaid by delivery of 155,988 shares of common stock at market value.
During 1996, 2,850,000 shares of Series A 5% convertible Preferred Stock
were converted into 2,850,000 shares of common stock, in accordance with
the private placement (note 11).
(14) COMMITMENTS AND CONTINGENCIES
LAND LEASES
The Company has entered into agreements to lease land at its manufacturing
facilities in Perris and Lathrop, California. Minimum lease payments under
these noncancelable operating leases for the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1998 $ 569,000
1999 515,000
2000 513,000
2001 444,000
2002 444,000
Thereafter 6,002,000
-----------
$ 8,487,000
===========
</TABLE>
Of the $8,487,000 in future rental payments, substantially all is
to related parties (note 8). Rent expense for the years ended December 31,
1995, 1996 and 1997 was $435,000, $447,000 and $522,000, respectively.
The manufacturing facility in Patterson, California was purchased in
January 1998 (note 18), and is not included above.
F-21
<PAGE> 136
MODTECH, INC.
Notes to Financial Statements, Continued
(15) SECONDARY STOCK OFFERING
In November 1997 the Company sold 1,000,000 shares of common stock at $20
per share. The net proceeds to the Company were $18,600,000, after the
deduction of underwriting discounts, commissions and offering expenses
paid by the Company.
The Company used a portion of the proceeds to repay amounts outstanding
under the Company's $20,000,000 revolving loan agreement with a bank (note
5). The remaining net proceeds are expected to be used as additions to
working capital.
(16) WARRANTY
The Company provides a one year warranty relating to the workmanship on
their modular units. To date, warranty costs incurred on completed
contracts have been immaterial.
(17) PENDING CLAIMS AND LITIGATION
In the normal course of business, the Company has been named in several
claims and lawsuits arising out of the failure to pay subcontractors or
for alleged breach of assigned security. In the opinion of management, the
outcome of the claims will not have a material effect on the Company's
financial position or results of operations.
(18) SUBSEQUENT EVENTS
The manufacturing facility in Patterson, California was leased from Miller
Structures, Inc. from October 1996 through December 1997. The lease
payments are included in rent expense. The Company purchased the facility
in January 1998.
On March 2, 1998, the Company announced that it had signed an agreement to
purchase a majority interest in Trac Modular Manufacturing, Inc (Trac).
Trac is based in Glendale, Arizona. Subsequent to the completion of due
diligence, the transaction closed on March 20, 1998.
F-22
<PAGE> 137
Schedule II
MODTECH, INC.
Valuation and Qualifying Accounts
Years ended December 31, 1995, 1996, and 1997
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING CHARGED BALANCE AT
DESCRIPTION OF YEAR TO EXPENSE DEDUCTIONS END OF YEAR
- ------------------------------------ -------------- -------------- ---------- ---------------
Allowance for contract adjustments:
<S> <C> <C> <C> <C>
Year ended December 31, 1995 $425,390 $ -- $(17,300) $408,090
======== =============== ======== ========
Year ended December 31, 1996 $408,090 $ 5,866 $ (583) $413,373
======== =============== ======== ========
Year ended December 31, 1997 $413,373 $ -- $ (3,254) $410,119
======== =============== ======== ========
</TABLE>
F-23
<PAGE> 138
MODTECH, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
- -------------------------------------------------------------------------------------------------
Audited Unaudited
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash $11,629,000 $30,450,000
Contracts receivable, net, including costs in excess of
billings of $16,021,000 and $13,738,000 in 1997 and 37,531,000 33,565,000
1998, respectively
Inventories 3,932,000 2,828,000
Due from affiliates 1,098,000 694,000
Deferred tax asset 2,094,000 2,094,000
Other current assets 310,000 402,000
----------- -----------
Total current assets 56,594,000 70,033,000
----------- -----------
Property and equipment, net 11,229,000 12,221,000
Other Assets
Deferred tax asset 99,000 99,000
Other assets 298,000 134,000
----------- -----------
$68,220,000 $82,487,000
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $11,763,000 $13,834,000
Billings in excess of costs 6,997,000 6,402,000
Current portion of long-term debt 1,417,000 --
----------- -----------
Total current liabilities 20,177,000 20,236,000
Stockholders Equity
Common stock, shares authorized, $.01 par. Authorized
20,000,000 shares; issued and outstanding 9,856,000
and 9,871,000 in 1997 and 1998, respectively 98,000 100,000
Additional paid-in capital 39,331,000 39,573,000
Retained earnings 8,614,000 22,578,000
----------- -----------
Total shareholders' equity 48,043,000 62,251,000
----------- -----------
$68,220,000 $82,487,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 139
MODTECH, INC.
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- --------------------------------------------------------------------------------------------------------------
1997 1998 1997 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 39,805,000 $ 37,243,000 $ 98,711,000 $ 113,119,000
Cost of goods sold 31,235,000 28,408,000 78,923,000 87,083,000
------------- ------------- ------------- -------------
Gross profit 8,570,000 8,835,000 19,788,000 26,036,000
Selling, general, and
administrative expenses 1,362,000 1,102,000 3,544,000 3,843,000
------------- ------------- ------------- -------------
Income from operations 7,208,000 7,733,000 16,244,000 22,193,000
------------- ------------- ------------- -------------
Other income (expense):
Interest income (expense), net (274,000) 305,000 (823,000) 694,000
Other - net 8,000 3,000 72,000 18,000
------------- ------------- ------------- -------------
(266,000) 308,000 (751,000) 712,000
------------- ------------- ------------- -------------
Income before income taxes 6,942,000 8,041,000 15,493,000 22,905,000
Income taxes (2,456,000) (2,862,000) (5,812,000) (8,511,000)
------------- ------------- ------------- -------------
Net income $ 4,486,000 $ 5,179,000 $ 9,681,000 $ 14,394,000
============= ============= ============= =============
Basic earnings per share $ 0.47 $ 0.52 $ 1.01 $ 1.46
============= ============= ============= =============
Weighted-average shares outstanding 9,611,000 9,871,000 9,611,000 9,871,000
============= ============= ============= =============
Diluted earnings per share $ 0.47 $ 0.48 $ 1.00 $ 1.33
============= ============= ============= =============
Weighted-average shares outstanding 9,647,000 10,800,000 9,647,000 11,000,000
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-25
<PAGE> 140
MODTECH, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
- -------------------------------------------------------------------------------------------
1997 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,681,000 $ 14,394,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 866,000 890,000
(Increase) decrease in operating assets and
liabilities:
Contracts receivable (21,779,000) 3,966,000
Inventories (1,394,000) 1,104,000
Due from affiliates (490,000) 404,000
Other assets (35,000) 72,000
Deferred tax asset -- --
Accounts payable and accrued liabilities 3,255,000 2,071,000
Billings in excess of costs 4,827,000 (595,000)
------------ ------------
Net cash provided by (used in) operating
activities (5,069,000) 22,306,000
------------ ------------
Cash flows from investing activities:
Proceeds from sale of equipment -- --
Purchase of property and equipment (981,000) (1,882,000)
------------ ------------
Net cash used in investing activities (981,000) (1,882,000)
------------ ------------
Cash flows from financing activities:
Net principal borrowings (payments) under revolving
credit lines 6,064,000 --
Principal payments on long-term debt -- (1,417,000)
Investment in affiliate -- (250,000)
Conversion of stock options 96,000 64,000
------------ ------------
Net cash provided by (used in) financing activities 6,160,000 (1,603,000)
------------ ------------
Net increase in cash 110,000 18,821,000
Cash at beginning of period 405,000 11,629,000
------------ ------------
Cash at end of period $ 515,000 $ 30,450,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-26
<PAGE> 141
MODTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1998
(1) Management Opinion
In the opinion of management, the condensed financial statements reflect
all adjustments (which include only normal recurring adjustments) necessary
to present fairly the financial position and results of operations as of
and for the periods presented.
The results of operations for the nine months ended September 30, 1998 are
not necessarily indicative of the results to be expected for the full
fiscal year.
Certain statements in this report constitute "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Such forward - looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance, or achievements of the
Company to be materially different from any future results, performance, or
achievements, expressed or implied by such forward - looking statements.
(2) Taxes on Income
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(3) Earnings Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). This
statement replaces the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
Primary earnings per share, basic earnings per share excludes any dilutive
effects of options and convertible securities. Diluted earnings per share
is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been restated to
conform to the SFAS No. 128 requirement.
F-27
<PAGE> 142
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following table sets forth certain items in the Condensed Statements
of Income as a percent of net sales.
<TABLE>
<CAPTION>
Percent of Net Sales Percent of Net Sales
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1997 1998 1997 1998
-------------------- ---------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 21.5 23.7 20.0 23.0
Selling, general and administrative 3.4 3.0 3.6 3.4
Income from operations 18.1 20.8 16.5 19.6
Interest income (expense), net (0.7) 0.8 (0.8) 0.6
Income before taxes on income 17.4 21.6 15.7 20.2
</TABLE>
Net sales decreased by $2,562,000 or 6.4% for the three months and increased by
$14,408,000 or 14.6% for the nine months ended September 30, 1998. The overall
increase in revenue is attributable to the growth in the school population, the
Class Size Reduction program and a diversification of our product line. The
three month decrease was primarily due to the delay by the California
Legislature in the adoption of the California state fiscal budget for
1998/1999.
Gross profit as a percentage of net sales for the three and nine months ended
September 30, 1998 increased to 23.7% and 23.0% from 21.5% and 20.0% for the
same period in 1997. The increase was due principally to the utilization of the
manufacturing facilities and the realization of manufacturing efficiencies and
product mix.
Selling, general and administrative expenses decreased for the three months
ended September 30, 1998 by $260,000 and increased for the nine months ended
September 30, 1998 by $299,000, a change of 19.1% and 8.4% respectively. The
increase is primarily due to the increase in sales expense as well as the
increase in the number of employees. As a percentage of sales, selling, general,
and administrative expenses for the three and nine months ended September 30,
are 3.0% and 3.4% for 1998. The percentages were 3.4% and 3.6% for the same
period in 1997.
Due to a higher cash balance and reduced line of credit borrowing, the nine
months ended September 30, 1998 reflects net interest income of $712,000
compared to net interest expense of $751,000 for the same period in 1997, a
favorable increase of $1,463,000 or 194.8%.
On March 20, 1998, the Company purchased an 80% interest in Trac Modular
Manufacturing, Inc (Trac). The purchase price approximated the fair value of net
assets on the purchase date. Trac is based in Glendale, Arizona. The financial
activity for this subsidiary has been included in the Company's financial
statements for the second and third quarter of 1998.
F-28
<PAGE> 143
Modtech, Inc. has announced that it has entered into a definitive agreement to
purchase 100% of the equity of SPI Manufacturing, Inc. ("SPI"), a privately held
company. SPI is a leading designer, manufacturer and wholesaler of commercial
and light industrial modular buildings. The transaction is scheduled to close in
December 1998 and is subject to shareholder and regulatory approval.
The acquisition will be structured as a merger transaction whereby each of
Modtech, Inc. and SPI will become wholly owned subsidiaries of a newly formed
public holding company, Modtech Holdings. Modtech holdings will acquire SPI for
consideration consisting of approximately $8 million in cash and approximately 5
million shares of holding company common stock. Modtech Holdings will also
refinance approximately $32 million of SPI debt. The merger agreement also
provides that Modtech, Inc. shareholders will receive approximately $3.66 per
share (in the aggregate, approximately $40 million) and that all of the
outstanding Modtech, Inc. shares will be converted into Modtech Holdings common
stock (approximately 10 million shares) at an effective ratio of approximately 1
Modtech, Inc. share to 0.85 shares of Modtech Holdings. Modtech Holdings shares
will be traded on NASDAQ in replacement of the existing Modtech, Inc. shares.
SPI had pro forma consolidated net sales of approximately $80 million for the
fiscal year ended March 31, 1998, which include the results of its California
operations, the Texas operation which was acquired in February 1998 and the
Arizona operation which was acquired in April 1998.
INFLATION
In the past, the Company has not been adversely affected by inflation, because
it has been generally able to pass along to its customers increases in the costs
of labor and materials.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has generated cash to meet its needs from operations, bank
borrowings and public offerings. At September 30, 1998, the Company had
$30,450,000 in cash. During the nine months ended September 30, 1998, the
Company provided cash in it's operating activities.
The Company has a revolving loan commitment that will expire in the year 2000.
The Company is entitled to borrow, from time to time up to $20,000,000 with
actual borrowings limited to specified percentages of eligible accounts
receivables, equipment and inventories. On September 30, 1998, no amounts were
outstanding under this loan.
During the three and nine months ended September 30, 1998,certain directors,
officers or employees exercised 14,575 and 49,575 common stock options for a
total of $41,688 and $63,738, respectively.
Management believes that the Company's existing product lines and manufacturing
capacity will enable the Company to generate sufficient cash through operations,
supplemented by periodic use of its existing bank line of credit, to finance the
Company's business at current levels over the next 12 months. Additional cash
resources may be required if the Company is able to expand its business beyond
current levels. For example, it will be necessary for the Company to construct
or acquire additional manufacturing facilities in order for the Company to
compete effectively in new market areas or states which are beyond a 300 mile
radius from one of its production facilities. The construction or acquisition of
new facilities would require significant additional capital. For these reasons,
among others, the Company may need additional debt or equity financing in the
future. There can be, however, no assurance that the Company will be successful
in obtaining such additional financing, or that any such financing will be
available on terms acceptable to the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS 130 requires all items that are
required to be
F-29
<PAGE> 144
recognized under accounting standards as components of comprehensive income to
be reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS 130 does not require a specific format for
that financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period covered by that financial
statement. SFAS 130 requires an enterprise to (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS 130 is effective for fiscal years beginning after
December 15, 1997. Management has determined the adoption of SFAS 130 will not
have a material impact on the Company's combined financial statement or results
of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for public business enterprises to
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise", but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries", to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS 131 requires, among other items, that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets, information about the revenues derived from the enterprise's
products or services, and major customers. SFAS 131 also requires that the
enterprise report descriptive information about the way that the operating
segments were determined and the products and services provided by the operating
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS 131 need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. Management has not determined whether the adoption of SFAS 131
will have a material impact on the Company's segment reporting.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132"). SFAS 132 revises employers' disclosures about pension
and other postretirement benefit plans. It does not change the measurement or
recognition of those plans. SFAS 132 is effective for fiscal years beginning
after December 15, 1997. SFAS 132, requiring only additional information
disclosures, is effective for the Company's fiscal year ending December 31,
1998.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. SFAS 133 is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Application of SFAS 133 is not
expected to have a material impact on the Company's financial position, results
of operations or liquidity.
YEAR 2000
The Company is currently working to resolve the potential impact of the Year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures.
The Company has investigated the impact of the Year 2000 problem on its
business, including the Company's operational, information and financial
systems. Based on this investigation, the Company does not expect the Year 2000
problem, including the cost of making the Company's computerized information
systems Year 2000 compliant, to have a material adverse impact on the Company's
financial position or results of operations in future periods. However, the
inability of the Company to resolve all potential Year 2000 problems in a timely
manner could have a material adverse impact on the Company.
The Company has also initiated communications with significant suppliers and
vendors on which the Company relies in an effort to determine the extent to
which the Company's business is vulnerable to the failure by these third
parties' to remediate their Year 2000 problems. While the Company had not been
informed of any material risks associated with the Year 2000 problem on these
entities, there can be no assurance that the computerized information systems of
these third parties will be Year 2000 compliant on a timely basis. The inability
of these third parties to remediate their Year 2000 problems could have a
material adverse impact on the Company.
To the extent possible, the Company will be developing and executing contingency
plans designed to allow continued operation in the event of failure of the
Company's or third parties'
F-30
<PAGE> 145
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
SPI Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of SPI HOLDINGS,
INC. (a Colorado corporation) as of January 31, 1997, March 27, 1997 and March
31, 1998, and the related consolidated statements of income, shareholders'
equity and cash flows for the years ended January 31, 1996 and 1997, the period
from February 1, 1997 to March 27, 1997, and the year ended March 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SPI Holdings, Inc.
as of January 31, 1997, March 27, 1997 and March 31, 1998 and the results of its
operations and its cash flows for the years ended January 31, 1996 and 1997, the
period from February 1, 1997 to March 27, 1997 and the year ended March 31, 1998
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
May 22, 1998
F-31
<PAGE> 146
SPI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
($ In Thousands)
ASSETS
<TABLE>
<CAPTION>
Predecessor(1) Company
----------------------------- ----------
January 31, March 27, March 31,
1997 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 1,243 $ 1,991 $ 1,119
Accounts receivable, net of allowance
for doubtful accounts of $26 at
January 31, 1997 and March 31, 1997
and $122 at March 31, 1998,
respectively 2,819 3,320 4,034
Accounts receivable from former officers 1,380 1,433 --
Inventories 918 1,215 2,761
Notes receivable from related parties 470 540 --
Interest receivable 48 -- --
Income tax receivable -- -- 166
Deferred tax asset 25 25 152
Prepaid expenses 2 14 380
---------- ---------- ----------
Total current assets 6,905 8,538 8,612
---------- ---------- ----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
at cost:
Furniture, fixtures and equipment 338 338 1,194
Vehicles 239 215 49
Leasehold improvements 375 380 390
Lease assignment and interest -- -- 566
---------- ---------- ----------
952 933 2,199
Less--Accumulated depreciation (219) (231) (330)
---------- ---------- ----------
733 702 1,869
---------- ---------- ----------
OTHER ASSETS:
Deposits 10 10 40
Deferred tax asset -- -- 50
Goodwill, net of accumulated amortization
of $239 at March 31, 1998 -- -- 11,934
Deferred loan fees, net of accumulated
amortization of $123 at March 31, 1998 -- -- 638
Covenants not to compete, net of
accumulated amortization of $575 at
March 31, 1998 -- -- 2,625
---------- ---------- ----------
Total assets $ 7,648 $ 9,250 $ 25,768
========== ========== ==========
</TABLE>
(1) Effective March 28, 1997, SPI Holdings, Inc. acquired Standard Pacific
Industries, Inc. ("the Predecessor"). Because the acquisition was
accounted for as a purchase, the post-acquisition period is not
comparable to the pre-acquisition periods.
The accompanying notes are an integral part of these consolidated balance
sheets.
F-32
<PAGE> 147
SPI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
($ In Thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Predecessor(1) Company Pro forma
---------------------------- --------- shareholders'
equity at
January 31, March 27, March 31, at March
1997 1997 1998 31, 1998
----------- --------- --------- --------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES: (unaudited)
Accounts payable $ 1,869 $ 2,021 $ 2,973
Accrued liabilities 264 533 1,537
Revolving line of credit -- -- 600
Current portion of long-term debt 10 -- 2,332
Income taxes payable 1,091 1,437 --
-------- -------- --------
Total current liabilities 3,234 3,991 7,442
-------- -------- --------
LONG-TERM LIABILITIES:
Deferred tax liability 21 21 --
Long-term debt, net of current portion 13 -- 11,624
-------- -------- --------
Total long-term liabilities 34 21 11,624
-------- -------- --------
Total liabilities 3,268 4,012 19,066
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY:
Convertible preferred stock-
Class A-1, stated value $2.715 per share:
1,500,000 shares authorized, 994,335
shares issued and outstanding at
March 31, 1998 -- -- 2,628 $ --
Class A-2, stated value $2.863 per share:
1,000,000 shares authorized, 272,051
shares issued and outstanding at
March 31, 1998 -- -- 725 --
Class A-3 warrants, no par value: 400,000
shares authorized, no shares issued at
March 31, 1998 -- -- 647 --
Class A-4, stated value $4.500 per share:
155,000 shares authorized, 133,331
shares issued and outstanding at
March 31, 1998 -- -- 600 --
Common stock of Predecessor, stated value
$1 per share: 3,600 shares authorized,
issued and outstanding at
January 31, 1997 and March 27, 1997 4 4 -- --
Common stock of Company, par value $0.017
per share: 5,000,000 shares authorized,
333,614 shares issued and outstanding
at March 31, 1998, 1,733,331 pro forma
shares at March 31, 1998 -- -- 6 4,606
Retained earnings 4,376 5,234 2,096 1,396
-------- -------- -------- --------
Total shareholders' equity 4,380 5,238 6,702 $ 6,002
-------- -------- -------- --------
$ 7,648 $ 9,250 $ 25,768
======== ======== ========
</TABLE>
(1) Effective March 28, 1997, SPI Holdings, Inc. acquired Standard Pacific
Industries, Inc. ("the Predecessor"). Because the acquisition was
accounted for as a purchase, the post-acquisition period is not
comparable to the pre-acquisition periods.
The accompanying notes are an integral part of these consolidated balance
sheets.
F-33
<PAGE> 148
SPI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
($ In Thousands, except per share data)
<TABLE>
<CAPTION>
Predecessor(1) Company
---------------------------------------------- --------
Year ended Period from
January 31, February 1, 1997 Year ended
--------------------------- to March 27, March 31,
1996 1997 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 13,429 $ 24,113 $ 6,033 $ 42,180
COST OF SALES 10,541 19,035 4,106 32,458
-------- -------- -------- --------
Gross profit 2,888 5,078 1,927 9,722
-------- -------- -------- --------
OPERATING EXPENSES:
Selling and administrative 2,609 1,644 507 2,667
Management and monitoring
fees -- -- -- 225
Depreciation 49 78 13 263
Amortization -- -- -- 1,488
-------- -------- -------- --------
2,658 1,722 520 4,643
-------- -------- -------- --------
Income from
operations 230 3,356 1,407 5,079
-------- -------- -------- --------
OTHER INCOME/(EXPENSE):
Interest expense (5) (1) -- (1,477)
Interest income 85 79 21 38
Miscellaneous income 34 111 90 36
Penalties and interest
on income taxes -- (117) -- --
-------- -------- -------- --------
114 72 111 (1,403)
-------- -------- -------- --------
Income before
provision for
income taxes 344 3,428 1,518 3,676
PROVISION FOR INCOME TAXES 141 1,409 660 1,580
-------- -------- -------- --------
Net income $ 203 $ 2,019 $ 858 $ 2,096
======== ======== ======== ========
EARNINGS PER SHARE:
Basic $ 1.30
========
Diluted $ 1.12
========
</TABLE>
(1) Effective March 28, 1997, SPI Holdings, Inc. acquired the Predecessor
entity. Because the acquisition was accounted for as a purchase, the
post-acquisition period is not comparable to the pre-acquisition periods.
The accompanying notes are an integral part of these consolidated statements.
F-34
<PAGE> 149
SPI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in Thousands)
<TABLE>
<CAPTION>
Total
Common Stock Preferred Stock Share-
--------------------- --------------------- Retained holders'
Shares Amount Shares Amount Earnings Equity
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR(1):
BALANCE, January 31, 1995 4 $ 4 -- $ -- $2,154 $2,158
Net Income -- -- -- -- 203 203
------ ------ ------ ------ ------ ------
BALANCE, January 31, 1996 4 4 -- -- 2,357 2,361
Net Income -- -- -- -- 2,019 2,019
------ ------ ------ ------ ------ ------
BALANCE, January 31, 1997 4 4 -- -- 4,376 4,380
Net Income -- -- -- -- 858 858
------ ------ ------ ------ ------ ------
BALANCE, March 27, 1997 4 $ 4 -- $ -- $5,234 $5,238
====== ====== ====== ====== ====== ======
COMPANY:
BALANCE, March 27, 1997 -- $ -- -- $ -- $ -- $ --
Common stock issuance 334 6 -- -- -- 6
Series A-1 issuance -- -- 994 2,628 -- 2,628
Series A-2 issuance -- -- 272 725 -- 725
Series A-3 warrants issuance -- -- -- 647 -- 647
Series A-4 issuance -- -- 133 600 -- 600
Net Income -- -- -- -- 2,096 2,096
------ ------ ------ ------ ------ ------
BALANCE, March 31, 1998 334 $ 6 1,399 $4,600 $2,096 $6,702
====== ====== ====== ====== ====== ======
</TABLE>
(1) Effective March 28, 1997, SPI Holdings, Inc. acquired the Predecessor
entity. Because the acquisition was accounted for as a purchase, the
post-acquisition period is not comparable to the pre-acquisition periods.
The accompanying notes are an integral part of these consolidated statements.
F-35
<PAGE> 150
SPI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ In Thousands)
<TABLE>
<CAPTION>
Predecessor (1) Company
----------------------------------------------- ----------
Year ended Period from
January 31, February 1, 1997 Year ended
------------------------ to March 27, March 31,
1996 1997 1997 1998
------- ------- ---------------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 203 $ 2,019 $ 858 $ 2,096
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 49 78 13 1,203
Net gain on
disposition
of equipment -- (12) -- --
Provision for deferred
income taxes -- (25) -- (134)
Changes in assets and
liabilities, net of assets
acquired and liabilities
assumed:
Accounts receivable 271 (1,907) (501) (142)
Inventories (5) (391) (297) (623)
Notes receivable from
related parties (395) (74) (71) --
Interest receivable (7) (41) 48 --
Prepaid expenses (20) 18 (12) (367)
Other assets (23) 23 -- (30)
Accounts payable (74) 1,271 153 403
Accrued liabilities 727 (671) 269 666
Deferred tax liability -- 21 -- (25)
Income taxes payable 218 504 346 (1,603)
------- ------- ------- -------
Net cash provided by
operating activities 944 813 806 1,444
------- ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of equipment and
leasehold improvements (411) (193) (7) (1,260)
Insurance proceeds from
theft of equipment -- 21 -- --
(Increase) decrease in
accounts receivable
from officers -- (1,380) (53) 1,600
Investment in Office Master,
net of cash received -- -- -- (3,893)
Payments under non-compete
agreements -- -- -- (600)
------- ------- ------- -------
Net cash used in
investing activities (411) (1,552) (60) (4,153)
------- ------- ------- -------
</TABLE>
(continued)
F-36
<PAGE> 151
<TABLE>
<CAPTION>
Year ended Period from
January 31, February 1, 1997 Year ended
------------------------ to March 27, March 31,
1996 1997 1997 1998
------- ------- ---------------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on
notes payable -- (33) 2 (6,442)
Proceeds from notes
payable -- 25 -- --
Additions to notes
payable -- -- -- 8,604
Issuance of common
stock -- -- -- 600
Issuance of warrants -- -- -- 75
------- ------- ------- -------
Net cash provided
by (used in)
financing
activities -- (8) 2 2,837
------- ------- ------- -------
NET INCREASE
(DECREASE) IN CASH 533 (747) 748 128
CASH, beginning of period 1,457 1,990 1,243 991
------- ------- ------- -------
CASH, end of period $ 1,990 $ 1,243 $ 1,991 $ 1,119
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash paid during the
period for interest $ 5 $ 1 $ -- $ 1,303
======= ======= ======= =======
Cash paid during the
period for income taxes $ 201 $ 520 $ 314 $ 2,851
======= ======= ======= =======
</TABLE>
(1) Effective March 28, 1997, SPI Holdings, Inc. acquired the Predecessor
entity. Because the acquisition was accounted for as a purchase, the
post-acquisition period is not comparable to the pre-acquisition periods.
The accompanying notes are an integral part of these consolidated statements.
F-37
<PAGE> 152
SPI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
1. Company Background and Business
SPI Holdings, Inc. dba SPI Manufacturing, Inc. (the Company), was
incorporated in the state of Colorado in 1996. On March 27, 1997 the
Company completed a transaction to acquire all of the then outstanding
shares of Ronfran Inc., doing business as Standard Pacific Industries,
Inc. (the Predecessor) The acquisition by the Company was accounted for
as a purchase. Accordingly, the assets and liabilities were revalued
based on relative fair market values as follows: (in thousands)
<TABLE>
<S> <C>
Assets acquired:
Cash $ 991
Accounts receivable, net 3,320
Inventory 1,215
Property, plant and equipment, net 662
Covenant not to compete 2,500
Goodwill 9,190
Other 49
-------
17,927
-------
Liabilities assumed:
Accounts payable and
accrued liabilities 4,034
Long-term liabilities 21
-------
4,055
-------
Net purchase price $13,872
=======
</TABLE>
The purchase price above includes related transaction costs of $228,000
and the subsequent payment by the sellers of $1,600,000 for post-closing
adjustments to the purchase price pursuant to the purchase agreement.
The Company has consummated the following acquisitions:
- Leasehold interest in a manufacturing facility and certain
assets of a former mobile home manufacturer located in Ontario,
California (August, 1997)
- Office Master of Texas, Inc. ("Office Master"), a manufacturer
of modular buildings located in the Dallas, Texas area
(February, 1998)
- Rosewood Enterprises, Inc. Modular Manufacturing ("Rosewood"), a
Phoenix-based manufacturer of modular buildings (April, 1998 -
see Note 16)
The acquisitions of Office Master and Rosewood, which consisted of the
acquisition of all outstanding shares of common stock, have or will be
accounted for under the purchase method.
The Company manufactures modular buildings at its four production
facilities in Southern California, Texas and Arizona, and distributes to
customers throughout the western United States, primarily in California.
The Company's customers include dealers and leasing companies who then
sell or lease the buildings to third-party end users operating in
various industries.
F-38
<PAGE> 153
2. Summary of Significant Accounting Policies
a. Basis of Presentation
These consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Office Master. The Company
acquired Office Master on February 24, 1998, and the accompanying
consolidated financial statements include the period from acquisition
through March 31, 1998 for Office Master operations.
The effects of operations for the four-day period March 28, 1997 to
March 31, 1997 have been included in the year ended March 31, 1998. The
Company had sales of approximately $400,000, costs of sales of
approximately $251,000 and incurred payroll expenses of approximately
$47,000 during the period. There were no other material activities
during this four-day period.
Because of the effects of purchase accounting, the accounts of the
Predecessor are not comparable to those of the Company.
b. Office Master Purchase Price Allocation
The assets and liabilities were revalued based on relative fair market
values as follows: (in thousands)
<TABLE>
<S> <C>
Assets acquired:
Cash $ 89
Accounts receivable, net 571
Inventory 923
Property, plant and equipment, net 213
Goodwill 2,984
Non-compete covenant 100
------
4,880
------
Liabilities assumed:
Accounts payable and
accrued liabilities 898
------
898
------
Net purchase price $3,982
======
</TABLE>
Included in the purchase price above are related transaction costs of
$148,000, including fees to KRG Capital of $50,000.
F-39
<PAGE> 154
c. Inventories
Inventories are stated at the lower of cost or market. The following is
a summary of inventory by component as of January 31, 1997, March 27,
1997 and March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
January 31, March 27, March 31,
1997 1997 1998
------- ------- -------
<S> <C> <C> <C>
Raw materials $ 828 $ 1,138 $ 2,184
Work-in-process 90 77 167
Finished goods -- -- 550
------- ------- -------
918 1,215 2,901
Inventory reserve -- -- (140)
------- ------- -------
$ 918 $ 1,215 $ 2,761
======= ======= =======
</TABLE>
Work-in-process consists of raw materials and labor. Overhead costs are
not capitalized due to the short construction period, and in the opinion
of management, are not material.
Finished goods typically consist of structures manufactured for
customers based upon a verbal or preliminary order but for which a
signed purchase order was not received as of the balance sheet date.
d. Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation is
computed using straight-line and accelerated methods over the following
estimated useful lives:
Furniture and fixtures Seven years
Vehicles and equipment One to seven years
Leasehold improvements Useful life or life of the
lease, whichever is shorter
Upon retirement or disposal of depreciable assets, the cost and related
accumulated depreciation are removed from the accounts and the resulting
gain or loss is reflected in operations. Major renewals or betterments
are capitalized while maintenance costs and repairs are expensed in the
period incurred.
e. Revenue Recognition
The Company recognizes revenue under the completed-contract method. In
accounting for such contracts, income is recognized when performance is
substantially completed and accepted.
f. Goodwill
The purchase price in excess of the fair market value of net assets
acquired for each acquisition is recorded as goodwill and amortized
using the straight-line method over a period of 40 years. Accumulated
amortization related to goodwill was $239,000 at March 31, 1998.
F-40
<PAGE> 155
g. Covenants not to Compete
Covenants not to compete entered into as part of purchase agreements are
amortized over the term of the covenant on a straight-line basis.
Accumulated amortization related to the covenants not to compete was
$575,000 at March 31, 1998.
h. Accounting for Equity-based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation" establishes financial accounting and
reporting standards for stock-based employee compensation plans and
transactions in which an entity issues its equity instruments to acquire
goods or services from non-employees. The adoption of the accounting
methodology of SFAS No. 123 related to employees is optional, and as
permitted under SFAS No. 123, the Company intends to continue to account
for employee stock options using the intrinsic value methodology in
accordance with the Accounting Principles Board Opinion No. 25; however,
pro forma disclosures as if the Company adopted the accounting
methodology of SFAS No. 123 are required to be presented. (see Note 13)
i. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
j. Reclassifications
Certain reclassifications have been made to the prior year financial
statements in order to conform with the current year's presentation.
k. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS Nos. 130 and 131 "Reporting Comprehensive Income" and "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 130
and No. 131 are effective for fiscal years beginning after December 15,
1997, with earlier adoption permitted. The Company does not believe that
adoption of these standards will have a material effect on the Company's
financial statements. The Company has to date reflected no items of
comprehensive income in its statement of shareholders' equity.
l. Earnings Per Share
The Company accounts for earnings per share in accordance with SFAS No.
128, "Earnings per Share." This Statement requires the presentation of
both basic and diluted net income per share for financial statement
purposes. Basic net income per share is computed by dividing income
available to common shareholders by the weighted average number of
common shares outstanding. Diluted net income per share includes the
effect of the potential shares outstanding, including dilutive stock
options using the treasury stock method.
F-41
<PAGE> 156
Concurrent with the proposed merger, all outstanding shares of preferred
stock will convert into common stock of the acquiring Company or
redeemed for cash. (See Note 16 c.) Earnings per share is calculated
using the weighted average number of common shares outstanding that
would have resulted from the preferred stock conversion to common
shares.
The following table reconciles the components of the pro forma basic net
income per share calculation to pro forma diluted net income per share.
<TABLE>
<CAPTION>
Income Per share
(in Thousands) Shares Amount
-------------- --------- --------
<S> <C> <C> <C>
Basic Net Income per Share $ 2,096 1,612,785 $ 1.30
Effect of Dilutive Securities -- 265,143 (0.18)
--------- --------- --------
Diluted Net Loss per share $ 2,096 1,877,928 $ 1.12
========= ========= ========
</TABLE>
500,000 shares of convertible Series A-5 Preferred stock, 10,000
convertible Series A-6 Preferred stock options, and 63,346 convertible
Series A-3 Preferred stock warrants were issued subsequent to year end.
Additionally, 62,333 shares of convertible Series A-6 Preferred stock
and 28,416 convertible Series A-5 preferred stock options, which are
subject to further adjustment based on the final purchase price
calculation for Rosewood, were issued subsequent to year end. These
subsequent equity issuances are not included in the fiscal 1998 earnings
per common share calculation above.
3. Receivables From Related Parties and Former Officers
Notes receivable from related parties and accounts receivable from
former officers represent advances to the former shareholders of the
Predecessor during the years ended January 31, 1996 and 1997. Interest
accrued monthly on the receivables at 6.5 percent. Pursuant to the
acquisition of the Predecessor described in Note 1, these receivables
were paid following the close of the transaction.
4. Employee Benefit Plan
The Company sponsors a defined contribution plan (the Plan) under which
all employees who have completed one year of service are eligible to
participate. Company contributions, if any, are determined annually by
the board of directors from net profits or accumulated earnings and may
not exceed 15 percent of each employee's eligible compensation, as
defined. Vesting under the Plan is at a rate of 20 percent per year
beginning after the second year of participation. During the year ended
January 31, 1997, the Company made contributions to the Plan totaling
$64,000. The Company did not make contributions to the plan during the
year ended January 31, 1996 or the period from February 1, 1997 to March
27, 1997. The Company accrued a contribution of $131,000 at March 31,
1998, which was paid after year end. One of the former shareholders was
the trustee of the Plan through March 27, 1997. The President of the
Company and a member of the Board of Directors are currently the
trustees.
F-42
<PAGE> 157
5. Revolving Line of Credit
The Company maintains a working capital note with a bank which matures
on the earlier of May 1, 2004 or whenever the Long-Term Debt is paid in
full. As of March 31, 1998, borrowings against the line of credit
totaled $600,000. The unused amount available under this line of credit
was $2,751,000 as of March 31, 1998. Interest accrues at the Commercial
Paper Rate, plus 4 percent. The weighted average interest rate for the
year ended March 31, 1998 was 9.62 percent. The weighted average amount
of borrowings outstanding during the year ended March 31, 1998 was
$988,000. This line of credit is secured by a security interest which
covers substantially all assets of the Company. This line of credit
contains certain restrictive covenants, which, among other things,
require the maintenance of certain financial ratios and place limits on
other indebtedness. As of March 31, 1998, the Company was in compliance
with all of the financial covenants in the credit agreement.
6. Long-Term Debt
Long-term debt consists of (in thousands):
<TABLE>
<CAPTION>
January 31, March 27, March 31,
1997 1997 1998
------- ------- -------
<S> <C> <C> <C>
Secured note payable to NationsCredit, interest accrues at the
Commercial Paper Rate, plus 4.25 percent (9.77 percent at March 31,
1998,) payable in quarterly installments $ - $ -- $10,396
Secured note payable to NationsCredit, interest accrues at the
Commercial Paper Rate, plus 6.25 percent (11.77 percent at March
31, 1998) payable in quarterly installments -- -- 4,150
Debt discount -- -- (590)
Secured note payable to Bank 23 -- --
------- ------- -------
23 -- 13,956
Less--Current portion 10 -- 2,332
------- ------- -------
Long-term portion $ 13 $ -- $11,624
======= ======= =======
</TABLE>
The debt discount represents the value of warrants which were issued in
conjunction with the notes payable. The debt is being accreted to face
value using the effective interest method. The credit agreements also
contain anti-dilution provisions, which require the issuance of
additional warrants upon triggering events, such as the issuance of
certain equity securities at issuance or exercise prices below specified
amounts. Upon the occurrence of those triggering events, the Company
records additional debt costs, which are amortized over the remaining
life of the debt.
F-43
<PAGE> 158
Principal amounts due on notes payable as of March 31, 1998 are as
follows(in thousands):
<TABLE>
<CAPTION>
Year ending March 31,
<S> <C>
1999 $ 2,332
2000 2,414
2001 2,441
2002 2,551
2003 2,215
Thereafter 2,593
-------
$14,546
=======
</TABLE>
All of the notes are collateralized by a security interest, which covers
substantially all assets of the Company. These credit agreements contain
certain restrictive covenants, which, among other things, require the
maintenance of certain financial ratios and place limits on other
indebtedness. As of March 31, 1998, the Company was in compliance with
all of the financial ratio covenants listed in the credit agreement.
7. Employment, Consulting, and Non-compete Agreements
The Company has entered into a five-year employment agreement with its
Chief Executive Officer. The agreement provides for an annual base
salary of $150,000, all normal employee benefits, and an annual bonus
based on earnings before interest, taxes, depreciation and amortization.
The Board may, in its sole discretion, grant an additional bonus in cash
or stock options in any fiscal year. The agreement also entitles the
officer to purchase shares of the Company's Class A-2 convertible
preferred stock. Additionally, the agreement granted options to purchase
additional shares of such stock pursuant to the Company's 1997 Long Term
Incentive Stock Option Plan, and granted warrants to purchase additional
shares of such stock.
The Company has also entered into a five-year employment agreement with
its Senior Vice President Manufacturing. The agreement provides for an
annual base salary of $150,000; all normal employee benefits and annual
bonuses based on net sales and gross margin. The Board may, in its sole
discretion, grant an additional bonus in cash or stock options in any
fiscal year. The agreement also entitles the executive to purchase
shares of the Company's common stock. Additionally, the agreement
granted options to purchase shares of the Company's Class A-2
convertible preferred stock pursuant to the Company's 1997 Long Term
Incentive Stock Option Plan.
At March 27, 1997, the Company entered into a consulting agreement with
a former shareholder for a period of one year. The agreement calls for
the payment of $100,000 to the former shareholder over a twelve-month
period. Additionally, the Company entered into non-compete agreements
with the former shareholders for a period of five years. The Company
allocated $2,500,000 of the purchase price to the covenant as determined
in the agreement. The asset is recorded in the accompanying consolidated
balance sheet in other assets. The covenant is being amortized over the
term of the agreement and as of March 31, 1998 accumulated amortization
was $500,000.
F-44
<PAGE> 159
As of August 1997, the Company entered into one-year consulting
agreements with certain individuals from whom the Company purchased
certain assets and a leasehold interest in a manufacturing facility. The
Company paid $600,000 in accordance with these agreements. As of March
31, 1998, accumulated amortization was $400,000. The asset is recorded
in the prepaid assets in the accompanying consolidated balance sheet.
Additionally, the Company entered into non-compete agreements with these
individuals for a period of five years. The Company paid $600,000 for
these agreements. The asset is recorded in other assets in the
accompanying consolidated balance sheet. The covenant is being amortized
over the term of the agreement and as of March 31, 1998 accumulated
amortization was $75,000.
In February 1998, the Company entered into a non-compete agreement with
the former owners of Office Master for a five year period. The Company
paid $100,000 for this agreement. The asset is recorded in other assets
in the accompanying consolidated balance sheet. This agreement is being
amortized over the term of the agreement. As of March 31, 1998, the
accumulated amortization was nominal.
8. Related Party Transactions
The Predecessor previously sold inventory at normal margins, and
provided accounting and management services at no cost to another
company, which was also owned by the former shareholders. Sales to this
company during the years ended January 31, 1996 and 1997 were $185,000
and $231,000. There were no sales to this company for the period from
February 1, 1997 to March 27, 1997 or for the year ended March 31, 1998.
Receivables due to this company were $85,000 and 151,000 at January 31,
1996 and 1997, respectively. Accrued interest related to the above
receivables were $2,000 and $12,000 at January 31, 1996 and 1997,
respectively. Those amounts were subsequently repaid prior to the date
of acquisition.
As of the date of acquisition, the Company paid $300,000 to one of its
shareholders for obtaining debt financing and locating the equity
investors for the transaction. The portion related to obtaining debt
financing is included in deferred loan fees and the portion relating to
locating equity investors is recorded as a reduction to equity on the
consolidated balance sheets.
Pursuant to certain management agreements, the Company pays monitoring
fees to certain of its shareholders. During the year ended March 31,
1998, the Company paid $200,000 and $25,000 to two groups of
shareholders in accordance with the management agreement; such amounts
are included in operating expenses on the consolidated statements of
income. Additionally, the Company maintains a line of credit and all
outstanding notes payable with a shareholder of the Company. This lender
also received a management fee of $25,000 during the year ended March
31, 1998, which is included in interest expense on the consolidated
statements of income.
F-45
<PAGE> 160
9. Income Taxes
The components of the provision for income taxes for the years ended
January 31, 1996 and 1997, the period from February 1, 1997 to March 27,
1997 and the year ended March 31, 1998 consist of the following (in
thousands):
<TABLE>
<CAPTION>
January 31, January 31, March 27, March 31,
1996 1997 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Current:
Federal $ 117 $1,166 $ 505 $1,377
State 24 248 155 401
----- ------ ----- ------
141 1,414 660 1,778
----- ------ ----- ------
Deferred:
Federal -- 1 -- (162)
State -- (6) -- (36)
----- ------ ----- ------
-- (5) -- (198)
----- ------ ----- ------
$ 141 $1,409 $ 660 $1,580
===== ====== ===== ======
</TABLE>
Deferred income taxes arise as a result of temporary differences in the
methods used to determine income for financial reporting versus income
tax reporting purposes. Significant components of the Company's net
deferred tax asset and liability at January 31, 1997, March 27, 1997 and
March 31, 1998 are as follows: (in thousands)
<TABLE>
<CAPTION>
January 31, March 27, March 31,
1997 1997 1998
---- ---- ----
<S> <C> <C> <C>
Depreciation and Amortization $(21) $(21) $ 50
---- ---- ----
Long-term deferred tax asset
(liability) (21) (21) 50
==== ==== ====
Inventory costs capitalized -- -- 12
Provision for bad debt 12 12 52
Warranty accrual 13 13 88
---- ---- ----
Current deferred tax asset 25 25 152
==== ==== ====
Net deferred tax asset $ 4 $ 4 $202
==== ==== ====
</TABLE>
F-46
<PAGE> 161
The effective tax rate differs from the Federal statutory rate of 34
percent due to the following:
<TABLE>
<CAPTION>
Period from
Years ended February 1, Year
-------------------------------- 1997 to ended
January 31, January 31, March 27, March 31,
1996 1997 1997 1998
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Provision for income
taxes at statutory rate 34.0% 34.0% 34.0% 34.0%
Increases in tax
resulting from:
State income taxes, net 7.0 7.1 6.7 7.2
Other -- -- 2.8 1.8
---- ---- ---- ----
Provision for income
taxes 41.0% 41.1% 43.5% 43.0%
==== ==== ==== ====
</TABLE>
10. Commitments and Contingencies
a. Leases
The Company leases facilities under noncancelable operating leases.
Future minimum lease payments on operating leases as of March 31, 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending March 31:
<S> <C>
1999 $ 830
2000 807
2001 805
2002 771
2003 356
Thereafter 1,718
------
Total future minimum
lease payments $5,287
======
</TABLE>
Rent expense for the years ended January 31, 1996 and 1997, the period
from February 1, 1997 to March 27, 1997, and the year ended March 31,
1998, were $136,000, $209,000, $40,000 and $391,000, respectively.
b. Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business. The Company is not involved in any
pending or threatened legal proceeding which the Company believes could
reasonably be expected to have a material effect on the Company's
financial condition or results of operations.
F-47
<PAGE> 162
11. Accrued Liabilities
The components of accrued liabilities at January 31, 1997, March 27,
1997 and March 31, 1998 consist of the following (in thousands):
<TABLE>
<CAPTION>
January 31, March 27, March 31,
1997 1997 1998
------ ------ ------
<S> <C> <C> <C>
Warranty reserve $ 30 $ 30 $ 206
Income tax penalties 62 113 --
Interest on income taxes 55 59 --
Payroll and related 96 212 777
Professional fees -- 49 136
Interest payable -- -- 149
Other 21 70 269
------ ------ ------
$ 264 $ 533 $1,537
====== ====== ======
</TABLE>
12. Shareholders' Equity
As of March 31, 1998, the Company had four classes of convertible
preferred stock, Class A-1, A-2, A-3, and A-4. The holders of Class A-1,
A-2 and A-4 convertible preferred stock are entitled to one vote for
each share of common stock issuable upon conversion of the preferred
stock at the time the vote is taken. Class A-3 stock has no voting
privileges, except where mandated by law. All classes of preferred stock
share ratably with the common stockholders in dividends and upon
liquidation. Shares of convertible preferred stock are convertible to
common stock on a one-to-one basis. Preferred stock may be converted to
common stock at any time, and the Board of Directors may require
conversion of all outstanding preferred shares upon the closing of a
Qualified Public Offering. All classes of preferred stock contain
anti-dilution privileges whereby the conversion price will be reduced if
any shares of common stock are sold for a lower price than the stated
conversion price.
Prior to March 28, 1997, the Company had 3,600 shares of common stock
authorized, issued and outstanding which were owned equally by the
former shareholders. As of March 28, 1997 these common stock shares were
cancelled and new common stock shares were issued. The new common stock
shares have a par value of $0.017 per share.
13. Stock Option Plan
The Company has elected to follow APB 25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its employee
stock options because, as discussed below, the alternative fair value
accounting provided for under SFAS 123 "Accounting for Stock-Based
Compensation" requires use of option valuation models that were not
developed for use in valuing employee stock options.
F-48
<PAGE> 163
The 1997 Long Term Incentive Stock Plan, as amended (the Plan), allows
grants of options to purchase up to 200,000 shares of Series A-2
Preferred Stock and 16,667 shares of Series A-4 Preferred Stock. The
preferred stock is convertible into common stock at any time. Stock
options granted under the Plan are exercisable over a period of ten
years and vest over a period of three to five years. As of March 31,
1998, 178,749 stock options have been granted to various employees and
approximately 37,918 remained available for grant under the Plan. In
addition, an officer of the Company received options to purchase 34,933
shares of Series A-2 Preferred Stock and 2,538 shares of Series A-4
Preferred Stock. These options are in addition to those reserved under
the Plan and contain anti-dilution privileges. No options have been
exercised. There were no stock options granted, issued or exercised
during the years ended January 31, 1996 and 1997, or the period from
February 1, 1997 to March 27, 1997.
The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted
average assumptions: (i) no dividend yield, (ii) volatility of
effectively zero, (iii) risk-free interest rate of seven percent and
(iv) expected life of ten years.
The following table summarizes the information regarding stock options
as of March 31, 1998:
Options Outstanding
<TABLE>
<S> <C>
Average exercise price of options outstanding $ 3.11
Total options granted and outstanding 216,220
Average remaining outstanding life 8 years
Aggregate fair value of options granted $307,046
Range of exercise prices $2.8626-$4.725
Options Exercisable
Number exercisable 40,000
Exercise price $ 3.0057
</TABLE>
Had compensation expense for the Company's 1998 stock-based compensation
been recorded under fair market value principles applicable under SFAS
123, the Company would have recorded $62,000 of additional compensation
expense, and net income would have been reduced to $2,034,000 for the
year ended March 31, 1998. Basic earnings per share and fully diluted
earnings would have been reduced to $0.54 and $0.51, respectively, for
the year ended March 31, 1998 had the Company recorded the additional
compensation expense.
14. Concentration of Credit Risk
The Company had several customers which individually account for greater
than ten percent of net sales during the periods presented as follows:
<TABLE>
<CAPTION>
Period from
Years ended February 1, Year
January 31, 1997 to ended
---------------------- March 27, March 31,
1996 1997 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
GE Capital Modular Space 20% 49% 65% 41%
Mobile Modular Management 11 * 12 15
Williams Scotsman 36 15 12 14
</TABLE>
*-less than 10%
F-49
<PAGE> 164
15. Disclosure About the Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable
to estimate:
Cash-The carrying amount is a reasonable estimate of fair value. Thus,
the fair value is disclosed on the consolidated balance sheets.
Note Receivable-The notes receivable bear interest at a variable rate;
therefore fair value is assumed to approximate carrying value. Thus, the
fair value is disclosed on the consolidated balance sheets.
Long-Term Debt-The notes payable bear interest at a variable rate;
therefore fair value is assumed to approximate carrying value. Thus, the
fair value is disclosed on the consolidated balance sheets.
16. Subsequent Events
a. Rosewood Acquisition
In April 1998, the Company consummated the acquisition of all
outstanding Rosewood shares. The purchase price consisted of
cash payments totaling $21,773,000, a 9% subordinated note in
the amount of $1.5 million, and a variable number of shares of
the Company's Series A-6 preferred stock with a fixed value of
$1.0 million. The purchase price also includes $195,000 of
transactional costs. The number of shares issued is subject to
adjustment based on additional analysis of the value of the
Company. The agreement also provides that, in the event an
initial public offering, as defined, is not consummated within
five years of the purchase, the seller may elect to have the
shares repurchased by the Company at a price equal to the then
fair market value. Alternately, the Company may elect to acquire
the seller's shares at the fair market value.
b. Proposed acquisition (unaudited)
In June 1998, the Company signed a letter of intent to acquire a
modular building manufacturer located in the southeastern United
States. The proposed purchase price consists of a base price of
$2.0 million plus additional consideration based on future
earnings.
c. Proposed merger (unaudited)
The Company has entered into a Plan of Reorganization and Merger
dated September 28, 1998 with Modtech, Inc. Under terms of the
agreement, all equity instruments will be converted into equity
instruments of Modtech Holdings, Inc. or redeemed for cash.
F-50
<PAGE> 165
SPI HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ In Thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30,
1998
-------
<S> <C>
CURRENT ASSETS:
Cash $ 1,524
Accounts receivable, net of allowance
for doubtful accounts of $117 7,028
Inventories 3,792
Prepaid and other assets 609
-------
Total current assets 12,953
-------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization 2,142
OTHER ASSETS:
Goodwill, net 33,996
Deferred loan fees, net 853
Covenants not to compete, net 2,946
Other assets 381
-------
Total assets $53,271
=======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-51
<PAGE> 166
SPI HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ In Thousands)
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30,
1998
-------
<S> <C>
CURRENT LIABILITIES:
Accounts payable $ 4,437
Accrued liabilities 2,417
Revolving line of credit 2,324
Current portion of long-term debt 4,913
-------
Total current liabilities 14,091
-------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 26,023
-------
Total liabilities 40,114
-------
SHAREHOLDERS' EQUITY:
Convertible preferred stock:
Class A-1, stated value $2.715 per share; 1,500,000 shares authorized, 994,335
shares issued and outstanding 2,628
Class A-2, stated value $2.863 per share; 1,000,000
shares authorized, 272,051 shares issued and outstanding 725
Class A-3 warrants, no par value; 400,000 shares authorized, no shares issued 1,153
Class A-4, stated value $4.500 per share; 155,000 shares authorized, 133,331
shares issued and outstanding 600
Class A-5, stated value $ per share;
shares authorized, 500,000 shares issued and outstanding 3,930
Class A-6, stated value $ per share; shares authorized, 62,333 shares issued
and outstanding 1,000
Common stock of Company, par value $0.017 per share; 5,000,000 shares authorized,
333,614 shares issued and outstanding 6
Retained earnings 3,115
-------
Total shareholders' equity 13,157
-------
$53,271
=======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-52
<PAGE> 167
SPI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ In Thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months ended
--------------------------------------
June 30, June 30,
1997 1998
----------- -----------
<S> <C> <C>
NET SALES $ 9,837 $ 20,925
COST OF SALES 7,576 16,588
----------- -----------
Gross profit 2,261 4,337
----------- -----------
OPERATING EXPENSES:
Selling and administrative 499 1,183
Management and monitoring fees 56 84
Depreciation and amortization 306 667
----------- -----------
862 1,934
----------- -----------
Income from operations 1,400 2,403
----------- -----------
OTHER INCOME/(EXPENSE):
Interest expense, net (382) (835)
Miscellaneous income 2 1
----------- -----------
(380) (834)
----------- -----------
Income before provision for income taxes 1,020 1,569
PROVISION FOR INCOME TAXES 439 550
----------- -----------
Net income $ 581 $ 1,019
=========== ===========
NET INCOME PER SHARE:
Basic $ 0.36 $ 0.47
Diluted $ 0.31 $ 0.40
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic 1,600,000 2,190,616
Diluted 1,856,931 2,527,088
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-53
<PAGE> 168
SPI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ In Thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months ended
---------------------------
June 30, June 30,
1997 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 581 $ 1,019
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 306 667
Loss on sale of assets (50)
Changes in assets and liabilities, net of assets acquired and liabilities
assumed:
Accounts receivable (943) (688)
Inventories (10) 342
Prepaid expenses (57) 32
Other assets (976) (340)
Accounts payable (391) 189
Accrued liabilities (168) 149
-------- --------
Net cash provided by (used in) operating
activities (1,708) 1,370
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold
improvements (61) (220)
Proceeds from notes receivable from related
Party 1,600
Investment in Rosewood, net of cash
received -- (24,452)
-------- --------
Net cash provided by (used in) investing
Activities 1,539 (24,672)
-------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on notes payable (1,400) (1,321)
Additions to notes payable 1,231 20,097
Proceeds from issuance of common stock -- 4,931
-------- --------
Net cash provided by (used in) financing
activities (169) 23,707
-------- --------
NET INCREASE (DECREASE) IN CASH (339) 405
CASH, beginning of period 991 1,119
-------- --------
CASH, end of period $ 652 $ 1,524
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ -- $ --
======== ========
Cash paid during the period for income
taxes $ -- $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-54
<PAGE> 169
SPI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(In Thousands)
(unaudited)
1. Financial Statements
The accompanying consolidated financial statements included herein have
been prepared by the Company, without audit, and include all adjustments
which are, in the opinion of Management, necessary for a fair
presentation of the financial position as of June 30, 1998, the results
of operations and cash flows for the three-month period ended June 30,
1997 and June 30, 1998 pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). All such adjustments are of a
normal recurring nature. Certain information and footnote disclosures
normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Although
the Company believes that the disclosures in such financial statements
are adequate to make the information presented not misleading, these
consolidated statements should be read in conjunction with the Company's
fiscal 1998 audited consolidated financial statements and notes thereto
included in this Form S-4. The results of operations for the three-month
periods are not necessarily indicative of the results for a full year.
The financial statements include the accounts, from the date of
acquisition, of Office Master (acquired in February 1998) and Rosewood
(acquired in April 1998--see Note 6.)
2. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 30,
1998
-------
<S> <C>
Raw materials $ 3,237
Work-in-process 625
Finished goods 42
-------
3,904
Inventory reserve (112)
-------
3,792
=======
</TABLE>
3. Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". This Statement requires that all items that meet
the definition of comprehensive income be reported in a financial
statement for the period in which they are recognized. This Statement is
effective for fiscal years beginning after December 15, 1997 and was
adopted by the Company in the quarter ended June 30, 1998.
The Company had no comprehensive income adjustments for the period ended
June 30, 1998.
F-55
<PAGE> 170
4. Earnings per Share
The Company accounts for earnings per share in accordance with SFAS No.
128, "Earnings per Share." This Statement requires the presentation of
both basic and diluted net income per share for financial statement
purposes. Basic net income per share is computed by dividing income
available to common shareholders by the weighted average number of
common shares outstanding. Diluted net income per share includes the
effect of the potential shares outstanding, including dilutive stock
options using the treasury stock method.
Concurrent with the proposed merger, all outstanding shares of preferred
stock will convert into common stock. Pro forma earnings per share is
calculated using the pro forma weighted average number of common shares
outstanding that would have resulted from the preferred stock conversion
to common shares.
The following table reconciles the components of the pro forma basic net
income per share calculation to pro forma diluted net income per share.
<TABLE>
<CAPTION>
Income Shares Per share
Amount
------ ----- --------
<S> <C> <C> <C>
Basic Net Income per Share $1,019 2,190 $ 0.47
Effect of Dilutive Securities 341
------ ----- --------
Diluted Net Loss per share $1,019 2,531 $ 0.40
====== ===== ========
</TABLE>
5. Income Taxes
The effective tax rate differs from that computed at the Federal
statutory rate of 34 percent principally because of the effect of state
income taxes.
6. Rosewood Purchase Price Allocation
In April 1998, the Company consummated the acquisition of all
outstanding Rosewood shares. The assets and liabilities were recorded
based on relative fair market values as follows:
<TABLE>
<S> <C>
Assets acquired:
Cash $ 321
Accounts receivable, net 1,666
Prepaid and other assets 60
Notes receivable 475
Inventory 1,373
Property, plant and equipment, net 156
Goodwill 22,228
Non-compete covenant 500
-------
$26,779
-------
Liabilities assumed:
Accounts payable and
accrued liabilities 2,006
-------
Net purchase price $24,773
=======
</TABLE>
F-56
<PAGE> 171
Included in the purchase price above are related transaction costs of
$262,000, including fees to KRG Capital of $75,000.
7. Stockholders' Equity
Stockholders' equity activity consists of the following:
<TABLE>
<CAPTION>
Total
Common Stock Preferred Stock Share-
----------------------- ----------------------- Retained holders'
Shares Amount Shares Amount Earnings Equity
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
March 31, 1998 334 $ 6 1,399 $ 4,600 $ 2,096 $ 6,702
Series A-5
issuance 500 3,930 3,930
Series A-6
issuance 62 1,000 1,000
Series A-3
warrants
issued -- 506 506
Net income 1,019 1,019
BALANCE,
June 30, 1998 334 $ 6 1,961 $10,036 $ 3,115 $13,157
======= ======= ======= ======= ======= =======
</TABLE>
8. Proposed acquisition
In June 1998, the Company signed a letter of intent to acquire a
Florida-based modular building manufacturer. The proposed purchase price
consists of a base price of $2.0 million plus additional consideration
based on future earnings. No assurance can be provided that the
transaction will be consummated.
F-57
<PAGE> 172
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
Office Master of Texas, Inc.:
We have audited the accompanying balance sheet of Office Master of Texas, Inc.
(a Texas corporation) as of December 31, 1997, and the related statements of
income and retained earnings and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Office Master of Texas, Inc. as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
As discussed more fully in Note 9 to the financial statements, the Company's
shareholder has entered into a letter of intent to sell all shares of common
stock currently outstanding.
Dallas, Texas,
January 16, 1998
F-58
<PAGE> 173
OFFICE MASTER OF TEXAS, INC.
BALANCE SHEET--DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash $ 277,996
Accounts receivable 480,453
Inventories 839,524
Note receivable from shareholder 82,000
-----------
Total current assets 1,679,973
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost:
Buildings 10,365
Vehicles and equipment 127,409
Leasehold improvements 79,238
-----------
Less- Accumulated depreciation (62,271)
-----------
Total assets $ 1,834,714
===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 295,796
Accrued liabilities 169,478
Notes payable 310,162
Note payable to shareholder 46,000
Income taxes payable 73,670
-----------
Total current liabilities 895,106
LONG-TERM LIABILITIES:
Deferred tax liability 8,573
Notes payable, net of current portion 131,070
-----------
Total long-term liabilities 139,643
Total liabilities 1,034,749
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, par value $1 per share: 1,000 shares
authorized, issued and outstanding 1,000
Retained earnings 798,965
-----------
Total liabilities and shareholder's equity $ 1,834,714
===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-59
<PAGE> 174
OFFICE MASTER OF TEXAS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
NET SALES $ 8,328,105
COST OF SALES 7,468,292
-----------
Gross profit 859,813
OPERATING EXPENSES:
Selling and administrative expenses 867,154
Depreciation and amortization expense 16,866
-----------
Loss from operations (24,207)
OTHER INCOME (EXPENSE):
Interest income 7,884
Miscellaneous income 4,061
-----------
Loss before benefit from income taxes (12,262)
BENEFIT FROM INCOME TAXES (3,924)
-----------
Net loss (8,338)
RETAINED EARNINGS, beginning of year 807,303
-----------
RETAINED EARNINGS, end of year $ 798,965
===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-60
<PAGE> 175
OFFICE MASTER OF TEXAS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,338)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization 16,866
Decrease in accounts receivable 522,324
Increase in inventories (192,165)
Decrease in note receivable from related party 11,491
Decrease in other assets 10,020
Increase in accounts payable 1,831
Increase in accrued liabilities 125,326
Increase in deferred tax liability 1,543
Decrease in income taxes payable (195,958)
---------
Net cash provided by operating activities 292,940
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of equipment and leasehold improvements 8,843
---------
Net cash provided by investing activities 8,843
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (199,585)
---------
Net cash used in financing activities (199,585)
NET INCREASE IN CASH 102,198
---------
CASH, beginning of year 175,798
CASH, end of year $277,996
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 37,365
=========
Cash paid during the year for income taxes $ 192,034
=========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-61
<PAGE> 176
OFFICE MASTER OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. COMPANY OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
Organization and Business
Office Master of Texas, Inc. (the "Company"), manufactures modular buildings at
its production facility in Glen Rose, Texas, and distributes to customers
throughout the United States, primarily in the South. The Company's customers
include dealers and leasing companies who then sell or lease the buildings to
third parties operating in various industries. The Company is 100% owned by
Bertrand Taylor (the "shareholder").
Inventories
Inventories consist of raw materials, work-in-process, and finished goods and
are stated at the lower of cost or market on first-in first-out basis. The
following is a summary of inventory by component:
<TABLE>
<S> <C>
Raw materials $458,228
Work-in-process 95,669
Finished goods 285,627
</TABLE>
Work-in-process consists of raw materials and overhead.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation is
computed using the straight-line method over the following useful lives:
Buildings 31.5 years
Vehicles and equipment Five to ten years
Leasehold improvements Useful life or life of
the lease, whichever is
shorter
Major renewals or betterments are capitalized while maintenance costs and
repairs are expensed in the period incurred.
Revenue Recognition
The Company recognizes revenue upon completion of the buildings and transfer of
title. Buildings are maintained on the Company's property until the customer
arranges for delivery.
F-62
<PAGE> 177
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. NOTE RECEIVABLE FROM SHAREHOLDER:
Note receivable from the shareholder represents advances to the shareholder.
Interest accrues monthly on the receivable at 6.5%. Pursuant to the agreement
entered into as described in Note 9, this receivable will be paid prior to the
close of the transaction described therein.
3. NOTES PAYABLE:
Notes payable consists of five secured notes payable to two banks. These notes
accrue interest at rates ranging from 9.5% to 10.5%. Amounts due on the note
payable in future years are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1998 $310,162
1999 53,831
2000 55,012
2001 22,227
--------
$441,232
</TABLE>
4. NOTE PAYABLE TO SHAREHOLDER:
Note payable to the shareholder represents advances from the shareholder.
Interest accrues monthly on the payable at 10.95%. Pursuant to the agreement
entered into as described in Note 9, this payable will be paid prior to the
close of the transaction described therein.
5. INCOME TAXES:
Deferred income taxes arise as a result of temporary difference in the methods
used to determine income for financial reporting versus income tax reporting
purposes. The components of the Company's net deferred tax liability are as
follows:
<TABLE>
<S> <C>
Current $(2,381)
Deferred (1,543)
-------
Benefit from income taxes $(3,924)
=======
</TABLE>
The provision for income taxes for the year ended December 31, 1997, is
comprised of the following:
<TABLE>
<S> <C>
Deferred tax asset-
Warranty provision $ 5,520
Deferred tax liability-
Depreciation and amortization (14,093)
--------
Net deferred tax liability $ (8,573)
========
</TABLE>
F-63
<PAGE> 178
6. LEASE COMMITMENTS:
The Company conducts its major operations from a building owned by the
shareholder and currently pays a monthly rental fee of $3,300 pursuant to an
informal agreement. The Company also incurred rental expense during a portion of
the year related to a parcel of land adjacent to the Company's facility. Such
land was sold to the Company during the year in exchange for an agreement to
employ additional county residents. The current year rent expense was $60,906.
7. ACCRUED LIABILITIES:
The components of accrued liabilities at December 31, 1997, consist of the
following:
<TABLE>
<S> <C>
Sales taxes $83,108
Warranty reserve 17,250
Interest 11,654
Payroll 42,230
Payroll taxes and withheld income taxes 2,785
Property taxes 12,451
</TABLE>
8. CONCENTRATION OF CREDIT RISK:
The Company had six customers which accounted for approximately 88% of net sales
during the year, and approximately 93% of accounts receivable at December 31,
1997.
9. SUBSEQUENT EVENT:
On December 10, 1997, the shareholder entered into an agreement to sell all of
the outstanding shares of the Company for an amount substantially in excess of
the net book value of the Company. Pursuant to this agreement, the shareholders
agree to, among other things, (1) repay all related party notes and advances,
plus accrued interest, (2) enter into one-year consulting agreements, and (3)
enter into five-year noncompete agreements. The transaction is expected to close
in February 1998.
F-64
<PAGE> 179
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rosewood Enterprises, Inc. Modular Manufacturing:
We have audited the accompanying balance sheets of ROSEWOOD ENTERPRISES, INC.
MODULAR MANUFACTURING (formerly known as Arizona Millwork, Inc.) as of December
31, 1997 and 1996, and the related statements of operations, shareholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rosewood Enterprises, Inc.
Modular Manufacturing as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Phoenix, Arizona,
March 17, 1998.
F-65
<PAGE> 180
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
DBA ROSEWOOD ENTERPRISES MODULAR MFG.
BALANCE SHEETS
<TABLE>
<CAPTION>
Years Ended Three Months Ended
December 31, March 31,
---------------------------- ----------------------------
1997 1996 1998 1997
----------- ----------- ----------- -----------
ASSETS (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 108,866 $ 429,692 $ 179,247 $ 864,131
Accounts receivable, net of allowance for doubtful
accounts of $20,000 1,383,876 1,283,365 2,264,851 1,720,999
Inventories 1,454,520 1,330,076 1,951,692 1,391,726
Prepaid expenses 45,998 249,397 52,301 43,216
----------- ----------- ----------- -----------
Total current assets 2,993,260 3,292,530 4,448,091 4,020,072
EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
net 163,722 210,731 139,588 249,340
DEFERRED TAX ASSET 138,774 20,000 157,974 20,000
----------- ----------- ----------- -----------
Total assets $ 3,295,756 $ 3,523,261 $ 4,745,653 $ 4,289,412
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 468,813 $ 590,588 $ 1,605,090 $ 813,464
Income taxes payable 63,111 20,000 297,094 107,166
Accrued payroll and related liabilities 473,366 281,997 246,731 273,168
Accrued liabilities 106,511 31,000 329,285 70,389
Current portion of notes payable 200,000 -- 200,000 --
----------- ----------- ----------- -----------
Total current liabilities 1,311,801 923,585 2,678,200 1,264,187
OTHER LIABILITIES (Note 7) 762,771 -- 566,937 --
NOTES PAYABLE, net of current portion 1,275,437 1,211,260
NOTE PAYABLE TO RELATED PARTY 600,000 600,000
----------- ----------- ----------- -----------
Total liabilities 3,950,009 923,585 5,056,397 1,264,187
----------- ----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Nonvoting common stock, $.001 par value,
10,000 shares authorized, 1,011 and 4,049
shares issued and outstanding at
December 31, 1997
and 1996, respectively 1 4 1 4
Voting common stock, $.001 par value, 1,000 shares
authorized, 101 and 405 shares issued and
outstanding at December 31, 1997 and 1996,
respectively -- -- -- --
Additional paid-in capital 338,423 338,423 338,423 338,423
Treasury stock (4,884,599) -- (4,884,599) --
Retained earnings 3,891,922 2,261,249 4,235,431 2,686,798
----------- ----------- ----------- -----------
Total shareholders' equity (deficit) (654,253) 2,599,676 (310,744) 3,025,225
----------- ----------- ----------- -----------
Total liabilities and shareholders' equity (deficit) $ 3,295,756 $ 3,523,261 $ 4,745,653 $ 4,289,412
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-66
<PAGE> 181
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
DBA ROSEWOOD ENTERPRISES MODULAR MFG.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months
For the Years Ended December 31, Ended March 31,
----------------------------------------------- ------------------------------
1997 1996 1995 1998 1997
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
NET SALES $ 31,875,003 $ 18,361,747 $ 19,859,641 $ 6,724,383 $ 6,368,789
COST OF SALES 26,482,353 15,965,611 16,573,200 5,632,444 5,258,207
------------ ------------ ------------ ------------ ------------
Gross profit 5,392,650 2,396,136 3,286,441 1,091,939 1,110,582
OPERATING EXPENSES:
General and administrative expenses 2,551,986 1,767,241 1,890,964 478,392 412,364
Professional fees 250,000 300,000 375,000 -- --
------------ ------------ ------------ ------------ ------------
Income from operations 2,590,664 328,895 1,020,477 613,547 698,218
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (81,482) -- (53) (42,655) --
Interest income 46,980 50,667 47,528 3,503 8,675
Other income 180,650 213 29,404 3,046 --
Loss on sale of assets, net (28,802) -- -- -- --
------------ ------------ ------------ ------------ ------------
117,346 50,880 76,879 (36,106) 8,675
------------ ------------ ------------ ------------ ------------
Income before provision for
income taxes 2,708,010 379,775 1,097,356 577,441 706,893
PROVISION FOR INCOME TAXES 1,077,337 143,422 453,647 233,932 281,344
------------ ------------ ------------ ------------ ------------
Net income $ 1,630,673 $ 236,353 $ 643,709 $ 343,509 $ 425,549
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE> 182
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
DBA ROSEWOOD ENTERPRISES MODULAR MFG.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Voting Nonvoting Additional
Common Stock Common Stock Paid-in Treasury Retained
Shares Amount Shares Amount Capital Stock Earnings Total
----------- ----- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1994 405 $ -- 4,049 $ 4 $ 338,423 $ -- $ 1,381,187 $ 1,719,614
Net income -- -- -- -- -- -- 643,709 643,709
----------- ----- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
December 31, 1995 405 -- 4,049 4 338,423 -- 2,024,896 2,363,323
Net income -- -- -- -- -- -- 236,353 236,353
----------- ----- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
December 31, 1996 405 -- 4,049 4 338,423 -- 2,261,249 2,599,676
Purchase of
common stock (304) -- (3,038) (3) -- (4,884,599) -- (4,884,602)
Net income -- -- -- -- -- -- 1,630,673 1,630,673
----------- ----- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
December 31, 1997 101 -- 1,011 1 338,423 (4,884,599) 3,891,922 (654,253)
Net income
(unaudited) -- -- -- -- -- -- 343,509 343,509
----------- ----- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, (unaudited)
March 31, 1998 101 $ -- 1,011 $ 1 $ 338,423 $(4,884,599) $ 4,235,431 $ (310,744)
=========== ===== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE> 183
ARIZONA MILLWORK, INC.
DBA ROSEWOOD ENTERPRISES MODULAR MFG.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months
For the Years Ended December 31, Ended March 31,
----------------------------------------- --------------------------
1997 1996 1995 1998 1997
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,630,673 $ 236,353 $ 643,709 $ 343,509 $ 425,549
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Depreciation 109,317 92,097 71,284 24,134 24,144
Deferred income taxes (118,774) -- (20,000) (19,200) --
Loss on sale of assets 28,802 -- -- -- --
Changes in assets and liabilities:
Increase in accounts receivable (100,511) (384,175) (298,420) (880,975) (437,634)
Decrease (increase) in inventories (124,444) (489,682) 422,957 (497,172) (61,650)
Decrease (increase) in prepaid expenses 203,399 (150,868) (50,940) (6,303) 206,181
Increase (decrease) in income tax payables 43,111 (432,634) 404,871 233,983 87,166
Increase (decrease) in accounts payable (121,775) 329,942 (599,092) 1,136,277 222,876
Increase in accrued payroll and related
liabilities 191,369 75,980 120,781 (226,635) (8,829)
Increase (decrease) in accrued liabilities 75,511 (11,887) (126,776) 222,774 39,389
Increase in other liabilities 183,771 -- -- (195,834) --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities 2,000,449 (734,874) 568,374 134,558 497,192
----------- ----------- ----------- ----------- -----------
CASH FLOWS FOR INVESTING ACTIVITIES:
Purchases of equipment and
leasehold improvements (103,110) (82,965) (111,601) -- (62,753)
Proceeds from sale of equipment 12,000 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities (91,110) (82,965) (111,601) -- (62,753)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock (3,305,602) -- -- -- --
Proceeds from notes payable 1,600,000 -- -- -- --
Principal payments on notes payable (524,563) -- -- (64,177) --
----------- ----------- ----------- ----------- -----------
Net cash used in financing
activities (2,230,165) -- -- (64,177) --
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (320,826) (817,839) 456,773 70,381 434,439
CASH AND CASH EQUIVALENTS,
beginning of year 429,692 1,247,531 790,758 108,866 429,692
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year $ 108,866 $ 429,692 $ 1,247,531 $ 179,247 $ 864,131
=========== =========== =========== =========== ===========
</TABLE>
(continued)
F-69
<PAGE> 184
<TABLE>
<CAPTION>
For the Three Months
For the Years Ended December 31, Ended March 31,
----------------------------------------- ------------------------
1997 1996 1995 1998 1997
---------- ----------- ----------- ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $ 94,982 $ -- $ -- $ 42,655 $ --
========== =========== =========== =========== ==========
Cash paid during the year for income taxes $1,153,000 $ 336,000 $ 21,300 $ -- $ --
========== =========== =========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF
NONCASH TRANSACTIONS:
Common stock purchased through issuance
of a note payable $1,000,000 $ -- $ -- $ -- $ --
========== =========== =========== =========== ==========
Common stock purchased through other
long-term liabilities $ 579,000 $ -- $ -- $ -- $ --
========== =========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE> 185
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
DBA ROSEWOOD ENTERPRISES MODULAR MFG.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) COMPANY OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS
Rosewood Enterprises, Inc. Modular Manufacturing, formerly known as Arizona
Millwork, Inc. (the Company), manufactures modular buildings at its production
facility in Phoenix, Arizona, and distributes to customers throughout the
western United States. The Company's customers include dealers and leasing
companies who sell or lease the buildings to third parties operating in various
industries.
FINANCIAL STATEMENTS
The accompanying consolidated financial statements included herein have been
prepared by the Company. Quarterly results have been prepared, without audit,
and include all adjustments, which are, in the opinion of Management, necessary
for a fair presentation of the financial position as of March 31, 1998, the
results of operations and cash flows for the three-month period ended March
31, 1997 and March 31, 1998 pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). All such adjustments are of a normal
recurring nature. Certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted for the
quarterly results pursuant to such rules and regulations. Although the Company
believes that the disclosures in such financial statements are adequate to make
the information presented not misleading, these consolidated statements should
be read in conjunction with the Company's audited consolidated financial
statements and notes thereto included herein. The results of operations for the
three-month periods are not necessarily indicative of the results for a full
year.
CASH AND CASH EQUIVALENTS
The Company considers all cash and highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents. Cash
equivalents consist of investments in a money market account. Cash equivalents
are recorded at cost of $17,048 and $363,314 at December 31, 1997 and 1996,
respectively, which approximates market value.
INVENTORIES
Inventories consist of raw materials and work-in-process and are stated at the
lower of cost (first-in first-out) or market. Work-in-process consists of raw
materials and overhead. Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, December 31, March 31, March 31,
1997 1996 1997 1998
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Raw materials $1,193,530 $ 971,772 $1,053,374 $1,532,992
Insignias -- -- 1,284 --
Work-in-process 260,990 358,304 337,068 418,700
---------- ---------- ---------- ----------
Total inventories $1,454,520 $1,330,076 $1,391,726 $1,951,692
========== ========== ========== ==========
</TABLE>
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation is
computed using the straight-line method over the assets' useful lives or life of
the lease, whichever is shorter.
Equipment and leasehold improvements at December 31 is comprised of the
following:
<TABLE>
<CAPTION>
Useful
Life 1997 1996
---- --------- ---------
<S> <C> <C> <C>
Automotive equipment 3-5 $ 199,855 $ 164,162
Furniture and fixtures 5-10 208,691 208,691
Leasehold improvements 5-10 33,545 33,545
Warehouse equipment 5-7 202,911 187,205
--------- ---------
645,002 593,603
Less - accumulated depreciation (481,280) (382,872)
--------- ---------
$ 163,722 $ 210,731
========= =========
</TABLE>
Major renewals or betterments are capitalized while maintenance costs and
repairs are expensed in the period incurred. Upon retirement or disposal of
depreciable assets, the cost and related accumulated depreciation are removed
from the accounts and the resulting gain or loss is reflected in operations.
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of,
requires that long-lived assets to be held and used be
F-71
<PAGE> 186
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable based on the
estimated future cash flows. In management's opinion, no such events or changes
in circumstances have occurred.
PRODUCT WARRANTY
The Company provides a one-year parts and labor warranty on units sold. The
Company provides, by a current charge to income, an amount it estimates will be
needed to cover future warranty obligations for products sold during the year.
The accrued liability for warranty costs of $71,600 and $31,000 at December 31,
1997 and 1996, respectively, is included in accrued liabilities in the
accompanying balance sheets.
REVENUE RECOGNITION
The Company recognizes revenue upon completion of the buildings and transfer of
title to the customer. Customer-owned buildings are often maintained on the
Company's premises until the customer arranges for pickup and delivery.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
OTHER INCOME
Other income for the year ended December 31, 1997 included approximately
$130,000 of bad debt recovery and a dividend of approximately $50,000 received
from the Company's workers' compensation carrier.
(2) NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER
----------------------------
1997 1996
------------ --------
<S> <C> <C>
Note payable to bank, payments of principal and interest due monthly,
interest at base rate (9.5.% at December 31, 1997) plus 1% per annum,
guaranteed by the Company's president, due August 27, 2002, secured by
receivables, inventories, and equipment. $ 475,437 $ --
Note payable to a former shareholder, monthly payments of interest only
for the first 24 months, monthly payments of principal and interest
thereafter, interest at 11% per annum, guaranteed by the Company's
president, due August 28, 2004, secured by all of the Company's assets. $1,000,000 $ --
------------ --------
$1,475,437 $ --
Less - current portion (200,000) --
------------ --------
$1,275,437 --
============ ========
Amounts due on the note payable in future years are as follows:
</TABLE>
F-72
<PAGE> 187
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C> <C>
1998 $ 200,000
1999 251,000
2000 240,080
2001 183,700
2002 204,963
Thereafter 395,694
----------
$1,475,437
==========
</TABLE>
Additionally, the Company has a note payable to the Company's president.
Payments of interest are due quarterly at 9%; with principal due August 29,
2006. The note is secured by all the Company's assets.
(3) LINE OF CREDIT:
In August 1997, the Company obtained a bank revolving line of credit for
borrowings in an amount that is the lower of $500,000 or 80% of eligible
accounts receivable and 20% of raw materials inventory as defined in the line of
credit agreement. Interest accrues at the bank's base rate (9.5% at December 31,
1997) plus 1% on the outstanding balance and is payable monthly. The line of
credit is guaranteed by the president and is secured by all of the Company's
assets. The line of credit expires May 1998 and contains certain financial
covenants. The Company had no borrowings under the line of credit during the
year ended December 31, 1997.
(4) INCOME TAXES:
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Deferred tax assets and liabilities are recorded
based on the differences between the financial statement and tax bases of assets
and liabilities at the tax rates in effect when these differences are expected
to reverse. The deferred provision for income taxes results from timing
differences in the recognition of certain revenue and expense items for
financial reporting and income tax reporting purposes.
The provision for income taxes for the years ended December 31 is comprised of
the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current $ 1,196,069 $ 143,422 $ 453,647
Deferred (118,732) -- --
----------- ----------- -----------
Provision for income taxes $ 1,077,337 $ 143,422 $ 453,647
=========== =========== ===========
</TABLE>
The components of the Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Reserves $ 36,774 $ 20,000
Deferred compensation 97,000 --
Depreciation and amortization 5,000 --
-------- --------
Net deferred tax asset $138,774 $ 20,000
======== ========
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective tax
rate for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate 34% 34% 34%
State taxes, net of federal benefit 6 6 6
Other -- (2) 1
--- --- ---
40% 38% 41%
=== === ===
</TABLE>
F-73
<PAGE> 188
(5) LEASE COMMITMENTS:
OPERATING LEASE
The Company conducts its major operations from a facility owned by a former
shareholder and currently pays a monthly rental fee of $16,300 plus taxes,
maintenance fees and insurance. The Company also incurred month-to-month rental
expense for storage during a portion of 1997, 1996 and 1995 related to a parcel
of land adjacent to the Company's facility. Rent expense was approximately
$245,000, $233,000, and $234,000 for the years ended December 31, 1997, 1996,
and 1995, respectively.
As of December 31, 1997, future minimum lease payments required under
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1998 $206,148
1999 204,390
2000 195,600
2001 195,600
2002 130,400
--------
$932,138
========
</TABLE>
(6) CONCENTRATION OF CREDIT RISK:
The Company is a wholesale manufacturer that sells its products to dealers, who
in turn, sell or lease the products to end-users. Financial instruments which
potentially expose the Company to concentrations of credit risk, as defined by
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit
Risk consist primarily of trade accounts receivable. The Company's trade
accounts receivable are not secured. The Company generally does not require
collateral upon delivery of its products.
The percentage of total sales to customers that in aggregate exceed 10% of total
sales are as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Customer #1 50% 44% 61%
Customer #2 29 11 18
Customer #3 -- 12 --
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES:
LITIGATION
In the normal course of its business, the Company is subject to certain
contractual guarantees and litigation. In management's opinion, upon
consultation with legal counsel, there is no current, pending, or threatened
litigation that will materially affect the Company's financial position or
results of operations.
DEFERRED COMPENSATION AND CONSULTING AGREEMENTS
On August 29, 1997, the Company entered into a deferred compensation agreement
with a former shareholder. For services provided from January 1997 to August
1997, the shareholder earned $200,000, payable quarterly over the next twelve
years. The Company recorded $200,000 of professional fees for the year ended
December 31, 1997 related to the deferred compensation agreement in the
accompanying statements of operations.
On August 29, 1997, the Company entered into a consulting agreement with the
same shareholder to provide consulting services to the Company for three years.
Under the consulting agreement, the former shareholder earns $150,000 in year
one, $100,000 in year two, and $75,000 in year three for these services. The
fees are paid quarterly over twelve years. The Company recognizes the expense
straight-line in each of the three years earned and recorded professional fees
of $50,000 for the year ended December 31, 1997, in the accompanying statements
of operations.
F-74
<PAGE> 189
Professional fees for 1996 and 1995 of $300,000 and $375,000, respectively, were
paid to this same former shareholder for management and consulting services.
PROFIT SHARING PLAN AND 401(k) SALARY SAVINGS PLAN
In 1987, the Company adopted a profit sharing plan and a 401(k) salary savings
plan (the Plan). All of the Company's employees are eligible to participate
after completing three months of service with the Company. The Company matches
25% of the employee's contribution up to an annual maximum of 6% of the
employee's annual compensation. In addition, the Company, at its discretion, may
make a profit sharing contribution. To be eligible for a profit sharing
contribution, the employee must work at least 1,000 hours during the Plan year
and be employed by the Company on the last day of the Plan year. The Company's
matching contributions and profit sharing contributions vest over a seven year
period. The Company contributed approximately $141,000, $48,000, and $94,000 to
the Plan for the years ended December 31, 1997, 1996, and 1995, respectively.
(8) STOCK PURCHASE:
On August 29, 1997, the Company entered into an agreement to purchase 303 shares
of voting common stock and 3,034 shares of nonvoting common stock (approximately
75% of the Company's outstanding voting and nonvoting common stock) for $1,462
per share from the then, majority shareholder, for $4,879,000. The transaction
was financed with cash from operations of $1,700,000, a loan from a bank for
$1,000,000, a note from the seller in the amount of $1,000,000 and a note from
the Company's president in the amount of $600,000. In connection with this
agreement, the Company entered into a non-compete agreement with this
shareholder. Under the agreement, the shareholder agreed not to compete with the
Company for twelve years in exchange for a total of $579,000, paid quarterly
over twelve years. The Company recorded the value of this agreement in the
accompanying balance sheets as additional consideration paid to acquire his
outstanding common stock. The corresponding liability is recorded in other
long-term liabilities in the accompanying balance sheets.
In addition, the Company purchased fractional shares from various minority
shareholders for approximately $6,000.
(9) DESCRIPTION OF SECURITIES:
REVERSE STOCK SPLIT
Information in the accompanying financial statements and notes to financial
statements gives retroactive effect to a reverse stock split effected October
31, 1997. Each holder of record of the Company's common stock received one share
of newly created nonvoting common stock and one-tenth of a share of the newly
created voting common stock for each 10,000 shares of common stock.
COMMON STOCK
The Company's capital stock consists of 10,000 shares of $.001 par value
nonvoting common stock and 1,000 shares of $.001 par value of voting common
stock. No holders of any shares of common stock have preemptive or preferential
right to acquire any additional shares. Holders of common stock will be entitled
to receive such dividends, if any, as may be declared by the board of directors
from time to time out of legally available funds. Holders of the voting common
stock are entitled to one vote for each share on all matters submitted to a vote
of shareholders. Holders of the nonvoting common stock have no voting rights.
Upon any liquidation, dissolution or winding up of the Company, and after paying
or adequately providing for the payment of all its obligations, the remainder of
the assets of the Company shall be distributed, either in cash or in kind, pro
rata to the holders of common stock.
(10) SUBSEQUENT EVENT:
In February 1998, the shareholders entered into an agreement to sell all of the
outstanding shares of the Company for an amount in excess of the net book value
of the Company. Pursuant to this agreement, the shareholders agree to, among
other things, enter into noncompete, consulting and employment agreements. The
transaction is expected to close in April 1998.
F-75
<PAGE> 190
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law empowers the
Registrant to indemnify, subject to the standards therein prescribed, any person
in connection with any action, suit or proceeding brought or threatened by
reason of the fact that such person is or was a director, officer, employee or
agent of the Registrant or is or was serving as such with respect to another
corporation or other entity at the request of the Registrant. Article VI of the
Registrant's By-Laws provides that such Registrant shall, to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law, indemnify its
directors and officers from and against any and all of the expenses, liabilities
or other matters referred to in or covered by said Article.
As permitted by Section 102 of the Delaware General Corporation Law, the
Registrant's Certificates of Incorporation includes a provision eliminating, to
the extent permitted by Delaware law, the personal liability of each director of
the Registrant to the Registrant or any of its stockholders for monetary damages
resulting from breaches of such director's fiduciary duty of care.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ------ -------
<S> <C>
2 Agreement and Plan of Reorganization and Merger, dated as of September 28, 1998, by and
between Modtech, Inc. and SPI Holdings, Inc. (included as Annex I to the Joint Proxy
Statement/Prospectus)
3.1 Certificate of Incorporation of Modtech Holdings, Inc.
3.2 Bylaws of Modtech Holdings, Inc.
3.3* Articles of Incorporation of Modtech, Inc.
3.4* Bylaws of Modtech, Inc.
3.5 Articles of Incorporation of SPI Holdings, Inc.
3.6 Bylaws of SPI Holdings, Inc.
3.7 Certificate of Designation of Modtech Holdings, Inc. Series A Preferred Stock
3.8 Designation of SPI Holdings, Inc. Series A-1, A-2, A-3, A-4, A-5 and A-6
Convertible Preferred Stock
4 Registration Rights Agreement
</TABLE>
II-1
<PAGE> 191
<TABLE>
<S> <C>
5** Opinion of Haddan & Zepfel LLP regarding the validity of securities offered hereby
8.1** Opinion of Gibson, Dunn & Crutcher LLP regarding certain tax matters
8.2** Opinion of Dorsey & Whitney LLP regarding certain tax matters
10.1 Transaction Advisory Agreement
10.2** Employment Agreement-- Evan M. Gruber
10.3** Employment Agreement-- Patrick Van Den Bossche
10.4** Employment Agreement-- Michael G. Rhodes
10.5* Lease between Modtech, Inc. and Pacific Continental Modular Enterprises, relating to the
Barrett Street property in Perris, California
10.6* Lease between Modtech, Inc. and Gerald Bashaw, relating to the Morgan Street Property in
Perris, California
10.7* Lease between Modtech, Inc. and BMG2, relating to the property in Lathrop, California
10.8* Industrial Development Bond agreements
10.9 Lease between Office Master of Texas, Inc. and Bertgrand L. Taylor, relating to the Gibbs
Boulevard property in Glen Rose, Texas
10.10 Lease between Baron Homes, Inc. and David V. Homme and Mary B. Homme, relating to the
South Cucamonga Avenue property in Rancho Cucamonga, California, assigned to SPI
10.11 Lease between Ronfran Incorporated d/b/a Standard Pacific Industries and Toth Enterprises,
relating to the Hermosa Avenue property in Rancho Cucamonga, California, assigned to SPI
10.12 Lease between Arizona Millwork, Inc. and The Rosenfield Family Trust, relating to the
Madison Avenue property in Phoenix, Arizona
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Arthur Andersen LLP
23.3** Consent of Haddan & Zepfel LLP (included in Exhibit 5)
23.4** Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 8.1)
23.5** Consent of Dorsey & Whitney LLP (included in Exhibit 8.2)
24 Powers of attorney (included on Page II-4 hereof)
27 Financial Data Schedule
99.1 Form of Modtech, Inc. proxy
</TABLE>
II-2
<PAGE> 192
<TABLE>
<S> <C>
99.2 Form of SPI Holdings, Inc. proxy
</TABLE>
- ------------------
* Incorporated by reference from Modtech's Annual Report on Form 10-K for
the year ended December 31, 1997 (Commission File No. 0-18680).
** To be filed by amendment.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this Registration
Statement.
(b) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(d) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this form,
within one business day of receipt of such request, and to send the incorporated
documents by first-class mail or equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(e) to supply by means of a post-effective amendment all information
concerning a transaction, and SPI being acquired involved therein, that was not
the subject of and included in the registration statement when it became
effective.
(f) that, for purposes of determining any liability under the Securities
Act of 1933, each filing of a Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of any employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(g) insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrants pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the
II-3
<PAGE> 193
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 194
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Newport Beach, California on October
26, 1998.
MODTECH HOLDINGS, INC.
By: s/Evan M. Gruber
---------------------------------------
Evan M. Gruber, Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below does hereby constitute and appoint Evan M. Gruber and Michael G.
Rhodes, and each of them, with full power to act without the other, his true and
lawful attorneys-in-fact and agents to act for him or her in his or her name,
place and stead, in any and all capacities, to sign a registration statement on
Form S-4 and any or all amendments thereto (including without limitation any
post-effective amendments thereto), and to file each of the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully, to all intents and purposes, as they
or he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by each of the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
s/Evan M. Gruber Chief Executive Officer October 26, 1998
- ----------------------------- and Director
Evan M. Gruber
s/Michael G. Rhodes Chief Operating and Chief October 26, 1998
- ----------------------------- Financial Officer (principal financial
Michael G. Rhodes and accounting officer)
s/Patrick Van Den Bossche President, Director October 26, 1998
- -----------------------------
Patrick Van Den Bossche
s/Charles A. Hamilton Director October 26, 1998
- -----------------------------
Charles A. Hamilton
s/Charles R. Gwirtsman Director October 26, 1998
- -----------------------------
Charles R. Gwirtsman
s/Charles C. McGettigan Director October 26, 1998
- -----------------------------
Charles C. McGettigan
s/Myron A. Wick III Director October 26, 1998
- -----------------------------
Myron A. Wick III
s/Daniel J. Donahoe III Director October 26, 1998
- -----------------------------
Daniel J. Donahoe III
</TABLE>
II-5
<PAGE> 195
EXHIBIT INDEX
NUMBER NAME OF EXHIBIT
- ------ ---------------
2 Agreement and Plan of Reorganization and Merger, dated as of
September 28, 1998, by and between Modtech, Inc. and SPI Holdings,
Inc. (included as Annex I to the Joint Proxy Statement/Prospectus)
3.1 Certificate of Incorporation of Modtech Holdings, Inc.
3.2 Bylaws of Modtech Holdings, Inc.
3.3* Articles of Incorporation of Modtech, Inc.
3.4* Bylaws of Modtech, Inc.
3.5 Articles of Incorporation of SPI Holdings, Inc.
3.6 Bylaws of SPI Holdings, Inc.
3.7 Certificate of Designation of Modtech Holdings, Inc. Series A
Preferred Stock
3.8 Designation of SPI Holdings, Inc. Series A-1, A-2, A-3, A-4, A-5 and
A-6 Convertible Preferred Stock
4 Registration Rights Agreement
5** Opinion of Haddan & Zepfel LLP regarding the validity of securities
offered hereby
8.1** Opinion of Gibson, Dunn & Crutcher LLP regarding certain tax matters
8.2** Opinion of Dorsey & Whitney LLP regarding certain tax matters
10.1 Transaction Advisory Agreement
10.2** Employment Agreement-- Evan M. Gruber
10.3** Employment Agreement-- Patrick Van Den Bossche
10.4** Employment Agreement-- Michael G. Rhodes
10.5* Lease between Modtech, Inc. and Pacific Continental Modular
Enterprises, relating to the Barrett Street property in Perris,
California
10.6* Lease between Modtech, Inc. and Gerald Bashaw, relating to the Morgan
Street Property in Perris, California
10.7* Lease between Modtech, Inc. and BMG2, relating to the property in
Lathrop, California
10.8* Industrial Development Bond agreements
10.9 Lease between Office Master of Texas, Inc. and Bertgrand L. Taylor,
relating to the Gibbs Boulevard property in Glen Rose, Texas
10.10 Lease between Baron Homes, Inc. and David V. Homme and Mary B. Homme,
relating to the South Cucamonga Avenue property in Rancho Cucamonga,
California, assigned to SPI
10.11 Lease between Ronfran Incorporated d/b/a Standard Pacific Industries
and Toth Enterprises, relating to the Hermosa Avenue property in
Rancho Cucamonga, California, assigned to SPI
10.12 Lease between Arizona Millwork, Inc. and The Rosenfield Family Trust,
relating to the Madison Avenue property in Phoenix, Arizona
<PAGE> 196
<TABLE>
<S> <C>
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Arthur Andersen LLP
23.3** Consent of Haddan & Zepfel LLP (included in Exhibit 5)
23.4** Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 8.1)
23.5** Consent of Dorsey & Whitney LLP (included in Exhibit 8.2)
24 Powers of attorney (included on Page II-4 hereof)
27 Financial Data Schedule
99.1 Form of Modtech, Inc. proxy
99.2 Form of SPI Holdings, Inc. proxy
</TABLE>
- ------------------
* Incorporated by reference from Modtech's Annual Report on Form 10-K for
the year ended December 31, 1997 (Commission File No. 0-18680).
** To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
MODTECH HOLDINGS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
================================================================================
ARTICLE I
NAME
The name of the corporation (the "Corporation") is:
Modtech Holdings, Inc.
ARTICLE II
REGISTERED OFFICE
The address of the Corporation's registered office in the State of
Delaware is Paracorp Incorporated, 15 East North Street, in the City of Dover,
County of Kent. The name of the Corporation's registered agent at such address
is Paracorp Incorporated.
ARTICLE III
POWERS
The purpose of the Corporation shall be to engage in any lawful act or
activity for which corporations may be organized and incorporated under the
General Corporation Law of the State of Delaware (the "GCL").
ARTICLE IV
CAPITAL STOCK
(a) The total number of shares of stock which the Corporation shall have
authority to issue is 30,000,000, consisting of 5,000,000 shares of preferred
stock, par value $0.01 per share ("Preferred Stock"), and 25,000,000 shares of
common stock, par value $0.01 per share ("Common Stock").
(b) The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized to provide for the issuance
of shares of Preferred Stock in series and, by filing a certificate pursuant to
the applicable law of the State of Delaware ("Preferred Stock Designation"), to
establish from time to time the number of shares to be
<PAGE> 2
included in each such series, and to fix the designation, powers, preferences
and rights of the shares of each such series and the qualifications, limitations
and restrictions thereof. The authority of the Board of Directors with respect
to each series shall include, but not be limited to, determination of the
following:
(1) The designation of the series, which may be by distinguishing
number, letter or title.
(2) The number of shares of the series, which number the Board of
Directors may thereafter (except where otherwise provided in the
Preferred Stock Designation) increase or decrease (but not below the
number of shares thereof then outstanding).
(3) Whether dividends, if any, shall be cumulative or
noncumulative and the dividend rate of the series.
(4) The dates on which dividends, if any, shall be payable.
(5) The redemption rights and price or prices, if any, for
shares of the series.
(6) The terms and amount of any sinking fund provided for the
purchase or redemption of shares of the series.
(7) The amounts payable on, and the preferences, if any, of
shares of the series in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the
Corporation.
(8) Whether the shares of the series shall be convertible into
shares of any other class or series, or any other security, of the
Corporation or any other corporation, and, if so, the specification of
such other class or series of such other security, the conversion price
or prices or rate or rates, any adjustments thereof, the date or dates
at which such shares shall be convertible and all other terms and
conditions upon which such conversion may be made.
(9) Restrictions on the issuance of shares of the same series or
of any other class or series.
(10) The voting rights, if any, of the holders of shares of the
series.
(c) The Common Stock shall be subject to the express terms of the
Preferred Stock and any series thereof. Each share of Common Stock shall be
equal to each other share of Common Stock. The holders of shares of Common Stock
shall be entitled to one vote for each such share upon all questions presented
to the stockholders.
Except as may be provided in this Certificate of Incorporation or in a
Preferred Stock Designation, or as may be required by law, the Common Stock
shall have the exclusive right to vote for the election of directors and for all
other purposes, and holders of Preferred Stock shall
2
<PAGE> 3
not be entitled to receive notice of any meeting of stockholders at which they
are not entitled to vote.
(d) The Corporation shall be entitled to treat the person in whose name
any share of its stock is registered as the owner thereof for all purposes and
shall not be bound to recognize any equitable or other claim to, or interest in,
such share on the part of any other person, whether or not the Corporation shall
have notice thereof, except as expressly provided by applicable law.
ARTICLE V
BYLAWS
In furtherance of, and not in limitation of, the powers conferred by
law, the Board of Directors is expressly authorized and empowered:
(1) to adopt, amend or repeal the By-laws of the Corporation;
provided, however, that the By-laws adopted by the Board of Directors
under the powers hereby conferred may be amended or repealed by the
Board of Directors or by the stockholders having voting power with
respect thereto, and
(2) from time to time to determine whether and to what extent,
and at what times and places, and under what conditions and regulations,
the accounts and books of the Corporation, or any of them, shall be open
to inspection of stockholders; and, except as so determined or as
expressly provided in this Certificate of Incorporation or in any
Preferred Stock Designation, no stockholder shall have any right to
inspect any account, book or document of the Corporation other than such
rights as may be conferred by applicable law.
The Corporation may in its By-laws confer powers upon the Board of
Directors in addition to the foregoing and in addition to the powers and
authorities expressly conferred upon the Board of Directors by applicable law.
ARTICLE VI
STOCKHOLDER MEETINGS
Subject to the rights of the holders of any series of Preferred Stock or
any other series or class of stock as set forth in this Certificate of
Incorporation to elect additional directors under specific circumstances, any
action required or permitted to be taken by the stockholders of the Corporation
must be effected at a duly called annual or special meeting of stockholders of
the Corporation and may not be effected by any consent in writing in lieu of a
meeting of such stockholders.
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ARTICLE VII
DIRECTORS
Subject to the rights of the holders of any series of Preferred Stock or
any other series or class of stock as set forth in this Certificate of
Incorporation to elect additional directors under specified circumstances, the
number of directors of the Corporation shall be fixed, and may be increased or
decreased from time to time, in such manner as may be prescribed by the By-laws
of the Corporation.
Unless and except to the extent that the By-laws of the Corporation
shall so require, the election of directors of the Corporation need not be by
written ballot.
Each director shall serve for a term ending on the date of the next
annual meeting; provided, that each director shall serve until his successor is
duly elected and qualified or until his death, resignation or removal.
Subject to the rights of the holders of any series of Preferred Stock or
any other series or class of stock as set forth in this Certificate of
Incorporation to elect additional directors under specified circumstances, any
director may be removed from office at any time by the stockholders, but only
for cause.
ARTICLE VIII
INDEMNIFICATION
Each person who is or was or has agreed to become a director or officer
of the Corporation, or each such person who is or was serving or who has agreed
to serve at the request of the Board of Directors or an officer of the
Corporation as an employee or agent of the Corporation or as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans (including the heirs, executors, administrators or estate of such person),
shall be indemnified by the Corporation, in accordance with the By-laws of the
Corporation, to the fullest extent permitted from time to time by the GCL as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than said law permitted prior to such amendment)
or any other applicable laws as presently or hereafter in effect. Without
limiting the generality or the effect of the foregoing, the Corporation may
enter into one or more agreements with any person which provide for
indemnification greater than or different from that provided in this Article
VIII. Any amendment or repeal of this Article VIII shall not adversely affect
any right or protection existing hereunder in respect of any act or omission
occurring prior to such amendment or repeal.
ARTICLE IX
LIMITATION OF DIRECTORS' LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach or alleged
breach of fiduciary duty as a director, except for liability (1) for any breach
of the director's duty of loyalty to the Corporation or its
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stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) under Section 174 of
the GCL, or (4) for any transaction from which the director derived an improper
personal benefit. Any amendment or repeal of this Article IX shall not adversely
affect any right or protection of a director of the Corporation existing
hereunder in respect of any act or omission occurring prior to such amendment or
repeal.
ARTICLE X
AMENDMENT
Except as may be expressly provided in this Certificate of
Incorporation, the Corporation reserves the right at any time and from time to
time to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation or a Preferred Stock Designation, and any other
provisions authorized by the laws of the State of Delaware at the time in force
may be added or inserted, in the manner now or hereafter prescribed herein or by
applicable law, and all rights, preferences and privileges of whatsoever nature
conferred upon stockholders, directors or any other persons whomsoever by and
pursuant to this Certificate of Incorporation in its present form or as
hereafter amended are granted subject to the right reserved in this Article X;
provided, however, that any amendment or repeal of any provision of this
Certificate of Incorporation shall not adversely affect any right or protection
existing hereunder in respect of any act or omission occurring prior to such
amendment or repeal; and provided further that no Preferred Stock Designation
shall be amended after the issuance of any shares of the series of Preferred
Stock created thereby, except in accordance with the terms of such Preferred
Stock Designation and the requirements of applicable law.
ARTICLE XI
INCORPORATOR
The name and mailing address of the incorporator is Sharon Beirdneau,
4675 MacArthur Court, Suite 710, Newport Beach, CA 92660.
IN WITNESS WHEREOF, I, the undersigned, being the incorporator
hereinbefore named, do hereby further certify that the facts hereinabove stated
are truly set forth and, accordingly, I have hereunto set my hand this 6th day
of October, 1998.
s/Sharon Beirdneau
------------------------------
Sharon Beirdneau, Incorporator
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EXHIBIT 3.2
BYLAWS
OF
MODTECH HOLDINGS, INC.
ARTICLE I
LAW, CERTIFICATE OF INCORPORATION AND BYLAWS
Section 1. These Bylaws are subject to the Certificate of Incorporation
of Modtech Holdings, Inc., the corporation. In these Bylaws, references to law,
the Certificate of Incorporation and Bylaws mean the law, the provisions of the
Certificate of Incorporation and the Bylaws as from time to time in effect.
ARTICLE II
STOCKHOLDERS
Section 1. Annual Meetings. The annual meeting of stockholders shall be
held at such place, on such date, and at such time as the Board of Directors
shall each year fix, which date shall be within thirteen months subsequent to
the later of the organization of the corporation or the last annual meeting of
stockholders, at which meeting they shall elect a Board of Directors and
transact such other business as may be required by law or these Bylaws or as may
properly come before the meeting.
Section 2. Special Meetings. A special meeting of the stockholders may
be called at any time by the Chairman of the Board, if any, or a majority of the
Board of Directors. A special meeting of the stockholders shall be called by the
Secretary, or in the case of the death, absence, incapacity or refusal of the
Secretary, by an Assistant Secretary or some other officer. Any such application
shall state the purpose or purposes of the proposed meeting. Any such call shall
state the place, date, hour, and purposes of the meeting.
Section 3. Place Of Meeting. All meetings of the stockholders for the
election of Directors or for any other purpose shall be held at such place
within or without the State of Delaware as may be determined from time to time
by the Chairman of the Board, if any, the President or the Board of Directors.
Any adjourned session of any meeting of the stockholders shall be held at the
place designated in the vote of adjournment.
Section 4. Notice Of Meetings. Except as otherwise provided by law, a
written notice of each meeting of stockholders stating the place, day and hour
thereof and, in the case of a special
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meeting, the purposes for which the meeting is called, shall be given not less
then ten (10) nor more than sixty (60) days before the meeting, to each
stockholder entitled to vote thereat, and to each stockholder who, by law, by
the Certificate of Incorporation or by these Bylaws, is entitled to notice, by
leaving such notice with him or at his residence or usual place of business, or
by depositing it in the United States mail, postage prepaid, and addressed to
such stockholder at his address as it appears in the records of the corporation.
Such notice shall be given by the Secretary, or by an officer or person
designated by the Board of Directors. As to any adjourned session of any meeting
of stockholders, notice of the adjourned meeting need not be given if the time
and place thereof are announced at the meeting at which the adjournment was
taken except that if the adjournment is for more than thirty (30) days or if
after the adjournment a new record date is set for the adjourned session, notice
of any such adjourned session of the meeting shall be given in the manner
heretofore described. No notice of any meeting of stockholders or any adjourned
session thereof need be given to a stockholder if a written waiver of notice,
executed before or after the meeting or such adjourned session by such
stockholder, is filed with the records of the meeting or if the stockholder
attends such meeting without objecting at the beginning of the meeting to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
meeting of the stockholders or any adjourned session thereof need be specified
in any written waiver of notice.
Section 5. Quorum Of Stockholders. At any meeting of the stockholders a
quorum as to any matter shall consist of a majority of the votes entitled to be
cast on the matter, except where a larger quorum is required by law, by the
Certificate of Incorporation or by these Bylaws. Any meeting may be adjourned
from time to time by a majority of the votes properly cast upon the question,
whether or not a quorum is present. If a quorum is present at an original
meeting, a quorum need not be present at an adjourned session of that meeting.
Shares of its own stock belonging to the corporation or to another corporation,
if a majority of the shares entitled to vote in the election of directors of
such other corporation is held, directly or indirectly, by the corporation,
shall neither be entitled to vote nor be counted for quorum purposes; provided,
however, that the foregoing shall not limit the right of any corporation to vote
stock, including but not limited to its own stock, held by it in a fiduciary
capacity.
Section 6. Action By Vote. When a quorum is present at any meeting, a
plurality of the votes properly cast for election to any office shall elect to
such office and a majority of the votes properly cast upon any question other
than an election to an office shall decide the question, except when a larger
vote is required by law, by the Certificate of Incorporation or by these Bylaws.
No ballot shall be required for any election unless requested by a stockholder
present or represented at the meeting and entitled to vote in the election.
Section 7. Proxy Representation. Every stockholder may authorize another
person or persons to act for him by proxy in all matters in which a stockholder
is entitled to participate, whether by waiving notice of any meeting, objecting
to or voting or participating at a meeting, or expressing consent or dissent
without a meeting. Every proxy must be signed by the stockholder or by his
attorney-in-fact. No proxy shall be voted or acted upon after three years from
its date unless such proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it
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states that it is irrevocable and, if, and only as long as, it is coupled with
an interest sufficient in law to support an irrevocable power. A proxy may be
made irrevocable regardless of whether the interest with which it is coupled is
an interest in the stock itself or an interest in the corporation generally. The
authorization of a proxy may but need not be limited to specified action,
provided, however, that if a proxy limits its authorization to a meeting or
meetings of stockholders, unless otherwise specifically provided such proxy
shall entitle the holder thereof to vote at any adjourned session but shall not
be valid after the final adjournment thereof.
Section 8. Inspectors. The Directors or the person presiding at the
meeting may, and shall if required by applicable law, appoint one or more
inspectors of election and any substitute inspectors to act at the meeting or
any adjournment thereof. Each inspector, before entering upon the discharge of
his duties, shall take and sign an oath faithfully to execute the duties of
inspector at such meeting with strict impartiality and according to the best of
his ability. The inspectors, if any, shall determine the number of shares of
stock outstanding and the voting power of each, the shares of stock represented
at the meeting, the existence of a quorum, the validity and effect of proxies,
and shall receive votes, ballots or consents, hear and determine all challenges
and questions arising in connection with the right to vote, count and tabulate
all votes, ballots or consents, determine the result, and do such acts as are
proper to conduct the election or vote with fairness to all stockholders. On
request of the person presiding at the meeting, the inspectors shall make a
report in writing of any challenge, question or matter determined by them and
execute a certificate of any fact found by them.
Section 9. List Of Stockholders. The Secretary shall prepare and make,
at least ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at such meeting, arranged in alphabetical order
and showing the address of each stockholder and the number of shares registered
in his name. The stock ledger shall be the only evidence as to who are
stockholders entitled to examine such list or to vote in person or by proxy at
such meeting.
Section 10. Stockholder Proposals. At an annual meeting of stockholders,
only such business shall be conducted, and only such proposals shall be acted
upon, as shall have been properly brought before the annual meeting of
stockholders (i) by or at the direction of the Board of Directors or (ii) by a
stockholder of the corporation who complies with the procedures set forth in
this Section 10. For business or a proposal to be properly brought before an
annual meeting of stockholders by a stockholder, the stockholder must have given
timely notice thereof in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 120 days nor
more than 150 days prior to the first anniversary of the date of the Company's
notice of annual meeting provided with respect to the previous year's annual
meeting of stockholders; provided that if no annual meeting of stockholders was
held in the previous year or the date of the annual meeting of stockholders has
been changed to be more than 30 calendar days earlier than or 60 calendar days
after such anniversary, notice by the stockholder, to be timely, must be so
received not more than 90 days nor later than the later of (i) 60 days prior to
the annual meeting of stockholders or (ii) the close of business on the 10th day
following the date on which notice of the date of the meeting is given to
stockholders or made public, whichever first occurs.
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A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before an annual meeting of
stockholders (i) a description, in 500 words or less, of the business desired to
be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and address, as such information
appears on the Corporation's books, of the stockholder proposing such business
and any other stockholders known by such stockholder to be supporting such
proposal, (iii) the class and number of shares of the Corporation that are
beneficially owned by such stockholder and each other stockholder known by such
stockholder to be supporting such proposal on the date of such stockholder's
notice, (iv) a description, in 500 words or less, of any interest of the
stockholder in such proposal and (v) a representation that the stockholder is a
holder of record of stock of the Corporation and intends to appear in person or
by proxy at the meeting to present the proposal specified in the notice.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that any business or proposal was not properly brought
before the meeting in accordance with the procedures prescribed by this Section
10, and if he should so determine, he shall so declare to the meeting and any
such business not properly brought before the meeting shall not be transacted.
Notwithstanding the foregoing, nothing in this Section 10 shall be interpreted
or construed to require the inclusion of information about any such proposal in
any proxy statement distributed by, at the direction of, or on behalf of, the
Board of Directors.
Section 11. Nomination for Election. Nominations of persons for election
to the Board of Directors may be made at an annual meeting of stockholders or
special meeting of stockholders called by the Board of Directors for the purpose
of electing directors (i) by or at the direction of the Board of Directors or
(ii) by any stockholder of the Corporation entitled to vote for the election of
directors at such meeting who complies with the notice procedures set forth in
this Section 11. Such nomination, other than those made by or at the direction
of the Board shall be made pursuant to timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than 120 days nor more than 150 days prior to the first anniversary of the
date of the Company's notice of annual meeting provided with respect to the
previous year's annual meeting of stockholders; provided that if no annual
meeting of stockholders was held in the previous year or the date of the annual
meeting of stockholders has been changed to be more than 30 calendar days
earlier than or 60 calendar days after such anniversary, notice by the
stockholder, to be timely, must be so received not more than 90 days nor later
than the later of (i) 60 days prior to the annual meeting of stockholders or
(ii) the close of business on the 10th day following the date on which notice of
the date of the meeting is given to stockholders or made public, whichever first
occurs.
A stockholder's notice to the Secretary shall set forth (i) as to each
person whom the stockholder proposes to nominate for election or reelection as a
director (a) the name, age, business address and residence address of such
person, (b) the principal occupation or employment of such person, (c) the class
and number of shares of the Corporation which are beneficially owned by such
person on the date of such stockholder's notice and (d) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for
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election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended, or any
successor statute thereto (including, without limitation, such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (ii) as to the stockholder giving notice (a) the name and
address, as such information appears on the Corporation's books, of such
stockholder and any other stockholders known by such stockholder to be
supporting such nominee(s), (b) the class and number of shares of the
Corporation which are beneficially owned by such stockholder and each other
stockholder known by such stockholder to be supporting such nominee(s) on the
date of such stockholders notice, (c) a representation that the stockholder is a
holder of record of stock of the Corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; and (iii) a description of all
arrangements or understandings between the stockholder and each nominee and
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder.
Subject to the rights, if any, of the holders of any series of Preferred
Stock then outstanding, no person shall be eligible for election as a director
of the Corporation unless nominated in accordance with the procedures set forth
in this Section 11. The chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by this Section 11 and if he should so
determine, he shall so declare to the meeting and the defective nomination shall
be disregarded.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Number. The Board of Directors shall be seven (7) in number.
The number of directors may be fixed at any time by the affirmative vote of a
majority of the directors at a regular or special meeting called for that
purpose, provided, however, that no vote to decrease the number of the directors
of the Corporation shall shorten the term of any incumbent director.
Directors need not be stockholders.
Section 2. Tenure. Except as otherwise provided by law, by the
Certificate of Incorporation or by these Bylaws, each director shall hold office
until the next annual meeting and until his successor is elected and qualified,
or until he sooner dies, resigns, is removed or becomes disqualified.
Section 3. Powers. The business and affairs of the corporation shall be
managed by or under the direction of the Board of Directors who shall have and
may exercise all the powers of the corporation and do all such lawful acts and
things as are not by law, the Certificate of Incorporation or these Bylaws
directed or required to be exercised or done by the stockholders.
Section 4. Vacancies. Vacancies and any newly created directorships
resulting from any increase in the number of directors may be filled by vote of
the holders of the particular class or
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series of stock entitled to elect such director at a meeting called for the
purpose, or by a majority of the directors then in office, although less than a
quorum, or by a sole remaining director, in each case elected by the particular
class or series of stock entitled to elect such directors. When one or more
directors shall resign from the Board, effective at a future date, a majority of
the directors then in office, including those who have resigned, who were
elected by the particular class or series of stock entitled to elect such
resigning director or directors shall have power to fill such vacancy or
vacancies, the vote or action by writing thereon to take effect when such
resignation or resignations shall become effective. The directors shall have and
may exercise all their powers notwithstanding the existence of one or more
vacancies in their number, subject to the Certificate of Incorporation, and to
the other provisions of these Bylaws, as to the number of directors required for
a quorum or for any vote or other actions.
Section 5. Committees. The Board of Directors may, by vote of a majority
of the whole Board, (a) designate, change the membership of or terminate the
existence of any committee or committees, each committee to consist of one or
more of the directors; (b) designate one or more directors as alternate members
of any such committee who may replace any absent or disqualified member at any
meeting of the committee; and (c) determine the extent to which each such
committee shall have and may exercise the powers of the Board of Directors in
the management of the business and affairs of the corporation, including the
power to authorize the seal of the corporation to be affixed to all papers which
require it and the power and authority to declare dividends or to authorize the
issuance of stock; excepting, however, such powers which by law, by the
Certificate of Incorporation or by these Bylaws they are prohibited from so
delegating. In the absence or disqualification of any member of such committee
and his alternate, if any, the member or members thereof present at any meeting
and not disqualified from voting, whether or not constituting a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Except as the
Board of Directors may otherwise determine, any committee may make rules for the
conduct of its business, but unless otherwise provided by the board or such
rules, its business shall be conducted as nearly as may be in the same manner as
is provided by these Bylaws for the conduct of business by the Board of
Directors. Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors upon request.
Section 6. Regular Meetings. Regular meetings of the Board of Directors
may be held without call or notice at such places within or outside of the State
of Delaware and at such times as the Board may from time to time determine;
provided, however, that notice of the first regular meeting following any such
determination shall be given to absent directors. A regular meeting of the
directors may be held without call or notice immediately after and at the same
place as the annual meeting of stockholders.
Section 7. Special Meetings. Special meetings of the Board of Directors
may be held at any time and at any place within or outside of the State of
Delaware designated in the notice of the meeting, when called by the Chairman of
the Board, if any, or by one-third or more in number of the directors,
reasonable notice thereof being given to each director by the Secretary or by
the Chairman of the Board, if any, or any one of the directors calling the
meeting.
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Section 8. Notice. It shall be reasonable and sufficient notice to a
director to send notice by mail at least forty-eight (48) hours or by telegram
at least twenty-four (24) hours before the meeting addressed to him at his usual
or last known business or residence address or to give notice to him in person
or by telephone or facsimile at least twenty-four (24) hours before the meeting.
Notice of a meeting need not be given to any director if a written waiver of
notice, executed by him before or after the meeting, is filed with the records
of the meeting, or to any director who attends the meeting without protesting
prior thereto or at its commencement the lack of notice to him. Neither notice
of a meeting nor a waiver of a notice need specify the purposes of the meeting.
Section 9. Quorum. Except as may be otherwise provided by law, by the
Certificate of Incorporation or by these Bylaws, at any meeting of the directors
a majority of the directors then in office shall constitute a quorum; a quorum
shall not in any case be less than one-third of the total number of directors
constituting the whole board. Any meeting may be adjourned from time to time by
a majority of the votes cast upon the question, whether or not a quorum is
present, and the meeting may be held as adjourned without further notice.
Section 10. Action By Vote. Except as may be otherwise provided by law,
by the Certificate of Incorporation or by these Bylaws, when a quorum is present
at any meeting the vote of a majority of the directors present shall be the act
of the Board of Directors.
Section 11. Action Without A Meeting. Any action required or permitted
to be taken at any meeting of the Board of Directors or a committee thereof may
be taken without a meeting if all the members of the Board or of such committee,
as the case may be, consent thereto in writing, and such writing or writings are
filed with the records of the meetings of the Board or of such committee. Such
consent shall be treated for all purposes as the act of the Board or of such
committee, as the case may be.
Section 12. Participation In Meetings By Conference Telephone. Members
of the Board of Directors, or any committee designated by such Board, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other or by any other means permitted
by law. Such participation shall constitute presence in person at such meeting.
Section 13. Compensation. In the discretion of the Board of Directors,
each director may be paid such fees for his services as director (including,
without limitation, in the form of cash compensation and stock options to
purchase common stock of the corporation) and be reimbursed for his reasonable
expenses incurred in the performance of his duties as director as the Board of
Directors from time to time may determine. Nothing contained in this section
shall be construed to preclude any director from serving the corporation in any
other capacity and receiving reasonable compensation therefor.
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ARTICLE IV
OFFICERS AND AGENTS
Section 1. Enumeration; Qualification. The officers of the corporation
shall be a President, a Secretary and such other officers, if any, as the Board
of Directors from time to time may in its discretion elect or appoint,
including, without limitation, a Chairman of the Board and one or more Vice
Presidents. The corporation may also have such agents, if any, as the Board of
Directors from time to time may in its discretion choose. Any officer may be but
none need be a director or stockholder. Any two or more offices may be held by
the same person. Any officer may be required by the Board of Directors to secure
the faithful performance of his duties to the corporation by giving bond in such
amount and with sureties or otherwise as the Board of Directors may determine.
Section 2. Powers. Subject to law, to the Certificate of Incorporation
and to the other provisions of these Bylaws, each officer shall have, in
addition to the duties and powers herein set forth, such duties and powers as
are commonly incident to his office and such additional duties and powers as the
Board of Directors may from time to time designate.
Section 3. Election. The officers may be elected by the Board of
Directors at their first meeting following the annual meeting of the
stockholders or at any other time. At any time or from time to time the
directors may delegate to any officer their power to elect or appoint any other
officer or any agents.
Section 4. Tenure. Each officer shall hold office at the pleasure of the
Board of Directors or other officers of the corporation authorized by the Board
of Directors until the first meeting of the Board of Directors following the
next annual meeting of the stockholders and until his respective successor is
chosen and qualified unless a shorter period shall have been specified by the
terms of his election or appointment, or in each case until he sooner dies,
resigns, is removed or becomes disqualified.
Section 5. Chairman Of The Board Of Directors, Chief Executive Officer
And Vice President. The Chairman of the Board, if any, shall have such duties
and powers as shall be designated from time to time by the Board of Directors.
Unless the Board of Directors otherwise specifies, the Chairman of the Board, or
if there is none the Chief Executive Officer, shall preside, or designate the
person who shall preside, at all meetings of the stockholders and of the Board
of Directors.
Unless the Board of Directors otherwise specifies, the Chief Executive
Officer, or, in his or her absence, the President, shall be the chief executive
officer of the corporation and shall have direct charge of all business
operations of the corporation and, subject to the control of the Directors,
shall have general charge and supervision of the business of the corporation.
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Any Vice Presidents shall have such duties and powers as shall be set
forth in these Bylaws or as shall be designated from time to time by the Board
of Directors or by the officer or officers of the corporation authorized by the
Board of Directors.
Section 6. Chief Financial Officer. Unless the Board of Directors
otherwise specifies, the Chief Financial Officer of the corporation shall be in
charge of its funds and valuable papers, and shall have such other duties and
powers as may be designated from time to time by the Board of Directors or by
the Chief Executive Officer. If no Controller is elected, the Chief Financial
Officer shall, unless the Board of Directors otherwise specifies, also have the
duties and powers of the Controller.
Section 7. Controller And Assistant Controllers. If a controller is
elected, he shall, unless the Board of Directors otherwise specifies, be the
Chief Accounting Officer of the corporation and be in charge of its books of
account and accounting records, and of its accounting procedures. He shall have
such other duties and powers as may be designated from time to time by the Board
of Directors, the President or the Chief Executive Officer.
Any Assistant Controller shall have such duties and powers as shall be
designated from time to time by the Board of Directors, the President, or the
Controller.
Section 8. Secretary And Assistant Secretaries. The Secretary shall
record all proceedings of the stockholders, of the Board of Directors and of
committees of the Board of Directors in a book or series of books to be kept
therefor and shall file therein all actions by written consent of stockholders
or directors. In the absence of the Secretary from any meeting, an Assistant
Secretary, or if there be none or he is absent, a temporary Secretary chosen at
the meeting, shall record the proceedings thereof. Unless a transfer agent has
been appointed the Secretary shall keep or cause to be kept the stock and
transfer records of the corporation, which shall contain the names and record
addresses of all stockholders and the number of shares registered in the name of
each stockholder. He shall have such other duties and powers as may from time to
time be designated by the Board of Directors or the President.
Any Assistant Secretaries shall have such duties and powers as shall be
designated from time to time by the Board of Directors, the President or the
Secretary.
ARTICLE V
RESIGNATIONS AND REMOVALS
Section 1. Any director or officer may resign at any time by delivering
his resignation in writing to the Chairman of the Board, if any, the President,
or the Secretary or to a meeting of the Board of Directors. Such resignation
shall be effective upon receipt unless specified to be effective at some other
time, and without in either case the necessity of its being accepted unless the
resignation shall so state. Except as may be otherwise provided by law, by the
Certificate of Incorporation or by these Bylaws, a director (including persons
elected by stockholders or
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directors to fill vacancies) may be removed from office for cause only. The
Board of Directors may at any time terminate or modify the authority of any
agent.
ARTICLE VI
INDEMNIFICATION
Section 1. Each person who was or is made a party to, or is threatened
to be made a party to, or is involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (a "proceeding"), by reason of
the fact that he or she (or a person of whom he or she is the legal
representative), is or was a director, officer or employee of the Corporation or
is or was serving at the request of the Corporation as a director, officer or
employee of another corporation, or of a partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
shall be indemnified and held harmless by the Corporation to the fullest extent
permitted by the Delaware General Corporation Law, against all expenses,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes and penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith, and such
indemnification shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that the Corporation shall indemnify any such
person seeking indemnity in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation.
Section 2. The Corporation shall pay all expenses (including attorneys'
fees) incurred by such a director or officer in defending any such proceeding as
they are incurred in advance of its final disposition; provided, however, that
if the Delaware General Corporation Law then so requires, the payment of such
expenses incurred by such a director or officer in advance of the final
disposition of such proceeding shall be made only upon delivery to the
Corporation of an undertaking, by or on behalf of such director or officer, to
repay all amounts so advanced if it should be determined ultimately that such
director or officer is not entitled to be indemnified under this Article VI or
otherwise; and provided, further, that the Corporation shall not be required to
advance any expenses to a person against whom the Corporation directly brings a
claim, in a proceeding alleging that such person has breached his or her duty of
loyalty to the Corporation, committed an act or omission not in good faith or
that involves intentional misconduct or a knowing violation of law, or derived
an improper personal benefit from a transaction.
Section 3. The rights conferred on any person in this Article VI shall
not be exclusive of any other right that such person may have or hereafter
acquire under any statute, provision of the Certificate of Incorporation, Bylaw,
agreement, vote or consent of stockholders or disinterested directors, or
otherwise. Additionally, nothing in this Article VI shall limit the ability of
the Corporation, in its discretion, to indemnify or advance expenses to persons
whom the Corporation is not obligated to indemnify or advance expenses pursuant
to this Article VI.
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Section 4. The Board of Directors is authorized to cause the
Corporation to enter into indemnification contracts with any director, officer,
employee or agent of the Corporation, or any person serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, including
employee benefit plans, providing indemnification rights to such person. Such
rights may be greater than those provided in this Article VI .
Section 5. Any amendment, repeal or modification of any provision of
this Article VI shall be prospective only, and shall not adversely affect any
right or protection conferred on a person pursuant to this Article VI and
existing at the time of such amendment, repeal or modification.
ARTICLE VII
CAPITAL STOCK
Section 1. Stock Certificates. Each stockholder shall be entitled to a
certificate stating the number and the class and the designation of the series,
if any, of the shares held by him, in such form as shall, in conformity to law,
the Certificate of Incorporation and the Bylaws, be prescribed from time to time
by the Board of Directors. Such certificate shall be signed by the Chairman or
Vice Chairman of the Board, if any, or the President or a Vice President and by
the Chief Financial Officer or by the Secretary or an Assistant Secretary. Any
of or all the signatures on the certificate may be a facsimile. In case an
officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed on such certificate shall have ceased to be such
officer, transfer agent, or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if he were such officer,
transfer agent, or registrar at the time of its issue.
Section 2. Loss Of Certificates. In the case of the alleged theft, loss,
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms, including receipt of a bond
sufficient to indemnify the corporation against any claim on account thereof, as
the Board of Directors may prescribe.
ARTICLE VIII
TRANSFER OF SHARES OF STOCK
Section 1. Transfer On Books. Subject to the restrictions, if any,
related to such shares of the corporation; shares of stock may be transferred on
the books of the corporation by the surrender to the corporation or its transfer
agent of the certificate therefor properly endorsed or accompanied by a written
assignment and power of attorney properly executed, with necessary transfer
stamps affixed, and with such proof of the authenticity of signature as the
Board of Directors or the transfer agent of the corporation may reasonably
require. Except as may be otherwise required by law, by the Certificate of
Incorporation or by these Bylaws, the
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corporation shall be entitled to treat the record holder of stock as shown on
its books as the owner of such stock for all purposes, including the payment of
dividends and the right to receive notice and to vote or to give any consent
with respect thereto and to be held liable for such calls and assessments, if
any, as may lawfully be made thereon, regardless of any transfer, pledge or
other disposition of such stock until the shares have been properly transferred
on the books of the corporation.
It shall be the duty of each stockholder to notify the corporation of
his post office address.
Section 2. Record Date. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board of Directors, and which record date shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting. If no such record date is fixed by the Board of Directors, the record
date for determining the stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
In order that the corporation may determine the stockholders entitled to
receive payment of any dividend or other distribution or allotment of any rights
or to exercise any rights in respect of any change, conversion or exchange of
stock, or for the purpose of any other lawful action, the Board of Directors may
fix a record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted, and which record date shall be not
more than sixty (60) days prior to such payment, exercise or other action. If no
such record date is fixed, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
ARTICLE IX
CORPORATE SEAL
Section 1. Subject to alteration by the Board of Directors, the seal of
the corporation shall consist of a flat-faced circular die with the word
"Delaware" and the name of the corporation cut or engraved thereon, together
with such other words, dates or images as may be approved from time to time by
the Board of Directors.
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ARTICLE X
EXECUTION OF PAPERS
Section 1. Except as the Board of Directors may generally or in
particular cases authorize the execution thereof in some other manner, all
deeds, leases, transfers, contracts, bonds, notes, checks, drafts or other
obligations made, accepted or endorsed by the corporation shall be signed by the
Chairman of the Board, if any, the President, or a Vice President.
ARTICLE XI
FISCAL YEAR
Section 1. The fiscal year of the corporation shall end on December 31.
ARTICLE XII
AMENDMENTS
Section 1. These Bylaws may be adopted, amended or repealed by vote of a
majority of the directors then in office or by vote of a majority of the voting
power of the stock outstanding and entitled to vote. Any Bylaw, whether adopted,
amended or repealed by the stockholders or directors, may be amended or
reinstated by the stockholders or the directors.
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EXHIBIT 3.5
ARTICLES OF INCORPORATION
OF
SPI Holdings, Inc.
The undersigned who, if a natural person,, is eighteen (18) years or
older, hereby forms a corporation, under and pursuant to the statutes of the
State of Colorado, and adopts the following Articles of Incorporation:
ARTICLE I
The name of the Corporation is SPI Holdings, Inc.
ARTICLE II
A. The Corporation shall have and may exercise all of the rights, powers
and privileges now or hereafter conferred upon corporations organized under the
laws of the State of Colorado. In addition, the Corporation may do everything
necessary, suitable or proper for the accomplishment of any of its corporate
purposes. The Corporation may conduct part or all of its business in any part of
Colorado, the United States or the world and may hold, purchase, mortgage, lease
and convey real and personal property in any of such places.
ARTICLE III
This Corporation shall have perpetual existence, which existence shall
commence upon the filing of these Articles of Incorporation with the Secretary
of State of the State of Colorado.
ARTICLE IV
A. The aggregate number of shares which the Corporation shall have
authority to issue is Five Million (5,000,000) shares of common stock of no par
value and Two Million (2,000,000) shares of preferred stock of no par value
("Board Designated Preferred Stock"). The shares of common stock shall have
unlimited voting rights and shall constitute the sole voting group of the
Corporation, except to the extent any additional voting group or groups may
hereafter be established. The Board of Directors of the Corporation may
determine, in whole or in part, the preferences, limitations, and relative
rights of the Board Designated Preferred Stock, within the limits set forth in
Section 7-106-101 of the Colorado Business Corporation Act, of any class of the
Board Designated Preferred Stock, before the issuance of any shares of that
class, or one or more series within a class of the Board Designated Preferred
Stock before the issuance of any shares of that series. The Board of Directors
may issue, in one or more classes or series, shares of the Board Designated
Preferred Stock with full, limited, multiple, fractional or no voting rights,
and with such designations, preferences, qualifications, privileges,
limitations,
<PAGE> 2
restrictions, options, conversion rights, or other special or relative rights as
shall be fixed from time to time by the Board of Directors, except for and
subject to, in each case, the limits set forth in Section 7-106-101 of the
Colorado Business Corporation Act and in accordance with the provisions and
requirements of Section 7-106-102 of the Colorado Business Corporation Act.
B. Each shareholder of record shall have one vote for each share of
common stock standing in his name on the books of the Corporation and entitled
to vote. In the election of directors, cumulative voting shall not be allowed.
C. Shareholders shall not have the preemptive right to acquire unissued
shares, unless otherwise provided by a written agreement with the Corporation.
Such provision shall apply to both shares outstanding and to newly issued
shares.
D. At. all meetings of the shareholders a majority of the votes entitled
to be cast on a matter by a voting group, represented in person or by proxy,
shall constitute a quorum of that voting group.
ARTICLE V
A. The address of the initial registered office of the Corporation is
370 17th Street, Suite 2300, Denver, Colorado 80202.
B. The name of the initial registered agent for the Corporation at such
address is Bruce L. Rogers.
C. The address of the initial principal office of the Corporation is 370
17th Street, Suite 2300, Denver, Colorado 80202.
ARTICLE VI
A. The personal liability of a director to the Corporation or its
shareholders is limited to the fullest extent permitted by the laws of the State
of Colorado. Any repeal or modification of this Article VI shall not adversely
affect any right or protection of a director hereunder existing at the time of
such repeal or modification.
B. The Corporation shall indemnify all persons to the extent and in the
manner permitted by the provisions of the Colorado Business Corporation Act, as
amended from time to time, subject to any expansion or limitation of such
indemnification as may be set forth in the bylaws of the Corporation or any
shareholders' or directors' resolution or by contract.
ARTICLE VII
The number of persons constituting the board of directors of the
Corporation shall be fixed by the Bylaws of the Corporation. The initial board
of directors shall consist of three (3) members, and the names and addresses of
such persons who are to serve as directors until the
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first annual meeting of shareholders, or until their successors shall have been
elected and qualified, is as follows:
Name Address
Mark M. King 370 17th Street
Suite 2300
Denver, Colorado 80202
Bruce L. Rogers 370 17th Street
Suite 2300
Denver, Colorado 80202
Charles R. Gwirtsman 50 S. Steele
Suite 777
Denver, CO 80209
ARTICLE VIII
The right is expressly reserved to amend, alter, change or repeal any
provision or provisions contained in these Articles of Incorporation or any
Article herein in any manner or respect now or hereafter permitted or provided
by the Colorado Business Corporation Act, and the rights of all officers,
directors and shareholders are expressly made subject to such reservation.
ARTICLE IX
The name and address of the incorporator of this Corporation is Darren
R. Hensley, % Ballard Spahr Andrews & Ingersoll, 1225 17th Street, Suite 2300,
Denver, Colorado 80202.
Executed this 14th day of November, 1996
/S/ Darren R. Hensley
---------------------------------
Darren R. Hensley
The undersigned hereby consents to the appointment as the initial
registered agent for SPI Holdings, Inc.
/S/ Bruce L. Rogers
---------------------------------
Bruce L. Rogers
Initial Registered Agent
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EXHIBIT 3.6
BYLAWS
OF
SPI HOLDINGS, INC.
ARTICLE I
Offices and Agents
1. Principal Office. The principal office of the Corporation may
be located within or without the State of Colorado, as designated by the most
recent filing with the Secretary of State of the State of Colorado. The
Corporation may have other offices and places of business at such places within
or without the State of Colorado as shall be determined by the directors.
2. Registered Office. The registered office of the Corporation
required by the Colorado Business Corporation Act must be continually maintained
in the State of Colorado, and it may be, but need not be, identical with the
principal office, if located in the State of Colorado. The address of the
registered office of the Corporation may be changed from time to time as
provided by the Colorado Business Corporation Act.
3. Registered Agent. The Corporation shall maintain a registered
agent in the State of Colorado as required by the Colorado Business Corporation
Act. Such registered agent may be changed from time to time as provided by the
Colorado Business Corporation Act.
ARTICLE II
Shareholders' Meetings
1. Annual Meetings. The annual meeting of the shareholders of the
Corporation shall be held at a date and time fixed by resolution of the board of
directors or by the president in the absence of action by the board of
directors. The annual meeting of the shareholders shall be held for the purpose
of electing directors and transacting such other corporate business as may come
before the meeting. If the election of directors is not held as provided herein
at any annual meeting of the shareholders, or at any adjournment thereof, the
board of directors shall cause the election to be held at a special meeting of
the shareholders as soon thereafter as it may conveniently be held.
Notice of an annual meeting need not include a description of the
purpose or purposes of the meeting except when the purpose of the meeting is to
consider (i) an amendment to the Articles of Incorporation of the Corporation,
(ii) a merger or share exchange in which the Corporation is a party and, with
respect to a share exchange, in which the Corporation's shares will
<PAGE> 2
be acquired, (iii) the sale, lease, exchange or other disposition, other than in
the usual and regular course of business, of all or substantially all of the
property of the Corporation or of another entity which the Corporation controls,
in each case with or without goodwill, (iv) the dissolution of the Corporation
or (v) any other purpose for which a statement of purpose is required by the
Colorado Business Corporation Act.
2. Special Meetings. Unless otherwise prescribed by the Colorado
Business Corporation Act, special meetings of the shareholders of the
Corporation may be called at any time by the chairman of the board of directors,
by the president, by resolution of the board of directors or upon receipt of one
or more written demands for a meeting, stating the purpose or purposes for which
it is to be held, signed and dated by the holders of at least ten percent (10%)
of all votes entitled to be cast on any issue proposed to be considered at the
meeting. Notice of a special meeting shall include a description of the purpose
or purposes for which the meeting is called.
3. Place of Meeting. The annual meeting of the shareholders of
the Corporation may be held at any place, either within or without the State of
Colorado, as may be designated by the board of directors. Except as limited by
the following sentence, the person or persons calling any special meeting of the
shareholders may designate any place, within or without the State of Colorado,
as the place for the meeting. If no designation is made or if a special meeting
shall be called other than by the board of directors, the chairman of the board
of directors or the president, the place of meeting shall be the principal
office of the Corporation. A waiver of notice signed by all shareholders
entitled to vote at a meeting may designate any place as the place for holding
such meeting.
4. Notice of Meeting. Written notice stating the date, time and
place of the meeting shall be given no f ewer than ten (10) and no more than
sixty (60) days before the date of the meeting. Notice shall be given personally
or by mail, private carrier, telegraph, teletype, electronically transmitted
facsimile or other form of wire or wireless communication by or at the direction
of the president, the secretary, or the officer or other person calling the
meeting to each shareholder of record entitled to vote at such meeting. If
mailed and if in a comprehensible form, such notice shall be deemed to be given
and effective when deposited in the United States mail, addressed to the
shareholder at his or her address as it appears in the Corporation's current
record of shareholders, with postage prepaid. If notice is given other than by
mail, and provided that the notice is in comprehensible form, the notice is
given and effective on the date received by the shareholder. No notice need be
sent to any shareholder if three successive notices mailed to the last known
address of such shareholder have been returned as undeliverable until such time
as another address for such shareholder is made known to the corporation by such
shareholder.
When a meeting is adjourned to a different date, time or place,
notice need not be given of the new date, time or place if the new date, time or
place is announced at the meeting before adjournment. At the adjourned meeting,
the Corporation may transact any business which might have been transacted at
the original meeting. If the adjournment is for more than 120 days, or if a new
record date is fixed for the adjourned meeting, a new notice of the adjourned
meeting shall be given to each shareholder of record entitled to vote at the
meeting as of the new record date.
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<PAGE> 3
5. Waiver of Notice. A shareholder may waive any notice of a
meeting either bef ore or after the time and date of the meeting. The waiver
shall be in writing, be signed by the shareholder entitled to the notice and be
delivered to the corporation for inclusion in the minutes or filing with the
corporate records, but such delivery and filing shall not be conditions for
effectiveness.
A shareholder's attendance at a meeting waives objection to (i)
lack of notice or defective notice of the meeting, unless the shareholder at the
beginning of the meeting objects to holding the meeting because of lack of
notice or defective notice, and (ii) consideration of a particular matter at the
meeting that is not within the purpose or purposes described in the meeting
notice, unless the shareholder objects to considering the matter when it is
presented.
6. Fixing of Record. Date. In order to determine shareholders
entitled (i) to be given notice of a shareholders meeting, (ii) to vote, or
(iii) to take any other action, the board of directors may fix a future date as
the record date, such date, in any case, shall not be more than seventy (70)
days and not less than ten (10) days prior to the date on which the particular
action requiring such determination of shareholders is to be taken. If no record
date is fixed, the record date shall be the date on which notice of the meeting
is mailed or the date on which a resolution of the board of directors providing
for a distribution is adopted, as the case may be. When a determination of
shareholders entitled to vote at any meeting of shareholders is made as provided
in this Section 6, such determination shall-apply to any adjournment thereof.
Notwithstanding the foregoing, the record date for determining
the shareholders entitled to take action without a meeting or entitled to be
given notice of action so taken shall be the date a writing upon which the
action is taken is first received by the Corporation. The record date for
determining shareholders entitled to demand a special meeting shall be the date
of the earliest of the demands pursuant to which the meeting is called.
7. Voting List. Af ter fixing a record date f or a shareholders'
meeting, the Corporation shall prepare a list of names of all its shareholders
who are entitled to be given notice of the meeting. The list shall be arranged
by voting groups and within each voting group by class or series, and shall show
the address of, and the number of shares of each class or series that are held
by each shareholder.
The list of shareholders shall be available for inspection by any
shareholder, beginning the earlier of ten (10) days before the meeting for which
the list was prepared or two (2) business days after notice of the meeting is
given and continuing through the meeting, and any adjournment thereof, at the
Corporation's principal office or at a place identified in the notice of the
meeting in the city where the meeting will be held.
A shareholder or an agent or attorney of the shareholder may,
upon written demand, inspect and copy the list during regular business hours and
during the period it is available for inspection, provided (i) the shareholder
has been a shareholder for at least three (3) months immediately preceding the
demand or holds at least five percent (5%) of all outstanding shares of any
class of shares as of the date of the demand, (ii) the demand is made in good
faith and for a
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<PAGE> 4
purpose reasonably related to the demanding shareholder's interest as a
shareholder, (iii) the shareholder describes with reasonable particularity the
purpose and records the shareholder desires to inspect, (iv) the records are
directly connected with the described purpose, and (v) the shareholder pays a
reasonable charge covering the costs of labor and material for such copies, not
to exceed the estimated cost of production and reproduction.
8. Proxies. At all meetings of shareholders, a shareholder may
vote by proxy by signing an appointment form either personally or by his or her
duly authorized attorney-in-fact. A shareholder may also appoint a proxy by
transmitting or authorizing the transmission of a telegram, teletype, or other
electronic transmission providing a written statement of the appointment to the
proxy, to a proxy solicitor, proxy support service organization or other person
duly authorized by the proxy to receive appointments as agent for the proxy, or
to the Corporation. The transmitted appointment shall set forth or be
transmitted with written evidence from which it can be determined that the
shareholder transmitted or authorized the transmission of the appointment. The
proxy appointment form shall be filed with the secretary of the Corporation by
or at the time of the meeting. The appointment of a proxy is effective when
received by the Corporation and is valid for eleven (11) months unless a
different period is expressly provided in the appointment form.
Any complete copy F including an electronically transmitted
facsimile, of an appointment of a proxy may be substituted for or used in lieu
of the original appointment f or any purpose for which the original appointment
could be used.
Revocation of a proxy does not affect the right of the
Corporation to accept the proxy's appointment unless (i) the Corporation had
notice that the appointment was coupled with an interest and notice that the
interest is extinguished is received by the secretary or other officer or agent
authorized to tabulate votes before the proxy exercises his or her authority
under the appointment, or (ii) other notice of the revocation of the appointment
is received by the secretary or other officer or agent authorized to tabulate
votes before the proxy exercises his or her authority under the appointment.
Other notice of revocation may, in the discretion of the Corporation, be deemed
to include the appearance at a shareholders' meeting of the shareholder who
granted the proxy appointment and his or her voting in person on any matter
subject to a vote at such meeting.
The death or incapacity of the shareholder appointing a proxy
does not affect the right of the Corporation to accept the proxy's authority
unless notice of the death or incapacity is received by the secretary or other
officer or agent authorized to tabulate votes before the proxy exercised his or
her authority under the appointment.
The Corporation shall not be required to recognize an appointment
made irrevocable if it has received a writing revoking the appointment signed by
the shareholder either personally or by the shareholder's attorney-in-fact,
notwithstanding that the revocation may be a breach of an obligation of the
shareholder to another person not to revoke the appointment.
A transferee for value of shares subject to an irrevocable
appointment may revoke the appointment if the transferee did not know of its
existence when he or she acquired the shares and the irrevocable appointment was
not noted on the certificate representing the shares.
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<PAGE> 5
Subject to the provisions of Article II, Section 10 below or any
express limitation on the proxy's authority appearing on the appointment form,
the Corporation is entitled to accept the proxy's vote or other action as that
of the shareholder making the appointment.
9. Voting Rights. Each outstanding share, regardless of class, is
entitled to one vote and each fractional share is entitled to a corresponding
fractional vote, on each matter voted on at a shareholders' meeting except to
the extent that the voting rights of the shares of any class or classes are
limited or denied by the Articles of Incorporation. Only shares are entitled to
vote. Voting on any question or in any election may be by voice vote unless the
presiding officer shall order, or any shareholder shall demand, that voting be
by ballot.
Cumulative voting in the election of directors shall not be
permitted.
10. Corporation's Acceptance of Votes. If the name signed on a
vote, consent, waiver, proxy appointment, or proxy appointment revocation
corresponds to the name of a shareholder, the Corporation, if acting in good
faith, is entitled to accept the vote, consent, waiver, proxy appointment, or
proxy appointment revocation and to give it effect as the act of the
shareholder. If the name signed on a vote, consent, waiver, proxy appointment,
or proxy appointment revocation does not correspond to the name of a
shareholder, the Corporation, if acting in good faith, is nevertheless entitled
to accept the vote, consent, waiver, proxy appointment, or proxy appointment
revocation and to give it effect as the act of the shareholder if:
(a) The shareholder is an entity and the name signed purports to
be that of an officer or agent of the entity;
(b) The name signed purports to be that of an administrator,
executor, guardian, or conservator representing the shareholder and, if the
Corporation requests, evidence of fiduciary status acceptable to the Corporation
has been presented with respect to the vote, consent, waiver, proxy appointment,
or proxy appointment revocation;
(c) The name signed purports to be that of a receiver or trustee
in bankruptcy of the shareholder and, if the Corporation requests, evidence of
this status acceptable to the Corporation has been presented with respect to the
vote, consent, waiver, proxy appointment, or proxy appointment revocation;
(d) The name signed purports to be that of a pledgee, beneficial
owner, or attorney-in-fact of the shareholder and, if the Corporation requests,
evidence acceptable to the Corporation of the signatory's authority to sign for
the shareholder has been presented with respect to the vote, consent, waiver,
proxy appointment, or proxy appointment revocation;
(e) Two or more persons are the shareholder as cotenants or
fiduciaries and the name signed purports to be the name of at least one of the
cotenants or fiduciaries and the person signing appears to be acting on behalf
of all the cotenants or fiduciaries; or
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(f) The acceptance of the vote, consent, waiver, proxy
appointment, or proxy appointment revocation is otherwise proper under rules
established by the Corporation that are not inconsistent with the provisions of
this Section 10.
The Corporation is entitled to reject a vote, consent, waiver,
proxy appointment, or proxy appointment revocation if the secretary or other
officer or agent authorized to tabulate votes, acting in good faith, has
reasonable basis for doubt about the validity of the signature on it or about
the signatory's authority to sign for the shareholder.
The Corporation and its officer or agent who accepts or rejects a
vote, consent, waiver, proxy appointment, or proxy appointment revocation in
good faith and in accordance with the standards of this Section 10 are not
liable in damages for the consequences of the acceptance or rejection.
11. Quorum and Voting Requirements. A majority of the votes
entitled to be cast on a matter by a voting group shall constitute a quorum of
that voting group for action on the matter unless a lesser number is authorized
by the Articles of Incorporation. Once a share is represented for any purpose at
a meeting, including the purpose of determining that a quorum exists, it is
deemed present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting, unless otherwise provided in the Articles of
Incorporation or unless a new record date is or shall be set for that adjourned
meeting.
If a quorum exists, action on a matter other than the election of
directors by a voting group is approved if the votes cast within the voting
group favoring the action exceed the votes cast within the voting group opposing
the action, unless the vote of a greater number or voting by classes is required
by law or the Articles of Incorporation.
12. Adjournments. If less than a quorum of shares entitled to
vote is represented at any meeting of the shareholders, a majority of the shares
so represented may adjourn the meeting from time to time without further notice,
for a period not to exceed 120 days at any one adjournment. If a quorum is
present at such adjourned meeting, any business may be transacted which might
have been transacted at the meeting as originally noticed. Any meeting of the
shareholders may adjourn from time to time until its business is completed.
13. Action by Shareholders Without Meeting. Any action required
or permitted to be taken at a shareholders' meeting may be taken without a
meeting if all of the shareholders entitled to vote on the action consent to
such action in writing. Action taken under this Section 13 shall be ef f ective
as of the date the Corporation receives writings describing and consenting to
the action signed by all of the shareholders entitled to vote with respect to
the action, unless all of the writings specify another date as the effective
date of the action, in which case such other date shall be the effective date of
the action. Any such writings may be received by the Corporation by
electronically transmitted facsimile or other form of wire or wireless
communication providing the Corporation with a complete copy thereof, including
a copy of the signatures thereto. Action taken under this Section 13 has the
same effect as action taken at a meeting of shareholders and may be described as
such in any document.
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Any shareholder who has signed a writing describing and
consenting to action taken pursuant to this Section 13 may revoke such consent
by a writing signed and dated by the shareholder describing the action and
stating that the shareholder's prior consent thereto is revoked, if such writing
is received by the Corporation prior to the date the last writing necessary to
effect the action is received by the Corporation.
14. Meetings by Telecommunication. Any or all of the shareholders
may participate in an annual or special shareholders' meeting by, or the meeting
may be conducted through the use of, any means of communication by which all
persons participating in the meeting may hear each other during the meeting. A
shareholder participating in a meeting by this means is deemed to be present in
person at the meeting.
ARTICLE III
Board of Directors
1. General Powers. All corporate powers shall be exercised by or
under the authority of, and the business and affairs of the Corporation shall be
managed under the direction of, the board of directors, except as otherwise
provided in the Colorado Business Corporation Act or the Articles of
Incorporation.
2. Number, Qualifications and Term of Office. The number of
directors of the Corporation shall be fixed from time to time by resolution of
the board of directors, within a range of no less than one (1) or more than nine
(9). A director shall be a natural person who is eighteen years or older. A
director need not be a resident of the State of Colorado or a shareholder of the
Corporation.
Directors shall be elected at each annual meeting of shareholders
and shall hold such office until the next annual meeting of shareholders and
until his or her successor is elected and qualifies. A decrease in the number of
directors does not shorten an incumbent director's term.
3. Resignation, Vacancies. Any director may resign at any time by
giving written notice to the Corporation. A resignation of a director is
effective when the notice is received by the Corporation unless the notice
specifies a later effective date. Unless otherwise specified in the notice, the
acceptance of such resignation by the Corporation shall not be necessary to make
it effective. Any vacancy on the board of directors may be filled by the
affirmative vote of a majority of the shareholders or by the affirmative vote of
a majority of directors then in office, even if less than a quorum is remaining
in of f ice. If elected by the directors, the director shall hold office until
the next annual shareholders' meeting at which directors are elected. If elected
by the shareholders, the director shall hold office for the unexpired term of
his or her predecessor in office, except that, if the director's predecessor was
elected by the directors to fill a vacancy, the director elected by the
shareholders shall hold office for the unexpired term of the last predecessor
elected by the shareholders.
4. Removal of Directors bv Shareholders. Unless otherwise
provided in the Articles of Incorporation, the shareholders may remove one or
more directors with or without cause. A director may be removed by the
shareholders only at a meeting called for the purpose of removing
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the director and the meeting notice states that the purpose, or one of the
purposes, of the meeting is removal of the director.
5. Removal of Directors by Judicial Proceeding. A director may be
removed by the District Court of the Colorado county where the principal office
is located or, if the corporation has no principal office in the State of
Colorado, by the District court of the Colorado county in which its registered
office is located or, if the Corporation has no registered office, by the
District Court for the City and County of Denver, upon a finding by the District
Court that the director engaged in fraudulent or dishonest conduct or gross
abuse of authority or discretion with respect to the Corporation and that
removal is in the best interests of the Corporation. The judicial proceeding may
be commenced either by the Corporation or by shareholders holding at least ten
percent (10%) of the outstanding shares of any class.
6. Compensation. By resolution of the board of directors, any
director may be paid any one or more of the following: his or her expenses, if
any, of attendance at meetings; a fixed sum for attendance at each meeting; a
stated salary as director; or such other compensation as the Corporation and the
director may reasonably agree upon. No such payment shall preclude any director
from serving the Corporation in any other capacity and receiving compensation
therefor.
ARTICLE IV
Meetings of the Board of Directors
1. Place of Meetings. The regular or special meetings of the
board of directors shall be held at the principal office of the Corporation
unless otherwise designated.
2. Regular Meetings. The board of directors shall meet each year
after the annual meeting of the shareholders for the purpose of appointing
officers and transacting such other business as may come before the meeting. The
board of directors may provide, by resolution, for the holding of additional
regular meetings without other notice than such resolution.
3. Special Meetings. Special meetings of the board of directors
may be called at any time by the chairman of the board of directors, by the
president or by a majority of the members of the board of directors.
4. Notice of Meetings. Notice of the regular meetings of the
board of directors need not be given. Except as otherwise provided by these
Bylaws or the laws of the State of Colorado, written notice of each special
meeting of the board of directors setting forth the time and the place of the
meeting shall be given to each director not less than two (2) days prior to the
date and time fixed for the meeting. Notice of any special meeting may be either
personally delivered or mailed to each director at his or her business address,
or by notice transmitted by telegraph, telex, electronically transmitted
facsimile or other form of wire or wireless communication. If mailed, such
notice shall be deemed to be given and to be effective on the earlier of (i)
three (3) days after such notice is deposited in the United States mail properly
addressed, with postage prepaid, or (ii) the date shown on the return receipt if
mailed by registered or certified mail return receipt
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requested. If notice is given by telex, electronically transmitted facsimile or
other similar form of wire or wireless communication, such notice shall be
deemed to be given and to be effective when sent with a confirmation of receipt,
and with respect to a telegram, such notice shall be deemed to be given and to
be effective when the telegram is delivered to the telegraph company. If a
director has designated in writing one or more reasonable addresses or facsimile
numbers for delivery of notice, notice sent by mail, telegraph, telex,
electronically transmitted facsimile or other form of wire or wireless
communication shall not be deemed to have been given or to be effective unless
sent to such addresses or facsimile numbers, as the case may be. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the board of directors need be specified in the notice or waiver of notice of
such meeting.
5. Waiver of Notice. A director may, in writing, waive notice
of any special meeting of the board of directors either before, at, or after the
meeting. Such waiver shall be delivered to the corporation for filing with the
corporate records. Attendance or participation of a director at a meeting waives
any required notice of that meeting unless at the beginning of the meeting or
promptly upon the director's arrival, the director objects to holding the
meeting or transacting business at the meeting because of lack of notice or
defective notice and does not thereafter vote for or assent to action taken at
the meeting.
6. Quorum, Manner of Acting. At meetings of the board of
directors a majority of the number of directors fixed by resolution of the board
of directors shall constitute a quorum for the transaction of business. If the
number of directors is not fixed, then a majority of the number in office
immediately before the meeting begins shall constitute a quorum. If a quorum is
present when a vote is taken, the affirmative vote of a majority of directors
present is the act of the board of directors unless the vote of a greater number
is required by these Bylaws, the Articles of Incorporation or the Colorado
Business Corporation Act.
7. Presumption of Assent. A director who is present at a
meeting of the board of directors when corporate action is taken is deemed to
have assented to the action taken unless:
(a) the director objects at the beginning of such meeting or
promptly upon his or her arrival, to the holding of the meeting or the
transacting of business at the meeting and does not thereafter vote for or
assent to any action taken at the meeting;
(b) the director contemporaneously requests that his or her
dissent or abstention as to any specific action taken be entered in the minutes
of such meeting; or
(c) the director causes written notice of his or her dissent or
abstention as to any specific action to be received by the presiding officer of
such meeting before its adjournment or by the Corporation promptly after
adjournment of such meeting.
The right of dissent or abstention as to a specific action
taken in a meeting of the board of directors is not available to a director who
votes in favor of the action taken.
8. Committees. The board of directors may, by a resolution
adopted by a
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majority of all of the directors in office when the action is taken, designate
one of more of its members to constitute an executive committee, and one or more
other committees. To the extent provided in the resolution, each committee shall
have and may exercise all of the authority of the board of directors, except
that no such committee shall have the authority to: (i) authorize distributions;
(ii) approve or propose to shareholders action required by the Colorado Business
Corporation Act to be approved by shareholders; (iii) fill vacancies on the
board of directors or any committee thereof; (iv) amend the Articles of
Incorporation; (v) amend or repeal these Bylaws or adopt new Bylaws; (vi)
approve a plan of merger not requiring shareholder approval; (vii) authorize or
approve the reacquisition of shares except in accordance with a formula or
method prescribed by the board of directors; or (viii) authorize or approve the
issuance or sale of shares, or a contract for the sale of shares, or determine
the designation, relative rights, preferences and limitations of a class or
series of shares; except that the board of directors, may authorize a committee
or an officer to do so within limits specifically prescribed by the board of
directors.
The creation of, delegation of authority to, or action by a
committee does not alone constitute compliance by a director with the standards
of conduct set forth in Article V.
9. Informal Action by Directors. Any action required or
permitted be taken at a board of directors meeting may be taken without a
meeting if all members of the board of directors consent to such action in
writing. Action taken under this Section 9 is effective at the time the last
director signs a writing describing the action taken unless the directors
establish a different effective date, and unless, bef ore such time, a director
has revoked his or her consent by a writing signed by the director and received
by the president or secretary. Action taken pursuant to this Section 9 has the
same effect as action taken at a meeting of the directors and may be described
as such in any document.
10. Telephonic Meetings. Members of the board of directors may
participate in a regular or special meeting by, or conduct the meeting through,
the use of any means of communication by which all directors participating may
hear each other during the meeting. A director participating in a meeting by
this means is deemed to be present in person at the meeting.
ARTICLE V
Standards of Conduct
Each director shall perform his or her duties as a director,
including his or her duties as a member of any committee, and each officer with
discretionary authority shall discharge his or her duties under that authority
(i) in good faith, (ii) with the care an ordinarily prudent person in a like
position would exercise under similar circumstances, and (iii) in a manner he or
she reasonably believes to be in the best interests of the Corporation.
In discharging his or her duties, a director or officer is
entitled to rely on information, opinions, reports, or statements, including
financial statements and other financial data, if prepared or presented by (i)
one or more officers or employees of the Corporation whom the director or
officer reasonably believes to be reliable and competent in the matters
presented, (ii)
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legal counsel, a public accountant, or other person as to matters which the
director or officer reasonably believes to be within such person's professional
or expert competence, or (iii) in the case of a director, a committee of the
board of directors of which the director is not a member if the director
reasonably believes the committee merits confidence.
A director or officer is not acting in good faith if he or she
has knowledge concerning the matter in question that makes reliance otherwise
permitted under this Article V unwarranted.
A director or officer is not liable as such to the Corporation
or its shareholders for any action he or she takes or omits to take as a
director or officer, as the case may be, if, in connection with such action or
omission, he or she performed the duties of the position in compliance with
this Article V.
ARTICLE VI
Officers and Agents
1. General. The officers of the Corporation shall consist of a
chairman of the board of directors, a president, a secretary and a treasurer.
Each officer shall be a natural years of age or older. The board of directors or
officers authorized by the officers, assistant person eighteen or an officer or
officers authorized by the board of directors may appoint such other officers,
assistant officers, committees and agents, including one or more vice
presidents, assistant secretaries and assistant treasurers, as they may consider
necessary. The board of directors or the officer or officers authorized by the
board of directors shall from time to time determine the procedure for the
appointment of officers, their term of office, their authority and duties and
their compensation. One person may hold more than one office. In all cases where
the duties of any officer, agent, or employee are not prescribed by these Bylaws
or by the board of directors, such officer, agent or employee shall follow the
orders and instructions of the president of the Corporation.
Any officer shall have the power to execute and deliver on
behalf of and in the name of the Corporation any instrument requiring the
signature of an officer of the Corporation, except as otherwise provided in
these Bylaws or where the execution and delivery thereof shall be expressly
delegated by the board of directors to some other officer or agent of the
Corporation.
2. Appointment and Term of Office. The officers of the
Corporation shall be appointed by the board of directors at each annual meeting
of the board of directors held after each annual meeting of the shareholders. If
the appointment of officers is not made at such meeting or if an officer or
officers are to be appointed by another officer or officers of the Corporation,
such appointments shall be made as soon thereafter as practicable.
3. Vacancies. A vacancy in any office, however occurring, may
be filled by the board of directors, or by the officer or officers authorized by
the board of directors, for the unexpired portion of the officer's term.
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4. Resignation. An officer may resign at any time by giving
written notice of resignation to the Corporation. A resignation of an officer is
effective when the notice is received by the Corporation unless the notice
specifies a later effective date. If a resignation is made effective at a later
date, the board of directors may permit the officer to remain in of f ice until
the effective date and may f ill the pending vacancy bef ore the effective date
if the board of directors provides that the successor does not take office until
the effective date, or the board of directors may remove the officer at any time
before the effective date and may fill the resulting vacancy.
5. Removal. Any officer or agent of this Corporation may be
removed with or without cause by the board of directors or an officer or
officers authorized by the board of directors.
6. Contract Rights. Appointment of an officer does not itself
create contract rights. An officer"s removal does not affect the officer's
contract rights, if any, with the Corporation. An officer's resignation does not
affect the Corporation's contract rights, if any, with the officer.
7. Chairman of the Board of Directors. The chairman of the
board of directors shall preside as chairman at meetings of the shareholders and
the board of directors. He or she shall, in addition, have such other duties as
the board of directors may prescribe that he or she perform. At the request of
the president, the chairman of the board of directors may, in the case of the
president's absence or inability to act, temporarily act in his or her place. In
the case of death of the president or in the case of his or her absence or
inability to act without having designated the chairman of the board of
directors to act temporarily in his place, the chairman of the board of
directors shall perform the duties of the president, unless the board of
directors, by resolution, provides otherwise. If the chairman of the board of
directors shall be unable to act in place of the president, the vice presidents
may exercise such powers and perform such duties as provided in Section 9 below.
8. President. Subject to the direction and supervision of the
board of directors, the president shall be the chief executive officer of the.
Corporation and shall have general and active control of its affairs and
business and general supervision of its officers, agents and employees. In the
event the position of chairman of the board of directors shall not be occupied
or the chairman shall be absent or otherwise unable to act, the president shall
preside at meetings of the shareholders and the board of directors and shall
discharge the duties of the presiding officer. Unless otherwise directed by the
board of directors, the president shall attend in person or by substitute
appointed by him or her, or shall execute on behalf of the Corporation written
instruments appointing a proxy or proxies to represent the Corporation at, all
meetings of the shareholders of any other corporation in which the Corporation
holds any stock. On behalf of the Corporation, the president may in person or by
substitute or proxy execute written waivers of notice and consents with respect
to any such meetings. At all such meetings and otherwise, the president, in
person or by substitute or proxy, may vote the stock held by the Corporation,
execute written-consents and other instruments with respect to such stock and
exercise any and all rights and powers incident to the ownership of said stock.
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9. Vice Presidents. Each vice president shall have such powers
and perform such duties as the board of directors may from time to time
prescribe or as the president may from time to time delegate to him or her. At
the request of the president, in the case of the president's absence or
inability to act, any vice president may temporarily act in his or her place. In
the case of the death of the president, or in the case of his or her absence or
inability to act without having designated a vice president or vice presidents
to act temporarily in his or her place, the board of directors, by resolution,
may designate a vice president or vice presidents, to perform the duties of the
president. If no such designation shall be made, the chairman of the board of
directors shall exercise such powers and perform such duties, as provided in
Section 8 of this Article V, but if the Corporation has no chairman of the board
of directors, or if the chairman is unable to act in place of the president, any
of the vice presidents may exercise such powers and perform such duties.
10. Secretary. The secretary shall (i) prepare, or cause to be
prepared, and maintain as permanent records the minutes of the proceedings of
the shareholders and the board of directors or any committee thereof, a record
of all actions taken by the shareholders or board of directors or any committee
thereof without a meeting and a record of all waivers of notice of meetings of
shareholders and of the board of directors or any committee thereof, (ii) see
that all notices are duly given in accordance with the provisions of these
Bylaws and as required by law, (iii) serve as custodian of the records of the
Corporation, (iv) keep at the registered office or principal place of business,
a record containing the names and addresses of all shareholders in a form that
permits preparation of a list of shareholders arranged by voting group and by
class or series of shares within each voting group, that is alphabetical within
each class or series and that shows the address of, and the number of shares of
each class or series held by, each shareholder, unless such a record shall be
kept at the office of the Corporation's transfer agent or registrar, (v)
maintain at the Corporation's principal office the originals or copies of the
Corporation's Articles of Incorporation, Bylaws, minutes of all shareholders'
meeting and records of all action taken by shareholders without meeting, all
written communications to shareholders as a group or to the holders of any class
or series of shares as a group, a list of the names and business addresses of
the current directors and officers, and a copy of the Corporation's most recent
corporate report filed with the Secretary of State, (vi) have general charge of
the stock transfer books of the Corporation, unless the Corporation has a
transfer agent, (vii) authenticate records of the Corporation, and (viii) in
general, perform all duties incident to the office of secretary and such other
duties as f rom time to time may be assigned to him or her by the president or
by the board of directors. Assistant secretaries, if any, shall have the same
duties and powers, subject to supervision by the secretary. The directors and/or
shareholders may, however, respectively designate a person other than the
secretary or assistant secretary to keep the minutes of their respective
meetings.
11. Treasurer. The treasurer shall be the chief financial
officer of the Corporation, shall have care and custody of all corporate funds,
securities, evidences of indebtedness and other personal property of the
Corporation and shall deposit the same in accordance with the instructions of
the board of directors. The treasurer shall receive and give receipts and
acquittances for money paid in on account of the Corporation, and shall pay out
of the Corporation's funds on hand all bills, payrolls and other just debts of
the Corporation of whatever nature upon maturity. Such power given to the
treasurer to deposit and disburse funds shall not, however, preclude any other
officer or employee of the Corporation from also depositing and
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disbursing funds when authorized to do so by the board of directors. The
treasurer shall, if required by the board of directors, give the Corporation a
bond in such amount and with such surety or sureties as may be ordered by the
board of directors for the faithful performance of duties of his or her office.
The treasurer shall have such other powers and perform such other duties as may
be from time to time prescribed by the board of directors or the president. The
assistant treasurers, if any, shall have the same powers and duties, subject to
the supervision of the treasurer.
The treasurer shall also be the principal accounting officer of
the Corporation and shall prescribe and maintain the methods and systems of
accounting to be followed, keep complete books and records of account as
required by the Colorado Business Corporation Act, prepare and file all local,
state and federal tax returns, prescribe and maintain an adequate system of
internal audit and prepare and furnish the president and the board of directors
statements of account showing the financial position of the Corporation and the
results of its operations.
12. Assistant Secretaries and Assistant Treasurers. The
assistant secretaries and the assistant treasurers (in the order designated by
the board of directors or, lacking such designation, by the president), in the
absence of the secretary or treasurer respectively, as the case may be, shall
perform the duties and exercise the powers of such secretary or treasurer and
shall perform such other duties as the board of directors shall prescribe.
13. Delegation of Duties. Whenever an officer is absent or
whenever, for any reason, the board of directors may deem it desirable, the
board of directors may delegate the powers and duties of an officer to any other
officer or officers or to any director or directors.
14. Bond of Officers. The board of directors may require any
officer to give the Corporation a bond in such sum and with such surety or
sureties as shall be satisfactory to the board of directors for such terms and
conditions as the board of directors may specify, including, without limitation,
for the faithful performance of his or her duties and for the restoration to the
Corporation of all property in his or her possession or under his or her control
belonging to the Corporation.
ARTICLE VII
Share Certificates and the Transfer of Shares
1. Share Certificates. Each share certificate shall state on
its face (i) the name of the Corporation and that it is incorporated under the
laws of the State of Colorado, (ii) the name of the person to whom the
certificate is issued, and (iii) the number and class of shares and the
designation of the series, if any, the certificate represents. Each share
certificate shall be signed, either manually or in facsimile, by the chairman or
vice chairman of the board of directors or by the president or the vice
president and by the treasurer or an assistant treasurer or by the secretary or
an assistant secretary, or such other officers as the board of directors may
designate, by resolution, and may bear such other information as may be deemed
necessary or appropriate. If the person who signed a share certificate either
manually or in facsimile no longer holds office when the certificate is issued,
the certificate is nevertheless valid. If the Corporation is authorized to issue
different classes of shares or different series within a class, the certificate
shall state conspicuously on its
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front or back that the Corporation will furnish the shareholder information
regarding the designations, preferences, limitations and relative rights of each
class and for each series, upon written request and without charge.
2. Issuance of Shares. Except as provided in the Articles of
Incorporation or the Colorado Business Corporation Act, the board of directors
may authorize the issuance of shares for consideration consisting of any
tangible property, intangible property or benefit to the Corporation, including
cash, promissory notes, services performed and other securities of the
Corporation. The board of directors shall determine that the consideration
received or to be received for the shares to be issued is adequate. Such
determination, in the absence of fraud, is conclusive insofar as the adequacy of
such consideration relates to whether the shares are validly issued, fully paid
and non-assessable. The promissory note of a subscriber or an affiliate of a
subscriber for shares shall not constitute consideration for the shares unless
the note is negotiable and is secured by collateral other than the shares,
having a fair market value at least equal to the principal amount of the note.
For the purposes of this Section 2, "promissory note" means a negotiable
instrument on which there is an obligation to pay independent of collateral and
does not include a nonrecourse note. Unless otherwise expressly provided in the
Articles of Incorporation, shares having a par value may be issued for less than
the par value.
3. Lost Certificates. The board of directors may direct a new
certificate to be issued in place of a certificate alleged to have been
destroyed or lost if the owner makes an affidavit or affirmation of that fact
and produces such evidence of loss or destruction as the board of directors may
require. The board of directors, in its discretion, may as a condition precedent
to the issuance of a new certificate require the owner to give the Corporation a
bond as indemnity against any claim that may be made against the Corporation
relating to the certificate allegedly destroyed or lost.
4. Transfer of Shares.
(a) Shares of the Corporation shall only be transferred on the
stock transfer books of the Corporation by the holder of record thereof upon the
surrender to the Corporation of the share certificates duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer and such documentary stamps as may be required by law. In that event,
the surrendered certificates shall be canceled, new certificates issued to the
persons entitled to them, and the transaction recorded on the books of the
Corporation. The person in whose name shares stand on the books of the
Corporation shall be deemed by the Corporation to be the owner thereof for all
purposes.
(b) The Articles of Incorporation, these Bylaws, an agreement
among shareholders, or an agreement among shareholders and the Corporation may
impose restrictions on the transfer or registration of transfer of shares of the
Corporation. A restriction does not affect shares issued before the restriction
became effective unless the holder of such shares acquired such shares with
knowledge of the restriction, is a party to the agreement containing the
restriction, or voted in favor of the restriction or otherwise consented to the
restriction.
(c) A restriction on the transfer or registration of transfer
of shares is valid and
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enforceable against the holder or a transferee of the holder if the restriction
is authorized by the Colorado Business Corporation Act and its existence is
noted conspicuously on the front or back of the certificate. Unless so noted, a
restriction is not enforceable against a person without knowledge of the
restriction.
5. Registered Shareholders. The Corporation shall be entitled
to treat the registered holder of any shares of the Corporation as the owner
thereof for all purposes, and the Corporation shall not be bound to recognize
any equitable or other claim to, or interest in, such shares or rights deriving
from such shares on the part of any person other than the registered holder,
including, without limitation, any purchaser, assignee or transferee of such
shares or rights deriving from such shares, unless and until such other person
becomes the registered holder of such shares, whether or not the Corporation
shall have either actual or constructive notice of the claimed interest of such
other person.
6. Transfer Agent, Registrars and Paying Agents. The board of
directors may at its discretion appoint one or more transfer agents, registrars
and agents for making payment upon any class of stock, bond, debenture or other
security of the Corporation. Such agents and registrars may be located either
within or outside Colorado. They shall have such rights and duties and shall be
entitled to such compensation as may be agreed.
ARTICLE VIII
Insurance
By action of the board of directors, notwithstanding any
interest of the directors in the action, the Corporation may purchase and
maintain insurance, in such scope and amounts as the board of directors deems
appropriate, on behalf of any person who is or was a director, officer,
employee, fiduciary or agent of the Corporation, or who, while a director,
officer, employee, fiduciary or agent of the Corporation, is or was serving at
the request of the Corporation as a director, officer, partner, trustee,
employee, fiduciary or agent of any other foreign or domestic corporation or of
any partnership, joint venture, trust, profit or nonprofit unincorporated
association, limited liability company or other enterprise or employee benefit
plan, against any liability asserted against, or incurred by, him or her in that
capacity or arising out of his or her status as such, whether or not the
Corporation would have the power to indemnify him or her against such liability
under the provisions of the Colorado Business Corporation Act. Any such
insurance may be procured from any insurance company designated by the board of
directors of the Corporation, whether such insurance company is formed under the
laws of Colorado or is a company in which the Corporation has an equity interest
or any other interest, through stock ownership or otherwise.
ARTICLE IX
Miscellaneous
1. Fiscal Year. The fiscal year of the corporation shall end
on January 31 of each year. Said fiscal year may be changed from time to time by
the board of directors in its
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discretion.
2. Amendments. The board of directors shall have power to make,
amend and repeal these Bylaws at any regular or special meeting of the board of
directors unless the shareholders expressly provide that the directors may not
amend or repeal such bylaw. The shareholders also shall have the power to make,
amend or repeal these Bylaws at any annual meeting or at any special meeting
called for that purpose.
3. Gender. Whenever required by the context, the singular shall
include the plural, the plural the singular, and one gender shall include all
genders.
4. Invalid Provision. The invalidity or unenforceability of any
particular provision of these Bylaws shall not affect the other provisions
herein, and these Bylaws shall be construed in all respects as if such invalid
or unenforceable provision was omitted.
5. Governing Law. These Bylaws shall be governed by and
construed in accordance with the laws of the State of Colorado.
6. Definitions. Except as otherwise specifically provided in
these Bylaws, all terms used in these Bylaws shall have the definitions ascribed
to them in the Colorado Business Corporation Act.
17
<PAGE> 1
EXHIBIT 3.7
CERTIFICATE OF DESIGNATION
PREFERENCES, RELATIVE, PARTICIPATING, OPTIONAL, AND OTHER SPECIAL
RIGHTS, QUALIFICATIONS, LIMITATIONS AND
RESTRICTIONS
OF
SERIES A PREFERRED STOCK
OF
MODTECH HOLDINGS, INC.
The undersigned, Evan M. Gruber and Michael Rhodes, certify that:
ONE. They are the duly elected Chief Executive Officer and Secretary,
respectively, of the above-named corporation.
TWO. Pursuant to and in accordance with the provisions of Section 151
of the Delaware General Corporation Law and the Certificate of Incorporation of
this corporation, the Board of Directors of this corporation has duly adopted
the following recitals and resolutions.
WHEREAS, the Certificate of Incorporation of this corporation provides
for a class of its authorized shares known as Preferred Stock comprised of
5,000,000 shares issuable from time to time in one or more series; and
WHEREAS, the Board of Directors of this corporation is authorized to
fix the number of shares of any series of Preferred Stock and to determine the
designation of any such series and the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued series of Preferred
Stock; and
WHEREAS, the Board of Directors of this corporation desires to
establish a class of Preferred Stock to be designated as the "Series A Preferred
Stock", and to fix the number of shares thereof and the rights, preferences,
privileges, restrictions and other matters relating thereto;
NOW, THEREFORE, BE IT RESOLVED, that a series consisting of 585,000
shares of Preferred Stock is hereby established and designated as the "Series A
Preferred Stock" of this corporation (the "Series A Preferred Stock"), and that
the Series A Preferred Stock shall have the rights, preferences and privileges,
and shall be subject to the restrictions, as are hereinafter set forth:
1. Dividend Provisions. The holders of outstanding Series A Preferred
Stock shall be entitled to receive when, as and if declared by the Board of
Directors, out of any assets at the time legally available therefor, dividends
in cash at the rate of $0.40 per share of Series A Preferred Stock per annum.
Such dividends shall accrue on each share of Series A Preferred Stock from the
date of its original issuance and shall accrue from day to day, whether or not
earned or declared. Such dividends shall be cumulative so that if such dividends
in respect of any previous year at said rate per share per annum shall not have
been paid or declared and set apart for all shares of Series A Preferred Stock
at the time outstanding, the deficiency shall be fully paid on or declared and
set apart for such shares before the corporation pays any dividend (except a
dividend in shares of the corporation) on Common Stock. Undeclared or unpaid
dividends shall not bear or accrue interest.
1
<PAGE> 2
Unless full dividends on the Series A Preferred Stock for all past dividend
periods and the then current dividend period shall have been paid or declared
and a sum sufficient for the payment thereof set apart, no shares of Common
Stock shall be purchased, redeemed, or acquired by the corporation and no funds
shall be paid into or set aside or made available for a sinking fund for the
purchase, redemption, or acquisition thereof; provided, however, that this
restriction shall not apply to the repurchase of shares of Common Stock held by
employees, officers, directors, consultants or other persons performing services
for the corporation or any wholly-owned subsidiary (including, but not by way of
limitation, distributors and sales representatives) that are approved by the
corporation's Board of Directors.
2. Liquidation Preference.
(a) Preference. In the event of any liquidation, dissolution
or winding up of this corporation, either voluntary or involuntary, subject to
the rights of series of Preferred Stock that may from time to time come into
existence, the holders of Series A Preferred Stock shall be entitled to receive,
prior and in preference to any distribution of any of the assets of this
corporation to the holders of Common Stock by reason of their ownership thereof,
an amount per share equal to the sum of (i) Five Dollars ($5.00) for each
outstanding share of Series A Preferred Stock and (ii) an amount equal to
accrued but unpaid dividends on such share. If upon the occurrence of such
event, the assets and funds thus distributed among the holders of the Series A
Preferred Stock shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amounts, then, subject to the rights of series
of Preferred Stock that may from time to time come into existence, the entire
assets and funds of the corporation legally available for distribution shall be
distributed ratably among the holders of the Series A Preferred Stock in
proportion to the amount of such stock owned by each such holder. If the
consideration received to be received in any liquidation, dissolution or winding
up of the corporation is other than cash, its value will be deemed its fair
market value as reasonably determined by the this corporation's board of
directors.
(b) Remaining Assets. Upon the completion of the distribution
required by subparagraph (a) of this Section 2 and any other distribution that
may be required with respect to series of Preferred Stock that may from time to
time come into existence, the remaining assets of the corporation available for
distribution to stockholders shall be distributed among the holders of Series A
Preferred Stock and Common Stock pro rata based on the number of shares of
Common Stock held by each (assuming conversion of all such Series A Preferred
Stock).
3. No Redemption.
The Series A Preferred Stock shall NOT be subject to
redemption at the option, election or request of the corporation or any holder
or holders of Series A Preferred Stock.
4. Conversion. The holders of the Series A Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Except as provided in Section 4(b)
below, no share of Series A Preferred Stock may be converted into Common Stock
until two years after the date of its
2
<PAGE> 3
original issuance. Thereafter, each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any at the office of this
corporation or any transfer agent for such stock, into one share of fully paid
and nonassessable shares of Common Stock (the "Conversion Ratio"). The
Conversion Ratio for the Series A Preferred Stock shall be subject to adjustment
as set forth in subsection 4(d).
(b) Automatic Conversion. Each share of Series A Preferred
Stock shall automatically be converted into shares of Common Stock at the
Conversion Ratio at the time in effect for such Series A Preferred Stock upon
the earlier of (i) the fourth anniversary date of its original issuance, or (ii)
immediately upon a "Change in Control", regardless of when such Change of
Control occurs. For purposes of this Section 4, a Change in Control means (i)
the acquisition of the corporation by another entity by means of any transaction
or series of related transactions (including, without limitation, any
reorganization, merger or consolidation but, excluding any merger effected
exclusively for the purpose of changing the domicile of the corporation); (ii) a
sale of all or substantially all of the assets of the corporation; (iii) the
sale of capital stock constituting 50% or more of the Company's outstanding
capital stock at the time of sale or, (iv) any transaction or series of related
transactions in which more than fifty percent (50%) of the voting power of the
corporation is disposed of.
(c) Mechanics of Conversion. Before any holder of Series A
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at the office of this corporation or of any transfer agent for the
Series A Preferred Stock, and shall give written notice to this corporation at
its principal corporate office, of the election to convert the same and shall
state therein the name or names in which the certificate or certificates for
shares of Common Stock are to be issued. This corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Series A Preferred Stock, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of Series A Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of such date. If the conversion is in
connection with a Change in Control the conversion shall be deemed to have
occurred immediately prior to the closing of the transaction which resulted in
the Change of Control.
(d) Adjustment in Conversion Price.
(i) Stock Splits. If the corporation at any time or
from time to time after the date of the first issuance of
shares of the Series A Preferred Stock ( the "Original Issue
Date") declares or pays any dividend on its Common Stock
payable in Common Stock or in any right to acquire Common
Stock, or effects a subdivision of the outstanding shares of
Common Stock into a greater number of shares of Common Stock
(by stock split, reclassification or otherwise), or if the
outstanding shares of Common Stock is combined or
consolidated, by reclassification or otherwise, into
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<PAGE> 4
a lesser number of shares of Common Stock, then the Conversion
Ratio in effect immediately prior to such event shall,
concurrently with the effectiveness of such event, be
proportionately decreased or increased, as appropriate.
(ii) Recapitalization. If at any time or from time to
time there shall be a recapitalization of the Common Stock
(other than a subdivision, combination or merger or sale of
assets transaction provided for elsewhere in this Section 4 or
Section 2) provision shall be made so that the holders of the
Series A Preferred Stock shall thereafter be entitled to
receive upon conversion of the Series A Preferred Stock the
number of shares of stock or other securities or property of
the Company or otherwise, to which a holder of Common Stock
deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment
shall be made in the application of the provisions of this
Section 4 with respect to the rights of the holders of the
Series A Preferred Stock after the recapitalization to the end
that the provisions of this Section 4 (including adjustment of
the Conversion Ratio then in effect and the number of shares
purchasable upon conversion of the Series A Preferred Stock)
shall be applicable after that event as nearly equivalent as
may be practicable.
(iii) Issuance of Additional Securities. Except as
otherwise provided in this Section 4(d), the Conversion Ratio
will not be adjusted upward or downward because of the
issuance of additional securities after Original Issue Date
without consideration or for a consideration per share less
than the price at which the Series A Preferred Stock was
originally issued.
(e) No Impairment. This corporation will not, by amendment of
its Certificate of Incorporation, reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by this corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Ratio of the holders of the
Series A Preferred Stock against impairment.
(f) No Fractional Shares. No fractional shares shall be issued
upon the conversion of any share or shares of the Series A Preferred Stock, and
the number of shares of Common Stock to be issued shall be rounded to the
nearest whole share. Whether or not fractional shares are issuable upon such
conversion shall be determined on the basis of the total number of shares of
Series A Preferred Stock the holder is at the time converting into Common Stock
and the number of shares of Common Stock issuable upon such aggregate
conversion.
(g) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Ratio of Series A Preferred Stock
pursuant to this Section 4, this corporation, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of Series A Preferred Stock a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such
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<PAGE> 5
adjustment or readjustment is based. This corporation shall, upon the written
request at any time of any holder of Series A Preferred Stock, furnish or cause
to be furnished to such holder a like certificate setting forth (a) such
adjustment and readjustment, (b) the Conversion Ratio for such series of
Preferred Stock at the time in effect, and (c) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of a share of Series A Preferred Stock.
(h) Record Date. In the event of any taking by this
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
corporation shall mail to each holder of Series A Preferred Stock, at least 20
days prior to the date specified therein, a notice specifying the date on which
any such record is to be taken for the purpose of such dividend, distribution or
right, and the amount and character of such dividend, distribution or right.
(i) Reservation of Stock Issuable Upon Conversion.
This corporation shall at all times reserve and keep available
out of its authorized but unissued shares of Common Stock,
solely for the purpose of effecting the conversion of the
shares of the Series A Preferred Stock, such number of its
shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all then outstanding
shares of the Series A Preferred Stock, in addition to such
other remedies as shall be available to the holder of such
Series A Preferred Stock, this corporation will take such
corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient
for such purposes, including, without limitation, engaging in
best efforts to obtain the requisite shareholder approval of
any necessary amendment to these articles.
(j) Notices. Any notice required by the provisions of
this Section 4 to be given to the holders of shares of Series
A Preferred Stock shall be deemed given if deposited in the
United States mail, postage prepaid, and addressed to each
holder of record at his address appearing on the books of this
corporation.
5. No Voting Rights. The holder of each share of Series A Preferred
Stock shall NOT have the right to vote their shares of Series A Preferred Stock
on any matters on which holders of any other class of stock, including Common
Stock, have the right to vote. However, holders of Series A Preferred Stock
shall be entitled to notice of any shareholders' meeting in accordance with the
bylaws of this corporation.
6. Protective Provisions. Subject to the rights of other series of
Preferred Stock which may from time to time come into existence, so long as any
shares of Series A Preferred Stock are outstanding, this corporation shall not
alter or change the rights, preferences or privileges of the shares of Series A
Preferred Stock without the consent of the holders of a majority of the shares
of Series A Preferred Stock then outstanding.
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<PAGE> 6
7. Status of Converted or Redeemed Stock. In the event any shares of
Series A Preferred Stock shall be converted pursuant to Section 4 hereof, the
shares so converted shall be canceled and shall not be issuable by the
corporation.
THREE. The authorized number of shares of Preferred Stock is 5,000,000
and no shares of such class have been issued. The authorized number of shares of
Series A Preferred Stock is 585,000, and no shares of such series have been
issued.
IN WITNESS WHEREOF, the undersigned has executed this certificate. The
undersigned declares under penalty of perjury that the matters set forth in the
foregoing certificate are true of his own knowledge.
Executed at Newport Beach, California on _____________1998.
________________________________________
Evan M. Gruber, Chief Executive Officer
________________________________________
_____________ Secretary
<PAGE> 1
EXHIBIT 3.8
EXHIBIT A
SERIES A-1 CONVERTIBLE PREFERRED STOCK
Section 1. Dividends.
When and as declared by the Corporation's board of directors
and to the extent permitted under the Colorado Business Corporation Act, the
holders of the Series A-1 Convertible Preferred Stock (the "Series A-1
Preferred") shall participate ratably with the holders of shares of the
Corporation's Common Stock (as hereinafter defined), Series A-2 Convertible
Preferred Stock (the "Series A-2 Preferred") and Series A-3 Convertible
Preferred Stock (the "Series A-3 Preferred") in any dividends on the Common
Stock based upon the number of shares of Common Stock into which each share of
Series A-1 Preferred (a "Share") is convertible at the time of such declaration.
Section 2. Liquidation.
Upon any liquidation, dissolution or winding up of the
Corporation, the holders of Series A-1 Preferred as a class shall vote to either
(A) convert all of the Series A-1 Preferred (including any fraction of a Share)
into Conversion Stock (as hereinafter defined) pursuant to the provisions of
Section 4 below and share ratably with the holders of Series A-2 Preferred and
the Series A-3 Preferred (collectively, the "Preferred Class"), if applicable,
and Junior Securities (as hereinafter defined) in any distribution or payment
upon such liquidation, dissolution or winding up of the Corporation, or (B) be
paid (i) before any distribution or payment is made upon any Junior Securities
and concurrently with the holders of the Preferred Class as set forth below, an
amount in cash equal to the Liquidation Value (as hereinafter defined) of the
Series A-1 Preferred (the "Liquidation Payment"), and (ii) after the payment of
the Liquidation Payment and before any distribution or payment is made upon any
Junior Securities, an amount equal to the Liquidation Premium (as hereinafter
defined) (collectively with the Liquidation Payment, the "Liquidation Amount").
For purposes of this Section 2, the vote of the holders of the majority of the
Series A-1 Preferred shall be deemed to be the election of all of the holders of
the Series A-1 Preferred. If the holders of the Series A-1 Preferred elect not
to convert the Series A-1 Preferred pursuant to clause (A) above and elect to
receive a cash payment pursuant to clause (B) above and the holders of the
Preferred Class elect not to convert their shares of the Preferred Class into
Conversion Stock, the holders of the Series A-1 Preferred and the holders of the
Preferred Class shall share the Liquidation Payment ratably based upon the
aggregate Liquidation Value of the Series A-1 Preferred and the aggregate
liquidation value of the Preferred Class held by each such holder pursuant to
clause (B)(i) above, after the payment of which the holders of the Series A-1
Preferred shall receive the Liquidation Premium, after the payment of which any
remaining assets shall be distributed to the holders of Junior Securities. If
the holders of the Series A-1 Preferred elect not to convert the Series A-1
Preferred pursuant to clause (A) above and elect to receive a cash payment
pursuant to clause (B) above and the holders of the Preferred Class elect to
convert their shares of the Preferred Class into Conversion Stock, the holders
of the Series A- 1 Preferred shall receive the Liquidation Amount before any
distribution or payment is made upon the Preferred Class or any Junior
Securities. If the holders of the Series A-1 Preferred elect
<PAGE> 2
to convert the Series A-1 Preferred pursuant to clause (A) above and elect not
to receive a cash payment pursuant to clause (B) above and the holders of the
Preferred Class elect not to convert their shares of the Preferred Class into
Conversion Stock, the holders of the Preferred Class shall receive payment of
the Preferred Class liquidation value before any distribution or payment is made
upon the Series A-1 Preferred or any Junior Securities and, thereafter, the
holders of the Series A-1 Preferred shall share ratably with the holders of
Junior Securities in any distribution or payment upon such liquidation,
dissolution or winding up of the Corporation. If the holders of the Series A-1
Preferred elect to convert the Series A-1 Preferred pursuant to clause (A) above
and elect not to receive a cash payment pursuant to clause (B) above and the
holders of the Preferred Class elect to convert their shares of the Preferred
Class into Conversion Stock, the holders of the Series A-1 Preferred and the
Preferred Class shall share ratably with the holders of Junior Securities in any
distribution or payment upon such liquidation, dissolution or winding up of the
Corporation. The Corporation shall mail written notice of such liquidation,
dissolution or winding up, not less than sixty (60) days prior to the payment
date stated therein (the "Payment Date"), to each record holder of Series A-1
Preferred. Neither the consolidation or merger of the Corporation into or with
any other entity or entities, nor the sale or transfer by the Corporation of all
or any part of its assets, nor the reduction of the capital stock of the
Corporation, shall be deemed to be a liquidation, dissolution or winding up of
the Corporation within the meaning of this Section 2.
Section 3. Voting Rights.
The holders of the Series A-1 Preferred shall be entitled to
notice of all stockholders meetings in accordance with the Corporation's bylaws,
and the holders of the Series A-1 Preferred shall be entitled to vote on all
matters submitted to the stockholders for a vote together with the holders of
the Common Stock and the Series A-2 Preferred voting together as a single class
with each share of Common Stock entitled to one vote per share, each Share of
Series A-I Preferred entitled to one vote for each share of Common Stock
issuable upon conversion of the Series A-1 Preferred at the time the vote is
taken, and each share of Series A-2 Preferred entitled to one vote for each
share of Common Stock issuable upon conversion of the Series A-2 Preferred at
the time the vote is taken.
Section 4. Conversion.
A. Conversion Procedure.
(i) At any time and from time to time, any holder of Series
A-1 Preferred may convert all or any portion of the Series A-1 Preferred
(including any fraction of a Share) held by such holder into a number of shares
of Conversion Stock computed by multiplying the number of Shares to be converted
by $2.7154 and dividing the result by the Conversion Price (as hereinafter
defined) then in effect.
(ii) Each conversion of Series A-1 Preferred shall be deemed
to have been effected as of the close of business on the date on which the
certificate or certificates representing the Series A-1 Preferred to be
converted have been surrendered at the principal office of the
<PAGE> 3
Corporation. At such time as such conversion has been effected, the rights of
the holder of such Series A-1 Preferred as such holder shall cease and the
Person (as hereinafter defined) or Persons in whose name or names any
certificate or certificates for shares of Conversion Stock are to be issued upon
such conversion shall be deemed to have become the holder or holders of record
of the shares of Conversion Stock represented thereby; provided, however, that
for purposes of Section 2(A) above the conversion of the Series A-1 Preferred
shall be deemed to have been effected as of the close of business on the day
prior to the Payment Date.
(iii) Notwithstanding any other provision hereof, if a
conversion of Series A-1 Preferred is to be made in connection with a Qualified
Public Offering (as hereinafter defined), the conversion of any Shares of Series
A-1 Preferred may, at the election of the holder of such Shares, be conditioned
upon the consummation of the Qualified Public Offering in which case such
conversion shall not be deemed to be effective until the consummation of the
Qualified Public Offering.
(iv) As soon as possible after a conversion has been effected
(but in any event within five business days in the case of subparagraph (a)
below), the Corporation shall deliver to the converting holder:
(a) a certificate or certificates representing the number of
shares of Conversion Stock issuable by reason of such conversion in such name or
names and such denomination or denominations as the converting holder has
specified;
(b) payment of the amount payable under subparagraph (vii)
below with respect to such conversion; and
(c) a certificate representing any Shares of Series A-1
Preferred which were represented by the certificate or certificates delivered to
the Corporation in connection with such conversion but which were not converted.
(v) The issuance of certificates for shares of Conversion
Stock upon conversion of Series A-1 Preferred shall be made without charge to
the holders of such Series A-1 Preferred for any issuance tax in respect thereof
or other cost incurred by the Corporation in connection with such conversion and
the related issuance of shares of Conversion Stock. Upon conversion of each
Share of Series A-1 Preferred, the Corporation shall take all such actions as
are necessary in order to insure that the Conversion Stock issuable with respect
to such conversion shall be validly issued, fully paid and non-assessable.
(vi) The Corporation shall not close its books against the
transfer of Series A-1 Preferred or of Conversion Stock issued or issuable upon
conversion of Series A-1 Preferred in any manner which interferes with the
timely conversion of Series A-1 Preferred. The Corporation shall assist and
cooperate with any holder of Shares required to make any governmental filings or
obtain any governmental approval prior to or in connection with any conversion
of Shares hereunder (including, without limitation, making any filings required
to be made by the Corporation).
<PAGE> 4
(vii) If any fractional interest in a share of Conversion
Stock would, except for the provisions of this subparagraph, be deliverable upon
any conversion of the Series A-1 Preferred, the Corporation, in lieu of
delivering the fractional share therefor, may pay an amount to the holder
thereof equal to the fair market price of such fractional interest as of the
date of conversion as determined by the Corporation's board of directors.
(viii) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Conversion Stock, solely
for the purpose of issuance upon the conversion of the Series A- I Preferred,
such number of shares of Conversion Stock issuable upon the conversion of all
outstanding Shares of Series A-1 Preferred. All shares of Conversion Stock which
are so issuable shall when issued, be duly and validly issued, fully paid and
non-assessable and free from all taxes, liens and charges. The Corporation shall
'take. all such actions as may be necessary to assure that all such shares of
Conversion Stock may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic securities exchange
upon which shares of Conversion Stock may be listed (except for official notice
of issuance which shall be immediately delivered by the Corporation upon each
such issuance).
B. Conversion Price. The initial "Conversion Price" shall be
$2.7154 per share. In order to prevent dilution of the conversion rights granted
under this subdivision, the Conversion Price shall be subject to adjustment from
time to time pursuant to this Section 4.
C. Anti-Dilution. If and whenever on or after the original
date of issuance of the Series A-1 Preferred the Corporation issues or sells, or
in accordance with Section 4(D) hereof is deemed to have issued or sold, any
shares of its Common Stock for a consideration per share less than the
Conversion Price in effect immediately prior to the time of such issue or sale,
then forthwith upon such issue or sale the Conversion Price shall be reduced to
the Conversion Price determined by dividing (i) the sum of (a) the product
derived by multiplying the Conversion Price in effect immediately prior to such
issue or sale times the number of shares of Common Stock Deemed Outstanding
immediately prior to such issue or sale, plus (b) the consideration, if any,
received by the Corporation upon such issue or sale, by (ii) the number of
shares of Common Stock Deemed Outstanding immediately after such issue or sale;
provided that there shall be no adjustment in the Conversion Price as a result
of any issuance or sale (or deemed issuance or sale) of (x) options issued
pursuant to the Corporation's stock option plan and capital stock issued upon
the exercise thereof, (y) capital stock of the Corporation upon the exercise of
warrants held by each of Patrick Van Den Bossche and NationsCredit Commercial
Corporation and any conversion of such capital stock subsequent to its issuance
and (z) the issuance of capital stock of the Corporation upon the conversion of
Series A-1 Preferred or the Preferred Class.
D. Effect on Conversion Price of Certain Events. For purposes
of determining the adjusted Conversion Price under Section 6(C) hereof, the
following shall be applicable:
<PAGE> 5
(i) Issuance of Rights or Options. If the Corporation in any
manner grants any rights or options to subscribe for or to purchase Common Stock
or any stock or other securities convertible into or exchangeable for Common
Stock (such rights or Options being herein called "Options" and such convertible
or exchangeable stock or securities being herein called "Convertible
Securities") and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of such Convertible
Securities is less than the Conversion Price in effect immediately prior to the
time of the granting of such Options then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Options shall be deemed to be outstanding and to have
been issued and sold by the Corporation at the time of the granting of such
Options for such price per share. For purposes of this Section 4(D)(i), the
"price per share for which Common Stock is issuable" shall be determined by
dividing (a) the total amount, if any, received or receivable by the
Corporation- as consideration for the granting of such Options, plus the minimum
aggregate amount of additional consideration payable to the Corporation upon
exercise of all such Options, plus in the case of such Options which relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the issuance of sale or
such Convertible Securities and the conversion or exchange thereof, by (b) the
total maximum number of shares of Common Stock issuable upon the exercise of
such Options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options. No further adjustment of
the Conversion Price shall be made when Convertible Securities are actually
issued upon the exercise of such Options or when Common Stock is actually issued
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(ii) Issuance of Convertible Securities. If the Corporation in
any manner issues or sells any Convertible Securities and the price per share
for which Common Stock is issuable upon such conversion or exchange is less than
the Conversion Price in effect immediately prior to the time of such issue or
sale then the maximum number of shares of Common Stock issuable upon conversion
or exchange of such Convertible Securities shall be deemed to be outstanding and
to have been issued and sold by the Corporation at the time of the issuance or
sale of such Convertible Securities for such price per share. For the purposes
of this Section 4(D)(ii), the "price per share for which Common Stock is
issuable" shall be determined by dividing (a) the total amount received or
receivable by the Corporation as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the conversion or
exchange thereof, by (b) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities. No
further adjustment of the Conversion Price shall be made when Common Stock is
actually issued upon the conversion or exchange of such Convertible Securities,
and if any such issue or sale of such Convertible Securities is made upon
exercise of any Options for which adjustments of the Conversion Price had been
or are to be made pursuant to other provisions of this Section 4, no further
adjustment of the Conversion Price shall be made by reason of such issue or
sale.
(iii) Change in Option Price or Conversion Rate. If the
purchase price
<PAGE> 6
provided for in any Options, the additional consideration, if any, payable upon
the conversion or exchange of any Convertible Securities, or the rate at which
any Convertible Securities are convertible into or exchangeable for Common Stock
change at any time, the Conversion Price in effect at the time of such change
shall be readjusted to the Conversion Price which would have been in effect at
such time had such Options or Convertible Securities still outstanding provided
for such changed purchase price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or sold.
E. Subdivision or Combination of Common Stock. If the
Corporation at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of.
Common Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision shall be proportionately reduced, and if
the Corporation at any time combines (by reverse stock split or otherwise) one
or more classes of its outstanding shares of Common Stock into a smaller number
of shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased.
F. Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Corporation's assets to another
Person or other transaction which is effected in such a manner that holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock is referred to herein as an "Organic Change". Prior to the
consummation of any Organic Change, the Corporation shall make appropriate
provisions (in form and substance satisfactory to the holders of a majority of
the Series A-1 Preferred then outstanding) to insure that each of the holders of
Series A-1 Preferred shall thereafter have the right to acquire and receive, in
lieu of or in addition to (as the case may be) the shares of Conversion Stock
immediately theretofore acquirable and receivable upon the conversion of such
holder's Series A-1 Preferred, such shares of stock, securities or assets as
such holder would have received in connection with such Organic Change if such
holder had converted its Series A-1 Preferred immediately prior to such Organic
Change. In each such case, the Corporation shall also make appropriate
provisions (in form and substance satisfactory to the holders of a majority of
the Series A-1 Preferred then outstanding) to insure that the provisions of this
Section 4 and Section 5 hereof shall thereafter be applicable to the Series A-1
Preferred (including, in the case of any such consolidation, merger or sale in
which the successor entity or purchasing entity is other than the Corporation,
an immediate adjustment of the Conversion Price to the value for the Common
Stock reflected by the terms of such consolidation, merger or sale, and a
corresponding immediate adjustment in the number of shares of Conversion Stock
acquirable and receivable upon conversion of Series A-1 Preferred, if the value
so reflected is less than the Conversion Price in effect immediately prior to
such consolidation, merger or sale). The Corporation shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor corporation (if other than the Corporation) resulting from
consolidation or merger or the corporation purchasing such assets assumes by
written instrument (in form reasonably satisfactory to the holders of a majority
of the Series A-1 Preferred then outstanding), the obligation to deliver to each
such holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to acquire.
<PAGE> 7
G. Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 4 but not expressly provided for
by such provisions, then the Corporation's board of directors shall make an
appropriate adjustment in the Conversion Price so as to protect the rights of
the holders of Series A-1 Preferred; provided that no such adjustment shall
increase the Conversion Price as otherwise determined pursuant to this Section 4
or decrease the number of shares of Conversion Stock issuable upon conversion of
each Share of Series A-1 Preferred.
H. Notices.
(i) Immediately upon any adjustment of the Conversion Price,
the Corporation shall give written notice thereof to all holders of Series A-1
Preferred, setting forth in reasonable detail and certifying the calculation of
such adjustment.
(ii) The Corporation shall give written notice to all holders
of Series A-1 Preferred at least 20 days prior to the date on which the
Corporation closes its books or takes a record (a) with respect to any dividend
or distribution upon Common Stock, (b) with respect to any pro rata subscription
offer to holders of Common Stock, or (c) for determining rights to vote with
respect to any Organic Change, dissolution or liquidation.
(iii) The Corporation shall also give written notice to the
holders of Series A-1 Preferred at least 20 days prior to the date on which any
Organic Change shall take place.
I. Mandatory Conversion. The Corporation's board of directors
may at any time require the conversion of all of the outstanding Series A-1
Preferred upon the occurrence of a Conversion Event (as hereinafter defined).
Any such mandatory conversion shall only be effected at the time of and subject
to the closing of the transactions contemplated by the Conversion Event and upon
written notice of such mandatory conversion delivered to all holders of Series
A-1 Preferred at least seven (7) days prior to such closing.
Section 5. Purchase Rights.
If at any time the Corporation grants, issues or sells any
options, convertible securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "Purchase Rights"), then each holder of Series A-1 Preferred
shall be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such holder could have acquired if such
holder had held the number of shares of Conversion Stock acquirable upon
conversion of such holder's Series A-1 Preferred immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights.
Section 6. Registration of Transfer.
<PAGE> 8
The Corporation shall keep at its principal office a register
for the registration of Series A-1 Preferred. Upon the surrender of any
certificate representing Series A-I Preferred at such place, the Corporation
shall, at the request of the record holder of such certificate, execute and
deliver (at the Corporation's expense) a new certificate or certificates in
exchange therefor representing in the aggregate the number of Shares represented
by the surrendered certificate. Each such new certificate shall be registered in
such name and shall represent such number of Shares as is requested by the
holder of the surrendered certificate and shall be substantially identical in
form to the surrendered certificate.
Section 7. Replacement
Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder shall be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing Shares of any class of Series A-1 Preferred, and in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the holder is a financial
institution or other institutional investor its own agreement shall be
satisfactory), or, in the case of any such mutilation, upon surrender of such
certificate, the Corporation shall (at its expense) execute and deliver in lieu
of such certificate a new certificate of like kind representing the number of
Shares of such class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.
Section 8. Definitions.
"Common Stock" means, collectively, the Corporation's Common
Stock, no par value, and any capital stock of any class of the Corporation
hereafter authorized which is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Corporation.
"Common Stock Deemed Outstanding" means, at any given time,
the number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to Section
4(D) hereof whether or not the Options or Convertible Securities are actually
exercisable at such time.
"Conversion Event" means (i) a Qualified Public Offering, (ii)
any sale of all the outstanding capital stock of the Corporation, or (iii) a
merger, consolidation, sale of substantially all of the assets of the
Corporation or similar transaction involving the Corporation.
"Conversion Stock" means shares of Common Stock; provided that
if there is a change such that the securities issuable upon conversion of the
Series A-1 Preferred are issued by an entity other than the Corporation or there
is a change in the class of securities so issuable, then the term "Conversion
Stock" shall mean one share of the security issuable upon conversion of the
Series A-1 Preferred if such security is issuable in shares, or shall mean the
smallest unit in
<PAGE> 9
which such security is issuable if such security is not issuable in shares.
"Junior Securities" means any of the Corporation's equity
securities other than the Series A-1 Preferred and the Preferred Class.
"Liquidation Premium" means the amount determined pursuant to
the following equation:
Liquidation Premium = ((1.2)14 x CP) - DP - Liquidation Value
; where (i) N = the number of years, including any fractional
portion thereof, from the date of issuance of the Series A-1
Preferred to the date of payment of the Liquidation Premium
(the "Payment Date"), (ii) CP = the Conversion Price, and
(iii) DP = the sum of the future values of any distributions
or dividends paid per. share of Series A-1 Preferred prior to
the Payment Date, assuming such dividend or distribution was
reinvested by the holder thereof at an annually compounded
rate of 20% from the date of payment to the Payment Date.
"Liquidation Value" of any Share as of any particular date
shall be equal to $2,7154.
"Person" means an individual, a partnership, a limited
liability company, a corporation, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization and a governmental entity
or any department, agency or political subdivision thereof.
"Oualified Public Offering" means any underwritten offering by
the Corporation of its equity securities to the public pursuant to an effective
registration statement under the Securities Act of 1933, as then in effect, or
any comparable statement under any similar federal statute then in force
pursuant to which the value of the Corporation prior to receipt of the proceeds
of such offering is at least $25,000,000 and the minimum gross proceeds to the
Corporation is $15,000,000; provided that for purposes of Section 4(G) hereof, a
Qualified Public Offering shall not include an offering made in connection with
a business acquisition or combination or an employee benefit plan.
Section 9. Amendment and Waiver.
No amendment, modification or waiver shall be binding or
effective with respect to, any provision of Sections 1 to 10 hereof without the
prior written consent of the holders of at least 75% of the Series A-1 Preferred
outstanding at the time such action is taken. No change in the terms hereof may
be accomplished by merger or consolidation of the Corporation with another
corporation or entity unless the Corporation has obtained the prior written
consent of the holders of 75% of the Series A-1 Preferred then outstanding.
<PAGE> 10
Section 10. Notices.
Except as otherwise expressly provided hereunder, all notices
referred to herein shall be in writing and shall be delivered by registered or
certified mail, return receipt requested and postage prepaid, or by reputable
overnight courier service, charges prepaid, and shall be deemed to have been
given when so mailed or sent (i) to the Corporation, at its principal executive
offices, and (ii) to any stockholder, at such holder's address as it appears in
the stock records of the Corporation (unless otherwise indicated by any such
holder).
<PAGE> 11
EXHIBIT B
SERIES A-2 CONVERTIBLE PREFERRED STOCK
Section 1. Dividends.
When and as declared by the Corporation's board of directors
and to the extent permitted under the Colorado Business Corporation Act, the
holders of the Series A-2 Convertible Preferred Stock (the "Series A-2
Preferred") shall participate ratably with the holders of shares of the
Corporation's Common Stock (as hereinafter defined), Series A-1 Convertible
Preferred Stock (the "Series A-1 Preferred") and Series A-3 Convertible
Preferred Stock (the "Series A-3 Preferred Stock") in any dividends on the
Common Stock based upon the number of shares of Common Stock into which each
share of Series A-2 Preferred (a "Share") is convertible at the time of such
declaration.
Section 2. Liquidation.
Upon any liquidation, dissolution or winding up of the
Corporation, the holders of the Series A-2 Preferred and the Series A-3
Preferred as a class (the "Preferred Class") shall vote to either (A) (i)
convert all of the Series A-2 Preferred (including any fraction of a Share) into
Conversion Stock (as hereinafter defined) pursuant to the provisions of Section
4 below, (ii) convert all of the Series A-3 Preferred (including any fraction of
a share) into Series A-2 Preferred, (iii) convert the Series A-2 Preferred
referred to in clause (ii) above into Conversion Stock, and (iv) share ratably
with the holders of Series A-1 Preferred, if applicable, and Junior Securities
(as hereinafter defined) in any distribution or payment upon such liquidation,
dissolution or winding up of the Corporation, or (B) be paid, before any
distribution or payment is made upon any Junior Securities and concurrently with
the holders of Series A- 1 Preferred as set forth below, an amount in cash equal
to the Liquidation Value (as hereinafter defined) of the Series A-2 Preferred
and the liquidation value of the Series A-3 Preferred (the "Liquidation
Payment"). For purposes of this Section 2, the vote of the holders of the
majority of the Preferred Class as a group shall de deemed to be the election of
all of the holders of the Preferred Class.' If the holders of the Preferred
Class elect not to convert the Preferred Class pursuant to clause (A) above and
elect to receive a cash payment pursuant to clause (B) above and the holders of
the Series A-1 Preferred elect not to convert their shares of Series A-1
Preferred into Conversion Stock, the holders of the Preferred Class and the
holders of the Series A- 1 Preferred shall share the Liquidation Payment ratably
based upon the aggregate Liquidation Value of the Series A-2 Preferred and the
aggregate liquidation value of the Series A-1 Preferred -and the Series A-3
Preferred held by each such holder pursuant to clause (B) above, after the
payment of which the holders of the Series A-1 Preferred shall receive payment
of the Series A-1 Preferred liquidation premium, after the payment of which any
remaining assets shall be distributed to the holders of Junior Securities. If
the holders of the Preferred Class elect to convert the Preferred Class pursuant
to clause (A) above and elect not to receive a cash payment pursuant to clause
(B) above and the holders of the Series A- I Preferred elect not to convert
their shares of Series A-1 Preferred into Conversion Stock, the holders of the
Series A-1 Preferred shall receive payment of the Series A-1 Preferred
liquidation amount before any distribution or payment is made upon the
<PAGE> 12
Preferred Class or any Junior Securities and, thereafter, the holders of the
Preferred Class shall share ratably with the holders of Junior Securities in any
distribution or payment upon such liquidation, dissolution or winding up of the
Corporation. If the holders of the Preferred Class elect not to convert the
Preferred Class pursuant to clause (A) above and elect to receive a cash payment
pursuant to clause (B) above and the holders of the Series A-1 Preferred elect
to convert their shares of Series A-1 Preferred into Conversion Stock, the
holders of the Preferred Class shall receive the Liquidation Payment before any
distribution or payment is made upon the Series A- I Preferred or any Junior
Securities and, thereafter, the holders of the Series A-1 Preferred shall share
ratably with the holders of Junior Securities in any distribution or payment
upon such liquidation, dissolution or winding up of the Corporation. If the
holders of the Preferred Class elect to convert the Preferred Class pursuant to
clause (A) above and elect not to receive a cash payment pursuant to clause (B)
above and the holders of the Series A-1 Preferred elect to convert their shares
of Series A- 1 Preferred into Conversion Stock, the holders of the Preferred
Class and the holders of the Series A-1 Preferred shall share ratably with the
holders of Junior Securities in any distribution or payment upon such
liquidation, dissolution or winding up of the Corporation. The Corporation shall
mail written notice of such liquidation, dissolution or winding up, not less
than sixty (60) days prior to the payment date stated therein (the "Payment
Date"), to each record holder of Series A-2 Preferred. Neither the consolidation
or merger of the Corporation into or with any other entity or entities, nor the
sale or transfer by the Corporation of all or any part of its assets, nor the
reduction of the capital stock of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this Section 2.
Section 3. Voting Rights.
The holders of the Series A-2 Prefer-red shall be entitled to
notice of all stockholders meetings in accordance with the Corporation's bylaws,
and the holders of the Series A-2 Preferred shall be entitled to vote on all
matters submitted to the stockholders for a vote together with the holders of
the Common Stock and the Series A-1 Preferred voting together as a single class
with each share of Common Stock entitled to one vote per shake, each share of
Series A-1 Preferred entitled to one vote for each share of Common Stock
issuable upon conversion of the Series A- I Preferred at the time the vote is.
taken, and each Share of Series A-2 Preferred entitled to one vote for each
share of Common Stock issuable upon conversion of the Series A-2 Preferred at
the time the vote is taken.
Section 4. Conversion.
A. Conversion Procedure.
(i) At any time and from time to time, any holder of Series
A-2 Preferred may convert all or any portion of the Series A-2 Preferred
(including any fraction of a Share) held by such holder into a number of shares
of Conversion Stock computed by multiplying the number of Shares to be converted
by $2.8626 and dividing. the result by the Conversion Price (as hereinafter
defined) then in effect.
<PAGE> 13
(ii) Each conversion of Series A-2 Preferred shall be deemed
to have been effected as of the close of business on the date on which the
certificate or certificates representing the Series A-2 Preferred to be
converted have been surrendered at the principal office of the Corporation. At
such time as such conversion has been effected, the rights of the holder of such
Series A-2 Preferred as such holder shall cease and the Person (as hereinafter
defined) or Persons in whose name or names any certificate or certificates for
shares of Conversion Stock are to be issued upon such conversion shall be deemed
to have become the holder or holders of record of the shares of Conversion Stock
represented thereby; provided, however, that for purposes of Section 2(A) above
the conversion of the Series A-2 Preferred shall be deemed to have been effected
as of the close of business on the day prior to the Payment Date.
(iii) Notwithstanding any other provision hereof, if a
conversion of Series A-2 Preferred is to be made in connection with a Qualified
Public Offering (as hereinafter defined), the conversion of any Shares of Series
A-2 Preferred may, at the election of the holder of such Shares, be conditioned
upon the consummation of the Qualified Public Offering in which case such
conversion shall not be deemed to be effective until the consummation of the
Qualified Public Offering.
(iv) As soon as possible after a conversion has been effected
(but in any event within five business days in the case of subparagraph (a)
below), the Corporation shall deliver to the converting holder:
(a) a certificate or certificates representing the
number of shares of Conversion Stock issuable by reason of such
conversion in such name or names and such denomination or denominations
as the converting holder has specified;
(b) payment of the amount payable under subparagraph
(vii) below with respect to such conversion; and
(c) a certificate representing any Shares of Series
A-2 Preferred which were represented by the certificate or certificates
delivered to the Corporation in connection with such conversion but
which were not converted.
(v) The issuance of certificates for shares of Conversion
Stock upon conversion of Series A-2 Preferred shall be made without charge to
the holders of such Series A-2 Preferred for any issuance tax in respect thereof
or other cost incurred by the Corporation in connection with such conversion and
the related issuance of shares of Conversion Stock. Upon conversion of each
Share of Series A-2 Preferred, the Corporation shall take all such actions as
are necessary in order to insure that the Conversion Stock issuable with respect
to such conversion shall be Validly issued, fully paid and nonassessable.
(vi) The Corporation shall not close its books against the
transfer of Series A-2 Preferred or of Conversion Stock issued or issuable upon
conversion of Series A-2 Preferred in any manner which interferes with the
timely conversion of Series A-2 Preferred. The Corporation shall assist and
cooperate with any holder of Shares required to make any governmental filings or
obtain any governmental approval prior to or in connection with any conversion
of Shares
<PAGE> 14
hereunder (including, without limitation, making any filings required to be made
by the Corporation).
(vii) If any fractional interest in a share of Conversion
Stock would, except for the provisions of this subparagraph, be deliverable upon
any conversion of the Series A-2 Preferred, the Corporation, in lieu of
delivering the fractional share therefor, may pay an amount to the holder
thereof equal to the fair market price of such fractional interest as of the
date of conversion as determined by the Corporation's board of directors.
(viii) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Conversion Stock, solely
for the purpose of issuance upon the conversion of the Series A-2 Preferred,
such number of shares of Conversion Stock issuable upon the conversion of all
outstanding Shares of Series A-2 Preferred. All shares of Conversion Stock which
are so issuable shall, when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The Corporation shall
take all such actions as may be necessary to assure that all such shares of
Conversion Stock may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic securities exchange
upon which shares of Conversion Stock may be listed (except for official notice
of issuance which shall be immediately delivered by the Corporation upon each
such issuance).
B. Conversion Price. The initial "Conversion Price" shall be
$2.8626 per share. In order to prevent dilution of the conversion right s
granted under this subdivision, the Conversion Price shall be subject to
adjustment from time to time pursuant to this Section 4.
C. Anti-Dilution. If and whenever on or after the original
date of issuance of the Series A-2 Preferred the Corporation issues or sells, or
in accordance with Section 4(D) hereof is deemed to have issued or sold, any
shares of its Common Stock for a consideration per share less than the
Conversion Price in effect immediately prior to the time of such issue or sale,
then forthwith upon such issue or sale the Conversion Price shall be reduced to
the Conversion Price determined by dividing (i) the sum of (a) the product
derived by multiplying the Conversion Price in effect immediately prior to such
issue or sale times the number of shares of Common Stock Deemed Outstanding
immediately prior to such issue or sale, plus (b) the consideration, if any,
received by the Corporation upon such issue or sale, by (ii) the number of
shares of Common Stock Deemed Outstanding immediately after such issue or sale;
provided that there shall be no adjustment in the Conversion Price as a result
of any issuance or sale (or deemed issuance or sale) of (x) options issued
pursuant to the Corporation's stock option plan and capital stock issued upon
the exercise thereof, (y) capital stock of the Corporation upon the exercise of
warrants held by each of Patrick Van Den Bossche and NationsCredit Commercial
Corporation and any conversion of such capital stock subsequent to its issuance,
and (z) the issuance of capital stock of the Corporation upon the conversion of
the Series A-1 Preferred or the Preferred Class.
D. Effect on Conversion Price of Certain Events. For purposes
of determining the adjusted Conversion Price under Section 6(C) hereof, the
following shall be applicable:
<PAGE> 15
(i) Issuance of Rights or Options. If the Corporation in any
manner grants any rights or options to subscribe for or to purchase Common Stock
or any stock or other securities convertible into or exchangeable for Common
Stock (such rights or options being herein called "Options" and such convertible
or exchangeable stock or securities being herein called "Convertible
Securities") and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of such Convertible
Securities. is less than the Conversion Price in effect immediately prior to the
time of the granting of such Options then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Options shall be deemed to be outstanding and to have
been issued and sold by the Corporation at the time of the granting of such
Options for such price per share. For purposes of this Section 4(D)(i), the
"price per share for which Common Stock is issuable" shall be determined by
dividing (a) the total amount, if any, received or receivable by the Corporation
as consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Corporation upon exercise of
all such Options, plus in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the issuance of sale or such Convertible
Securities and the conversion or exchange thereof, by (b) the total maximum
number of shares of Common Stock issuable upon the exercise of such Options or
upon the conversion or exchange of all such Convertible Securities issuable upon
the exercise of such Options. No further adjustment of the Conversion Price
shall be made when Convertible Securities are. actually issued upon the exercise
of such Options or when Common Stock is actually issued upon the exercise of
such Options or the conversion or exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Corporation in
any manner issues or sells any Convertible Securities and the price per share
for which Common Stock is issuable upon such conversion or exchange is less than
the Conversion Price in effect immediately prior to the time of such issue or
sale then the maximum number of shares of Common Stock issuable upon conversion
or exchange of such Convertible Securities shall be deemed to be outstanding and
to have been issued and sold by the Corporation at the time of the issuance or
sale of such Convertible Securities for such price per share. For the purposes
of this Section 4(D)(ii), the "price per share for which Common Stock is
issuable" shall be determined by dividing (a) the total amount received or
receivable by the Corporation as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the conversion or
exchange thereof, by (b) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities. No
further adjustment of the Conversion Price shall be made when Common Stock is
actually issued upon the conversion or exchange of such Convertible Securities,
and if any such issue or sale of such Convertible Securities is made upon
exercise of any Options for which adjustments of the Conversion Price had been
or are to be made pursuant to other provisions of this Section 4, no further
adjustment of the Conversion Price shall be made by reason of such issue or
sale.
<PAGE> 16
(iii) Change in Option Price or Conversion Rate. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities, or
the, rate at which any Convertible Securities are convertible into or
exchangeable for Common Stock change at any time, the Conversion Price in effect
at the time of such change shall be readjusted to the Conversion Price which
would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or changed conversion rate, as the case may be, at the
time initially granted, issued or sold.
E. Subdivision or Combination of Common Stock. If the
Corporation at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision shall be proportionately reduced, and if
the Corporation at any time combines (by reverse stock split or otherwise) one
or more classes of its outstanding shares of Common Stock into a smaller number
of shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased.
F. Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Corporation's assets to another
Person or other transaction which is effected in such a manner that holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock is referred to herein as an "Organic Change". Prior to the
consummation of any Organic Change, the Corporation shall make appropriate
provisions (in form and substance satisfactory to the holders of a majority of
the Series A-2 Preferred then outstanding) to insure that each of the holders of
Series A-2 Preferred shall thereafter have the right to acquire and receive, in
lieu of or in addition to (as the case may be), the shares of Conversion Stock
immediately theretofore acquirable and receivable upon the conversion of such
holder's Series A-2 Preferred, such shares of stock, securities or assets as
such holder would have received in connection with such Organic Change if such
holder had converted its Series A-2 Preferred immediately prior to such Organic
Change. In each such case, the Corporation shall also make appropriate
provisions (in form and substance satisfactory to the holders of a majority of
the Series A-2 Preferred then outstanding) to insure that the provisions of this
Section 4 and Section 5 hereof shall thereafter be applicable to the Series A-2
Preferred (including, in the case of any such consolidation, merger or sale in
which the successor entity or purchasing entity is other than the Corporation,
an immediate adjustment of the Conversion Price to the value for the Common
Stock reflected by the terms of such consolidation, merger or sale, and a
corresponding immediate adjustment in the number of shares of Conversion Stock
acquirable and receivable upon conversion of Series A-2 Preferred, if the value
so reflected is less than the Conversion Price in effect immediately prior to
such consolidation, merger or sale). The Corporation shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor corporation (if other than the Corporation) resulting from
consolidation or merger or the corporation purchasing such assets assumes by
written instrument (in form reasonably satisfactory to the holders of a majority
of the Series A-2 Preferred then outstanding), the obligation to deliver to each
such holder such shares
<PAGE> 17
of stock, securities or assets as, in accordance with the foregoing provisions,
such holder may be entitled to acquire.
G. Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 4 but not expressly provided for
by such provisions, then the Corporation's board of directors shall make an
appropriate adjustment in the Conversion Price so as to protect the rights of
the holders of Series A-2 Preferred; provided that no such adjustment shall
increase the Conversion Price as otherwise determined pursuant to this Section 4
or decrease the number of shares of Conversion Stock issuable upon conversion of
each Share of Series A-2 Preferred.
H. Notices.
(i) Immediately upon any adjustment of the Conversion Price,
the Corporation shall give written notice thereof to all holders of Series A-2
Preferred, setting forth in reasonable detail and certifying the calculation of
such adjustment.
(ii) The Corporation shall give written notice to all holders
of Series A-2 Preferred at least 20 days prior to the date on which the
Corporation closes its books or takes a record (a) with respect to any dividend
or distribution upon Common Stock, (b) with respect to any pro rata subscription
offer to holders of Common Stock, or (c) for determining rights to vote with
respect to any Organic Change, dissolution or liquidation.
(iii) The Corporation shall also give written notice to the
holders of Series A-2 Preferred at least 20 days prior to the date on which any
Organic Change shall take place.
I. Mandatory Conversion. The Corporation's board of directors
may at any time require the conversion of all of the outstanding Series A-2
Preferred upon the occurrence of a Conversion Event (as hereinafter defined).
Any such mandatory conversion shall only be effected at the time of and subject
to the closing of the transactions contemplated by the Conversion Event and upon
written notice of such mandatory conversion delivered to all holders of Series
A-2 Preferred at least seven (7) days prior to such closing.
Section 5. Purchase Rights.
If at any time the Corporation grants, issues or sells any
options, convertible securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "Purchase Rights"), then each holder of Series A-2 Preferred
shall be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such holder could have acquired if such
holder had held the number of shares of Conversion Stock acquirable upon
conversion of such holder's Series A-2 Preferred immediately before the date on
which a record is taken for the. grant, issuance or sale of such Purchase
Rights, or, if no such record is taken, the date as of which the record holders
of Common Stock are to be determined for the grant, issue or sale of such
Purchase Rights.
Section 6. Registration of Transfer.
<PAGE> 18
The Corporation shall keep at its principal office a register
for the registration of Series A-2 Preferred. Upon the surrender of any
certificate representing Series A-2 Preferred at such place, the Corporation
shall, at the request of the record holder of such certificate, execute and
deliver (at the Corporation's expense) a new certificate or certificates in
exchange therefor representing in the aggregate the number of Shares represented
by the surrendered certificate. Each such new certificate shall be registered in
such name and shall represent such number of Shares as is requested by the
holder of the surrendered certificate and shall be substantially identical in
form to the surrendered certificate.
Section 7. Replacement.
Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder shall be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing Shares of any class of Series A-2 Preferred, and in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the holder is a financial
institution or other institutional investor its own agreement shall be
satisfactory), or, in the case of any such mutilation, upon surrender of such
certificate, the Corporation shall (at its expense) execute and deliver in lieu
of such certificate a new certificate of like kind representing the number of
Shares of such class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.
Section 8. Definitions.
"Common Stock" means, collectively, the Corporation's Common
Stock, no par value, and any capital stock of any class of the Corporation
hereafter authorized which is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Corporation.
"Common Stock Deemed Outstanding" means, at any given time,
the number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to Section
4(D) hereof whether or not the Options or Convertible Securities are actually
exercisable at such time.
"Conversion Event" means (i) a Qualified Public Offering, (ii)
any sale of all the outstanding capital stock of the Corporation, or (iii) a
merger, consolidation, sale, of substantially all of the assets of the
Corporation or similar transaction involving the Corporation.
"Conversion Stock" means shares of Common Stock; provided that
if there is a change such that the securities issuable upon conversion of the
Series A-2 Preferred are issued by an entity other than the Corporation or there
is a change in the class of securities so issuable, then the term "Conversion
Stock" shall mean one share of the security issuable upon conversion of the
Series A-2 Preferred if such security is issuable in shares, or shall mean the
smallest unit in which such security is issuable if such security is not
issuable in shares.
<PAGE> 19
"Junior Securities" means any of the Corporation's equity
securities other than the Series A-1 Preferred and the Preferred Class.
"Liquidation Value" of any Share as of any particular date
shall be equal to $2.8626.
"Person" means an individual, a partnership, a limited
liability company, a corporation, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization and a governmental entity
or any department, agency or political subdivision thereof.
"Qualified Public Offering" means any underwritten offering by
the Corporation of its equity securities to the public pursuant to an effective
registration statement under the Securities Act of 1933, as then in effect, or
any comparable statement under any similar federal statute then in force
pursuant to which the value of the Corporation prior to receipt of the proceeds
of such offering is at least $25,000,000 and the minimum gross proceeds to the
Corporation is $15,000,000; provided that for purposes of Section 4(G) hereof, a
Qualified Public Offering shall not include an offering made in connection with
a business acquisition or combination or an employee benefit plan.
Section 9. Amendment and Waiver.
No amendment, modification or waiver shall be binding or
effective with respect to any provision of Sections 1 to 10 hereof without the
prior written consent of the holders of at least 75% of the Series A-2 Preferred
outstanding at the time such action is taken. No change in the terms hereof may
be accomplished by merger or consolidation of the Corporation with another
corporation or entity unless the Corporation has obtained the prior written
consent of the holders of 75% of the Series A-2 Preferred then outstanding.
Section 10. Notices.
Except as otherwise expressly provided hereunder, all notices
referred to herein shall be in writing and shall be delivered by registered or
certified mail, return receipt requested and postage prepaid, or by reputable
overnight courier service, charges prepaid, and shall be deemed to have been
given when so mailed or sent (i) to the Corporation, at its principal executive
offices, and (ii) to any stockholder, at such holder's address as it appears in
the stock records of the Corporation (unless otherwise indicated by any such
holder).
<PAGE> 20
EXHIBIT C
SERIES A-3 CONVERTIBLE PREFERRED STOCK
Section 1. Dividends.
When and as declared by the Corporation's board of directors
and to the extent permitted under the Colorado Business Corporation Act, the
holders of the Series A-3 Convertible Preferred Stock (the "Series A-3
Preferred") shall participate ratably with the holders of shares of the
Corporation's Common Stock (as hereinafter defined), Series A-1 Convertible
Preferred Stock (the "Series A-1 Preferred") and Series A-2 Convertible
Preferred Stock (the "Series A-2 Preferred") in any dividends on the Common
Stock based upon the number of shares of Common Stock into which each share of
Series A-2 Preferred issuable upon conversion of each share of the Series A-3
Preferred (a "Share") is convertible at the time of such declaration.
Section 2. Liquidation.
Upon any liquidation, dissolution or winding up of the
Corporation, the holders of Series A-2 Preferred and the Series A-3 Preferred as
a class (the "Preferred Class") shall vote to either (A) (i) convert all of the
Series A-2 Preferred (including any fraction of a share) into Common Stock, (ii)
convert all of the Series A-3 Preferred (including any fraction of a Share) into
Conversion Stock (as hereinafter defined) pursuant to the provisions of Section
4 below, (iii) convert the Conversion Stock into Common Stock, and (iv) share
ratably with the holders of Series A-1 Preferred, if applicable, and Junior
Securities (as hereinafter defined) in any distribution or payment upon such
liquidation, dissolution or winding up of the Corporation, or (B) be paid,
before any distribution or payment is made upon any Junior Securities and
concurrently with the holders of Series A-1 Preferred as set forth below, an
amount in cash equal to the Liquidation Value (as hereinafter defined) of the
Series A-3 Preferred and the liquidation value of the Series A-2 Preferred (the
"Liquidation Payment"). For purposes of this Section 2, the vote of the holders
of the majority of the Preferred Class as a group shall be deemed to be the
election of all of the holders of the Preferred Class. If the holders of the
Preferred Class elect not to convert the Preferred Class pursuant to clause (A)
above and elect to receive a cash payment pursuant to clause (B) above and the
holders-of the Series A-1 Preferred elect not to convert their shares of Series
A-1 Preferred into Common Stock, the holders of the Series A-1 Preferred and the
Preferred Class shall share the Liquidation Payment ratably based upon the
aggregate Liquidation Value of the Series A-3 Preferred and the aggregate
liquidation value of the Series A-1 Preferred and the Series A-2 Preferred held
by each such holder pursuant to clause (B) above, after the payment of which the
holders of the Series A-1 Preferred shall receive payment of the Series A-1
Preferred liquidation premium, after the payment of which any remaining assets
shall be distributed to the holders of Junior Securities. If the holders of the
Preferred Class elect to convert the Preferred Class pursuant to clause (A)
above and elect not to receive a cash payment pursuant to clause (B) above and
the holders of the Series A-1 Preferred elect not to convert their shares of
Series A-1 Preferred into Common Stock, the holders of the Series A-1 Preferred
shall receive payment of the Series A-1 Preferred liquidation amount before any
distribution or payment is made upon the Preferred Class or any Junior
Securities and, thereafter,
<PAGE> 21
the holders of the Preferred Class shall share ratably with the holders of
Junior Securities in any distribution or payment upon such liquidation,
dissolution or winding up of the Corporation. If the holders of the Preferred
Class elect not to convert the Preferred Class pursuant to clause (A) above and
elect to receive a cash payment pursuant to clause (B) above and the holders of
the Series A-1 Preferred elect to convert their shares of Series A-1 Preferred
into Common Stock, the holders of the Preferred Class shall receive the
Liquidation Payment before any distribution or payment is made upon the Series
A-1 Preferred or any Junior Securities and, thereafter, the holders of the
Series A-1 Preferred shall share ratably with the holders of Junior Securities
in any distribution or payment upon such liquidation, dissolution or winding up
of the Corporation. If the holders of the Preferred Class elect to convert the
Preferred Class pursuant to clause (A) above and elect not to receive a cash
payment pursuant to clause (B) above and the holders of the Series A-1 Preferred
elect to convert their shares of Series A-1 Preferred into Common Stock, the
holders of the Series A-1 Preferred and the Preferred Class shall share ratably
with the holders of Junior Securities in any distribution or payment upon such
liquidation dissolution or winding up of the Corporation. The Corporation shall
mail written notice of such liquidation, dissolution or winding up not less than
sixty (60) days prior to the payment date stated therein (the "Payment Date"),
to each record holder of Series A-3 Preferred. Neither the consolidation or
merger of the Corporation into or with any other entity or entities, nor the
sale or transfer by the Corporation of all or any part of its assets, nor the
reduction of the capital stock of the Corporation, shall be deemed to be a
liquidation, dissolution, or winding up of the Corporation within the meaning of
this Section 2. Notwithstanding the foregoing, in no event shall a conversion of
the Series A-3 Preferred occur pursuant to this Section 2 if such conversion
would result in a violation of Regulation Y under the Bank Holding Company Act
of 1956, as amended.
Section 3. Voting Right.
The holders of the Series A-3 Preferred shall be entitled to
notice of all stockholders meetings in accordance with the Corporation's bylaws.
The holders of Series A-3 Preferred shall not have any voting rights, except as
otherwise required by applicable law, in which case holders of Series A-3
Preferred shall vote (at the rate of one vote per Share of Series A-3 Preferred
held) as a single class on such matter unless otherwise required by law.
Section 4. Conversion.
A. Conversion Procedure.
(i) At any time and from time to time, any holder of Series
A-3 Preferred may convert all or any portion of the Series A-3 Preferred
(including any fraction of a Share) held by such holder into a number of shares
of Conversion Stock computed by in multiplying the number of Shares to be
converted by $2.8626 and dividing the result by the Conversion Price (as
hereinafter defined) then in effect.
(ii) Each conversion of Series A-3 Preferred shall be deemed
to have been effected as of the close of business on the date on which the
certificate or certificates representing the Series A-3 Preferred to be
converted have been surrendered at the principal office of the
<PAGE> 22
Corporation. At such time as such conversion has been effected, the rights of
the holder of such Series A-3 Preferred as such holder shall cease and the
Person (as hereinafter defined) or Persons in whose name or names any
certificate or certificates for shares of Conversion Stock are to be issued upon
such conversion shall be deemed to have become the holder or holders of record
of the shares of Conversion Stock represented thereby; provided, however, that
for purposes of Section 2(A) above the conversion of the Series A-3 Preferred
and the conversion of the Conversion Stock issued in connection therewith shall
be deemed to have been effected as of the close of business on the day prior to
the Payment Date.
(iii) Notwithstanding any other provision hereof, if a
conversion of Series A-3 Preferred is to be made in connection with a Qualified
Public Offering (as hereinafter defined), the conversion of any Shares of Series
A-3 Preferred may, at the election of the holder of such Shares, be conditioned
upon the consummation of the Qualified Public Offering in which case such
conversion shall not be deemed to be effective until the consummation of the
Qualified Public Offering.
(iv) As soon as possible after a conversion has been effected
(but in any event within five business days in the case of subparagraph (a)
below), the Corporation shall deliver to the converting holder:
(a) a certificate or certificates representing the
number of shares of Conversion Stock issuable by reason of such
conversion in such name or names and such denomination or denominations
as the converting holder has specified;
(b) payment of the amount payable under subparagraph
(vii) below with respect to such conversion; and
(c) a certificate representing any Shares of Series
A-3 Preferred which were represented by the certificate or certificates
delivered to the Corporation in connection with such conversion but
which were not converted.
(v) The issuance of certificates for shares of Conversion
Stock upon conversion of Series A-3 Preferred shall be made without charge io
the holders of such Series A-3 Preferred for any issuance tax in respect thereof
or other cost incurred by the Corporation in connection with such conversion and
the related issuance of shares of Conversion Stock. Upon conversion of each
Share of Series A-3 Preferred, the Corporation shall take all such actions as
are necessary in order to insure that the Conversion Stock issuable with respect
to such conversion shall be validly issued, fully paid and nonassessable.
(vi) The Corporation shall not close its books against the
transfer of Series A-3 Preferred or of Conversion Stock issued or issuable upon
conversion of Series A-3 Preferred in any manner which interferes with the
timely conversion of Series A-3 Preferred. The Corporation shall assist and
cooperate with any holder of Shares required to make any governmental filings or
obtain any governmental approval prior to or in connection with any conversion
of Shares hereunder (including, without limitation, making any filings required
to be made by the
<PAGE> 23
Corporation).
(vii) If any fractional interest in a share of Conversion
Stock would, except for the provisions of this subparagraph, be deliverable upon
any conversion of the Series A-3 Preferred, the Corporation, in lieu of
delivering the fractional share therefor, may pay an amount to the holder
thereof equal to the fair market price of such fractional interest as of the
date of conversion as. determined by the Corporation's board of directors.
(viii) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Conversion Stock, solely
for the purpose of issuance upon the conversion of the Series A-3 Preferred,
such number of shares of Conversion Stock issuable upon the conversion of all
outstanding Shares of Series A-3 Preferred. All shares of Conversion Stock which
are so issuable shall, when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The Corporation shall
take all such actions as may be necessary to assure that all such shares of
Conversion Stock may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic securities exchange
upon which shares of Conversion Stock may be listed (except for official notice
of issuance which shall be immediately delivered by the Corporation upon each
such issuance).
B. Conversion Price. The initial "Conversion Price" shall be
$2.8626 per share. In order to prevent dilution of the conversion rights granted
under this subdivision, the Conversion Price shall be subject to adjustment from
time to time pursuant to this Section 4.
C. Anti-Dilution. If and whenever on or. after the original
date of issuance of the Series A-3 Preferred the Corporation issues or sells, or
in accordance with Section 4(D) hereof is deemed to have issued or sold, any
shares of its Common Stock for a consideration per share less than the
Conversion Price in effect immediately prior to the time of such issue or sale,
then forthwith upon such issue or sale the Conversion Price shall be reduced to
the Conversion Price determined by dividing (i) the sum of (a) the product
derived by multiplying the Conversion Price in effect immediately prior to such
issue or sale times the number of shares of Common Stock Deemed Outstanding
immediately prior to such issue or sale, plus (b) the consideration, if any,
received by the Corporation upon such issue or sale, by (ii) the number of
shares of Common Stock Deemed Outstanding immediately after such issue or sale;
provided that there shall be no adjustment in the Conversion Price as a result
of any issuance or sale (or deemed issuance or sale) of (x) options issued
pursuant to the Corporation's stock option plan and capital stock issued upon
the exercise thereof, (y) capital stock of the Corporation issued upon the
exercise of warrants held by each of Patrick Van Den Bossche and NationsCredit
Commercial Corporation and any conversion of such capital stock subsequent to
its issuance, and (z) the issuance of capital stock of the Corporation upon the
conversion of Series A-1 Preferred or the Preferred Class.
D. Effect on Conversion Price of Certain Events. For purposes
of determining the adjusted Conversion Price under Section 6(C) hereof, the
following shall be applicable:
<PAGE> 24
(i) Issuance of Rights or Options. If the Corporation in any
manner grants any rights or options to subscribe for or to purchase Common Stock
or any stock or other securities convertible into or exchangeable for Common
Stock (such rights or options being herein called "Options" and such convertible
or exchangeable stock or securities being herein called "Convertible
Securities") and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of such Convertible
Securities is less than the Conversion Price in effect immediately prior to the
time of the granting of such Options then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Options shall be deemed to be outstanding and to have
been issued and sold by the Corporation at the time of the granting of such
Options for such price per share. For purposes of this Section 4(D)(i), the
"price per share for which Common Stock is issuable" shall be determined by
dividing (a) the total amount, if any, received or receivable by the Corporation
as consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Corporation upon exercise of
all such Options, plus in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the issuance of sale or such Convertible
Securities and the conversion or exchange thereof by (b) the, total maximum
number of shares of Common Stock issuable upon the exercise of such Options or
upon the conversion or exchange of all such Convertible Securities issuable upon
the exercise of such Options. No further adjustment of the Conversion Price
shall be made when Convertible Securities are actually issued upon the exercise
of such Options or when Common Stock is actually issued upon the exercise of
such Options or the conversion or exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Corporation in
any manner issues or sells any Convertible Securities and the price per share
for which Common Stock is issuable upon such conversion or exchange is less than
the Conversion Price in effect immediately prior to the time of such issue or
sale then the maximum number of shares of Common Stock issuable upon conversion
or exchange of such Convertible Securities shall be deemed to be outstanding and
to have been issued and sold by the Corporation at the time of the issuance or
sale of such Convertible Securities for such price per share. For the purposes
of this Section 4(D)(ii), the "price per share for which Common Stock is
issuable" shall be determined by dividing (a) the total amount received or
receivable by the Corporation as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the conversion or
exchange thereof, by (b) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities. No
further adjustment of the Conversion Price shall be made when Common Stock is
actually issued upon the conversion or exchange of such Convertible Securities,
and if any such issue or sale of such Convertible Securities is made upon
exercise of any Options for which adjustments of the Conversion Price had been
or are to be made pursuant to other provisions of this Section 4, no further
adjustment of the Conversion Price shall be made by reason of such issue or
sale.
(iii) Change in Option Price or Conversion Rate. If the
purchase price provided
<PAGE> 25
for in any Options, the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities, or the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock
change at any time, the Conversion Price in effect at the time of such change
shall be readjusted to the Conversion Price which would have been in effect at
such time had such Options or Convertible Securities still outstanding provided
for such changed purchase price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or sold.
E. Subdivision or Combination of Common Stock. If the
Corporation at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision shall be proportionately reduced, and if
the Corporation at any time combines (by reverse stock split or otherwise) one
or more classes of its outstanding shares of Common Stock into a smaller number
of shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased.
F. Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Corporation's assets to another
Person or other transaction which is effected in such a manner that holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock is referred to herein as an "Organic Change". Prior to the
consummation of any Organic Change, the Corporation shall make appropriate
provisions (in form and substance satisfactory to the holders of a majority of
the Series A-3 Preferred then outstanding) to insure that each of the holders of
Series A-3 Preferred shall thereafter have the right to acquire and receive, in
lieu of or in addition to (as the case may be), the shares of Conversion Stock
immediately theretofore acquirable and receivable upon the conversion of such
holder's Series A-3 Preferred, such shares of stock, securities or assets as
such holder would have received in connection with such Organic Change if such
holder had converted its Series A-3 Preferred into Conversion Stock and
converted the Conversion Stock immediately prior to such Organic Change. In each
such case, the Corporation shall also make appropriate provisions (in form and
substance satisfactory to the holders of a majority of the Series A-3 Preferred
then outstanding) to insure that the provisions of this Section 4 and Section 5
hereof shall thereafter be applicable to the Series A-3 Preferred (including, in
the case of any such consolidation, merger or sale in which the successor entity
or purchasing entity is other than the Corporation, an immediate adjustment of
the Conversion Price to the value for the Common Stock reflected by the terms of
such consolidation, merger or sale, and a corresponding immediate adjustment in
the number of shares of Conversion Stock acquirable and receivable upon
conversion of Series A-3 Preferred, if the value so reflected is less than the
Conversion Price in effect immediately prior to such consolidation, merger or
sale). The Corporation shall not effect any such consolidation, merger or sale,
unless prior to the consummation thereof, the successor corporation (if other
than the Corporation) resulting from consolidation or merger or the corporation
purchasing such assets assumes by written instrument (in form reasonably
satisfactory to the holders of a majority of the Series A-3 Preferred then
outstanding), the obligation to deliver to each such holder such shares of
stock, securities or
<PAGE> 26
assets as, in accordance with the foregoing provisions, such holder may be
entitled to acquire.
G. Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 4 but not expressly provided for
by such provisions, then the Corporation's board of directors shall make an
appropriate adjustment in the Conversion Price so as to protect the rights of
the holders of Series A-3 Preferred; provided that no such adjustment shall
increase the Conversion Price as otherwise determined pursuant to this Section
4 or decrease the number of shares of Conversion Stock issuable upon conversion
of each Share of Series A-3 Preferred.
H. Notices.
(i) Immediately upon any adjustment of the Conversion Price,
the Corporation shall give written notice thereof to all holders of Series A-3
Preferred, setting forth in reasonable detail and certifying the calculation of
such adjustment.
(ii) The Corporation shall give written notice to all holders
of Series A-3 Preferred at least 20 days prior to the date on which the
Corporation closes its books or takes a record (a) with respect to any dividend
or distribution upon Common Stock, (b) with respect to any pro rata subscription
offer to holders of Common Stock, or (c) for determining rights to vote with
respect to any Organic Change, dissolution or liquidation.
(iii) The Corporation shall also give written notice to the
holders of Series A-3 Preferred at least 20 days prior to the date on which any
Organic Change shall take place.
I. Mandatory Conversion. The Corporation's board of directors
may at any time require the conversion of all of the outstanding Series A-3
Preferred and the conversion of the Conversion Stock received in connection
therewith upon the occurrence of a Conversion Event (as hereinafter defined);
provided, however, that the board of directors may not require such mandatory
conversions if any such conversion would result in a violation of Regulation Y
under the Bank Holding Company Act of 1956, as amended. Any such mandatory
conversion shall only be effected at the time of and subject to the closing of
the transactions contemplated by the Conversion Event and upon written notice of
such mandatory conversion delivered to all holders of Series A-3 Preferred at
least seven (7) days prior to such closing.
Section 5. Purchase Rights.
If at any time the Corporation grants, issues or sells any
options, convertible securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "Purchase Rights"), then each holder of Series A-3 Preferred
shall be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such holder could have acquired if such
holder had held the number of shares of Common Stock issuable upon conversion of
the Conversion Stock acquirable upon conversion of such holder's Series A-3
Preferred immediately before the date on which a record is taken for the grant,
issuance or sale of such Purchase Rights, or, if no such
<PAGE> 27
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
Section 6. Registration of Transfer.
The Corporation shall keep at its principal office a register
for the registration of Series A-3 Preferred. Upon the surrender of any
certificate representing Series A-3 Preferred at such place, the Corporation
shall, at the request of the record holder of such certificate, execute and
deliver (at the Corporation's expense) a new certificate or certificates in
exchange therefor representing in the aggregate the number of Shares represented
by the surrendered certificate. Each such new certificate shall be registered in
such name and shall represent such number of Shares as is requested by the
holder of the surrendered certificate and shall be substantially identical in
form to the surrendered certificate.
Section 7. Replacement.
Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder shall be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing Shares of any class of Series A-3 Preferred, and in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the holder is a financial
institution or other institutional investor its own agreement shall be
satisfactory), or, in the case of any such mutilation, upon surrender of such
certificate, the Corporation shall (at its expense) execute and deliver in lieu
of such certificate a new certificate of like kind representing the number of
Shares of such class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.
Section 8. Regulated Stockholders.
The Corporation will not convert or directly or indirectly
redeem, purchase, acquire or take any other action affecting outstanding shares
of capital stock of the Corporation if such action will increase the percentage
of outstanding voting securities owned or controlled by any Regulation Y Holder
and its Affiliates (other than a Regulation Y Holder which waives in writing its
rights under this Section 9), unless the Corporation gives written notice (the
"Deferral Notice") of such action to each Regulation Y Holder. The Corporation
will defer making any such conversion, redemption, purchase or other
acquisition, or taking any such other action, for a period of 20 days (the
"Deferral Period") after giving the Deferral Notice in order tp allow each
Regulation Y Holder to determine whether it wishes to convert or take any other
action with respect to the Series A-3 Preferred it owns, controls or has the
power to vote, and if any Regulation Y Holder then elects to convert any Shares
of Series A-3 Preferred, it shall notify the Corporation in writing within 10
days of the issuance of the Deferral Notice, in which case the Corporation shall
promptly notify from time to time prior to the end of such 20-day period each
other Regulation Y Holder of each proposed conversion and effect the conversions
requested by all Regulation Y Holders at the end of the Deferral Period. The
Corporation will not directly or indirectly redeem, purchase, acquire or take
any other action affecting outstanding shares of
<PAGE> 28
Common Stock of the Corporation if such action will increase over 24.9% the
percentage of outstanding Common Stock owned or controlled by any Regulation Y
Holder and its Affiliates (other than a Regulation Y Holder which waives in
writing its rights under this Section 9).
Section 9. Definitions.
"Affiliate" shall mean, with respect to any Person, any other
Person directly or indirectly controlling, controlled by or under common control
with such Person. For the purpose of the above definition, the term "control"
(including with correlative meaning, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or by contact or otherwise.
"Common Stock" means, collectively, the Corporation's Common
Stock, no par value, and any capital stock of any class of the Corporation
hereafter authorized which is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Corporation.
"Common Stock Deemed Outstanding" means, at any given time,
the number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to Section
4(D) hereof whether or not the Options or Convertible Securities are actually
exercisable at such time.
"Conversion Event" means (i) a Qualified Public Offering, (ii)
any sale of all the outstanding capital stock of the Corporation, or (iii) a
merger, consolidation, sale of substantially all of the assets of the
Corporation or similar transaction involving the Corporation.
"Conversion Stock" means shares of Series A-2 Preferred;
provided that if there is a change such that the securities issuable upon
conversion of the Series A-3 Preferred are issued by an entity other than the
Corporation or there is a change in the class of securities so issuable, then
the term "Conversion Stock" shall mean one share of the security issuable upon
conversion of the Series A-3 Preferred if such security is issuable in shares,
or shall mean the smallest unit in which such security is issuable if such
security is not issuable in shares.
"Junior Securities" means any of the Corporation's equity
securities Series A-1 Preferred and the Preferred Class.
"Liquidation Value" of any Share as of any particular date
shall be equal to $2.8626.
"Person" means an individual, a partnership, a limited
liability company, a corporation, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization and a governmental entity
or any department agency or political subdivision
<PAGE> 29
thereof.
"Qualified Public Offering" means any underwritten offering by
the Corporation of its equity securities to the public pursuant to an effective
registration statement under the Securities Act of 1933, as then in effect, or
any comparable statement under any similar federal statute then in force
pursuant to which the value of the Corporation prior to receipt of the proceeds
of such offering is at least $25,000,000 and the minimum gross proceeds to the
Corporation is $15,000,000; provided that for purposes of Section 4(G) hereof,
a Qualified Public Offering shall not include an offering made in connection.
with a business acquisition or combination or an employee benefit plan.
"Regulation Y Holder" shall mean any stockholder of the
Corporation that is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended, or a subsidiary thereof subject to
Regulation Y under such Act.
Section 10. Amendment and Waiver.
No amendment, modification or waiver shall be binding or
effective with respect to any provision of Sections 1 to 11 hereof without the
prior written consent of the holders of at least 75% of the Series A-3 Preferred
outstanding at the time such action is taken. No change in the terms hereof may
be accomplished by merger or consolidation of the Corporation with another
corporation or entity unless the Corporation has obtained the prior written
consent of the holders of 75% of the Series A-3 Preferred then outstanding.
Section 11. Notices.
Except as otherwise expressly provided hereunder, all notices
referred to herein shall be in writing and shall be delivered by registered or
certified mail, return receipt requested and postage prepaid, or by reputable
overnight courier service, charges prepaid, and shall be deemed to have been
given when so mailed or sent (i) to the Corporation, at its principal executive
offices, and (ii) to any stockholder, at such holder's address as it appears in
the stock records of the Corporation (unless otherwise indicated by any such
holder).
<PAGE> 30
SERIES A-4 CONVERTIBLE PREFERRED STOCK
Section 1. Dividends.
When and as declared by the Corporation's board of directors
and to the extent permitted under the Colorado Business Corporation Act, the
holders of the Series A-4 Convertible Preferred Stock (the "Series A-4
Preferred") shall participate ratably with the holders of shares of the
Corporation's Common Stock (as hereinafter defined), Series A-1 Convertible
Preferred Stock (the "Series A-1 Preferred"), Series A-2 Convertible Preferred
Stock (the "Series A-2 Preferred") and Series A-3 Convertible Preferred Stock
(the "Series A-3 Preferred") in any dividends on the Common Stock based upon the
number of shares of Common Stock into which each share of Series A-4 Preferred
(a "Share") is convertible at the time of such declaration.
Section 2. Liquidation.
Upon any liquidation, dissolution or winding up of the
Corporation, the holders of the Series A-2 Preferred, the Series A-3 Preferred
and the Series A-4 Preferred as a class (the "Preferred Class") shall vote to
either (A) (i) convert all of the Series A-4 Preferred (including any fraction
of a Share) into Conversion Stock (as hereinafter defined) pursuant to the
provisions of Section 4 below, (ii) convert all of the Series A-2 Preferred
(including any fraction of a share) into Conversion Stock, (iii) convert all of
the Series A-3 Preferred (including any fraction of a share) into Series A-2
Preferred, (iv) convert the Series A-2 Preferred referred to in clause (iii)
above into Conversion Stock, and (v) share ratably with the holders of Series
A-1 Preferred, if applicable, and Junior Securities (as hereinafter defined) in
any distribution or payment upon such liquidation, dissolution or winding up of
the Corporation, or (B) be paid, before any distribution or payment is made upon
any Junior Securities and concurrently with the holders of Series A-1 Preferred
as set forth below, an amount in cash equal to the Liquidation Value (as
hereinafter defined) of the Series A-4 Preferred and the liquidation value of
the Series A-2 Preferred and the liquidation value of the Series A-3 Preferred
(the "Liquidation Payment"). For purposes of this Section 2, the vote of the
holders of the majority of the Preferred Class as a group shall de deemed to be
the election of all of the holders of the Preferred Class. If the holders of the
Preferred Class elect not to convert the Preferred Class pursuant to clause (A)
above and elect to receive a cash payment pursuant to clause (B) above and the
holders of the Series A-1 Preferred elect not to convert their shares of Series
A-1 Preferred into Conversion Stock, the holders of the Preferred Class and the
holders of the Series A-1 Preferred shall share the Liquidation Payment ratably
based upon the aggregate Liquidation Value of the Series A-4 Preferred and the
aggregate liquidation value of the Series A-1 Preferred, the Series A-2
Preferred and the Series A-3 Preferred held by each such holder pursuant to
clause (B) above, after the payment of which the holders of the Series A-1
Preferred shall receive payment of the Series A-1 Preferred liquidation premium,
after the payment of which any remaining assets shall be distributed to the
holders of Junior Securities. If the holders of the Preferred Class elect to
convert the Preferred Class pursuant to clause (A) above and elect not to
receive a cash payment pursuant to clause (B) above and the holders of the
Series A-1 Preferred elect not to convert their
<PAGE> 31
shares of Series A-1 Preferred into Conversion Stock, the holders of the Series
A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation
amount before any distribution or payment is made upon the Preferred Class or
any Junior Securities and, thereafter, the holders of the Preferred Class shall
share ratably with the holders of Junior Securities in any distribution or
payment upon such liquidation, dissolution or winding up of the Corporation. If
the holders of the Preferred Class elect not to convert the Preferred Class
pursuant to clause (A) above and elect to receive a cash payment pursuant to
clause (B) above and the holders of the Series A-1 Preferred elect to convert
their shares of Series A-1 Preferred into Conversion Stock, the holders of the
Preferred Class shall receive the Liquidation Payment before any distribution or
payment is made upon the Series A-1 Preferred or any Junior Securities and,
thereafter, the holders of the Series A-1 Preferred shall share ratably with the
holders of Junior Securities in any distribution or payment upon such
liquidation, dissolution or winding up of the Corporation. If the holders of the
Preferred Class elect to convert the Preferred Class pursuant to clause (A)
above and elect not to receive a cash payment pursuant to clause (B) above and
the holders of the Series A-1 Preferred elect to convert their shares of Series
A-1 Preferred into Conversion Stock, the holders of the Preferred Class and the
holders of the Series A-1 Preferred shall share ratably with the holders of
Junior Securities in any distribution or payment upon such liquidation,
dissolution or winding up of the Corporation. The Corporation shall mail written
notice of such liquidation, dissolution or winding up, not less than sixty (60)
days prior to the payment date stated therein (the "Payment Date"), to each
record holder of Series A-4 Preferred. Neither the consolidation or merger of
the Corporation into or with any other entity or entities, nor the sale or
transfer by the Corporation of all or any part of its assets, nor the reduction
of the capital stock of the Corporation, shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this Section
2.
Section 3. Voting Rights.
The holders of the Series A-4 Preferred shall be entitled to
notice of all stock-holders meetings in accordance with the Corporation's
bylaws, and the holders of the Series A-4 Preferred shall be entitled to vote on
all matters submitted to the stockholders for a vote together with the holders
of the Common Stock, the Series A-1 Preferred and the Series A-2 Preferred
voting together as a single class with each share of Common Stock entitled to
one vote per share, each share of Series A-1 Preferred entitled to one vote for
each share of Common Stock issuable upon conversion of the Series A-1 Preferred
at the time the vote is taken, each Share of Series A-2 Preferred entitled to
one vote for each share of Common Stock issuable upon conversion of the Series
A-2 Preferred at the time the vote is taken, and each Share of Series A-4
Preferred entitled to one vote for each share of Common Stock issuable upon
conversion of the Series A-4 Preferred at the time the vote is taken
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<PAGE> 32
Section 4. Conversion.
A. Conversion Procedure.
(i) At any time and from time to time, any holder of Series
A-4 Preferred may convert all or any portion of the Series A-4 Preferred
(including any fraction of a Share) held by such holder into a number of shares
of Conversion Stock computed by multiplying the number of Shares to be converted
by $4.50 and dividing the result by the Conversion Price (as hereinafter
defined) then in effect.
(ii) Each conversion of Series A-4 Preferred shall be deemed
to have been effected as of the close of business on the date on which the
certificate or certificates representing the Series A-4 Preferred to be
converted have been surrendered at the principal office of the Corporation. At
such time as such conversion has been effected, the rights of the holder of such
Series A-4 Preferred as such holder shall cease and the Person (as hereinafter
defined) or Persons in whose name or names any certificate or certificates for
shares of Conversion Stock are to be issued upon such conversion shall be deemed
to have become the holder or holders of record of the shares of Conversion Stock
represented thereby; provided, however, that for purposes of Section 2(A) above
the conversion of the Series A-4 Preferred shall be deemed to have been effected
as of the close of business on the day prior to the Payment Date.
(iii) Notwithstanding any other provision hereof, if a
conversion of Series A-4 Preferred is to be made in connection with a Qualified
Public Offering (as hereinafter defined), the conversion of any Shares of Series
A-4 Preferred may, at the election of the holder of such Shares, be conditioned
upon the consummation of the Qualified Public Offering in which case such
conversion shall not be deemed to be effective until the consummation of the
Qualified Public Offering.
(iv) As soon as possible after a conversion has been effected
(but in any event within five business days in the case of subparagraph (a)
below), the Corporation shall deliver to the converting holder:
(a) a certificate or certificates representing the
number of shares of Conversion Stock issuable by reason of such
conversion in such name or names and such denomination or denominations
as the converting holder has specified;
(b) payment of the amount payable under subparagraph
(vii) below with respect to such conversion; and
(c) a certificate representing any Shares of Series
A-4 Preferred which were represented by the certificate or certificates
delivered to the Corporation in connection with such conversion but
which were not converted.
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<PAGE> 33
(v) The issuance of certificates for shares of Conversion
Stock upon conversion of Series A-4 Preferred shall be made without charge to
the holders of such Series A-4 Preferred for any issuance tax in respect thereof
or other cost incurred by the Corporation in connection with such conversion and
the related issuance of shares of Conversion Stock. Upon conversion of each
Share of Series A-4 Preferred, the Corporation shall take all such actions as
are necessary in order to insure that the Conversion Stock issuable with respect
to such conversion shall be validly issued, fully paid and nonassessable.
(vi) The Corporation shall not close its books against the
transfer of Series A-4 Preferred or of Conversion Stock issued or issuable upon
conversion of Series A-4 Preferred in any manner which interferes with the
timely conversion of Series A-4 Preferred. The Corporation shall assist and
cooperate with any holder of Shares required to make any governmental filings or
obtain any governmental approval prior to or in connection with any conversion
of Shares hereunder (including, without limitation, making any filings required
to be made by the Corporation).
(vii) If any fractional interest in a share of Conversion
Stock would, except for the provisions of this subparagraph, be deliverable upon
any conversion of the Series A-4 Preferred, the Corporation, in lieu of
delivering the fractional share therefor, may pay an amount to the holder
thereof equal to the fair market price of such fractional interest as of the
date of conversion as determined by the Corporation's board of directors.
(viii) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Conversion Stock, solely
for the purpose of issuance upon the conversion of the Series A-4 Preferred,
such number of shares of Conversion Stock issuable upon the conversion of all
outstanding Shares of Series A-4 Preferred. All shares of Conversion Stock which
are so issuable shall, when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The Corporation shall
take all such actions as may be necessary to assure that all such shares of
Conversion Stock may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic securities exchange
upon which shares of Conversion Stock may be listed (except for official notice
of issuance which shall be immediately delivered by the Corporation upon each
such issuance).
B. Conversion Price. The initial "Conversion Price" shall be
$4.50 per share. In order to prevent dilution of the conversion rights granted
under this subdivision, the Conversion Price shall be subject to adjustment from
time to time pursuant to this Section 4.
C. Anti-Dilution. If and whenever on or after the original
date of issuance of the Series A-4 Preferred the Corporation issues or sells, or
in accordance with Section 4(D) hereof is deemed to have issued or sold, any
shares of its Common Stock for a consideration per share less than the
Conversion Price in effect immediately prior to the time of such issue or sale,
then forthwith upon such issue or sale the Conversion Price shall be reduced to
the Conversion
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<PAGE> 34
Price determined by dividing (i) the sum of (a) the product derived by
multiplying the Conversion Price in effect immediately prior to such issue or
sale times the number of shares of Common Stock Deemed Outstanding immediately
prior to such issue or sale, plus (b) the consideration, if any, received by the
Corporation upon such issue or sale, by (ii) the number of shares of Common
Stock Deemed Outstanding immediately after such issue or sale; provided that
there shall be no adjustment in the Conversion Price as a result of any issuance
or sale (or deemed issuance or sale) of (x) options issued pursuant to the
Corporation's stock option plan and capital stock issued upon the exercise
thereof, (y) capital stock of the Corporation upon the exercise of warrants held
by each of Patrick Van Den Bossche and NationsCredit Commercial Corporation and
any conversion of such capital stock subsequent to its issuance, and (z) the
issuance of capital stock of the Corporation upon the conversion of the Series
A-1 Preferred or the Preferred Class.
D. Effect on Conversion Price of Certain Events. For purposes
of determining the adjusted Conversion Price under Section 6(C) hereof, the
following shall be applicable:
(i) Issuance of Rights or Options. If the Corporation in any
manner grants any rights or options to subscribe for or to purchase Common Stock
or any stock or other securities convertible into or exchangeable for Common
Stock (such rights or options being herein called "Options" and such convertible
or exchangeable stock or securities being herein called "Convertible
Securities") and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of such Convertible
Securities is less than the Conversion Price in effect immediately prior to the
time of the granting of such Options then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Options shall be deemed to be outstanding and to have
been issued and sold by the Corporation at the time of the granting of such
Options for such price per share. For purposes of this Section 4(D)(i), the
"price per share for which Common Stock is issuable" shall be determined by
dividing (a) the total amount, if any, received or receivable by the Corporation
as consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Corporation upon exercise of
all such Options, plus in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the issuance of sale or such Convertible
Securities and the conversion or exchange thereof, by (b) the total maximum
number of shares of Common Stock issuable upon the exercise of such Options or
upon the conversion or exchange of all such Convertible Securities issuable upon
the exercise of such Options. No further adjustment of the Conversion Price
shall be made when Convertible Securities are actually issued upon the exercise
of such Options or when Common Stock is actually issued upon the exercise of
such Options or the conversion or exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Corporation in
any manner
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<PAGE> 35
issues or sells any Convertible Securities and the price per share for which
Common Stock is issuable upon such conversion or exchange is less than the
Conversion Price in effect immediately prior to the time of such issue or sale
then the maximum number of shares of Common Stock issuable upon conversion or
exchange of such Convertible Securities shall be deemed to be outstanding and to
have been issued and sold by the Corporation at the time of the issuance or sale
of such Convertible Securities for such price per share. For the purposes of
this Section 4(D)(ii), the "price per share for which Common Stock is issuable"
shall be determined by dividing (a) the total amount received or receivable by
the Corporation as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Corporation upon the conversion or exchange thereof, by (b)
the total maximum number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities. No further adjustment of the
Conversion Price shall be made when Common Stock is actually issued upon the
conversion or exchange of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for
which adjustments of the Conversion Price had been or are to be made pursuant to
other provisions of this Section 4, no further adjustment of the Conversion
Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or
exchangeable for Common Stock change at any time, the Conversion Price in effect
at the time of such change shall be readjusted to the Conversion Price which
would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or changed conversion rate, as the case may be, at the
time initially granted, issued or sold.
E. Subdivision or Combination of Common Stock. If the
Corporation at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision shall be proportionately reduced, and if
the Corporation at any time combines (by reverse stock split or otherwise) one
or more classes of its outstanding shares of Common Stock into a smaller number
of shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased.
F. Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Corporation's assets to another
Person or other transaction which is effected in such a manner that holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock is referred to herein as an "Organic Change". Prior to the
consummation of any Organic Change, the Corporation shall make appropriate
provisions (in form and substance satisfactory to the
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<PAGE> 36
holders of a majority of the Series A-4 Preferred then outstanding) to insure
that each of the holders of Series A-4 Preferred shall thereafter have the right
to acquire and receive, in lieu of or in addition to (as the case may be), the
shares of Conversion Stock immediately theretofore acquirable and receivable
upon the conversion of such holder's Series A-4 Preferred, such shares of stock,
securities or assets as such holder would have received in connection with such
Organic Change if such holder had converted its Series A-4 Preferred immediately
prior to such Organic Change. In each such case, the Corporation shall also make
appropriate provisions (in form and substance satisfactory to the holders of a
majority of the Series A-4 Preferred then outstanding) to insure that the
provisions of this Section 4 and Section 5 hereof shall thereafter be applicable
to the Series A-4 Preferred (including, in the case of any such consolidation,
merger or sale in which the successor entity or purchasing entity is other than
the Corporation, an immediate adjustment of the Conversion Price to the value
for the Common Stock reflected by the terms of such consolidation, merger or
sale, and a corresponding immediate adjustment in the number of shares of
Conversion Stock acquirable and receivable upon conversion of Series A-4
Preferred, if the value so reflected is less than the Conversion Price in effect
immediately prior to such consolidation, merger or sale). The Corporation shall
not effect any such consolidation, merger or sale, unless prior to the
consummation thereof, the successor corporation (if other than the Corporation)
resulting from consolidation or merger or the corporation purchasing such assets
assumes by written instrument (in form reasonably satisfactory to the holders of
a majority of the Series A-4 Preferred then outstanding), the obligation to
deliver to each such holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
acquire.
G. Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 4 but not expressly provided for
by such provisions, then the Corporation's board of directors shall make an
appropriate adjustment in the Conversion Price so as to protect the rights of
the holders of Series A-4 Preferred; provided that no such adjustment shall
increase the Conversion Price as otherwise determined pursuant to this Section 4
or decrease the number of shares of Conversion Stock issuable upon conversion of
each Share of Series A-4 Preferred.
H. Notices.
(i) Immediately upon any adjustment of the Conversion Price,
the Corporation shall give written notice thereof to all holders of Series A-4
Preferred, setting forth in reasonable detail and certifying the calculation of
such adjustment.
(ii) The Corporation shall give written notice to all holders
of Series A-4 Preferred at least 20 days prior to the date on which the
Corporation closes its books or takes a record (a) with respect to any dividend
or distribution upon Common Stock, (b) with respect to any pro rata subscription
offer to holders of Common Stock, or (c) for determining rights to vote with
respect to any Organic Change, dissolution or liquidation.
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<PAGE> 37
(iii) The Corporation shall also give written notice to the
holders of Series A-4 Preferred at least 20 days prior to the date on which any
Organic Change shall take place.
I. Mandatory Conversion. The Corporation's board of directors
may at any time require the conversion of all of the outstanding Series A-4
Preferred upon the occurrence of a Conversion Event (as hereinafter defined).
Any such mandatory conversion shall only be effected at the time of and subject
to the closing of the transactions contemplated by the Conversion Event and upon
written notice of such mandatory conversion delivered to all holders of Series
A-4 Preferred at least seven (7) days prior to such closing.
Section 5. Purchase Rights.
If at any time the Corporation grants, issues or sells any
options, convertible securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "Purchase Rights"), then each holder of Series A-4 Preferred
shall be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such holder could have acquired if such
holder had held the number of shares of Conversion Stock acquirable upon
conversion of such holder's Series A-4 Preferred immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights.
Section 6. Registration of Transfer.
The Corporation shall keep at its principal office a register
for the registration of Series A-4 Preferred. Upon the surrender of any
certificate representing Series A-4 Preferred at such place, the Corporation
shall, at the request of the record holder of such certificate, execute and
deliver (at the Corporation's expense) a new certificate or certificates in
exchange therefor representing in the aggregate the number of Shares represented
by the surrendered certificate. Each such new certificate shall be registered in
such name and shall represent such number of Shares as is requested by the
holder of the surrendered certificate and shall be substantially identical in
form to the surrendered certificate.
Section 7. Replacement.
Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder shall be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing Shares of any class of Series A-4 Preferred, and in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the holder is a financial
institution or other institutional investor its oven agreement shall be
satisfactory), or, in the case of any such mutilation, upon surrender of such
certificate, the Corporation shall (at its expense) execute and deliver in lieu
of such certificate a new certificate of like kind representing the number of
Shares of such class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost,
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<PAGE> 38
stolen, destroyed or mutilated certificate.
Section 8. Definitions.
"Common Stock" means, collectively, the Corporation's Common
Stock, no par value, and any capital stock of any class of the Corporation
hereafter authorized which is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Corporation.
"Common Stock Deemed Outstanding" means, at any given time,
the number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to Section
4(D) hereof whether or not the Options or Convertible Securities are actually
exercisable at such time.
"Conversion Event" means (i) a Qualified Public Offering, (ii)
any sale of all the outstanding capital stock of the Corporation, or (iii) a
merger, consolidation, sale of substantially all of the assets of the
Corporation or similar transaction involving the Corporation.
"Conversion Stock" means shares of Common Stock; provided that
if there is a change such that the securities issuable upon conversion of the
Series A-4 Preferred are issued by an entity other than the Corporation or there
is a change in the class of securities so issuable, then the term "Conversion
Stock" shall mean one share of the security issuable upon conversion of the
Series A-4 Preferred if such security is issuable in shares, or shall mean the
smallest unit in which such security is issuable if such security is not
issuable in shares.
"Junior Securities" means any of the Corporation's equity
securities other than the Series A-l Preferred and the Preferred Class.
"Liquidation Value" of any Share as of any particular date
shall be equal to $4.50.
"Person" means an individual, a partnership, a limited
liability company, a corporation, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization and a governmental entity
or any department, agency or political subdivision thereof.
"Qualified Public Offering" means any underwritten offering by
the Corporation of its equity securities to the public pursuant to an effective
registration statement under the Securities Act of 1933, as then in effect, or
any comparable statement under any similar federal statute then in force
pursuant to which the value of the Corporation prior to receipt of the proceeds
of such offering is at least $25,000,000 and the minimum gross proceeds to the
Corporation is $15,000,000; provided that for purposes of Section 4(G) hereof, a
Qualified Public Offering shall not include an offering made in connection with
a business acquisition or combination or an employee benefit plan.
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Section 9. Amendment and Waiver.
No amendment, modification or waiver shall be binding or
effective with respect to any provision of Sections 1 to 10 hereof without the
prior written consent of the holders of at least 75% of the Series A-4 Preferred
outstanding at the time such action is taken. No change in the terms hereof may
be accomplished by merger or consolidation of the Corporation with another
corporation or entity unless the Corporation has obtained the prior written
consent of the holders of 75% of the Series A-4 Preferred then outstanding.
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Section 10. Notices.
Except as otherwise expressly provided hereunder, all notices
referred to herein shall be in writing and shall be delivered by registered or
certified mail, return receipt requested and postage prepaid, or by reputable
overnight courier service, charges prepaid, and shall be deemed to have been
given when so mailed or sent (i) to the Corporation, at its principal executive
offices, and (ii) to any stockholder, at such holder's address as it appears in
the stock records of the Corporation (unless otherwise indicated by any such
holder).
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SERIES A-5 CONVERTIBLE PREFERRED STOCK
Section 1. Dividends.
When and as declared by the Corporation's board of directors
and to the extent permitted under the Colorado Business Corporation Act, the
holders of the Series A-5 Convertible Preferred Stock (the "Series A-5
Preferred") shall participate ratably with the holders of shares of the
Corporation's Common Stock (as hereinafter defined), Series A-1 Convertible
Preferred Stock (the "Series A-1 Preferred"), Series A-2 Convertible Preferred
Stock (the "Series A-2 Preferred"), Series A-3 Convertible Preferred Stock (the
"Series A-3 Preferred") and Series A-4 Convertible Preferred Stock (the "Series
A-4 Preferred") in any dividends on the Common Stock based upon the number of
shares of Common Stock into which each share of Series A-5 Preferred (a "Share")
is convertible at the time of such declaration.
Section 2. Liquidation.
Upon any liquidation, dissolution or winding up of the
Corporation, the holders of the Series A-2 Preferred, the Series A-3 Preferred,
the Series A-4 Preferred and the Series A-5 Preferred as a class (the "Preferred
Class") shall vote to either (A) (i) convert all of the Series A-5 Preferred
(including any fraction of a Share) into Conversion Stock (as hereinafter
defined) pursuant to the provisions of Section 4 below, (ii) convert all of the
Series A-2 Preferred (including any fraction of a share) into Conversion Stock,
(iii) convert all of the Series A-3 Preferred (including any fraction of a
share) into Series A-2 Preferred, (iv) convert all of the Series A-2 Preferred
referred to in clause (iii) above into Conversion Stock, (v) convert all of the
Series A-4 Preferred (including any fraction of a share) into Conversion Stock,
and (vi) share ratably with the holders of Series A-1 Preferred, if applicable,
and Junior Securities (as hereinafter defined) in any distribution or payment
upon such liquidation, dissolution or winding up of the Corporation, or (B) be
paid, before any distribution or payment is made upon any Junior Securities and
concurrently with the holders of Series A-1 Preferred as set forth below, an
amount in cash equal to their prorata share of the aggregate amount of the
Liquidation Value (as hereinafter defined) of the Series A-5 Preferred and the
respective liquidation values of the Series A-2 Preferred, the Series A-3
Preferred and the Series A-4 Preferred (the "Liquidation Payment"). For purposes
of this Section 2, the vote of the holders of the majority of the Preferred
Class as a group shall be deemed to be the election of all of the holders of the
Preferred Class. If the holders of the Preferred Class elect not to convert the
Preferred Class pursuant to clause (A) above and elect to receive a cash payment
pursuant to clause (B) above and the holders of the Series A-1 Preferred elect
not to convert their shares of Series A-1 Preferred into Conversion Stock, the
holders of the Preferred Class and the holders of the Series A-1 Preferred shall
share the Liquidation Payment ratably based upon the aggregate Liquidation Value
of the Series A-5 Preferred and the aggregate liquidation value of the Series
A-1 Preferred, the Series A-2 Preferred, the Series A-3 and the Series A-4
Preferred held by each such holder pursuant to clause (B) above, after the
payment of which the holders of the Series A-1 Preferred shall receive payment
of the Series A-1 Preferred liquidation premium, after the payment of which any
<PAGE> 42
remaining assets shall be distributed to the holders of Junior Securities. If
the holders of the Preferred Class elect to convert the Preferred Class pursuant
to clause (A) above and elect not to receive a cash payment pursuant to clause
(B) above and the holders of the Series A-1 Preferred elect not to convert their
shares of Series A-1 Preferred into Conversion Stock, the holders of the Series
A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation
amount before any distribution or payment is made upon the Preferred Class or
any Junior Securities and, thereafter, the holders of the Preferred Class shall
share ratably with the holders of Junior Securities in any distribution or
payment upon such liquidation, dissolution or winding up of the Corporation. If
the holders of the Preferred Class elect not to convert the Preferred Class
pursuant to clause (A) above and elect to receive a cash payment pursuant to
clause (B) above and the holders of the Series A-1 Preferred elect to convert
their shares of Series A-1 Preferred into Conversion Stock, the holders of the
Preferred Class shall receive the Liquidation Payment before any distribution or
payment is made upon the Series A-1 Preferred or any Junior Securities and,
thereafter, the holders of the Series A-1 Preferred shall share ratably with the
holders of Junior Securities in any distribution or payment upon such
liquidation, dissolution or winding up of the Corporation. If the holders of the
Preferred Class elect to convert the Preferred Class pursuant to clause (A)
above and elect not to receive a cash payment pursuant to clause (B) above and
the holders of the Series A-1 Preferred elect to convert their shares of Series
A-1 Preferred into Conversion Stock, the holders of the Preferred Class and the
holders of the Series A-1 Preferred shall share ratably with the holders of
Junior Securities in any distribution or payment upon such liquidation,
dissolution or winding up of the Corporation. The Corporation shall mail written
notice of such liquidation, dissolution or winding up, not less than sixty (60)
days prior to the payment date stated therein (the "Payment Date"), to each
record holder of Series A-5 Preferred. Neither the consolidation or merger of
the Corporation into or with any other entity or entities, nor the sale or
transfer by the Corporation of all or any part of its assets, nor the reduction
of the capital stock of the Corporation, shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this Section
2.
Section 3. Voting Rights.
The holders of the Series A-5 Preferred shall be entitled to
notice of all stockholder meetings in accordance with the Corporation's bylaws,
and the holders of the Series A-5 Preferred shall be entitled to vote on all
matters submitted to the stockholders for a vote together with the holders of
the Common Stock, the Series A-1 Preferred, the Series A-2 Preferred and the
Series A-4 Preferred voting together as a single class with each share of Common
Stock entitled to one vote per share, each share of Series A-1 Preferred
entitled to one vote for each share of Common Stock issuable upon conversion of
the Series A-1 Preferred at the time the vote is taken, each share of Series A-2
Preferred entitled to one vote for each share of Common Stock issuable upon
conversion of the Series A-2 Preferred at the time the vote is taken, each share
of Series A-4 Preferred entitled to one vote for each share of Common Stock
issuable upon conversion of the Series A-4 Preferred at the time the vote is
taken, and each Share of Series A-5 Preferred entitled to one vote for each
share of Common Stock issuable upon conversion of the Series A-5 Preferred at
the time the vote is taken.
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Section 4. Conversion.
A. Conversion Procedure.
(i) At any time and from time to time, any holder of Series
A-5 Preferred may convert all or any portion of the Series A-5 Preferred
(including any fraction of a Share) held by such holder into a number of shares
of Conversion Stock computed by multiplying the number of Shares to be converted
by $8.00 and dividing the result by the Conversion Price (as hereinafter
defined) then in effect.
(ii) Each conversion of Series A-5 Preferred shall be deemed
to have been effected as of the close of business on the date on which the
certificate or certificates representing the Series A-5 Preferred to be
converted have been surrendered at the principal office of the Corporation. At
such time as such conversion has been effected, the rights of the holder of such
Series A-5 Preferred as such holder shall cease and the Person (as hereinafter
defined) or Persons in whose name or names any certificate or certificates for
shares of Conversion Stock are to be issued upon such conversion shall be deemed
to have become the holder or holders of record of the shares of Conversion Stock
represented thereby; provided, however, that for purposes of Section 2(A) above
the conversion of the Series A-5 Preferred shall be deemed to have been effected
as of the close of business on the day prior to the Payment Date.
(iii) Notwithstanding any other provision hereof, if a
conversion of Series A-5 Preferred is to be made in connection with a Qualified
Public Offering (as hereinafter defined), the conversion of any Shares of Series
A-5 Preferred may, at the election of the holder of such Shares, be conditioned
upon the consummation of the Qualified Public Offering in which case such
conversion shall not be deemed to be effective until the consummation of the
Qualified Public Offering.
(iv) As soon as possible after a conversion has been effected
(but in any event within five business days in the case of subparagraph (a)
below), the Corporation shall deliver to the converting holder:
(a) a certificate or certificates representing the
number of shares of Conversion Stock issuable by reason of such
conversion in such name or names and such denomination or denominations
as the converting holder has specified;
(b) payment of the amount payable under subparagraph
(vii) below with respect to such conversion; and
(c) a certificate representing any Shares of Series
A-5 Preferred which were represented by the certificate or certificates
delivered to the Corporation in connection with such conversion but
which were not converted.
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(v) The issuance of certificates for shares of Conversion
Stock upon conversion of Series A-5 Preferred shall be made without charge to
the holders of such Series A-5 Preferred for any issuance tax in respect thereof
or other cost incurred by the Corporation in connection with such conversion and
the related issuance of shares of Conversion Stock. Upon conversion of each
Share of Series A-5 Preferred, the Corporation shall take all such actions as
are necessary in order to insure that the Conversion Stock issuable with respect
to such conversion shall be validly issued, fully paid and nonassessable.
(vi) The Corporation shall not close its books against the
transfer of Series A-5 Preferred or of Conversion Stock issued or issuable upon
conversion of Series A-5 Preferred in any manner which interferes with the
timely conversion of Series A-5 Preferred. The Corporation shall assist and
cooperate with any holder of Shares required to make any governmental filings or
obtain any governmental approval prior to or in connection with any conversion
of Shares hereunder (including, without limitation, making any filings required
to be made by the Corporation).
(vii) If any fractional interest in a share of Conversion
Stock would, except for the provisions of this subparagraph, be deliverable upon
any conversion of the Series A-5 Preferred, the Corporation, in lieu of
delivering the fractional share therefor, may pay an amount to the holder
thereof equal to the fair market price of such fractional interest as of the
date of conversion as determined by the Corporation's board of directors.
(viii) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Conversion Stock, solely
for the purpose of issuance upon the conversion of the Series A-5 Preferred,
such number of shares of Conversion Stock issuable upon the conversion of all
outstanding Shares of Series A-5 Preferred. All shares of Conversion Stock which
are so issuable shall, when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The Corporation shall
take all such actions as may be necessary to assure that all such shares of
Conversion Stock may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic securities exchange
upon which shares of Conversion Stock may be listed (except for official notice
of issuance which shall be immediately delivered by the Corporation upon each
such issuance).
B. Conversion Price. The initial "Conversion Price" shall be
$8.00 per share. In order to prevent dilution of the conversion rights granted
under this subdivision, the Conversion Price shall be subject to adjustment from
time to time pursuant to this Section 4.
C. Anti-Dilution. If and whenever on or after the original
date of issuance of the Series A-5 Preferred the Corporation issues or sells, or
in accordance with Section 4(D) hereof is deemed to have issued or sold, any
shares of its Common Stock for a consideration per share less than the
Conversion Price in effect immediately prior to the time of such issue or sale,
then forthwith upon such issue or sale the Conversion Price shall be reduced to
the Conversion
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<PAGE> 45
Price determined by dividing (i) the sum of (a) the product derived by
multiplying the Conversion Price in effect immediately prior to such issue or
sale times the number of shares of Common Stock Deemed Outstanding immediately
prior to such issue or sale, plus (b) the consideration, if any, received by the
Corporation upon such issue or sale, by (ii) the number of shares of Common
Stock Deemed Outstanding immediately after such issue or sale; provided that
there shall be no adjustment in the Conversion Price as a result of any issuance
or sale (or deemed issuance or sale) of (x) options issued pursuant to the
Corporation's stock option plan and capital stock issued upon the exercise
thereof, (y) capital stock of the Corporation upon the exercise of warrants held
by each of Patrick Van Den Bossche and NationsCredit Commercial Corporation and
any conversion of such capital stock subsequent to its issuance, and (z) the
issuance of capital stock of the Corporation upon the conversion of the Series
A-1 Preferred or the Preferred Class.
D. Effect on Conversion Price of Certain Events. For purposes
of determining the adjusted Conversion Price under Section 6(C) hereof, the
following shall be applicable:
(i) Issuance of Rights or Options. If the Corporation in any
manner grants any rights or options to subscribe for or to purchase Common Stock
or any stock or other securities convertible into or exchangeable for Common
Stock (such rights or options being herein called "Options" and such convertible
or exchangeable stock or securities being herein called "Convertible
Securities") and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of such Convertible
Securities is less than the Conversion Price in effect immediately prior to the
time of the granting of such Options then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Options shall be deemed to be outstanding and to have
been issued and sold by the Corporation at the time of the granting of such
Options for such price per share. For purposes of this Section 4(D)(i), the
"price per share for which Common Stock is issuable" shall be determined by
dividing (a) the total amount, if any, received or receivable by the Corporation
as consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Corporation upon exercise of
all such Options, plus in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the issuance of sale or such Convertible
Securities and the conversion or exchange thereof, by (b) the total maximum
number of shares of Common Stock issuable upon the exercise of such Options or
upon the conversion or exchange of all such Convertible Securities issuable upon
the exercise of such Options. No further adjustment of the Conversion Price
shall be made when Convertible Securities are actually issued upon the exercise
of such Options or when Common Stock is actually issued upon the exercise of
such Options or the conversion or exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Corporation in
any manner
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<PAGE> 46
issues or sells any Convertible Securities and the price per share for which
Common Stock is issuable upon such conversion or exchange is less than the
Conversion Price in effect immediately prior to the time of such issue or sale
then the maximum number of shares of Common Stock issuable upon conversion or
exchange of such Convertible Securities shall be deemed to be outstanding and to
have been issued and sold by the Corporation at the time of the issuance or sale
of such Convertible Securities for such price per share. For the purposes of
this Section 4(D)(ii), the "price per share for which Common Stock is issuable"
shall be determined by dividing (a) the total amount received or receivable by
the Corporation as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Corporation upon the conversion or exchange thereof, by (b)
the total maximum number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities. No further adjustment of the
Conversion Price shall be made when Common Stock is actually issued upon the
conversion or exchange of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for
which adjustments of the Conversion Price had been or are to be made pursuant to
other provisions of this Section 4, no further adjustment of the Conversion
Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or
exchangeable for Common Stock change at any time, the Conversion Price in effect
at the time of such change shall be readjusted to the Conversion Price which
would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or changed conversion rate, as the case may be, at the
time initially granted, issued or sold.
E. Subdivision or Combination of Common Stock. If the
Corporation at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision shall be proportionately reduced, and if
the Corporation at any time combines (by reverse stock split or otherwise) one
or more classes of its outstanding shares of Common Stock into a smaller number
of shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased.
F. Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Corporation's assets to another
Person or other transaction which is effected in such a manner that holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock is referred to herein as an "Organic Change". Prior to the
consummation of any Organic Change, the Corporation shall make appropriate
provisions (in form and substance satisfactory to the
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holders of a majority of the Series A-5 Preferred then outstanding) to insure
that each of the holders of Series A-5 Preferred shall thereafter have the right
to acquire and receive, in lieu of or in addition to (as the case may be), the
shares of Conversion Stock immediately theretofore acquirable and receivable
upon the conversion of such holder's Series A-5 Preferred, such shares of stock,
securities or assets as such holder would have received in connection with such
Organic Change if such holder had converted its Series A-5 Preferred immediately
prior to such Organic Change. In each such case, the Corporation shall also make
appropriate provisions (in form and substance satisfactory to the holders of a
majority of the Series A-5 Preferred then outstanding) to insure that the
provisions of this Section 4 and Section 5 hereof shall thereafter be applicable
to the Series A-5 Preferred (including, in the case of any such consolidation,
merger or sale in which the successor entity or purchasing entity is other than
the Corporation, an immediate adjustment of the Conversion Price to the value
for the Common Stock reflected by the terms of such consolidation, merger or
sale, and a corresponding immediate adjustment in the number of shares of
Conversion Stock acquirable and receivable upon conversion of Series A-5
Preferred, if the value so reflected is less than the Conversion Price in effect
immediately prior to such consolidation, merger or sale). The Corporation shall
not effect any such consolidation, merger or sale, unless prior to the
consummation thereof, the successor corporation (if other than the Corporation)
resulting from consolidation or merger or the corporation purchasing such assets
assumes by written instrument (in form reasonably satisfactory to the holders of
a majority of the Series A-5 Preferred then outstanding), the obligation to
deliver to each such holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
acquire.
G. Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 4 but not expressly provided for
by such provisions, then the Corporation's board of directors shall make an
appropriate adjustment in the Conversion Price so as to protect the rights of
the holders of Series A-5 Preferred; provided that no such adjustment shall
increase the Conversion Price as otherwise determined pursuant to this Section 4
or decrease the number of shares of Conversion Stock issuable upon conversion of
each Share of Series A-5 Preferred.
H. Notices.
(i) Immediately upon any adjustment of the Conversion Price,
the Corporation shall give written notice thereof to all holders of Series A-5
Preferred, setting forth in reasonable detail and certifying the calculation of
such adjustment.
(ii) The Corporation shall give written notice to all holders
of Series A-5 Preferred at least 20 days prior to the date on which the
Corporation closes its books or takes a record (a) with respect to any dividend
or distribution upon Common Stock, (b) with respect to any pro rata subscription
offer to holders of Common Stock, or (c) for determining rights to vote with
respect to any Organic Change, dissolution or liquidation.
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<PAGE> 48
(iii) The Corporation shall also give written notice to the
holders of Series A-5 Preferred at least 20 days prior to the date on which any
Organic Change shall take place.
I. Mandatory Conversion. The Corporation's board of directors
may at any time require the conversion of all of the outstanding Series A-5
Preferred upon the occurrence of a Conversion Event (as hereinafter defined).
Any such mandatory conversion shall only be effected at the time of and subject
to the closing of the transactions contemplated by the Conversion Event and upon
written notice of such mandatory conversion delivered to all holders of Series
A-5 Preferred at least seven (7) days prior to such closing.
Section 5. Purchase Rights.
If at any time the Corporation grants, issues or sells any
options, convertible securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "Purchase Rights"), then each holder of Series A-5 Preferred
shall be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such holder could have acquired if such
holder had held the number of shares of Conversion Stock acquirable upon
conversion of such holder's Series A-5 Preferred immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights.
Section 6. Registration of Transfer.
The Corporation shall keep at its principal office a register
for the registration of Series A-5 Preferred. Upon the surrender of any
certificate representing Series A-5 Preferred at such place, the Corporation
shall, at the request of the record holder of such certificate, execute and
deliver (at the Corporation's expense) a new certificate or certificates in
exchange therefor representing in the aggregate the number of Shares represented
by the surrendered certificate. Each such new certificate shall be registered in
such name and shall represent such number of Shares as is requested by the
holder of the surrendered certificate and shall be substantially identical in
form to the surrendered certificate.
Section 7. Replacement.
Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder shall be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing Shares of any class of Series A-5 Preferred, and in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the holder is a financial
institution or other institutional investor its oven agreement shall be
satisfactory), or, in the case of any such mutilation, upon surrender of such
certificate, the Corporation shall (at its expense) execute and deliver in lieu
of such certificate a new certificate of like kind representing the number of
Shares of such class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost,
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<PAGE> 49
stolen, destroyed or mutilated certificate.
Section 8. Definitions.
"Common Stock" means, collectively, the Corporation's Common
Stock, no par value, and any capital stock of any class of the Corporation
hereafter authorized which is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Corporation.
"Common Stock Deemed Outstanding" means, at any given time,
the number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to Section
4(D) hereof whether or not the Options or Convertible Securities are actually
exercisable at such time.
"Conversion Event" means (i) a Qualified Public Offering, (ii)
any sale of all the outstanding capital stock of the Corporation, or (iii) a
merger, consolidation, sale of substantially all of the assets of the
Corporation or similar transaction involving the Corporation.
"Conversion Stock" means shares of Common Stock; provided that
if there is a change such that the securities issuable upon conversion of the
Series A-5 Preferred are issued by an entity other than the Corporation or there
is a change in the class of securities so issuable, then the term "Conversion
Stock" shall mean one share of the security issuable upon conversion of the
Series A-5 Preferred if such security is issuable in shares, or shall mean the
smallest unit in which such security is issuable if such security is not
issuable in shares.
"Junior Securities" means any of the Corporation's equity
securities other than the Series A-l Preferred and the Preferred Class.
"Liquidation Value" of any Share as of any particular date
shall be equal to $8.00.
"Person" means an individual, a partnership, a limited
liability company, a corporation, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization and a governmental entity
or any department, agency or political subdivision thereof.
"Qualified Public Offering" means any underwritten offering by
the Corporation of its equity securities to the public pursuant to an effective
registration statement under the Securities Act of 1933, as then in effect, or
any comparable statement under any similar federal statute then in force
pursuant to which the value of the Corporation prior to receipt of the proceeds
of such offering is at least $25,000,000 and the minimum gross proceeds to the
Corporation is $15,000,000; provided that for purposes of Section 4(G) hereof, a
Qualified Public Offering shall not include an offering made in connection with
a business acquisition or combination or an employee benefit plan.
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<PAGE> 50
Section 9. Amendment and Waiver.
No amendment, modification or waiver shall be binding or
effective with respect to any provision of Sections 1 to 10 hereof without the
prior written consent of the holders of at least 75% of the Series A-5 Preferred
outstanding at the time such action is taken. No change in the terms hereof may
be accomplished by merger or consolidation of the Corporation with another
corporation or entity unless the Corporation has obtained the prior written
consent of the holders of 75% of the Series A-5 Preferred then outstanding.
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Section 10. Notices.
Except as otherwise expressly provided hereunder, all notices
referred to herein shall be in writing and shall be delivered by registered or
certified mail, return receipt requested and postage prepaid, or by reputable
overnight courier service, charges prepaid, and shall be deemed to have been
given when so mailed or sent (i) to the Corporation, at its principal executive
offices, and (ii) to any stockholder, at such holder's address as it appears in
the stock records of the Corporation (unless otherwise indicated by any such
holder).
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SERIES A-6 CONVERTIBLE PREFERRED STOCK
Section 1. Dividends.
When and as declared by the Corporation's board of directors
and to the extent permitted under the Colorado Business Corporation Act, the
holders of the Series A-6 Convertible Preferred Stock (the "Series A-6
Preferred") shall participate ratably with the holders of shares of the
Corporation's Common Stock (as hereinafter defined), Series A-1 Convertible
Preferred Stock (the "Series A-1 Preferred"), Series A-2 Convertible Preferred
Stock (the "Series A-2 Preferred"), Series A-3 Convertible Preferred Stock (the
"Series A-3 Preferred"), Series A-4 Convertible Preferred Stock (the "Series A-4
Preferred") and Series A-5 Convertible Preferred Stock (the "Series A-5
Preferred") in any dividends on the Common Stock based upon the number of shares
of Common Stock into which each share of Series A-5 Preferred (a "Share") is
convertible at the time of such declaration.
Section 2. Liquidation.
Upon any liquidation, dissolution or winding up of the
Corporation, the holders of the Series A-2 Preferred, the Series A-3 Preferred,
the Series A-4 Preferred, the Series A-5 Preferred and the Series A-6 Preferred
as a class (the "Preferred Class") shall vote to either: (A) (i) convert all of
the Series A-6 Preferred (including any fraction of a Share) into Conversion
Stock (as hereinafter defined) pursuant to the provisions of Section 4 below,
(ii) convert all of the Series A-2 Preferred (including any fraction of a share)
into Conversion Stock, (iii) convert all of A-3 Preferred (including any
fraction of a share) into Series A-2 Preferred, (iv) convert all of the Series
A-2 Preferred referred to in clause (iii) above into Conversion Stock, (v)
convert all of the Series A-4 Preferred (including any fraction of a share) into
Conversion Stock, (vi) convert all of the Series A-5 Preferred (including any
fraction of a share) into Conversion Stock, and (vii) share ratably with the
holders of Series A-1 Preferred, if applicable, and Junior Securities (as
hereinafter defined) in any distribution or payment upon such liquidation,
dissolution or winding up of the Corporation, or
(B) be paid, before any distribution or payment is made upon any Junior
Securities and concurrently with the holders of Series A-1 Preferred as set
forth below, an amount in cash equal to their prorata share of the aggregate
amount of the Liquidation Value (as hereinafter defined) of the Series A-6
Preferred and the respective liquidation values of the Series A-2 Preferred, the
Series A-3 Preferred, the Series A-4 Preferred and the Series A-5 Preferred (the
"Liquidation Payment"). For purposes of this Section 2, the vote of the holders
of the majority of the Preferred Class as a group shall be deemed to be the
election of all of the holders of the Preferred Class. If the holders of the
Preferred Class elect not to convert the Preferred Class pursuant to clause (A)
above and elect to receive a cash payment pursuant to clause (B) above and the
holders of the Series A-1 Preferred elect not to convert their shares of Series
A-1 Preferred into Conversion Stock, the holders of the Preferred Class and the
holders of the Series A-1 Preferred shall share the Liquidation Payment ratably
based upon the aggregate Liquidation Value of the Series A-6 Preferred and the
aggregate liquidation value of the Series A-1 Preferred, the Series
<PAGE> 53
A-2 Preferred, the Series A-3 Preferred, the Series A-4 Preferred and the Series
A-5 Preferred held by each such holder pursuant to clause (B) above, after the
payment of which the holders of the Series A-1 Preferred shall receive payment
of the Series A-1 Preferred liquidation premium, after the payment of which any
remaining assets shall be distributed to the holders of Junior Securities. If
the holders of the Preferred Class elect to convert the Preferred Class pursuant
to clause (A) above and elect not to receive a cash payment pursuant to clause
(B) above and the holders of the Series A-1 Preferred elect not to convert their
shares of Series A-1 Preferred into Conversion Stock, the holders of the Series
A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation
amount before any distribution or payment is made upon the Preferred Class or
any Junior Securities and, thereafter, the holders of the Preferred Class shall
share ratably with the holders of Junior Securities in any distribution or
payment upon such liquidation, dissolution or winding up of the Corporation. If
the holders of the Preferred Class elect not to convert the Preferred Class
pursuant to clause (A) above and elect to receive a cash payment pursuant to
clause (B) above and the holders of the Series A-1 Preferred elect to convert
their shares of Series A-1 Preferred into Conversion Stock, the holders of the
Preferred Class shall receive the Liquidation Payment before any distribution or
payment is made upon the Series A-1 Preferred or any Junior Securities and,
thereafter, the holders of the Series A-1 Preferred shall share ratably with the
holders of Junior Securities in any distribution or payment upon such
liquidation, dissolution or winding up of the Corporation. If the holders of the
Preferred Class elect to convert the Preferred Class pursuant to clause (A)
above and elect not to receive a cash payment pursuant to clause (B) above and
the holders of the Series A-1 Preferred elect to convert their shares of Series
A-1 Preferred into Conversion Stock, the holders of the Preferred Class and the
holders of the Series A-1 Preferred shall share ratably with the holders of
Junior Securities in any distribution or payment upon such liquidation,
dissolution or winding up of the Corporation. The Corporation shall mail written
notice of such liquidation, dissolution or winding up, not less than sixty (60)
days prior to the payment date stated therein (the "Payment Date"), to each
record holder of Series A-6 Preferred. Neither the consolidation or merger of
the Corporation into or with any other entity or entities, nor the sale or
transfer by the Corporation of all or any part of its assets, nor the reduction
of the capital stock of the Corporation, shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this Section
2.
Section 3. Voting Rights.
The holders of the Series A-6 Preferred shall be entitled to
notice of all stockholder meetings in accordance with the Corporation's bylaws,
and the holders of the Series A-6 Preferred shall be entitled to vote on all
matters submitted to the stockholders for a vote together with the holders of
the Common Stock, the Series A-1 Preferred, the Series A-2 Preferred, the Series
A-4 Preferred and the Series A-5 Preferred voting together as a single class
with each share of Common Stock entitled to one vote per share, each share of
Series A-1 Preferred entitled to one vote for each share of Common Stock
issuable upon conversion of the Series A-1 Preferred at the time the vote is
taken, each share of Series A-2 Preferred entitled to one vote for each share of
Common Stock issuable upon conversion of the Series A-2 Preferred
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at the time the vote is taken, each share of Series A-4 Preferred entitled to
one vote for each share of Common Stock issuable upon conversion of the Series
A-4 Preferred at the time the vote is taken, each share of Series A-5 Preferred
entitled to one vote for each share of Common Stock issuable upon conversion of
the Series A-5 Preferred at the time the vote is taken and each Share of Series
A-6 Preferred entitled to one vote for each share of Common Stock issuable upon
conversion of the Series A-6 Preferred at the time the vote is taken.
Section 4. Conversion.
A. Conversion Procedure.
(i) At any time and from time to time, any holder of Series
A-6 Preferred may convert all or any portion of the Series A-6 Preferred
(including any fraction of a Share) held by such holder into a number of shares
of Conversion Stock computed by multiplying the number of Shares to be converted
by $15.02 and dividing the result by the Conversion Price (as hereinafter
defined) then in effect.
(ii) Each conversion of Series A-6 Preferred shall be deemed
to have been effected as of the close of business on the date on which the
certificate or certificates representing the Series A-6 Preferred to be
converted have been surrendered at the principal office of the Corporation. At
such time as such conversion has been effected, the rights of the holder of such
Series A-6 Preferred as such holder shall cease and the Person (as hereinafter
defined) or Persons in whose name or names any certificate or certificates for
shares of Conversion Stock are to be issued upon such conversion shall be deemed
to have become the holder or holders of record of the shares of Conversion Stock
represented thereby; provided, however, that for purposes of Section 2(A) above
the conversion of the Series A-6 Preferred shall be deemed to have been effected
as of the close of business on the day prior to the Payment Date.
(iii) Notwithstanding any other provision hereof, if a
conversion of Series A-6 Preferred is to be made in connection with a Qualified
Public Offering (as hereinafter defined), the conversion of any Shares of Series
A-6 Preferred may, at the election of the holder of such Shares, be conditioned
upon the consummation of the Qualified Public Offering in which case such
conversion shall not be deemed to be effective until the consummation of the
Qualified Public Offering.
(iv) As soon as possible after a conversion has been effected
(but in any event within five business days in the case of subparagraph (a)
below), the Corporation shall deliver to the converting holder:
(a) a certificate or certificates representing the
number of shares of Conversion Stock issuable by reason of such
conversion in such name or names and such denomination or denominations
as the converting holder has specified;
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(b) payment of the amount payable under subparagraph
(vii) below with respect to such conversion; and
(c) a certificate representing any Shares of Series
A-6 Preferred which were represented by the certificate or certificates
delivered to the Corporation in connection with such conversion but
which were not converted.
(v) The issuance of certificates for shares of Conversion
Stock upon conversion of Series A-6 Preferred shall be made without charge to
the holders of such Series A-6 Preferred for any issuance tax in respect thereof
or other cost incurred by the Corporation in connection with such conversion and
the related issuance of shares of Conversion Stock. Upon conversion of each
Share of Series A-6 Preferred, the Corporation shall take all such actions as
are necessary in order to insure that the Conversion Stock issuable with respect
to such conversion shall be validly issued, fully paid and nonassessable.
(vi) The Corporation shall not close its books against the
transfer of Series A-6 Preferred or of Conversion Stock issued or issuable upon
conversion of Series A-6 Preferred in any manner which interferes with the
timely conversion of Series A-6 Preferred. The Corporation shall assist and
cooperate with any holder of Shares required to make any governmental filings or
obtain any governmental approval prior to or in connection with any conversion
of Shares hereunder (including, without limitation, making any filings required
to be made by the Corporation).
(vii) If any fractional interest in a share of Conversion
Stock would, except for the provisions of this subparagraph, be deliverable upon
any conversion of the Series A-6 Preferred, the Corporation, in lieu of
delivering the fractional share therefor, may pay an amount to the holder
thereof equal to the fair market price of such fractional interest as of the
date of conversion as determined by the Corporation's board of directors.
(viii) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Conversion Stock, solely
for the purpose of issuance upon the conversion of the Series A-6 Preferred,
such number of shares of Conversion Stock issuable upon the conversion of all
outstanding Shares of Series A-6 Preferred. All shares of Conversion Stock which
are so issuable shall, when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The Corporation shall
take all such actions as may be necessary to assure that all such shares of
Conversion Stock may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic securities exchange
upon which shares of Conversion Stock may be listed (except for official notice
of issuance which shall be immediately delivered by the Corporation upon each
such issuance).
B. Conversion Price. The initial "Conversion Price" shall be
$15.02 per share. In order to prevent dilution of the conversion rights granted
under this subdivision, the Conversion Price shall be subject to adjustment from
time to time pursuant to this Section 4.
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C. Anti-Dilution. If and whenever on or after the original
date of issuance of the Series A-6 Preferred the Corporation issues or sells, or
in accordance with Section 4(D) hereof is deemed to have issued or sold, any
shares of its Common Stock for a consideration per share less than the
Conversion Price in effect immediately prior to the time of such issue or sale,
then forthwith upon such issue or sale the Conversion Price shall be reduced to
the Conversion Price determined by dividing (i) the sum of (a) the product
derived by multiplying the Conversion Price in effect immediately prior to such
issue or sale times the number of shares of Common Stock Deemed Outstanding
immediately prior to such issue or sale, plus (b) the consideration, if any,
received by the Corporation upon such issue or sale, by (ii) the number of
shares of Common Stock Deemed Outstanding immediately after such issue or sale;
provided that there shall be no adjustment in the Conversion Price as a result
of any issuance or sale (or deemed issuance or sale) of (x) options issued
pursuant to the Corporation's stock option plan and capital stock issued upon
the exercise thereof, (y) capital stock of the Corporation upon the exercise of
warrants held by each of Patrick Van Den Bossche and NationsCredit Commercial
Corporation and any conversion of such capital stock subsequent to its issuance,
and (z) the issuance of capital stock of the Corporation upon the conversion of
the Series A-1 Preferred or the Preferred Class.
D. Effect on Conversion Price of Certain Events. For purposes
of determining the adjusted Conversion Price under Section 6(C) hereof, the
following shall be applicable:
(i) Issuance of Rights or Options. If the Corporation in any
manner grants any rights or options to subscribe for or to purchase Common Stock
or any stock or other securities convertible into or exchangeable for Common
Stock (such rights or options being herein called "Options" and such convertible
or exchangeable stock or securities being herein called "Convertible
Securities") and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of such Convertible
Securities is less than the Conversion Price in effect immediately prior to the
time of the granting of such Options then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Options shall be deemed to be outstanding and to have
been issued and sold by the Corporation at the time of the granting of such
Options for such price per share. For purposes of this Section 4(D)(i), the
"price per share for which Common Stock is issuable" shall be determined by
dividing (a) the total amount, if any, received or receivable by the Corporation
as consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Corporation upon exercise of
all such Options, plus in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the issuance of sale or such Convertible
Securities and the conversion or exchange thereof, by (b) the total maximum
number of shares of Common Stock issuable upon the exercise of such Options or
upon the conversion or exchange of all such Convertible
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Securities issuable upon the exercise of such Options. No further adjustment of
the Conversion Price shall be made when Convertible Securities are actually
issued upon the exercise of such Options or when Common Stock is actually issued
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(ii) Issuance of Convertible Securities. If the Corporation in
any manner issues or sells any Convertible Securities and the price per share
for which Common Stock is issuable upon such conversion or exchange is less than
the Conversion Price in effect immediately prior to the time of such issue or
sale then the maximum number of shares of Common Stock issuable upon conversion
or exchange of such Convertible Securities shall be deemed to be outstanding and
to have been issued and sold by the Corporation at the time of the issuance or
sale of such Convertible Securities for such price per share. For the purposes
of this Section 4(D)(ii), the "price per share for which Common Stock is
issuable" shall be determined by dividing (a) the total amount received or
receivable by the Corporation as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the conversion or
exchange thereof, by (b) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities. No
further adjustment of the Conversion Price shall be made when Common Stock is
actually issued upon the conversion or exchange of such Convertible Securities,
and if any such issue or sale of such Convertible Securities is made upon
exercise of any Options for which adjustments of the Conversion Price had been
or are to be made pursuant to other provisions of this Section 4, no further
adjustment of the Conversion Price shall be made by reason of such issue or
sale.
(iii) Change in Option Price or Conversion Rate. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or
exchangeable for Common Stock change at any time, the Conversion Price in effect
at the time of such change shall be readjusted to the Conversion Price which
would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or changed conversion rate, as the case may be, at the
time initially granted, issued or sold.
E. Subdivision or Combination of Common Stock. If the
Corporation at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision shall be proportionately reduced, and if
the Corporation at any time combines (by reverse stock split or otherwise) one
or more classes of its outstanding shares of Common Stock into a smaller number
of shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased.
F. Reorganization, Reclassification, Consolidation, Merger or
Sale. Any
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recapitalization, reorganization, reclassification, consolidation, merger, sale
of all or substantially all of the Corporation's assets to another Person or
other transaction which is effected in such a manner that holders of Common
Stock are entitled to receive (either directly or upon subsequent liquidation)
stock, securities or assets with respect to or in exchange for Common Stock is
referred to herein as an "Organic Change". Prior to the consummation of any
Organic Change, the Corporation shall make appropriate provisions (in form and
substance satisfactory to the holders of a majority of the Series A-6 Preferred
then outstanding) to insure that each of the holders of Series A-6 Preferred
shall thereafter have the right to acquire and receive, in lieu of or in
addition to (as the case may be), the shares of Conversion Stock immediately
theretofore acquirable and receivable upon the conversion of such holder's
Series A-6 Preferred, such shares of stock, securities or assets as such holder
would have received in connection with such Organic Change if such holder had
converted its Series A-6 Preferred immediately prior to such Organic Change. In
each such case, the Corporation shall also make appropriate provisions (in form
and substance satisfactory to the holders of a majority of the Series A-6
Preferred then outstanding) to insure that the provisions of this Section 4 and
Section 5 hereof shall thereafter be applicable to the Series A-6 Preferred
(including, in the case of any such consolidation, merger or sale in which the
successor entity or purchasing entity is other than the Corporation, an
immediate adjustment of the Conversion Price to the value for the Common Stock
reflected by the terms of such consolidation, merger or sale, and a
corresponding immediate adjustment in the number of shares of Conversion Stock
acquirable and receivable upon conversion of Series A-6 Preferred, if the value
so reflected is less than the Conversion Price in effect immediately prior to
such consolidation, merger or sale). The Corporation shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor corporation (if other than the Corporation) resulting from
consolidation or merger or the corporation purchasing such assets assumes by
written instrument (in form reasonably satisfactory to the holders of a majority
of the Series A-6 Preferred then outstanding), the obligation to deliver to each
such holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to acquire.
G. Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 4 but not expressly provided for
by such provisions, then the Corporation's board of directors shall make an
appropriate adjustment in the Conversion Price so as to protect the rights of
the holders of Series A-6 Preferred; provided that no such adjustment shall
increase the Conversion Price as otherwise determined pursuant to this Section 4
or decrease the number of shares of Conversion Stock issuable upon conversion of
each Share of Series A-6 Preferred.
H. Notices.
(i) Immediately upon any adjustment of the Conversion Price,
the Corporation shall give written notice thereof to all holders of Series A-6
Preferred, setting forth in reasonable detail and certifying the calculation of
such adjustment.
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(ii) The Corporation shall give written notice to all holders
of Series A-6 Preferred at least 20 days prior to the date on which the
Corporation closes its books or takes a record (a) with respect to any dividend
or distribution upon Common Stock, (b) with respect to any pro rata subscription
offer to holders of Common Stock, or (c) for determining rights to vote with
respect to any Organic Change, dissolution or liquidation.
(iii) The Corporation shall also give written notice to the
holders of Series A-6 Preferred at least 20 days prior to the date on which any
Organic Change shall take place.
I. Mandatory Conversion. The Corporation's board of directors
may at any time require the conversion of all of the outstanding Series A-6
Preferred upon the occurrence of a Conversion Event (as hereinafter defined).
Any such mandatory conversion shall only be effected at the time of and subject
to the closing of the transactions contemplated by the Conversion Event and upon
written notice of such mandatory conversion delivered to all holders of Series
A-6 Preferred at least seven (7) days prior to such closing.
Section 5. Purchase Rights.
If at any time the Corporation grants, issues or sells any
options, convertible securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "Purchase Rights"), then each holder of Series A-6 Preferred
shall be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such holder could have acquired if such
holder had held the number of shares of Conversion Stock acquirable upon
conversion of such holder's Series A-6 Preferred immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights.
Section 6. Registration of Transfer.
The Corporation shall keep at its principal office a register
for the registration of Series A-6 Preferred. Upon the surrender of any
certificate representing Series A-6 Preferred at such place, the Corporation
shall, at the request of the record holder of such certificate, execute and
deliver (at the Corporation's expense) a new certificate or certificates in
exchange therefor representing in the aggregate the number of Shares represented
by the surrendered certificate. Each such new certificate shall be registered in
such name and shall represent such number of Shares as is requested by the
holder of the surrendered certificate and shall be substantially identical in
form to the surrendered certificate.
Section 7. Replacement.
Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder shall be satisfactory) of the
ownership and the loss, theft, destruction or
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mutilation of any certificate evidencing Shares of any class of Series A-6
Preferred, and in the case of any such loss, theft or destruction, upon receipt
of indemnity reasonably satisfactory to the Corporation (provided that if the
holder is a financial institution or other institutional investor its oven
agreement shall be satisfactory), or, in the case of any such mutilation, upon
surrender of such certificate, the Corporation shall (at its expense) execute
and deliver in lieu of such certificate a new certificate of like kind
representing the number of Shares of such class represented by such lost,
stolen, destroyed or mutilated certificate and dated the date of such lost,
stolen, destroyed or mutilated certificate.
Section 8. Definitions.
"Common Stock" means, collectively, the Corporation's Common
Stock, no par value, and any capital stock of any class of the Corporation
hereafter authorized which is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Corporation.
"Common Stock Deemed Outstanding" means, at any given time,
the number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to Section
4(D) hereof whether or not the Options or Convertible Securities are actually
exercisable at such time.
"Conversion Event" means (i) a Qualified Public Offering, (ii)
any sale of all the outstanding capital stock of the Corporation, or (iii) a
merger, consolidation, sale of substantially all of the assets of the
Corporation or similar transaction involving the Corporation.
"Conversion Stock" means shares of Common Stock; provided that
if there is a change such that the securities issuable upon conversion of the
Series A-6 Preferred are issued by an entity other than the Corporation or there
is a change in the class of securities so issuable, then the term "Conversion
Stock" shall mean one share of the security issuable upon conversion of the
Series A-6 Preferred if such security is issuable in shares, or shall mean the
smallest unit in which such security is issuable if such security is not
issuable in shares.
"Junior Securities" means any of the Corporation's equity
securities other than the Series A-l Preferred and the Preferred Class.
"Liquidation Value" of any Share as of any particular date
shall be equal to $15.02.
"Person" means an individual, a partnership, a limited
liability company, a corporation, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization and a governmental entity
or any department, agency or political subdivision thereof.
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"Qualified Public Offering" means any underwritten offering by
the Corporation of its equity securities to the public pursuant to an effective
registration statement under the Securities Act of 1933, as then in effect, or
any comparable statement under any similar federal statute then in force
pursuant to which the value of the Corporation prior to receipt of the proceeds
of such offering is at least $25,000,000 and the minimum gross proceeds to the
Corporation is $15,000,000; provided that for purposes of Section 4(G) hereof, a
Qualified Public Offering shall not include an offering made in connection with
a business acquisition or combination or an employee benefit plan.
Section 9. Amendment and Waiver.
No amendment, modification or waiver shall be binding or
effective with respect to any provision of Sections 1 to 10 hereof without the
prior written consent of the holders of at least 75% of the Series A-6 Preferred
outstanding at the time such action is taken. No change in the terms hereof may
be accomplished by merger or consolidation of the Corporation with another
corporation or entity unless the Corporation has obtained the prior written
consent of the holders of 75% of the Series A-6 Preferred then outstanding.
Section 10. Notices.
Except as otherwise expressly provided hereunder, all notices
referred to herein shall be in writing and shall be delivered by registered or
certified mail, return receipt requested and postage prepaid, or by reputable
overnight courier service, charges prepaid, and shall be deemed to have been
given when so mailed or sent (i) to the Corporation, at its principal executive
offices, and (ii) to any stockholder, at such holder's address as it appears in
the stock records of the Corporation (unless otherwise indicated by any such
holder).
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EXHIBIT 4
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated this _____ day of ________, 1998
(the "Agreement"), by and among those investors set forth on Schedule A (the
"Modtech Stockholders"), and on Schedule B (the "SPI Stockholders"), and Modtech
Holdings, Inc., a Delaware corporation (the "Company"). The Modtech Stockholders
and the SPI Stockholders are sometimes collectively referred to in this
Agreement as "Holders" or "Investors".
1. Background. Modtech, Inc. and SPI Holdings, Inc. entered into an
Agreement and Plan of Reorganization and Merger dated as of September 28, 1998
(the "Merger Agreement"). The Investors are, or are comprised of, persons who
are or may be considered "affiliates" of the parties to the Merger Agreement, as
that term is defined in Rule 144. Investors have received certain shares of the
Company's common stock ("Registrable Securities") pursuant to the Merger
Agreement. The Merger Agreement provided that Investors shall have certain
Registration Rights. This Agreement sets forth the Registration Rights granted
to the Investors pursuant to the Merger Agreement.
2. Registration under Securities Act
2.1 Company Registration.
(a) Subject to the limitations set forth herein, if at any time
after the completion of the Mergers (as defined in the Merger Agreement) the
Company shall determine to register, pursuant to the Act, any of its equity
securities for its own account other than a registration relating solely to
employee benefit plans, or a registration on any registration form which does
not permit secondary sales or does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of Registrable Securities, the Company will:
(i) promptly give to each of the Holders a written
notice thereof (which shall include a list of the jurisdictions in which the
Company intends to attempt to qualify such securities under the applicable blue
sky or other state securities laws); and
(ii) use its best efforts to include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, subject to the
limitations of Sections 2.1(b) and 2.1(c) below, all the Registrable Securities
specified in a written request or requests (the "Requested Securities"), made by
the Holders within [twenty-five (25) days] after receipt of the written notice
from the Company described in clause (i) above. Except as otherwise limited,
such written request may specify all or a part of the Holders' Registrable
Securities. The Company is not required to include the Registrable Securities
among the securities covered by
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<PAGE> 2
the registration statement if (i) the requests of the Holders cover, in the
aggregate, less than $1,000,000 in market value determined as of the date of the
request; or (ii) the Board of Directors of the Company, or the representative of
the underwriters, determines in good faith that including the Registrable
Securities held by any Holder among the securities covered by the registration
statement would have a materially detrimental effect on the offering and would
therefore not be in the best interest of the Company.
(b) Underwriting. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise each of the Holders as a part of the written notice
given pursuant to Section 2.1(a)(i). In such event, the right of each of the
Holders to registration pursuant to this Section 2.1 shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent provided
herein. The Holders whose shares are to be included in such registration (other
than any Holder that elects not to participate in such underwriting) (together
with the Company, and any other stockholders entitled to distribute their
securities through such underwriting) shall enter into an underwriting agreement
in customary form with the representative of the underwriter or underwriters
selected for underwriting by the Company. Notwithstanding any other provision of
this Section 2.1, if the representative determines in its reasonable opinion
that marketing factors require a limitation on the number of shares to be
underwritten, the representative may exclude from such registration and
underwriting some or all of the Registrable Securities which would otherwise be
underwritten pursuant hereto. The Company shall so advise all Holders of
Requested Securities, and the number of the Requested Securities that are
entitled to be included in the registration and underwriting shall be allocated
in accordance with subsection (c) of this Section 2.1. If any of the Holders
disapproves of the terms of any such underwriting, such Holder may elect to
withdraw therefrom by written notice to the Company and the underwriter. Any
Registrable Securities or other securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration.
(c) Number and Transferability.
(A) In each registration statement in which Requested
Securities may be included (the "Allocated Shares") until the Modtech
Stockholders have sold 2,300,000 shares of Registrable Securities after the date
hereof pursuant to an exemption from the registration provisions of the Act or a
registration statement, the number of shares to be registered on behalf of the
Investors shall be allocated between the SPI Investors as a group and the
Modtech Stockholders as a group as follows:
(i) The Modtech Stockholders shall be entitled to sell
42.5% of the Allocated Shares;
(ii) The SPI Stockholders shall be entitled to sell 7.5%
of the Allocated Shares; and
(iii) the remaining 50% of the Allocated Shares shall
consist of the Requested Securities of both SPI Stockholders and
Modtech Stockholders, on a pro rata basis in accordance with
their respective ownership of Registrable Securities.
(B) In all subsequent registration statements, afer the
conditions set forth in Section 2.1 (c) (A) have been met until such time as the
SPI Stockholders have sold 750,000
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shares of Registrable Securities after the date hereof, the number of shares to
be registered on behalf of the Investors shall be allocated between the SPI
Stockholders as a group and the Modtech Stockholders as a group as follows:
(i) The SPI Stockholders shall be entitled to sell 42.5%
of the Allocated Shares;
(ii) The Modtech Stockholders shall be entitled to sell
7.5% of the Allocated Shares; and
(iii) the remaining 50% of the Allocated Shares shall
consist of the Requested Securities of both SPI Stockholders and
Modtech Stockholders, on a pro-rata basis.
Subject to Section 2.7, each of the Holders shall be entitled to
have its Registrable Securities included in one or more registrations on the
same basis as and pursuant to this Section 2.1, until such Holder is no longer
subject to the terms of Rule 145 promulgated under the Act.
(d) The Company shall have priority over any and all of the
Holders with respect to the inclusion of shares in each registration that is
subject to this Agreement, and in no event shall the Company be required to
reduce or limit the number of newly issued shares of its Common Stock to be
covered by any registration statement for the purpose of permitting the
Registrable Securities of any Holder to be included in the registration.
2.2 Expenses of Registration. All Registration Expenses incurred
in connection with any registration, qualification or compliance pursuant to
this Agreement shall be borne by the Company, and all Selling Expenses shall be
borne by the Holders of the securities so registered shall be borne
proportionately on the basis of the number of their shares so registered;
provided, however, that a Holder shall reimburse the Company for any
Registration Expenses attributable to such Holder's Requested Securities if such
Holder requests the withdrawal of a request for registration.
2.3 Registration Procedures. In the case of each registration
effected by the Company pursuant to this Agreement, the Company will keep the
Holders, as applicable, advised in writing as to the initiation of each
registration and as to the completion thereof. The Company alone shall determine
and control all decisions concerning any registration of the Company's
securities which might give rise to the registration rights granted in this
Agreement, including any registration in which Shares of any Holders of
Registrable Securities are to be included. The Company's exclusive right to make
decisions shall include, without limitation, the decision as to whether to use
underwriters, the selection of underwriters and arrangements therewith, the
size, timing and other terms of any offering, the provisions of the registration
statements and prospectuses and all supplements and amendments thereto, the
selection of accountants and attorneys for the Company, and the states in which
the sale of Shares shall occur and be registered or qualified for sale. At its
expense, the Company will:
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(a) keep such registration effective for a period of ninety (90)
days or until the Holders, as applicable, have completed the distribution
described in the registration statement relating thereto, whichever first
occurs;
(b) prepare and file with the Commission such amendments and
post-effective amendments to the registration statement as may be necessary to
keep each registration statement effective for the applicable period, or such
shorter period which will terminate when all Registrable Securities covered by
such registration statement have been sold; cause each Prospectus to be
supplemented by any required Prospectus supplement, and as so supplemented to be
filed pursuant to Rule 424 under the Act; and comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement during the applicable period in accordance with the
intended method or methods of distribution by the Holders thereof set forth in
such registration statement or supplement to the Prospectus; the Company shall
be deemed to have used its best efforts to keep a registration statement
effective during the applicable period if it voluntarily takes any action that
would result in selling holders of the Registrable Securities covered thereby
not being able to sell such Registrable Securities during that period if the
actions taken by the Company were in good faith and for valid business reasons,
including without limitation the acquisition or divestiture of assets, so long
as the Company promptly thereafter complies with the requirements of subsection
(f) of this Section 2.3, if applicable;
(c) notify the selling Holders of Registrable Securities
promptly, and (if requested by any such person or entity) confirm such advice in
writing, (i) when the Prospectus or any Prospectus supplement or post-effective
amendment has been filed, and, with respect to the registration statement or any
post-effective amendment, when the same has become effective, (ii) of any
request by the Commission for amendments or supplements to the registration
statement or the Prospectus or for additional information, (iii) of the issuance
by the Commission of any stop order suspending the effectiveness of the
registration statement or the initiation of any proceedings for that purpose,
and (iv) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose;
(d) furnish to each selling Holder of Registrable Securities,
without charge, as many copies of the registration statement, Prospectus
(including each preliminary prospectus) and any amendment or supplement thereto
as such selling Holder of Registrable Securities may reasonably request;
(e) prior to any public offering of the Registrable Securities,
register or qualify or cooperate with the selling Holders of Registrable
Securities and their respective counsel in connection with the registration or
qualification of such Registrable Securities for offer and sale under the
securities or "blue sky" laws of such jurisdictions as any seller reasonably
requests in writing, considering the amount of Registrable Securities proposed
to be sold in each such jurisdiction, and do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by the registration statement; provided that the
Company shall not be required to qualify generally to do business in any
jurisdiction where it
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<PAGE> 5
is not then so qualified or to take any action that would subject it to general
service of process in any such jurisdiction where it is not then so subject; and
(f) upon the occurrence of any event contemplated by subsection
(b) of this Section 2.3, prepare a supplement or post-effective amendment to the
registration statement or the related Prospectus or any document incorporated
therein by reference or file any other required document, if necessary, so that,
as thereafter delivered to the purchasers of the Registrable Securities, the
Prospectus will not contain an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading.
The Company may require each seller of Registrable Securities as to
which any Registration is being effected to furnish to the Company such
information regarding the proposed distribution of such securities as the
Company may from time to time reasonably request in writing.
Each Holder of Registrable Securities agrees that, upon receipt of any
notice from the Company of the happening of any event of the kind described in
subsections (c)(ii) through (c)(iv) of this Section 2.3, such Holder will
forthwith discontinue disposition of Registrable Securities pursuant to the
Registration Statement until such Holder's receipt of copies of the supplemented
or amended Prospectus as contemplated by subsection (f) of this Section 2.3, or
until it is advised in writing (the "Advice") by the Company that the use of the
Prospectus may be resumed, and has received copies of any additional or
supplemental filings that are incorporated by reference in the Prospectus, and,
if so directed by the Company, such Holder will deliver to the Company (at the
Company's expense) all copies, other than permanent file copies then in such
Holder's possession, of the Prospectus covering such Registrable Securities
current at the time of receipt of such notice. In the event the Company shall
give any such notice, the time periods referred to in subsection (a) of this
Section 2.3, shall be extended by the number of days during the period from and
including the date of the giving of such notice to and including the date when
each seller of Registrable Securities covered by such Registration Statement
shall have received the copies of the supplemented or amended Prospectus
contemplated by subsection (f) of this Section 2.3 or the Advice.
2.4 Indemnification.
(a) The Company will indemnify each of the Holders, as
applicable, each of its officers, directors, partners, members and other
constituents, and each person controlling each of the Holders, with respect to
each registration which has been effected pursuant to this Agreement, 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 registration statement, prospectus, offering
circular or other document (including any related registration statement,
notification or the like) 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 not misleading, or any violation by the Company of the Act or any rule
or regulation thereunder applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration,
qualification or compliance, and will reimburse each of the Holders, each of its
officers, directors, partners,
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<PAGE> 6
members and other constituents and each person controlling each of the Holders
for any legal and any other expenses reasonably incurred in connection with
investigating and defending any such claim, loss, damage, liability or action,
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 based upon written information furnished to the
Company by the Holders and stated to be specifically for use therein.
(b) To the extent permitted by law, each of the Holders will, if
Registrable Securities held by it are included in the securities as to which
such registration, qualification or compliance is being effected, indemnify the
Company, each of its directors and officers and each underwriter, if any, of the
Company's securities covered by such a registration statement, each person who
controls the Company or such underwriter within the meaning of the Act and the
rules and regulations thereunder, each other stockholder and each of their
officers, directors, partners, members and other constituents and each person
controlling such other stockholder 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
made by such Holder, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
by such Holder therein not misleading, and will reimburse the Company, other
stockholders, directors, officers, partners, persons, underwriters, members and
other constituents 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, 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 information furnished to the Company by such Holder.
(c) Each party entitled to indemnification under this Section
2.4 (the "Indemnified Party") shall give 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 counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, 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 (unless the Indemnified Party shall have
reasonably concluded that there may be a conflict of interest between the
Indemnifying Party and the Indemnified Party in such action, in which case the
fees and expenses of counsel shall be at the expense of the Indemnifying Party),
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 Agreement unless the Indemnifying Party is materially prejudiced
thereby. 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
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<PAGE> 7
request in writing and as shall be reasonably required in connection with the
defense of such claim and litigation resulting therefrom.
(d) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with any underwritten public offering
contemplated by this Agreement are in conflict with the foregoing provisions,
the provisions in such underwriting agreement shall be controlling.
2.5 Information by the Holders. Each of the Holders holding
securities included in any registration shall furnish to the Company such
information regarding such Holder and the distribution proposed by such Holder
as the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance
referred to in this Agreement.
2.6 "Market Stand-off" Agreement. Each of the Holders agrees, if
requested by the Company and an underwriter of Registrable Securities (or other
securities) of the Company, not to sell or otherwise transfer or dispose of any
Shares (or other securities) of the Company held by such Holder during a period
of up to 180 days following the effective date of a registration statement of
the Company filed under the Act. If requested by the underwriters, the Holders
shall execute a separate agreement to the foregoing effect. The Company may
impose stop-transfer instructions with respect to the shares (or securities)
subject to the foregoing restriction until the end of said 180-day period. The
provisions of this Section 2.6 shall be binding upon any transferee who acquires
Registrable Securities, whether or not such transferee is entitled to the
registration rights provided hereunder and Holder shall cause such transference
to be bound by such provisions.
2.7 Termination. The registration rights set forth in this
Agreement shall not be available to any Holder if, in the opinion of counsel to
the Company, all of the Registrable Securities then owned by such and at such
time as Holder could be sold in any one 90-day period pursuant to Rule 145 or
Rule 144 under the Act.
3. Definitions. As used herein, unless the context otherwise
requires, the following terms have the following respective meanings:
"Act": The United States Securities Act of 1933, as amended.
"Commission": The United States Securities and Exchange
Commission or any other federal agency at the time administering the Act.
"Company": As defined in the introductory paragraph of this
Agreement.
"Exchange Act": The United States Securities Exchange Act of
1934, as amended.
"Holders": As defined in the introductory paragraph of this
Agreement (each a "Holder").
"Indemnified Party": As defined in Section 2.4(c).
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<PAGE> 8
"Indemnifying Party": As defined in Section 2.4(c).
"Person": A corporation, an association, a partnership, a
limited liability company, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.
"Prospectus": A part of a Registration.
"Register," "Registered" and "Registration": A registration
effected by preparing and filing a registration statement in compliance with the
Act (and any post-effective amendments filed or required to be filed) and the
declaration or ordering of effectiveness of such registration statement.
"Registrable Securities": (A) the Shares issued to the Investors
pursuant to the Merger Agreement, (B) any capital stock of the Company issued as
a dividend or other distribution with respect to, or in exchange for or in
replacement of, the shares referred to in clause (A).
"Registration Expenses": All expenses incurred by the Company in
compliance with Sections 2.1 hereof, including, printing expenses, 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). Registration Expenses shall not include
any Selling Expenses or other expenses of Holders applicable to such Registrable
Securities.
"Selling Expenses": All underwriting discounts and selling
commissions applicable to the sale of Registrable Securities and all fees and
disbursements of counsel and accountants for each of the Holders, filing fees
and any transfer or other taxes applicable to such Registrable Securities and
any other expenses incurred by the Investors applicable to the sale of
Registrable Securities.
"Shares": The shares of Common Stock, par value $0.01 per share,
of the Company.
4. Amendments. This Agreement may not be amended without the prior
written consent of all parties.
5. Notices. All communications provided for hereunder shall be sent by
first-class mail and (a) if addressed to a Holder, at the address of such Holder
as it appears in the Company's current record of Stockholders or as shall have
been furnished in writing to the Company, or (b) if addressed to the Company, at
2830 Barrett Avenue, P.O. Box 1240, Perris, California 92572, attention, Evan M.
Gruber or to such other address as the Company shall have furnished to the
Holders.
6. Assignment. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and assigns; provided, however, that Holders may only assign this
Agreement to members of their respective immediate family, or a trust or such
other entity for the benefit of such family member, solely for estate planning
purposes.
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<PAGE> 9
7. Descriptive Headings. The descriptive headings of the several
sections of this Agreement are inserted for reference only and shall not limit
or otherwise affect the meaning hereof.
8. Amendment and Waiver. This Agreement may not be amended or waived
except in a writing executed by the party against which such amendment or waiver
is sought to be enforced. No course of dealing between or among any persons
having any interest in this Agreement shall be deemed effective to modify or
amend any part of this Agreement or any rights or obligations of any person
under or by reason of this Agreement.
9. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this Agreement.
10. Complete Agreement. This Agreement contains the complete agreement
between the parties and supersede any prior understandings, agreements or
representations by or between the parties, written or oral, which may have
related to the subject matter hereof in any way.
11. Governing Law. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of Delaware without giving effect to conflicts of law principles
thereof.
12. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which counterparts shall
together constitute one and the same instrument.
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<PAGE> 10
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers hereunto duly authorized as
of the date first above written.
MODTECH HOLDINGS, INC. THE MODTECH STOCKHOLDERS:
By: ________________________________ ____________________________________
Name:
Title: ____________________________________
____________________________________
____________________________________
____________________________________
____________________________________
THE SPI STOCKHOLDERS:
____________________________________
____________________________________
____________________________________
____________________________________
____________________________________
____________________________________
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<PAGE> 11
SCHEDULE A
SCHEDULE OF MODTECH STOCKHOLDERS
Gerald B. Bashaw
Evan M. Gruber
Michael G. Rhodes
Robert W. Campbell
James D. Goldenetz
Charles C. McGettigan
Daniel Donahoe
Myron A. Wick, III
Jon D. Gruber
J. Patterson McBaine
Gruber & McBaine Capital Management
Platinum Partners, L.P.
Proactive Partners, L.P.
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<PAGE> 12
SCHEDULE B
SCHEDULE OF SPI STOCKHOLDERS
Infrastructure and Environmental Private Equity Fund III, L.P.
Environmental & Information Technology Private Equity Fund III
Argentum Capital Partners II, L.P.
Patrick Van Den Bossche
NationsCredit Commercial Corporation
Ronald West
Capital Resources Growth, Inc.
Charles R. Gwirtsman & Nancy J. Reichman
Nancy J. Reichman
Nancy J. Reichman, Custodian for Daniel L. Gwirtsman
Nancy J. Reichman, Custodian for Andrew J. Gwirtsman
Mark M. King
Brenda K. King
MBK Children's Trust
Mark M. King Trust
Brenda K. King Trust
Bruce L. Rogers and Sally K. Rogers, Ten in Common
Sally K. Rogers Trust
Rogers Family Trust
Christopher J. Lane
Lee W. Dines
Mathers Associates
Skippack Partners
CRL, Inc.
Chuck Hamilton
The DGP Trust
The RRP Trust
Ron Procunier
<PAGE> 1
EXHIBIT A
SERIES A-1 CONVERTIBLE PREFERRED STOCK
Section 1. Dividends.
When and as declared by the Corporation's board of directors
and to the extent permitted under the Colorado Business Corporation Act, the
holders of the Series A-1 Convertible Preferred Stock (the "Series A-1
Preferred") shall participate ratably with the holders of shares of the
Corporation's Common Stock (as hereinafter defined), Series A-2 Convertible
Preferred Stock (the "Series A-2 Preferred") and Series A-3 Convertible
Preferred Stock (the "Series A-3 Preferred") in any dividends on the Common
Stock based upon the number of shares of Common Stock into which each share of
Series A-1 Preferred (a "Share") is convertible at the time of such declaration.
Section 2. Liquidation.
Upon any liquidation, dissolution or winding up of the
Corporation, the holders of Series A-1 Preferred as a class shall vote to either
(A) convert all of the Series A-1 Preferred (including any fraction of a Share)
into Conversion Stock (as hereinafter defined) pursuant to the provisions of
Section 4 below and share ratably with the holders of Series A-2 Preferred and
the Series A-3 Preferred (collectively, the "Preferred Class"), if applicable,
and Junior Securities (as hereinafter defined) in any distribution or payment
upon such liquidation, dissolution or winding up of the Corporation, or (B) be
paid (i) before any distribution or payment is made upon any Junior Securities
and concurrently with the holders of the Preferred Class as set forth below, an
amount in cash equal to the Liquidation Value (as hereinafter defined) of the
Series A-1 Preferred (the "Liquidation Payment"), and (ii) after the payment of
the Liquidation Payment and before any distribution or payment is made upon any
Junior Securities, an amount equal to the Liquidation Premium (as hereinafter
defined) (collectively with the Liquidation Payment, the "Liquidation Amount").
For purposes of this Section 2, the vote of the holders of the majority of the
Series A-1 Preferred shall be deemed to be the election of all of the holders of
the Series A-1 Preferred. If the holders of the Series A-1 Preferred elect not
to convert the Series A-1 Preferred pursuant to clause (A) above and elect to
receive a cash payment pursuant to clause (B) above and the holders of the
Preferred Class elect not to convert their shares of the Preferred Class into
Conversion Stock, the holders of the Series A-1 Preferred and the holders of the
Preferred Class shall share the Liquidation Payment ratably based upon the
aggregate Liquidation Value of the Series A-1 Preferred and the aggregate
liquidation value of the Preferred Class held by each such holder pursuant to
clause (B)(i) above, after the payment of which the holders of the Series A-1
Preferred shall receive the Liquidation Premium, after the payment of which any
remaining assets shall be distributed to the holders of Junior Securities. If
the holders of the Series A-1 Preferred elect not to convert the Series A-1
Preferred pursuant to clause (A) above and elect to receive a cash payment
pursuant to clause (B) above and the holders of the Preferred Class elect to
convert their shares of the Preferred Class into Conversion Stock, the holders
of the Series A- 1 Preferred shall receive the Liquidation Amount before any
distribution or payment is made upon the Preferred Class or any Junior
Securities. If the holders of the Series A-1 Preferred elect to convert the
Series A-1 Preferred pursuant to clause (A) above and elect not to receive a
cash payment pursuant to clause (B) above and the holders of the Preferred Class
elect not to convert their shares of the Preferred Class into Conversion Stock,
the
<PAGE> 2
holders of the Preferred Class shall receive payment of the Preferred Class
liquidation value before any distribution or payment is made upon the Series A-1
Preferred or any Junior Securities and, thereafter, the holders of the Series
A-1 Preferred shall share ratably with the holders of Junior Securities in any
distribution or payment upon such liquidation, dissolution or winding up of the
Corporation. If the holders of the Series A-1 Preferred elect to convert the
Series A-1 Preferred pursuant to clause (A) above and elect not to receive a
cash payment pursuant to clause (B) above and the holders of the Preferred Class
elect to convert their shares of the Preferred Class into Conversion Stock, the
holders of the Series A-1 Preferred and the Preferred Class shall share ratably
with the holders of Junior Securities in any distribution or payment upon such
liquidation, dissolution or winding up of the Corporation. The Corporation shall
mail written notice of such liquidation, dissolution or winding up, not less
than sixty (60) days prior to the payment date stated therein (the "Payment
Date"), to each record holder of Series A-1 Preferred. Neither the consolidation
or merger of the Corporation into or with any other entity or entities, nor the
sale or transfer by the Corporation of all or any part of its assets, nor the
reduction of the capital stock of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this Section 2.
Section 3. Voting Rights.
The holders of the Series A-1 Preferred shall be entitled to
notice of all stockholders meetings in accordance with the Corporation's bylaws,
and the holders of the Series A-1 Preferred shall be entitled to vote on all
matters submitted to the stockholders for a vote together with the holders of
the Common Stock and the Series A-2 Preferred voting together as a single class
with each share of Common Stock entitled to one vote per share, each Share of
Series A-I Preferred entitled to one vote for each share of Common Stock
issuable upon conversion of the Series A-1 Preferred at the time the vote is
taken, and each share of Series A-2 Preferred entitled to one vote for each
share of Common Stock issuable upon conversion of the Series A-2 Preferred at
the time the vote is taken.
Section 4. Conversion.
A. Conversion Procedure.
(i) At any time and from time to time, any holder of Series
A-1 Preferred may convert all or any portion of the Series A-1 Preferred
(including any fraction of a Share) held by such holder into a number of shares
of Conversion Stock computed by multiplying the number of Shares to be converted
by $2.7154 and dividing the result by the Conversion Price (as hereinafter
defined) then in effect.
(ii) Each conversion of Series A-1 Preferred shall be deemed
to have been effected as of the close of business on the date on which the
certificate or certificates representing the Series A-1 Preferred to be
converted have been surrendered at the principal office of the Corporation. At
such time as such conversion has been effected, the rights of the holder of such
Series A-1 Preferred as such holder shall cease and the Person (as hereinafter
defined) or Persons in whose name or names any certificate or certificates for
shares of Conversion Stock are to be issued upon such conversion shall be deemed
to have become the holder or holders of record of the
<PAGE> 3
shares of Conversion Stock represented thereby; provided, however, that for
purposes of Section 2(A) above the conversion of the Series A-1 Preferred shall
be deemed to have been effected as of the close of business on the day prior to
the Payment Date.
(iii) Notwithstanding any other provision hereof, if a
conversion of Series A-1 Preferred is to be made in connection with a Qualified
Public Offering (as hereinafter defined), the conversion of any Shares of Series
A-1 Preferred may, at the election of the holder of such Shares, be conditioned
upon the consummation of the Qualified Public Offering in which case such
conversion shall not be deemed to be effective until the consummation of the
Qualified Public Offering.
(iv) As soon as possible after a conversion has been effected
(but in any event within five business days in the case of subparagraph (a)
below), the Corporation shall deliver to the converting holder:
(a) a certificate or certificates representing the number of
shares of Conversion Stock issuable by reason of such conversion in such name or
names and such denomination or denominations as the converting holder has
specified;
(b) payment of the amount payable under subparagraph (vii)
below with respect to such conversion; and
(c) a certificate representing any Shares of Series A-1
Preferred which were represented by the certificate or certificates delivered to
the Corporation in connection with such conversion but which were not converted.
(v) The issuance of certificates for shares of Conversion
Stock upon conversion of Series A-1 Preferred shall be made without charge to
the holders of such Series A-1 Preferred for any issuance tax in respect thereof
or other cost incurred by the Corporation in connection with such conversion and
the related issuance of shares of Conversion Stock. Upon conversion of each
Share of Series A-1 Preferred, the Corporation shall take all such actions as
are necessary in order to insure that the Conversion Stock issuable with respect
to such conversion shall be validly issued, fully paid and non-assessable.
(vi) The Corporation shall not close its books against the
transfer of Series A-1 Preferred or of Conversion Stock issued or issuable upon
conversion of Series A-1 Preferred in any manner which interferes with the
timely conversion of Series A-1 Preferred. The Corporation shall assist and
cooperate with any holder of Shares required to make any governmental filings or
obtain any governmental approval prior to or in connection with any conversion
of Shares hereunder (including, without limitation, making any filings required
to be made by the Corporation).
(vii) If any fractional interest in a share of Conversion
Stock would, except for the provisions of this subparagraph, be deliverable upon
any conversion of the Series A-1 Preferred, the Corporation, in lieu of
delivering the fractional share therefor, may pay an amount to the holder
thereof equal to the fair market price of such fractional interest as of the
date of conversion as determined by the Corporation's board of directors.
<PAGE> 4
(viii) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Conversion Stock, solely
for the purpose of issuance upon the conversion of the Series A- I Preferred,
such number of shares of Conversion Stock issuable upon the conversion of all
outstanding Shares of Series A-1 Preferred. All shares of Conversion Stock which
are so issuable shall when issued, be duly and validly issued, fully paid and
non-assessable and free from all taxes, liens and charges. The Corporation shall
'take. all such actions as may be necessary to assure that all such shares of
Conversion Stock may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic securities exchange
upon which shares of Conversion Stock may be listed (except for official notice
of issuance which shall be immediately delivered by the Corporation upon each
such issuance).
B. Conversion Price. The initial "Conversion Price" shall be
$2.7154 per share. In order to prevent dilution of the conversion rights granted
under this subdivision, the Conversion Price shall be subject to adjustment from
time to time pursuant to this Section 4.
C. Anti-Dilution. If and whenever on or after the original
date of issuance of the Series A-1 Preferred the Corporation issues or sells, or
in accordance with Section 4(D) hereof is deemed to have issued or sold, any
shares of its Common Stock for a consideration per share less than the
Conversion Price in effect immediately prior to the time of such issue or sale,
then forthwith upon such issue or sale the Conversion Price shall be reduced to
the Conversion Price determined by dividing (i) the sum of (a) the product
derived by multiplying the Conversion Price in effect immediately prior to such
issue or sale times the number of shares of Common Stock Deemed Outstanding
immediately prior to such issue or sale, plus (b) the consideration, if any,
received by the Corporation upon such issue or sale, by (ii) the number of
shares of Common Stock Deemed Outstanding immediately after such issue or sale;
provided that there shall be no adjustment in the Conversion Price as a result
of any issuance or sale (or deemed issuance or sale) of (x) options issued
pursuant to the Corporation's stock option plan and capital stock issued upon
the exercise thereof, (y) capital stock of the Corporation upon the exercise of
warrants held by each of Patrick Van Den Bossche and NationsCredit Commercial
Corporation and any conversion of such capital stock subsequent to its issuance
and (z) the issuance of capital stock of the Corporation upon the conversion of
Series A-1 Preferred or the Preferred Class.
D. Effect on Conversion Price of Certain Events. For purposes
of determining the adjusted Conversion Price under Section 6(C) hereof, the
following shall be applicable:
(i) Issuance of Rights or Options. If the Corporation in any
manner grants any rights or options to subscribe for or to purchase Common Stock
or any stock or other securities convertible into or exchangeable for Common
Stock (such rights or Options being herein called "Options" and such convertible
or exchangeable stock or securities being herein called "Convertible
Securities") and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of such Convertible
Securities is less than the Conversion Price in effect immediately prior to the
time of the granting of such Options then the total maximum number of shares of
Common Stock issuable upon the exercise
<PAGE> 5
of such Options or upon conversion or exchange of the total maximum amount of
such Convertible Securities issuable upon the exercise of such Options shall be
deemed to be outstanding and to have been issued and sold by the Corporation at
the time of the granting of such Options for such price per share. For purposes
of this Section 4(D)(i), the "price per share for which Common Stock is
issuable" shall be determined by dividing (a) the total amount, if any, received
or receivable by the Corporation- as consideration for the granting of such
Options, plus the minimum aggregate amount of additional consideration payable
to the Corporation upon exercise of all such Options, plus in the case of such
Options which relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the issuance
of sale or such Convertible Securities and the conversion or exchange thereof,
by (b) the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options. No further
adjustment of the Conversion Price shall be made when Convertible Securities are
actually issued upon the exercise of such Options or when Common Stock is
actually issued upon the exercise of such Options or the conversion or exchange
of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Corporation in
any manner issues or sells any Convertible Securities and the price per share
for which Common Stock is issuable upon such conversion or exchange is less than
the Conversion Price in effect immediately prior to the time of such issue or
sale then the maximum number of shares of Common Stock issuable upon conversion
or exchange of such Convertible Securities shall be deemed to be outstanding and
to have been issued and sold by the Corporation at the time of the issuance or
sale of such Convertible Securities for such price per share. For the purposes
of this Section 4(D)(ii), the "price per share for which Common Stock is
issuable" shall be determined by dividing (a) the total amount received or
receivable by the Corporation as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the conversion or
exchange thereof, by (b) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities. No
further adjustment of the Conversion Price shall be made when Common Stock is
actually issued upon the conversion or exchange of such Convertible Securities,
and if any such issue or sale of such Convertible Securities is made upon
exercise of any Options for which adjustments of the Conversion Price had been
or are to be made pursuant to other provisions of this Section 4, no further
adjustment of the Conversion Price shall be made by reason of such issue or
sale.
(iii) Change in Option Price or Conversion Rate. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or
exchangeable for Common Stock change at any time, the Conversion Price in effect
at the time of such change shall be readjusted to the Conversion Price which
would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or changed conversion rate, as the case may be, at the
time initially granted, issued or sold.
E. Subdivision or Combination of Common Stock. If the
Corporation at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of.
Common Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision shall be proportionately reduced, and if
the Corporation at any time combines (by reverse stock split or otherwise) one
or more classes of its
<PAGE> 6
outstanding shares of Common Stock into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately increased.
F. Reorganization, Reclassification, Consolidation, Merger or
Sale Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Corporation's assets to another
Person or other transaction which is effected in such a manner that holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock is referred to herein as an "Organic Change". Prior to the
consummation of any Organic Change, the Corporation shall make appropriate
provisions (in form and substance satisfactory to the holders of a majority of
the Series A-1 Preferred then outstanding) to insure that each of the holders of
Series A-1 Preferred shall thereafter have the right to acquire and receive, in
lieu of or in addition to (as the case may be) the shares of Conversion Stock
immediately theretofore acquirable and receivable upon the conversion of such
holder's Series A-1 Preferred, such shares of stock, securities or assets as
such holder would have received in connection with such Organic Change if such
holder had converted its Series A-1 Preferred immediately prior to such Organic
Change. In each such case, the Corporation shall also make appropriate
provisions (in form and substance satisfactory to the holders of a majority of
the Series A-1 Preferred then outstanding) to insure that the provisions of this
Section 4 and Section 5 hereof shall thereafter be applicable to the Series A-1
Preferred (including, in the case of any such consolidation, merger or sale in
which the successor entity or purchasing entity is other than the Corporation,
an immediate adjustment of the Conversion Price to the value for the Common
Stock reflected by the terms of such consolidation, merger or sale, and a
corresponding immediate adjustment in the number of shares of Conversion Stock
acquirable and receivable upon conversion of Series A-1 Preferred, if the value
so reflected is less than the Conversion Price in effect immediately prior to
such consolidation, merger or sale). The Corporation shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor corporation (if other than the Corporation) resulting from
consolidation or merger or the corporation purchasing such assets assumes by
written instrument (in form reasonably satisfactory to the holders of a majority
of the Series A-1 Preferred then outstanding), the obligation to deliver to each
such holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to acquire.
G. Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 4 but not expressly provided for
by such provisions, then the Corporation's board of directors shall make an
appropriate adjustment in the Conversion Price so as to protect the rights of
the holders of Series A-1 Preferred; provided that no such adjustment shall
increase the Conversion Price as otherwise determined pursuant to this Section 4
or decrease the number of shares of Conversion Stock issuable upon conversion of
each Share of Series A-1 Preferred.
H. Notices.
(i) Immediately upon any adjustment of the Conversion Price,
the Corporation shall give written notice thereof to all holders of Series A-1
Preferred, setting forth in reasonable detail and certifying the calculation of
such adjustment.
<PAGE> 7
(ii) The Corporation shall give written notice to all holders
of Series A-1 Preferred at least 20 days prior to the date on which the
Corporation closes its books or takes a record (a) with respect to any dividend
or distribution upon Common Stock, (b) with respect to any pro rata subscription
offer to holders of Common Stock, or (c) for determining rights to vote with
respect to any Organic Change, dissolution or liquidation.
(iii) The Corporation shall also give written notice to the
holders of Series A-1 Preferred at least 20 days prior to the date on which any
Organic Change shall take place.
I. Mandatory Conversion. The Corporation's board of directors
may at any time require the conversion of all of the outstanding Series A-1
Preferred upon the occurrence of a Conversion Event (as hereinafter defined).
Any such mandatory conversion shall only be effected at the time of and subject
to the closing of the transactions contemplated by the Conversion Event and upon
written notice of such mandatory conversion delivered to all holders of Series
A-1 Preferred at least seven (7) days prior to such closing.
Section 5. Purchase Rights.
If at any time the Corporation grants, issues or sells any
options, convertible securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "Purchase Rights"), then each holder of Series A-1 Preferred
shall be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such holder could have acquired if such
holder had held the number of shares of Conversion Stock acquirable upon
conversion of such holder's Series A-1 Preferred immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights.
Section 6. Registration of Transfer.
The Corporation shall keep at its principal office a register
for the registration of Series A-1 Preferred. Upon the surrender of any
certificate representing Series A-I Preferred at such place, the Corporation
shall, at the request of the record holder of such certificate, execute and
deliver (at the Corporation's expense) a new certificate or certificates in
exchange therefor representing in the aggregate the number of Shares represented
by the surrendered certificate. Each such new certificate shall be registered in
such name and shall represent such number of Shares as is requested by the
holder of the surrendered certificate and shall be substantially identical in
form to the surrendered certificate.
Section 7. Replacement
Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder shall be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing Shares of any class of Series A-1 Preferred, and in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the holder is a financial
institution or other institutional investor its
<PAGE> 8
own agreement shall be satisfactory), or, in the case of any such mutilation,
upon surrender of such certificate, the Corporation shall (at its expense)
execute and deliver in lieu of such certificate a new certificate of like kind
representing the number of Shares of such class represented by such lost,
stolen, destroyed or mutilated certificate and dated the date of such lost,
stolen, destroyed or mutilated certificate. Section 8. Definitions.
"Common Stock" means, collectively, the Corporation's Common
Stock, no par value, and any capital stock of any class of the Corporation
hereafter authorized which is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Corporation.
"Common Stock Deemed Outstanding" means, at any given time,
the number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to Section
4(D) hereof whether or not the Options or Convertible Securities are actually
exercisable at such time.
"Conversion Event" means (i) a Qualified Public Offering, (ii)
any sale of all the outstanding capital stock of the Corporation, or (iii) a
merger, consolidation, sale of substantially all of the assets of the
Corporation or similar transaction involving the Corporation.
"Conversion Stock" means shares of Common Stock; provided that
if there is a change such that the securities issuable upon conversion of the
Series A-1 Preferred are issued by an entity other than the Corporation or there
is a change in the class of securities so issuable, then the term "Conversion
Stock" shall mean one share of the security issuable upon conversion of the
Series A-1 Preferred if such security is issuable in shares, or shall mean the
smallest unit in which such security is issuable if such security is not
issuable in shares.
"Junior Securities" means any of the Corporation's equity
securities other than the Series A-1 Preferred and the Preferred Class.
"Liquidation Premium" means the amount determined pursuant to
the following equation:
Liquidation Premium = ((1.2)14 x CP) - DP - Liquidation Value
; where (i) N = the number of years, including any fractional
portion thereof, from the date of issuance of the Series A-1
Preferred to the date of payment of the Liquidation Premium
(the "Payment Date"), (ii) CP = the Conversion Price, and
(iii) DP = the sum of the future values of any distributions
or dividends paid per. share of Series A-1 Preferred prior to
the Payment Date, assuming such dividend or distribution was
reinvested by the holder thereof at an annually compounded
rate of 20% from the date of payment to the Payment
<PAGE> 9
Date.
"Liquidation Value" of any Share as of any particular date
shall be equal to $2,7154.
"Person" means an individual, a partnership, a limited
liability company, a corporation, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization and a governmental entity
or any department, agency or political subdivision thereof.
"Oualified Public Offering" means any underwritten offering by
the Corporation of its equity securities to the public pursuant to an effective
registration statement under the Securities Act of 1933, as then in effect, or
any comparable statement under any similar federal statute then in force
pursuant to which the value of the Corporation prior to receipt of the proceeds
of such offering is at least $25,000,000 and the minimum gross proceeds to the
Corporation is $15,000,000; provided that for purposes of Section 4(G) hereof, a
Qualified Public Offering shall not include an offering made in connection with
a business acquisition or combination or an employee benefit plan.
Section 9. Amendment and Waiver.
No amendment, modification or waiver shall be binding or
effective with respect to, any provision of Sections 1 to 10 hereof without the
prior written consent of the holders of at least 75% of the Series A-1 Preferred
outstanding at the time such action is taken. No change in the terms hereof may
be accomplished by merger or consolidation of the Corporation with another
corporation or entity unless the Corporation has obtained the prior written
consent of the holders of 75% of the Series A-1 Preferred then outstanding.
Section 10. Notices.
Except as otherwise expressly provided hereunder, all notices
referred to herein shall be in writing and shall be delivered by registered or
certified mail, return receipt requested and postage prepaid, or by reputable
overnight courier service, charges prepaid, and shall be deemed to have been
given when so mailed or sent (i) to the Corporation, at its principal executive
offices, and (ii) to any stockholder, at such holder's address as it appears in
the stock records of the Corporation (unless otherwise indicated by any such
holder).
<PAGE> 10
EXHIBIT B
SERIES A-2 CONVERTIBLE PREFERRED STOCK
Section 1. Dividends.
When and as declared by the Corporation's board of directors
and to the extent permitted under the Colorado Business Corporation Act, the
holders of the Series A-2 Convertible Preferred Stock (the "Series A-2
Preferred") shall participate ratably with the holders of shares of the
Corporation's Common Stock (as hereinafter defined), Series A-1 Convertible
Preferred Stock (the "Series A-1 Preferred") and Series A-3 Convertible
Preferred Stock (the "Series A-3 Preferred Stock") in any dividends on the
Common Stock based upon the number of shares of Common Stock into which each
share of Series A-2 Preferred (a "Share") is convertible at the time of such
declaration.
Section 2. Liquidation.
Upon any liquidation, dissolution or winding up of the
Corporation, the holders of the Series A-2 Preferred and the Series A-3
Preferred as a class (the "Preferred Class") shall vote to either (A) (i)
convert all of the Series A-2 Preferred (including any fraction of a Share) into
Conversion Stock (as hereinafter defined) pursuant to the provisions of Section
4 below, (ii) convert all of the Series A-3 Preferred (including any fraction of
a share) into Series A-2 Preferred, (iii) convert the Series A-2 Preferred
referred to in clause (ii) above into Conversion Stock, and (iv) share ratably
with the holders of Series A-1 Preferred, if applicable, and Junior Securities
(as hereinafter defined) in any distribution or payment upon such liquidation,
dissolution or winding up of the Corporation, or (B) be paid, before any
distribution or payment is made upon any Junior Securities and concurrently with
the holders of Series A-1 Preferred as set forth below, an amount in cash equal
to the Liquidation Value (as hereinafter defined) of the Series A-2 Preferred
and the liquidation value of the Series A-3 Preferred (the "Liquidation
Payment"). For purposes of this Section 2, the vote of the holders of the
majority of the Preferred Class as a group shall de deemed to be the election of
all of the holders of the Preferred Class.' If the holders of the Preferred
Class elect not to convert the Preferred Class pursuant to clause (A) above and
elect to receive a cash payment pursuant to clause (B) above and the holders of
the Series A-1 Preferred elect not to convert their shares of Series A-1
Preferred into Conversion Stock, the holders of the Preferred Class and the
holders of the Series A-1 Preferred shall share the Liquidation Payment ratably
based upon the aggregate Liquidation Value of the Series A-2 Preferred and the
aggregate liquidation value of the Series A-1 Preferred and the Series A-3
Preferred held by each such holder pursuant to clause (B) above, after the
payment of which the holders of the Series A-1 Preferred shall receive payment
of the Series A-1 Preferred liquidation premium, after the payment of which any
remaining assets shall be distributed to the holders of Junior Securities. If
the holders of the Preferred Class elect to convert the Preferred Class pursuant
to clause (A) above and elect not to receive a cash payment pursuant to clause
(B) above and the holders of the Series A-I Preferred elect not to convert their
shares of Series A-1 Preferred into Conversion Stock, the holders of the Series
A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation
amount before any distribution or payment is made upon the Preferred Class or
any Junior Securities and, thereafter, the holders of the Preferred Class shall
<PAGE> 11
share ratably with the holders of Junior Securities in any distribution or
payment upon such liquidation, dissolution or winding up of the Corporation. If
the holders of the Preferred Class elect not to convert the Preferred Class
pursuant to clause (A) above and elect to receive a cash payment pursuant to
clause (B) above and the holders of the Series A-1 Preferred elect to convert
their shares of Series A-1 Preferred into Conversion Stock, the holders of the
Preferred Class shall receive the Liquidation Payment before any distribution or
payment is made upon the Series A- I Preferred or any Junior Securities and,
thereafter, the holders of the Series A-1 Preferred shall share ratably with the
holders of Junior Securities in any distribution or payment upon such
liquidation, dissolution or winding up of the Corporation. If the holders of the
Preferred Class elect to convert the Preferred Class pursuant to clause (A)
above and elect not to receive a cash payment pursuant to clause (B) above and
the holders of the Series A-1 Preferred elect to convert their shares of Series
A- 1 Preferred into Conversion Stock, the holders of the Preferred Class and the
holders of the Series A-1 Preferred shall share ratably with the holders of
Junior Securities in any distribution or payment upon such liquidation,
dissolution or winding up of the Corporation. The Corporation shall mail written
notice of such liquidation, dissolution or winding up, not less than sixty (60)
days prior to the payment date stated therein (the "Payment Date"), to each
record holder of Series A-2 Preferred. Neither the consolidation or merger of
the Corporation into or with any other entity or entities, nor the sale or
transfer by the Corporation of all or any part of its assets, nor the reduction
of the capital stock of the Corporation, shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this Section
2.
Section 3. Voting Rights.
The holders of the Series A-2 Prefer-red shall be entitled to
notice of all stockholders meetings in accordance with the Corporation's bylaws,
and the holders of the Series A-2 Preferred shall be entitled to vote on all
matters submitted to the stockholders for a vote together with the holders of
the Common Stock and the Series A-1 Preferred voting together as a single class
with each share of Common Stock entitled to one vote per shake, each share of
Series A-1 Preferred entitled to one vote for each share of Common Stock
issuable upon conversion of the Series A- I Preferred at the time the vote is.
taken, and each Share of Series A-2 Preferred entitled to one vote for each
share of Common Stock issuable upon conversion of the Series A-2 Preferred at
the time the vote is taken.
Section 4. Conversion.
A. Conversion Procedure.
(i) At any time and from time to time, any holder of Series
A-2 Preferred may convert all or any portion of the Series A-2 Preferred
(including any fraction of a Share) held by such holder into a number of shares
of Conversion Stock computed by multiplying the number of Shares to be converted
by $2.8626 and dividing the result by the Conversion Price (as hereinafter
defined) then in effect.
2
<PAGE> 12
(ii) Each conversion of Series A-2 Preferred shall be deemed
to have been effected as of the close of business on the date on which the
certificate or certificates representing the Series A-2 Preferred to be
converted have been surrendered at the principal office of the Corporation. At
such time as such conversion has been effected, the rights of the holder of such
Series A-2 Preferred as such holder shall cease and the Person (as hereinafter
defined) or Persons in whose name or names any certificate or certificates for
shares of Conversion Stock are to be issued upon such conversion shall be deemed
to have become the holder or holders of record of the shares of Conversion Stock
represented thereby; provided, however, that for purposes of Section 2(A) above
the conversion of the Series A-2 Preferred shall be deemed to have been effected
as of the close of business on the day prior to the Payment Date.
(iii) Notwithstanding any other provision hereof, if a
conversion of Series A-2 Preferred is to be made in connection with a Qualified
Public Offering (as hereinafter defined), the conversion of any Shares of Series
A-2 Preferred may, at the election of the holder of such Shares, be conditioned
upon the consummation of the Qualified Public Offering in which case such
conversion shall not be deemed to be effective until the consummation of the
Qualified Public Offering.
(iv) As soon as possible after a conversion has been effected
(but in any event within five business days in the case of subparagraph (a)
below), the Corporation shall deliver to the converting holder:
(a) a certificate or certificates representing the
number of shares of Conversion Stock issuable by reason of such
conversion in such name or names and such denomination or denominations
as the converting holder has specified;
(b) payment of the amount payable under subparagraph
(vii) below with respect to such conversion; and
(c) a certificate representing any Shares of Series
A-2 Preferred which were represented by the certificate or certificates
delivered to the Corporation in connection with such conversion but
which were not converted.
(v) The issuance of certificates for shares of Conversion
Stock upon conversion of Series A-2 Preferred shall be made without charge to
the holders of such Series A-2 Preferred for any issuance tax in respect thereof
or other cost incurred by the Corporation in connection with such conversion and
the related issuance of shares of Conversion Stock. Upon conversion of each
Share of Series A-2 Preferred, the Corporation shall take all such actions as
are necessary in order to insure that the Conversion Stock issuable with respect
to such conversion shall be Validly issued, fully paid and nonassessable.
(vi) The Corporation shall not close its books against the
transfer of Series A-2 Preferred or of Conversion Stock issued or issuable upon
conversion of Series A-2 Preferred in any manner which interferes with the
timely conversion of Series A-2 Preferred. The Corporation shall assist and
cooperate with any holder of Shares required to make any governmental filings or
3
<PAGE> 13
obtain any governmental approval prior to or in connection with any conversion
of Shares hereunder (including, without limitation, making any filings required
to be made by the Corporation).
(vii) If any fractional interest in a share of Conversion
Stock would, except for the provisions of this subparagraph, be deliverable upon
any conversion of the Series A-2 Preferred, the Corporation, in lieu of
delivering the fractional share therefor, may pay an amount to the holder
thereof equal to the fair market price of such fractional interest as of the
date of conversion as determined by the Corporation's board of directors.
(viii) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Conversion Stock, solely
for the purpose of issuance upon the conversion of the Series A-2 Preferred,
such number of shares of Conversion Stock issuable upon the conversion of all
outstanding Shares of Series A-2 Preferred. All shares of Conversion Stock which
are so issuable shall, when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The Corporation shall
take all such actions as may be necessary to assure that all such shares of
Conversion Stock may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic securities exchange
upon which shares of Conversion Stock may be listed (except for official notice
of issuance which shall be immediately delivered by the Corporation upon each
such issuance).
B. Conversion Price. The initial "Conversion Price" shall be
$2.8626 per share. In order to prevent dilution of the conversion right s
granted under this subdivision, the Conversion Price shall be subject to
adjustment from time to time pursuant to this Section 4.
C. Anti-Dilution. If and whenever on or after the original
date of issuance of the Series A-2 Preferred the Corporation issues or sells, or
in accordance with Section 4(D) hereof is deemed to have issued or sold, any
shares of its Common Stock for a consideration per share less than the
Conversion Price in effect immediately prior to the time of such issue or sale,
then forthwith upon such issue or sale the Conversion Price shall be reduced to
the Conversion Price determined by dividing (i) the sum of (a) the product
derived by multiplying the Conversion Price in effect immediately prior to such
issue or sale times the number of shares of Common Stock Deemed Outstanding
immediately prior to such issue or sale, plus (b) the consideration, if any,
received by the Corporation upon such issue or sale, by (ii) the number of
shares of Common Stock Deemed Outstanding immediately after such issue or sale;
provided that there shall be no adjustment in the Conversion Price as a result
of any issuance or sale (or deemed issuance or sale) of (x) options issued
pursuant to the Corporation's stock option plan and capital stock issued upon
the exercise thereof, (y) capital stock of the Corporation upon the exercise of
warrants held by each of Patrick Van Den Bossche and NationsCredit Commercial
Corporation and any conversion of such capital stock subsequent to its issuance,
and (z) the issuance of capital stock of the Corporation upon the conversion of
the Series A-1 Preferred or the Preferred Class.
4
<PAGE> 14
D. Effect on Conversion Price of Certain Events. For purposes
of determining the adjusted Conversion Price under Section 6(C) hereof, the
following shall be applicable:
(i) Issuance of Rights or Options. If the Corporation in any
manner grants any rights or options to subscribe for or to purchase Common Stock
or any stock or other securities convertible into or exchangeable for Common
Stock (such rights or options being herein called "Options" and such convertible
or exchangeable stock or securities being herein called "Convertible
Securities") and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of such Convertible
Securities. is less than the Conversion Price in effect immediately prior to the
time of the granting of such Options then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Options shall be deemed to be outstanding and to have
been issued and sold by the Corporation at the time of the granting of such
Options for such price per share. For purposes of this Section 4(D)(i), the
"price per share for which Common Stock is issuable" shall be determined by
dividing (a) the total amount, if any, received or receivable by the Corporation
as consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Corporation upon exercise of
all such Options, plus in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the issuance of sale or such Convertible
Securities and the conversion or exchange thereof, by (b) the total maximum
number of shares of Common Stock issuable upon the exercise of such Options or
upon the conversion or exchange of all such Convertible Securities issuable upon
the exercise of such Options. No further adjustment of the Conversion Price
shall be made when Convertible Securities are. actually issued upon the exercise
of such Options or when Common Stock is actually issued upon the exercise of
such Options or the conversion or exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Corporation in
any manner issues or sells any Convertible Securities and the price per share
for which Common Stock is issuable upon such conversion or exchange is less than
the Conversion Price in effect immediately prior to the time of such issue or
sale then the maximum number of shares of Common Stock issuable upon conversion
or exchange of such Convertible Securities shall be deemed to be outstanding and
to have been issued and sold by the Corporation at the time of the issuance or
sale of such Convertible Securities for such price per share. For the purposes
of this Section 4(D)(ii), the "price per share for which Common Stock is
issuable" shall be determined by dividing (a) the total amount received or
receivable by the Corporation as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the conversion or
exchange thereof, by (b) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities. No
further adjustment of the Conversion Price shall be made when Common Stock is
actually issued upon the conversion or exchange of such Convertible Securities,
and if any such issue or sale of such Convertible Securities is made upon
exercise of any Options for which adjustments of the Conversion Price had been
or are to be made pursuant
5
<PAGE> 15
to other provisions of this Section 4, no further adjustment of the Conversion
Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities, or
the, rate at which any Convertible Securities are convertible into or
exchangeable for Common Stock change at any time, the Conversion Price in effect
at the time of such change shall be readjusted to the Conversion Price which
would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or changed conversion rate, as the case may be, at the
time initially granted, issued or sold.
E. Subdivision or Combination of Common Stock. If the
Corporation at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision shall be proportionately reduced, and if
the Corporation at any time combines (by reverse stock split or otherwise) one
or more classes of its outstanding shares of Common Stock into a smaller number
of shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased.
F. Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Corporation's assets to another
Person or other transaction which is effected in such a manner that holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock is referred to herein as an "Organic Change". Prior to the
consummation of any Organic Change, the Corporation shall make appropriate
provisions (in form and substance satisfactory to the holders of a majority of
the Series A-2 Preferred then outstanding) to insure that each of the holders of
Series A-2 Preferred shall thereafter have the right to acquire and receive, in
lieu of or in addition to (as the case may be), the shares of Conversion Stock
immediately theretofore acquirable and receivable upon the conversion of such
holder's Series A-2 Preferred, such shares of stock, securities or assets as
such holder would have received in connection with such Organic Change if such
holder had converted its Series A-2 Preferred immediately prior to such Organic
Change. In each such case, the Corporation shall also make appropriate
provisions (in form and substance satisfactory to the holders of a majority of
the Series A-2 Preferred then outstanding) to insure that the provisions of this
Section 4 and Section 5 hereof shall thereafter be applicable to the Series A-2
Preferred (including, in the case of any such consolidation, merger or sale in
which the successor entity or purchasing entity is other than the Corporation,
an immediate adjustment of the Conversion Price to the value for the Common
Stock reflected by the terms of such consolidation, merger or sale, and a
corresponding immediate adjustment in the number of shares of Conversion Stock
acquirable and receivable upon conversion of Series A-2 Preferred, if the value
so reflected is less than the Conversion Price in effect immediately prior to
such consolidation, merger or sale). The Corporation shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor corporation (if other than the
6
<PAGE> 16
Corporation) resulting from consolidation or merger or the corporation
purchasing such assets assumes by written instrument (in form reasonably
satisfactory to the holders of a majority of the Series A-2 Preferred then
outstanding), the obligation to deliver to each such holder such shares of
stock, securities or assets as, in accordance with the foregoing provisions,
such holder may be entitled to acquire.
G. Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 4 but not expressly provided for
by such provisions, then the Corporation's board of directors shall make an
appropriate adjustment in the Conversion Price so as to protect the rights of
the holders of Series A-2 Preferred; provided that no such adjustment shall
increase the Conversion Price as otherwise determined pursuant to this Section 4
or decrease the number of shares of Conversion Stock issuable upon conversion of
each Share of Series A-2 Preferred.
H. Notices.
(i) Immediately upon any adjustment of the Conversion Price,
the Corporation shall give written notice thereof to all holders of Series A-2
Preferred, setting forth in reasonable detail and certifying the calculation of
such adjustment.
(ii) The Corporation shall give written notice to all holders
of Series A-2 Preferred at least 20 days prior to the date on which the
Corporation closes its books or takes a record (a) with respect to any dividend
or distribution upon Common Stock, (b) with respect to any pro rata subscription
offer to holders of Common Stock, or (c) for determining rights to vote with
respect to any Organic Change, dissolution or liquidation.
(iii) The Corporation shall also give written notice to the
holders of Series A-2 Preferred at least 20 days prior to the date on which any
Organic Change shall take place.
I. Mandatory Conversion. The Corporation's board of directors
may at any time require the conversion of all of the outstanding Series A-2
Preferred upon the occurrence of a Conversion Event (as hereinafter defined).
Any such mandatory conversion shall only be effected at the time of and subject
to the closing of the transactions contemplated by the Conversion Event and upon
written notice of such mandatory conversion delivered to all holders of Series
A-2 Preferred at least seven (7) days prior to such closing.
Section 5. Purchase Rights.
If at any time the Corporation grants, issues or sells any
options, convertible securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "Purchase Rights"), then each holder of Series A-2 Preferred
shall be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such holder could have acquired if such
holder had held the number of shares of Conversion Stock acquirable upon
conversion of such holder's Series A-2 Preferred immediately before the date on
which a record is taken for the. grant, issuance or sale
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<PAGE> 17
of such Purchase Rights, or, if no such record is taken, the date as of which
the record holders of Common Stock are to be determined for the grant, issue or
sale of such Purchase Rights.
Section 6. Registration of Transfer.
The Corporation shall keep at its principal office a register
for the registration of Series A-2 Preferred. Upon the surrender of any
certificate representing Series A-2 Preferred at such place, the Corporation
shall, at the request of the record holder of such certificate, execute and
deliver (at the Corporation's expense) a new certificate or certificates in
exchange therefor representing in the aggregate the number of Shares represented
by the surrendered certificate. Each such new certificate shall be registered in
such name and shall represent such number of Shares as is requested by the
holder of the surrendered certificate and shall be substantially identical in
form to the surrendered certificate.
Section 7. Replacement.
Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder shall be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing Shares of any class of Series A-2 Preferred, and in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the holder is a financial
institution or other institutional investor its own agreement shall be
satisfactory), or, in the case of any such mutilation, upon surrender of such
certificate, the Corporation shall (at its expense) execute and deliver in lieu
of such certificate a new certificate of like kind representing the number of
Shares of such class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.
Section 8. Definitions.
"Common Stock" means, collectively, the Corporation's Common
Stock, no par value, and any capital stock of any class of the Corporation
hereafter authorized which is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Corporation.
"Common Stock Deemed Outstanding" means, at any given time,
the number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to Section
4(D) hereof whether or not the Options or Convertible Securities are actually
exercisable at such time.
"Conversion Event" means (i) a Qualified Public Offering, (ii)
any sale of all the outstanding capital stock of the Corporation, or (iii) a
merger, consolidation, sale, of substantially all of the assets of the
Corporation or similar transaction involving the Corporation.
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<PAGE> 18
"Conversion Stock" means shares of Common Stock; provided that
if there is a change such that the securities issuable upon conversion of the
Series A-2 Preferred are issued by an entity other than the Corporation or there
is a change in the class of securities so issuable, then the term "Conversion
Stock" shall mean one share of the security issuable upon conversion of the
Series A-2 Preferred if such security is issuable in shares, or shall mean the
smallest unit in which such security is issuable if such security is not
issuable in shares.
"Junior Securities" means any of the Corporation's equity
securities other than the Series A-1 Preferred and the Preferred Class.
"Liquidation Value" of any Share as of any particular date
shall be equal to $2.8626.
"Person" means an individual, a partnership, a limited
liability company, a corporation, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization and a governmental entity
or any department, agency or political subdivision thereof.
"Qualified Public Offering" means any underwritten offering by
the Corporation of its equity securities to the public pursuant to an effective
registration statement under the Securities Act of 1933, as then in effect, or
any comparable statement under any similar federal statute then in force
pursuant to which the value of the Corporation prior to receipt of the proceeds
of such offering is at least $25,000,000 and the minimum gross proceeds to the
Corporation is $15,000,000; provided that for purposes of Section 4(G) hereof, a
Qualified Public Offering shall not include an offering made in connection with
a business acquisition or combination or an employee benefit plan.
Section 9. Amendment and Waiver.
No amendment, modification or waiver shall be binding or
effective with respect to any provision of Sections 1 to 10 hereof without the
prior written consent of the holders of at least 75% of the Series A-2 Preferred
outstanding at the time such action is taken. No change in the terms hereof may
be accomplished by merger or consolidation of the Corporation with another
corporation or entity unless the Corporation has obtained the prior written
consent of the holders of 75% of the Series A-2 Preferred then outstanding.
Section 10. Notices.
Except as otherwise expressly provided hereunder, all notices
referred to herein shall be in writing and shall be delivered by registered or
certified mail, return receipt requested and postage prepaid, or by reputable
overnight courier service, charges prepaid, and shall be deemed to have been
given when so mailed or sent (i) to the Corporation, at its principal executive
offices, and (ii) to any stockholder, at such holder's address as it appears in
the stock records of the Corporation (unless otherwise indicated by any such
holder).
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<PAGE> 19
EXHIBIT C
SERIES A-3 CONVERTIBLE PREFERRED STOCK
Section 1. Dividends.
When and as declared by the Corporation's board of directors
and to the extent permitted under the Colorado Business Corporation Act, the
holders of the Series A-3 Convertible Preferred Stock (the "Series A-3
Preferred") shall participate ratably with the holders of shares of the
Corporation's Common Stock (as hereinafter defined), Series A-1 Convertible
Preferred Stock (the "Series A-1 Preferred") and Series A-2 Convertible
Preferred Stock (the "Series A-2 Preferred") in any dividends on the Common
Stock based upon the number of shares of Common Stock into which each share of
Series A-2 Preferred issuable upon conversion of each share of the Series A-3
Preferred (a "Share") is convertible at the time of such declaration.
Section 2. Liquidation.
Upon any liquidation, dissolution or winding up of the
Corporation, the holders of Series A-2 Preferred and the Series A-3 Preferred as
a class (the "Preferred Class") shall vote to either (A) (i) convert all of the
Series A-2 Preferred (including any fraction of a share) into Common Stock, (ii)
convert all of the Series A-3 Preferred (including any fraction of a Share) into
Conversion Stock (as hereinafter defined) pursuant to the provisions of Section
4 below, (iii) convert the Conversion Stock into Common Stock, and (iv) share
ratably with the holders of Series A-1 Preferred, if applicable, and Junior
Securities (as hereinafter defined) in any distribution or payment upon such
liquidation, dissolution or winding up of the Corporation, or (B) be paid,
before any distribution or payment is made upon any Junior Securities and
concurrently with the holders of Series A-1 Preferred as set forth below, an
amount in cash equal to the Liquidation Value (as hereinafter defined) of the
Series A-3 Preferred and the liquidation value of the Series A-2 Preferred (the
"Liquidation Payment"). For purposes of this Section 2, the vote of the holders
of the majority of the Preferred Class as a group shall be deemed to be the
election of all of the holders of the Preferred Class. If the holders of the
Preferred Class elect not to convert the Preferred Class pursuant to clause (A)
above and elect to receive a cash payment pursuant to clause (B) above and the
holders-of the Series A-1 Preferred elect not to convert their shares of Series
A-1 Preferred into Common Stock, the holders of the Series A-1 Preferred and the
Preferred Class shall share the Liquidation Payment ratably based upon the
aggregate Liquidation Value of the Series A-3 Preferred and the aggregate
liquidation value of the Series A- I Preferred and the Series A-2 Preferred held
by each such holder pursuant to clause (B) above, after the payment of which the
holders of the Series A-1 Preferred shall receive payment of the Series A-1
Preferred liquidation premium, after the payment of which any remaining assets
shall be distributed to the holders of Junior Securities. If the holders of the
Preferred Class elect to convert the Preferred Class pursuant to clause (A)
above and elect not to receive a cash payment pursuant to clause (B) above and
the holders of the Series A-1 Preferred elect not to convert their shares of
Series A-1 Preferred into Common Stock, the holders of the Series A-1 Preferred
shall receive payment of the Series A-1 Preferred liquidation amount before any
distribution or payment is made upon the Preferred Class or any Junior
Securities and, thereafter, the holders of the Preferred Class shall share
ratably with the holders of Junior Securities in any
<PAGE> 20
distribution or payment upon such liquidation, dissolution or winding up of the
Corporation. If the holders of the Preferred Class elect not to convert the
Preferred Class pursuant to clause (A) above and elect to receive a cash payment
pursuant to clause (B) above and the holders of the Series A-1 Preferred elect
to convert their shares of Series A-1 Preferred into Common Stock, the holders
of the Preferred Class shall receive the Liquidation Payment before any
distribution or payment is made upon the Series A-1 Preferred or any Junior
Securities and, thereafter, the holders of the Series A-1 Preferred shall share
ratably with the holders of Junior Securities in any distribution or payment
upon such liquidation, dissolution or winding up of the Corporation. If the
holders of the Preferred Class elect to convert the Preferred Class pursuant to
clause (A) above and elect not to receive a cash payment pursuant to clause (B)
above and the holders of the Series A-1 Preferred elect to convert their shares
of Series A-1 Preferred into Common Stock, the holders of the Series A-1
Preferred and the Preferred Class shall share ratably with the holders of Junior
Securities in any distribution or payment upon such liquidation dissolution or
winding up of the Corporation. The Corporation shall mail written notice of such
liquidation, dissolution or winding up not less than sixty (60) days prior to
the payment date stated therein (the "Payment Date"), to each record holder of
Series A-3 Preferred. Neither the consolidation or merger of the Corporation
into or with any other entity or entities, nor the sale or transfer by the
Corporation of all or any part of its assets, nor the reduction of the capital
stock of the Corporation, shall be deemed to be a liquidation, dissolution, or
winding up of the Corporation within the meaning of this Section 2.
Notwithstanding the foregoing, in no event shall a conversion of the Series A-3
Preferred occur pursuant to this Section 2 if such conversion would result in a
violation of Regulation Y under the Bank Holding Company Act of 1956, as
amended.
Section 3. Voting Right.
The holders of the Series A-3 Preferred shall be entitled to
notice of all stockholders meetings in accordance with the Corporation's bylaws.
The holders of Series A-3 Preferred shall not have any voting rights, except as
otherwise required by applicable law, in which case holders of Series A-3
Preferred shall vote (at the rate of one vote per Share of Series A-3 Preferred
held) as a single class on such matter unless otherwise required by law.
Section 4. Conversion.
A. Conversion Procedure.
(i) At any time and from time to time, any holder of Series
A-3 Preferred may convert all or any portion of the Series A-3 Preferred
(including any fraction of a Share) held by such holder into a number of shares
of Conversion Stock computed by in multiplying the number of Shares to be
converted by $2.8626 and dividing the result by the Conversion Price (as
hereinafter defined) then in effect.
(ii) Each conversion of Series A-3 Preferred shall be deemed
to have been effected as of the close of business on the date on which the
certificate or certificates representing the Series A-3 Preferred to be
converted have been surrendered at the principal office of the Corporation. At
such time as such conversion has been effected, the rights of the holder of such
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<PAGE> 21
Series A-3 Preferred as such holder shall cease and the Person (as hereinafter
defined) or Persons in whose name or names any certificate or certificates for
shares of Conversion Stock are to be issued upon such conversion shall be deemed
to have become the holder or holders of record of the shares of Conversion Stock
represented thereby; provided, however, that for purposes of Section 2(A) above
the conversion of the Series A-3 Preferred and the conversion of the Conversion
Stock issued in connection therewith shall be deemed to have been effected as of
the close of business on the day prior to the Payment Date.
(iii) Notwithstanding any other provision hereof, if a
conversion of Series A-3 Preferred is to be made in connection with a Qualified
Public Offering (as hereinafter defined), the conversion of any Shares of Series
A-3 Preferred may, at the election of the holder of such Shares, be conditioned
upon the consummation of the Qualified Public Offering in which case such
conversion shall not be deemed to be effective until the consummation of the
Qualified Public Offering.
(iv) As soon as possible after a conversion has been effected
(but in any event within five business days in the case of subparagraph (a)
below), the Corporation shall deliver to the converting holder:
(a) a certificate or certificates representing the
number of shares of Conversion Stock issuable by reason of such
conversion in such name or names and such denomination or denominations
as the converting holder has specified;
(b) payment of the amount payable under subparagraph
(vii) below with respect to such conversion; and
(c) a certificate representing any Shares of Series
A-3 Preferred which were represented by the certificate or certificates
delivered to the Corporation in connection with such conversion but
which were not converted.
(v) The issuance of certificates for shares of Conversion
Stock upon conversion of Series A-3 Preferred shall be made without charge io
the holders of such Series A-3 Preferred for any issuance tax in respect thereof
or other cost incurred by the Corporation in connection with such conversion and
the related issuance of shares of Conversion Stock. Upon conversion of each
Share of Series A-3 Preferred, the Corporation shall take all such actions as
are necessary in order to insure that the Conversion Stock issuable with respect
to such conversion shall be validly issued, fully paid and nonassessable.
(vi) The Corporation shall not close its books against the
transfer of Series A-3 Preferred or of Conversion Stock issued or issuable upon
conversion of Series A-3 Preferred in any manner which interferes with the
timely conversion of Series A-3 Preferred. The Corporation shall assist and
cooperate with any holder of Shares required to make any governmental filings or
obtain any governmental approval prior to or in connection with any conversion
of Shares hereunder (including, without limitation, making any filings required
to be made by the Corporation).
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<PAGE> 22
(vii) If any fractional interest in a share of Conversion
Stock would, except for the provisions of this subparagraph, be deliverable upon
any conversion of the Series A-3 Preferred, the Corporation, in lieu of
delivering the fractional share therefor, may pay an amount to the holder
thereof equal to the fair market price of such fractional interest as of the
date of conversion as. determined by the Corporation's board of directors.
(viii) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Conversion Stock, solely
for the purpose of issuance upon the conversion of the Series A-3 Preferred,
such number of shares of Conversion Stock issuable upon the conversion of all
outstanding Shares of Series A-3 Preferred. All shares of Conversion Stock which
are so issuable -shall, when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The Corporation shall
take all such actions as may be necessary to assure that all such shares of
Conversion Stock may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic securities exchange
upon which shares of Conversion Stock may be listed (except for official notice
of issuance which shall be immediately delivered by the Corporation upon each
such issuance).
B. Conversion Price. The initial "Conversion Price" shall be
$2.8626 per share. In order to prevent dilution of the conversion rights granted
under this subdivision, the Conversion Price shall be subject to adjustment from
time to time pursuant to this Section 4.
C. Anti-Dilution. If and whenever on or. after the original
date of issuance of the Series A-3 Preferred the Corporation issues or sells, or
in accordance with Section 4(D) hereof is deemed to have issued or sold, any
shares of its Common Stock for a consideration per share less than the
Conversion Price in effect immediately prior to the time of such issue or sale,
then forthwith upon such issue or sale the Conversion Price shall be reduced to
the Conversion Price determined by dividing (i) the sum of (a) the product
derived by multiplying the Conversion Price in effect immediately prior to such
issue or sale times the number of shares of Common Stock Deemed Outstanding
immediately prior to such issue or sale, plus (b) the consideration, if any,
received by the Corporation upon such issue or sale, by (ii) the number of
shares of Common Stock Deemed Outstanding immediately after such issue or sale;
provided that there shall be no adjustment in the Conversion Price as a result
of any issuance or sale (or deemed issuance or sale) of (x) options issued
pursuant to the Corporation's stock option plan and capital stock issued upon
the exercise thereof, (y) capital stock of the Corporation issued upon the
exercise of warrants held by each of Patrick Van Den Bossche and NationsCredit
Commercial Corporation and any conversion of such capital stock subsequent to
its issuance, and (z) the issuance of capital stock of the Corporation upon the
conversion of Series A-1 Preferred or the Preferred Class.
D. Effect on Conversion Price of Certain Events. For purposes
of determining the adjusted Conversion Price under Section 6(C) hereof, the
following shall be applicable:
(i) Issuance of Rights or Options. If the Corporation in any
manner grants any rights or options to subscribe for or to purchase Common Stock
or any stock or other securities
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<PAGE> 23
convertible into or exchangeable for Common Stock (such rights or options being
herein called "Options" and such convertible or exchangeable stock or securities
being herein called "Convertible Securities") and the price per share for which
Common Stock is issuable upon the exercise of such Options or upon conversion or
exchange of such Convertible Securities is less than the Conversion Price in
effect immediately prior to the time of the granting of such Options then the
total maximum number of shares of Common Stock issuable upon the exercise of
such Options or upon conversion or exchange of the total maximum amount of such
Convertible Securities issuable upon the exercise of such Options shall be
deemed to be outstanding and to have been issued and sold by the Corporation at
the time of the granting of such Options for such price per share. For purposes
of this Section 4(D)(i), the "price per share for which Common Stock is
issuable" shall be determined by dividing (a) the total amount, if any, received
or receivable by the Corporation as consideration for the granting of such
Options, plus the minimum aggregate amount of additional consideration payable
to the Corporation upon exercise of all such Options, plus in the case of such
Options which relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the issuance
of sale or such Convertible Securities and the conversion or exchange thereof by
(b) the, total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options. No further
adjustment of the Conversion Price shall be made when Convertible Securities are
actually issued upon the exercise of such Options or when Common Stock is
actually issued upon the exercise of such Options or the conversion or exchange
of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Corporation in
any manner issues or sells any Convertible Securities and the price per share
for which Common Stock is issuable upon such conversion or exchange is less than
the Conversion Price in effect immediately prior to the time of such issue or
sale then the maximum number of shares of Common Stock issuable upon conversion
or exchange of such Convertible Securities shall be deemed to be outstanding and
to have been issued and sold by the Corporation at the time of the issuance or
sale of such Convertible Securities for such price per share. For the purposes
of this Section 4(D)(ii), the "price per share for which Common Stock is
issuable" shall be determined by dividing (a) the total amount received or
receivable by the Corporation as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the conversion or
exchange thereof, by (b) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities. No
further adjustment of the Conversion Price shall be made when Common Stock is
actually issued upon the conversion or exchange of such Convertible Securities,
and if any such issue or sale of such Convertible Securities is made upon
exercise of any Options for which adjustments of the Conversion Price had been
or are to be made pursuant to other provisions of this Section 4, no further
adjustment of the Conversion Price shall be made by reason of such issue or
sale.
(iii) Change in Option Price or Conversion Rate. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into
5
<PAGE> 24
or exchangeable for Common Stock change at any time, the Conversion Price in
effect at the time of such change shall be readjusted to the Conversion Price
which would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or changed conversion rate, as the case may be, at the
time initially granted, issued or sold.
E. Subdivision or Combination of Common Stock. If the
Corporation at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision shall be proportionately reduced, and if
the Corporation at any time combines (by reverse stock split or otherwise) one
or more classes of its outstanding shares of Common Stock into a smaller number
of shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased.
F. Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Corporation's assets to another
Person or other transaction which is effected in such a manner that holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock is referred to herein as an "Organic Change". Prior to the
consummation of any Organic Change, the Corporation shall make appropriate
provisions (in form and substance satisfactory to the holders of a majority of
the Series A-3 Preferred then outstanding) to insure that each of the holders of
Series A-3 Preferred shall thereafter have the right to acquire and receive, in
lieu of or in addition to (as the case may be), the shares of Conversion Stock
immediately theretofore acquirable and receivable upon the conversion of such
holder's Series A-3 Preferred, such shares of stock, securities or assets as
such holder would have received in connection with such Organic Change if such
holder had converted its Series A-3 Preferred into Conversion Stock and
converted the Conversion Stock immediately prior to such Organic Change. In each
such case, the Corporation shall also make appropriate provisions (in form and
substance satisfactory to the holders of a majority of the Series A-3 Preferred
then outstanding) to insure that the provisions of this Section 4 and Section 5
hereof shall thereafter be applicable to the Series A-3 Preferred (including, in
the case of any such consolidation, merger or sale in which the successor entity
or purchasing entity is other than the Corporation, an immediate adjustment of
the Conversion Price to the value for the Common Stock reflected by the terms of
such consolidation, merger or sale, and a corresponding immediate adjustment in
the number of shares of Conversion Stock acquirable and receivable upon
conversion of Series A-3 Preferred, if the value so reflected is less than the
Conversion Price in effect immediately prior to such consolidation, merger or
sale). The Corporation shall not effect any such consolidation, merger or sale,
unless prior to the consummation thereof, the successor corporation (if other
than the Corporation) resulting from consolidation or merger or the corporation
purchasing such assets assumes by written instrument (in form reasonably
satisfactory to the holders of a majority of the Series A-3 Preferred then
outstanding), the obligation to deliver to each such holder such shares of
stock, securities or assets as, in accordance with the foregoing provisions,
such holder may be entitled to acquire.
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G. Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 4 but not expressly provided for
by such provisions, then the Corporation's board of directors shall make an
appropriate adjustment in the Conversion Price so as to protect the rights of
the holders of Series A-3 Preferred; provided that no such adjustment shall
increase the Con-version Price as otherwise determined pursuant to this Section
4 or decrease the number of shares of Conversion Stock issuable upon conversion
of each Share of Series A-3 Preferred.
H. Notices.
(i) Immediately upon any adjustment of the Conversion Price,
the Corporation shall give written notice thereof to all holders of Series A-3
Preferred, setting forth in reasonable detail and certifying the calculation of
such adjustment.
(ii) The Corporation shall give written notice to all holders
of Series A-3 Preferred at least 20 days prior to the date on which the
Corporation closes its books or takes a record (a) with respect to any dividend
or distribution upon Common Stock, (b) with respect to any pro rata subscription
offer to holders of Common Stock, or (c) for determining rights to vote with
respect to any Organic Change, dissolution or liquidation.
(iii) The Corporation shall also give written notice to the
holders of Series A-3 Preferred at least 20 days prior to the date on which any
Organic Change shall take place.
I. Mandatory Conversion. The Corporation's board of directors
may at any time require the conversion of all of the outstanding Series A-3
Preferred and the conversion of the Conversion Stock received in connection
therewith upon the occurrence of a Conversion Event (as hereinafter defined);
provided, however, that the board of directors may not require such mandatory
conversions if any such conversion would result in a violation of Regulation Y
under the Bank Holding Company Act of 1956, as amended. Any such mandatory
conversion shall only be effected at the time of and subject to the closing of
the transactions contemplated by the Conversion Event and upon written notice of
such mandatory conversion delivered to all holders of Series A-3 Preferred at
least seven (7) days prior to such closing.
Section 5. Purchase Rights.
If at any time the Corporation grants, issues or sells any
options, convertible securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "Purchase Rights"), then each holder of Series A-3 Preferred
shall be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such holder could have acquired if such
holder had held the number of shares of Common Stock issuable upon conversion of
the Conversion Stock acquirable upon conversion of such holder's Series A-3
Preferred immediately before the date on which a record is taken for the grant,
issuance or sale of such Purchase Rights, or, if no such record is taken, the
date as of which the record holders of Common Stock are to be determined for the
grant, issue or sale of such Purchase Rights.
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Section 6. Registration of Transfer.
The Corporation shall keep at its principal office a register
for the registration of Series A-3 Preferred. Upon the surrender of any
certificate representing Series A-3 Preferred at such place, the Corporation
shall, at the request of the record holder of such certificate, execute and
deliver (at the Corporation's expense) a new certificate or certificates in
exchange therefor representing in the aggregate the number of Shares represented
by the surrendered certificate. Each such new certificate shall be registered in
such name and shall represent such number of Shares as is requested by the
holder of the surrendered certificate and shall be substantially identical in
form to the surrendered certificate.
Section 7. Replacement.
Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder shall be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing Shares of any class of Series A-3 Preferred, and in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the holder is a financial
institution or other institutional investor its own agreement shall be
satisfactory), or, in the case of any such mutilation, upon surrender of such
certificate, the Corporation shall (at its expense) execute and deliver in lieu
of such certificate a new certificate of like kind representing the number of
Shares of such class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.
Section 8. Regulated Stockholders.
The Corporation will not convert or directly or indirectly
redeem, purchase, acquire or take any other action affecting outstanding shares
of capital stock of the Corporation if such action will increase the percentage
of outstanding voting securities owned or controlled by any Regulation Y Holder
and its Affiliates (other than a Regulation Y Holder which waives in writing its
rights under this Section 9), unless the Corporation gives written notice (the
"Deferral Notice") of such action to each Regulation Y Holder. The Corporation
will defer making any such conversion, redemption, purchase or other
acquisition, or taking any such other action, for a period of 20 days (the
"Deferral Period") after giving the Deferral Notice in order tp allow each
Regulation Y Holder to determine whether it wishes to convert or take any other
action with respect to the Series A-3 Preferred it owns, controls or has the
power to vote, and if any Regulation Y Holder then elects to convert any Shares
of Series A-3 Preferred, it shall notify the Corporation in writing within 10
days of the issuance of the Deferral Notice, in which case the Corporation shall
promptly notify from time to time prior to the end of such 20-day period each
other Regulation Y Holder of each proposed conversion and effect the conversions
requested by all Regulation Y Holders at the end of the Deferral Period. The
Corporation will not directly or indirectly redeem, purchase, acquire or take
any other action affecting outstanding shares of Common Stock of the Corporation
if such action will increase over 24.9% the percentage of outstanding Common
Stock owned or controlled by any Regulation Y Holder and its Affiliates (other
than a Regulation Y Holder which waives in writing its rights under this Section
9).
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Section 9. Definitions.
"Affiliate" shall mean, with respect to any Person, any other
Person directly or indirectly controlling, controlled by or under common control
with such Person. For the purpose of the above definition, the term "control"
(including with correlative meaning, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or by contact or otherwise.
"Common Stock" means, collectively, the Corporation's Common
Stock, no par value, and any capital stock of any class of the Corporation
hereafter authorized which is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Corporation.
"Common Stock Deemed Outstanding" means, at any given time,
the number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to Section
4(D) hereof whether or not the Options or Convertible Securities are actually
exercisable at such time.
"Conversion Event" means (i) a Qualified Public Offering, (ii)
any sale of all the outstanding capital stock of the Corporation, or (iii) a
merger, consolidation, sale of substantially all of the assets of the
Corporation or similar transaction involving the Corporation.
"Conversion Stock" means shares of Series A-2 Preferred;
provided that if there is a change such that the securities issuable upon
conversion of the Series A-3 Preferred are issued by an entity other than the
Corporation or there is a change in the class of securities so issuable, then
the term "Conversion Stock" shall mean one share of the security issuable upon
conversion of the Series A-3 Preferred if such security is issuable in shares,
or shall mean the smallest unit in which such security is issuable if such
security is not issuable in shares.
"Junior Securities" means any of the Corporation's equity
securities Series A-1 Preferred and the Preferred Class.
"Liquidation Value" of any Share as of any particular date
shall be equal to $2.8626.
"Person" means an individual, a partnership, a limited
liability company, a corporation, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization and a governmental entity
or any department agency or political subdivision thereof.
"Qualified Public Offering" means any underwritten offering by
the Corporation of its equity securities to the public pursuant to an effective
registration statement under the
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Securities Act of 1933, as then in effect, or any comparable statement under any
similar federal statute then in force pursuant to which the value of the
Corporation prior to receipt of the proceeds of such offering is at least
$25,000,000 and the minimum gross proceeds to the Corporation is $15,000,000;
provided that for purposes of Section 4(G) hereof, a Qualified Public Offering
shall not include an offering made in connection. with a business acquisition or
combination or an employee benefit plan.
"Regulation Y Holder" shall mean any stockholder of the
Corporation that is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended, or a subsidiary thereof subject to
Regulation Y under such Act.
Section 10. Amendment and Waiver.
No amendment, modification or waiver shall be binding or
effective with respect to any provision of Sections 1 to 11 hereof without the
prior written consent of the holders of at least 75% of the Series A-3 Preferred
outstanding at the time such action is taken. No change in the terms hereof may
be accomplished by merger or consolidation of the Corporation with another
corporation or entity unless the Corporation has obtained the prior written
consent of the holders of 75% of the Series A-3 Preferred then outstanding.
Section 11. Notices.
Except as otherwise expressly provided hereunder, all notices
referred to herein shall be in writing and shall be delivered by registered or
certified mail, return receipt requested and postage prepaid, or by reputable
overnight courier service, charges prepaid, and shall be deemed to have been
given when so mailed or sent (i) to the Corporation, at its principal executive
offices, and (ii) to any stockholder, at such holder's address as it appears in
the stock records of the Corporation (unless otherwise indicated by any such
holder).
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EXHIBIT 10.9
LEASE AGREEMENT
This Lease Agreement is made and entered into at Columbia,
Tennessee, on this, the _____ day of February, 1998, by and between Bertrand L.
Taylor, hereinafter referred to as LANDLORD, and Office Master of Texas, Inc.,
hereinafter referred to as TENANT, both of which expressions shall include the
respective successors, heirs, assigns and personal representatives of the
parties.
W I T N E S S E T H:
WHEREAS, LANDLORD desires to lease to TENANT, the premises
hereinafter described, and the parties have agreed upon the terms and conditions
of the Lease Agreement, which terms and conditions are set forth hereinafter.
NOW, THEREFORE, for and in consideration of the mutual advantages
to the respective parties, the parties agree as follows:
1. PREMISES: LANDLORD hereby lets and leases to TENANT the
premises described on the attached Schedules A and B:
2. TERM: This Lease is for a period of ten (10) years and six (6)
days beginning on the 1st day of February, 1998, and ending on the 31st day of
January, 2008.
3. RENT: TENANT covenants and agrees to pay, without demand to
LANDLORD at 100 Overbrook Court, Columbia, Tennessee, or such other place as
LANDLORD may from time to time designate, as rent for the Leased Premises during
the term of this Lease the sum of $3,553,930.80 payable at the initial rate of
$29,616.09 per month commencing on February 1, 1998, and on the first day of
each month thereafter. If not paid within five (5) days after the due date, said
rental shall bear interest at the Base Rate of First Farmers & Merchants
National Bank plus two (2%) percent. The rent shall be adjusted by LANDLORD on
February 1, 1999, and every twelve (12) months thereafter. The lease rate is
based upon a valuation of the property and the capitalized value of the
equipment listed on Schedule A hereto (an aggregate value of $2,342,936) of
$2,342,956.00 amortized over 10 years from the
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effective date of this Lease at an interest rate equal to the Base Rate of First
Farmers & Merchants National Bank, Columbia, Tennessee. Said rate is defined as
that rate set by First Farmers & Merchants National Bank from time to time as
such Bank's Base Rate and is currently 8.95%. The annual rent shall be
recalculated on the first day of each new twelve-month period of the term of
this Lease using the remaining unamortized value of the property and the capital
equipment shown on Schedule A over the remaining term of this Lease using the
then effective Base Rate.
4. IMPROVEMENTS AND ALTERATIONS: TENANT shall have the right
during the continuance of this Lease to make improvements and alterations on the
Leased Premises as may be proper and necessary for the conduct of TENANT'S
business; provided, however, that TENANT obtains the written consent of LANDLORD
for any alterations or improvements, which consent will not be unreasonably
withheld. At the sole option of LANDLORD, any such improvements and alterations
shall become the property of LANDLORD at the termination of this Lease. If
LANDLORD elects not to take such improvements, TENANT agrees to restore the
premises to their condition at the time of the beginning of this Lease.
Except as otherwise provided, furnishings and trade fixtures
installed on the Leased Premises by TENANT and paid for by TENANT, including,
without limitation, any cranes and crane ways and any other fixtures installed
by TENANT (other than the capitalized equipment shown on Schedule A which shall
deemed to be the property of LANDLORD) shall remain the property of TENANT and
may be removed upon the termination of this Lease, provided: a) that any of such
as are fixed to the Leased Premises and require severance may be removed only if
TENANT shall repair any damage caused by such removal to restore the Leased
Premises in substantially the same condition as that when rented; and b) that
TENANT shall have fully performed all of the covenants and agreements to be
performed under the provisions of this Lease. It is further agreed that TENANT
shall return the Leased Premises in as good a condition as that on the initial
date of the term of the lease including repainting, repairing and cleaning up of
the Leased Premises.
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5. HOLD HARMLESS, PUBLIC LIABILITY AND INSURANCE: TENANT will
indemnify LANDLORD and hold LANDLORD harmless against all claims, demands and
judgments for loss, damage or injury to property or person, which shall result
or occur by reason of the use and/or occupancy of the Leased Premises, other
than a loss, damage or injury to property or person which occurred prior to the
commencement of the term of this Lease or a loss, damage or injury arising from
a condition of the leased premises, or circumstance or event affecting the
leased premises prior to the commencement of the Lease, as to which LANDLORD
indemnified and holds harmless TENANT to the same extent as TENANT'S
indemnification of LANDLORD herein provided. Each such indemnification shall
include the costs and attorney's fees incurred by LANDLORD or TENANT, as the
case may be, in defending any such claims, demands and judgments. In furtherance
of this agreement, but in no way limited thereby, TENANT shall obtain casualty
insurance for full value and liability insurance insuring this indemnification
in an amount not less than $5,000,000.00 (combined single limit) with LANDLORD
being named as an additional insured under said policy. TENANT shall pay the
costs of such insurance and provide evidence of such insurance to LANDLORD
within ten (10) days from the execution of this Lease. All personal property of
any kind that may at any time be used, left or placed on the premises during the
term of this Lease shall be at the sole risk of the TENANT.
6. UTILITIES AND TAXES: TENANT shall pay all state and city real
property taxes assessed against the premises during the term of this Lease.
TENANT shall further pay any charges for electricity, water, gas, sewage, heat,
telephone or other utilities which may be used, rendered, or supplied upon or in
connection with the Leased Premises.
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<PAGE> 4
7. TOTAL OR PARTIAL DESTRUCTION OF PREMISES: Should the building
on which the leased premises are located be totally or substantially destroyed
by fire, explosion, tornado, acts of God, or any unforeseen cause over which
TENANT has no control, so that such leased premises are unfit for the conduct of
TENANT'S business, the LANDLORD may, at his option, repair such damage or
LANDLORD shall have the right, by giving notice to TENANT, to terminate this
lease, said termination to be effective upon receipt of the notice, and all
rents and other charges shall be adjusted to the date of such destruction. If,
however, such damage is only partial, and TENANT'S business is only temporarily
closed or inconvenienced, then LANDLORD may promptly repair such damage and,
during the time from the occurrence of such damage until the premises are
restored, TENANT shall be liable only for such as the proportionate part of the
premises which are usable shall bear to the whole of the same, and upon
restoration of such improvements, the rent herein provided for shall be restored
and shall be payable as herein provided.
8. TRANSFER OF LEASE: TENANT may not assign or sublet the
Premises, either in whole or in part, without the prior written consent of
LANDLORD; provided that (i) TENANT may freely assign or sublet the leased
premises to any affiliate of TENANT (Aaffiliate being defined in Rule 405
promulgated under the Securities Act of 1933, as amended), and (ii) TENANT may
assign or sublet the leased premises to any person who acquires all or
substantially all of the capital stock or assets of TENANT with the prior
written consent of LANDLORD, which consent shall not be unreasonably withheld.
Unless LANDLORD shall have consented in writing to the release of TENANT from
liability for the payment of rent upon an assignment or sublease (which consent
shall not be unreasonably withheld), any assignment or sublease shall contain a
provision that TENANT is not released from liability and that Assignee or
Sublessee shall assume and hold LANDLORD harmless for any liability to Somervell
County, Texas, under an agreement between it and LANDLORD dated April, 1997.
Consent to one assignment or subletting will not be deemed a consent to any
other. In the event of any assignment or subletting, TENANT shall remain fully
responsible under this Lease.
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<PAGE> 5
9. USE OF PREMISES: The premises shall be used only for the
manufacturing of mobile offices or other modular building structures or
components and related purposes. TENANT will not at any time use or occupy the
Premises in violation of laws, ordinances, or regulations of any government or
agency having jurisdiction or in violation of LANDLORD's insurance contract(s)
or in any manner creating a nuisance.
10. RESPONSIBILITY FOR REPAIRS AND MAINTENANCE: TENANT shall be
responsible for all repairs to all portions of the leased premises; provided,
however, LANDLORD shall be responsible for repairs resulting from defective
construction of the building. TENANT has inspected the premises and accepts them
in the present condition as is. TENANT shall keep the premises, including
without limitation, interior walls, floors, ceilings and light fixtures, clean
and in good repair at all times. TENANT will promptly replace all glass broken
during the said term with glass of the same quality.
11. RIGHT OF ENTRY: LANDLORD may at reasonable times and with
reasonable notice to TENANT enter the Premises to inspect them and make any
repairs required by Section 10 that TENANT has failed to make, and during the
one hundred eighty (180) days preceding the expiration of this Lease, may show
the Premises to persons who may wish to lease same, provided TENANT'S occupancy
is not interfered with. If LANDLORD makes any repairs required to be made by
TENANT under Section 10, TENANT shall pay LANDLORD as additional rent a sum
equal to the amounts expended by LANDLORD plus interest thereon at the Base Rate
of First Farmers & Merchants National Bank plus two (2%) percent within ten (10)
days after LANDLORD presents TENANT with a statement setting forth the repairs
made and the amounts expended.
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<PAGE> 6
12. LANDLORD'S REMEDIES ON DEFAULT: If default is made in the
payment of said rent, or any part thereof, or in the observance or performance
of any of the terms, conditions or agreements herein contained, LANDLORD shall
have the following remedies:
a) Within ten (10) days after any due date of the payment of rent
or within ten (10) days after LANDLORD gives written notice to TENANT of
TENANT'S material default or breach in the observance or performance of
the terms, conditions or agreements herein contained, or if such breach
cannot be cured reasonably within such ten (10) day period and TENANT
fails to commence and diligently proceed to cure such breach within a
reasonable time not to exceed thirty (30) days, LANDLORD may sue to
collect any and all sums which may accrue to it by virtue of the
provisions of this Lease, or for any and all damage that may accrue by
virtue of the breach of this Lease or both, TENANT hereby waiving all
demand for rent.
b) Within ten (10) days after any due date of the payment of rent
or within ten (10) days after LANDLORD gives written notice to TENANT of
TENANT'S material default or breach in the observance or performance of
the terms, conditions or agreements herein contained, or if such breach
cannot be cured reasonably within such ten (10) day period and TENANT
fails to commence and diligently proceed to cure such breach within a
reasonable time not to exceed thirty (30) days, LANDLORD may sue to
restrain by injunction any violation or threatened violation of the
covenants, conditions, or provisions of this Lease.
c) Within thirty (30) days after any due date for the payment of
rent or within thirty (30) days after LANDLORD gives written notice to
TENANT of TENANT'S material default or breach in the observance or
performance of the terms, conditions or agreements herein contained,
LANDLORD may, without further notice to TENANT, and without demand for
rent due, re-enter said premises and remove all persons and
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<PAGE> 7
property therefrom, with or without process of law. If TENANT shall
abandon or vacate, or be removed from said premises before the
expiration of the term of this Lease, LANDLORD shall use reasonable
efforts to relet for such rent and upon such terms as he may see fit,
but such reletting shall not relieve the TENANT from its obligations to
pay the rent herein set forth; provided, however, any rents received
under the new lease, less the cost in obtaining a new tenant, shall be
applied toward the satisfaction of said obligation to pay rent.
13. NO WAIVER: The failure of LANDLORD or TENANT to insist upon a
strict performance of any term or condition of this Lease shall not be deemed a
waiver of any right or remedy that LANDLORD or TENANT may have and shall not be
deemed a waiver of any subsequent breach of such term or condition.
14. TERMINATION: If, at the expiration of the term of this Lease,
TENANT shall continue to occupy said premises, such occupancy shall be on a
month to month basis.
15. QUIET ENJOYMENT: LANDLORD hereby covenants and agrees that if
TENANT shall perform all the covenants and agreements herein stipulated, TENANT
shall have at all times during the continuance hereof, the peaceful and quiet
enjoyment and possession of the premises without any manner of hindrance from
LANDLORD.
16. ATTORNEY'S FEES AND COSTS: In the event TENANT breaches any
of the covenants and agreements herein stipulated, TENANT agrees to pay
reasonable attorney's fees and all costs incurred by LANDLORD arising out of
said breach. In the event LANDLORD breaches any of the covenants and agreements
herein stipulated, LANDLORD agrees to pay reasonable attorney=s fees and all
costs incurred by TENANT arising out of said breach.
17. WAIVER OF SUBROGATION AGREEMENT: It is agreed that the
LANDLORD and the TENANT, each, hereby waive their respective rights of
subrogation as to the other party of all liabilities, expenses, losses, and any
other damages incurred by
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either party and covered under any fire, extended coverage, or other policy of
insurance purchased by either of them on the property or contents located
therein, to the extent that such liabilities are covered by insurance. This
waiver is made voluntarily and with full knowledge of all rights each party may
have to subrogation of the other parties' claims.
18. HAZARDOUS MATERIAL; INDEMNITY: (a) To the best of his
knowledge, LANDLORD hereby represents and warrants that the leased premises are
in compliance with the laws and regulations governing hazardous substances and
other environmental matters relating to the condition of the leased premises and
the real property on which the leased premises are located. TENANT shall not
cause or permit any Hazardous Material to be brought upon, kept, or used in or
about the premises by TENANT, its agents, employees, contractors or invitees,
without the prior written consent of LANDLORD (which consent LANDLORD shall not
unreasonably withhold as long as TENANT demonstrates to LANDLORD'S reasonable
satisfaction that each hazardous material and the quantities of each such
hazardous material, brought upon, kept or used in or about the premises by
TENANT, are necessary or useful to the permitted uses of the premises as
described in Section 9 of this Lease and will be used, kept and stored in a
manner that complies with all laws regulating any such hazardous material so
brought upon or used or kept in or about the premises). If TENANT breaches the
obligations stated in the preceding sentence, or if the presence of hazardous
material on the premises caused or permitted by TENANT results in contamination
of the premises, or if contamination of the premises by hazardous material
otherwise occurs for which TENANT is legally liable to LANDLORD for damage
resulting therefrom, then TENANT shall indemnify, defend and hold LANDLORD
harmless from any and all claims, judgments, damages, penalties, fines, costs,
liabilities or losses (including, without limitation, diminution in value of the
premises, damages for loss or restrictions on use of rentable or usable space or
of any amenity of the premises, damages arising from any adverse impact on
marketing of space, and sums paid in settlement of claims, attorney's fees,
consultant fees and expert fees) which arise during or after the lease term as
a result of such contamination.
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This indemnification of LANDLORD by TENANT includes, without
limitation, costs incurred in connection with any investigation of site
conditions or any cleanup, remedial, removal, or restoration work required by
any federal, state, or local governmental agency or political subdivision
because of hazardous material present in the soil or groundwater on or under the
premises. Without limiting the foregoing, if the presence of any hazardous
material on the premises caused or permitted by TENANT results in any
contamination of the premises, TENANT shall promptly take all actions at its
sole expense as are necessary to return the premises to the condition existing
prior to the introduction of any such hazardous material to the premises;
provided that LANDLORD'S approval of such actions shall first be obtained, which
approval shall not be unreasonably withheld so long as such actions would not
potentially have any material adverse long-term or short-term effect on the
premises. (b) As used herein, the term "hazardous material" means any hazardous
or toxic substance, material or waste which is or becomes regulated by any local
governmental authority, the State of Texas or the United States Government. The
term "hazardous material" includes, without limitation, any material or
substance that is (i) defined as a "hazardous substance" under Texas law, (ii)
petroleum, (iii) asbestos, (iv) designated as a "hazardous substance" pursuant
to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. 1321), (v)
defined as a "hazardous waste" pursuant to Section 1004 of the Federal Resource
Conservation and Recovery Act, 42 U.S.C. 6901 et seq. (42 U.S.C. 6903), (vi)
defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601 et seq.
(42 U.S.C. 9601), or (vii) defined as a "regulated substance" pursuant to
Subchapter IX, Solid Waste Disposal Act (Regulation of Underground Storage
Tanks), 42 U.S.C. 6991 et seq.
9
<PAGE> 10
19. RIGHT OF FIRST REFUSAL: In the event LANDLORD shall receive a
bona fide written offer acceptable to LANDLORD from a third party to purchase
the property, then LANDLORD shall by written notice to TENANT enclosing the
details (except names) of such written bona fide offer, offer to TENANT the
right to enter into a contract for the purchase of the property. TENANT shall
have thirty (30) calendar days after mailing of such notice and offer in which
to accept in writing such offer upon such terms and conditions specified
therein. Upon acceptance of such offer by TENANT, LANDLORD and TENANT shall
enter into a contract for the purchase of the property upon the terms and
conditions specified in the notice and offer from LANDLORD to TENANT. Mailing of
notice shall be by overnight courier service. In the event TENANT shall fail to
accept the terms and conditions of sale during such thirty (30) day period,
LANDLORD shall thereafter be free to sell the property upon the terms and
conditions specified in the bona fide written offer made by such third party,
provided that, if the sale of the property upon the terms and conditions
specified in such bona fide written offer by such third party is not consummated
within sixty (60) days after the mailing of the notice to TENANT provided by
this Section 19, the premises may not be sold to any third party unless and
until LANDLORD shall recommence the procedure provided by this Section 19 by
again giving notice to TENANT as provided herein.
20. SEVERABILITY: The provisions of this Lease are severable in
that should any provision be held to be illegal, invalid, or unenforceable by a
court of competent jurisdiction, the legality, validity and enforceability of
the other provisions herein shall not be affected, but they shall remain in full
force and effect.
21. EMINENT DOMAIN: If the whole of the Premises shall be taken
or condemned by any competent authority for any public use or purpose or if such
portion thereof shall be taken or condemned as shall materially change the
character of the Premises so as to prevent TENANT from using them in
substantially
10
<PAGE> 11
the same manner as theretofore used, the term hereby granted shall cease on the
day prior to the taking of possession by such authority or the day prior to
vesting of title in such authority, whichever first occurs, and an appropriate
pro rata portion of any rent paid in advance by TENANT shall be refunded.
If a portion of the Premises shall be condemned or taken, and if
such taking does not result in a material alteration in the character of the
Premises so as to prevent TENANT from using them in substantially the same
manner as theretofore used, then this Lease shall continue in effect, and any
damage to the Premises shall be repaired by LANDLORD. After the date taken,
TENANT is required to surrender possession of the portion taken and the rental
payable hereunder shall be reduced in proportion to the decrease in the fair
rental value of the Premises.
If all or a portion of the adjoining parking area shall be
condemned or taken so as to deprive TENANT of necessary parking or so as to in
some other way materially affect the TENANT's ability to conduct its business,
then TENANT may at its option cancel and terminate this Lease upon giving
LANDLORD notice within thirty (30) days of such taking. In the event TENANT
shall elect not to cancel and remain in possession and occupation of the
Premises, however, the terms and conditions of this Lease shall remain in full
force and effect.
The entire award of damages or compensation for a taking of the
Premises, whether such taking be in whole or in part, shall belong to and be the
property of LANDLORD, except for such compensation as may be made for TENANT's
moving or relocation expenses, TENANT's business interruption losses, and for
the taking of TENANT's trade fixtures, which compensation shall belong to and be
the property of TENANT.
If the Premises shall be taken or condemned by any governmental
authority for temporary use or occupancy, this Lease shall continue in full
force and effect without reduction or abatement of rent, and the rights of the
parties shall be
11
<PAGE> 12
unaffected by the other provisions of this Section. In the event of such
temporary taking, the entire award of damages in respect of the Premises shall
belong to TENANT; and LANDLORD assigns TENANT any and all interest it may have
in such award. To the extent TENANT is prevented by such temporary taking or
occupancy from fulfilling its obligations hereunder, TENANT's failure to do so
shall not be deemed a default under this Lease.
22. ESTOPPEL LETTERS: Either party hereto shall, at any time and
from time to time upon not less than ten (10) days prior written notice from the
other execute, acknowledge and deliver to the requesting party a statement in
writing certifying that this Lease is unmodified and in full force and effect
(or if modified, stating the nature of such modification and certifying that
this Lease, as so modified, is in full force and effect), and the dates to which
the rental and other charges are paid in advance, if any, and acknowledging that
there are not, to the certifying party's knowledge, any uncured defaults on the
part of the other party hereunder, and that no event has occurred that, by the
giving of notice or the passage of time or both, would constitute a default, or
specifying such defaults or events if they are claimed. Any such statement
requested by either party may be relied upon by any prospective purchaser or
encumbrancer of [the building or] the Premises. Failure of a party to deliver
such statement within such time shall be conclusive upon such party that this
Lease is in full force and effect, without modification, except as may be
represented by the requesting party, that there are no uncured defaults in the
requesting party's performance, and that not more than one (1) month rental has
been paid in advance.
23. LIENS: Nothing herein contained shall be construed as
authorizing TENANT to incur any mechanic's lien or liens against the Premises
for any work performed, labor, or other material furnished hereunder. If any
lien shall be filed against the interests of LANDLORD or of TENANT in the
Premises or asserted against any rent payable hereunder by reason of work,
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<PAGE> 13
labor, service or materials supplied or claimed to have been supplied on or to
the Premises at the request of, or with the permission of TENANT, or any
claiming under TENANT, TENANT shall, within thirty (30) days after notice of the
filing thereof, or the assertion thereof, against such rents, cause the same to
be discharged of record or effectively prevent the enforcement or foreclosure
thereof against the Premises of such rent by contest payment, deposit, bond,
order of Court or otherwise.
24. GOVERNING LAW: This Lease is governed by the laws of the
State of Tennessee and exclusive jurisdiction for any litigation or arbitration
arising out of same is in Maury County, Tennessee.
25. GENDER AND NUMBER/CAPTIONS: The words "LANDLORD" and
"TENANT", and the pronouns referring thereto, shall be construed singular or
plural, masculine, feminine or neuter as the facts warrant. The captions of the
provisions of this Lease are provided for convenience only and shall not limit
or extend the meaning or terms of any paragraph or section contained herein.
26. ENTIRE AGREEMENT: This Lease contains the entire agreement
between the parties, and any agreement hereafter made shall be ineffective to
change, modify or discharge it in whole or in part unless same is in writing and
signed by the party against whom enforcement of the change, modification or
discharge is sought. This Lease supersedes and voids all prior proposals,
letters, and agreements, oral or written. This Lease shall be interpreted and
construed in accordance with the laws of the State of Tennessee.
IN WITNESS WHEREOF, the parties have set their signatures, in
duplicate, on the day and date first above written.
-----------------------------------
Bertrand L. Taylor
LANDLORD
Office Master of Texas, Inc.
By_________________________________
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<PAGE> 14
STATE OF COLORADO
COUNTY OF ___________
Personally appeared before me, the undersigned, Bertrand L.
Taylor, with whom I am personally acquainted, and who acknowledged that he
executed the within instrument for the purposes therein contained.
WITNESS my hand, at office, this _____ day of February, 1998.
My commission expires:
______________________ ___________________________________
Notary Public
STATE OF COLORADO
COUNTY OF ____________
Personally appeared before me, the undersigned,
____________________________, with whom I am personally acquainted, and who
acknowledged that he executed the within instrument for the purposes therein
contained, and who further acknowledged that he is the ___________________ of
Office Master of Texas, Inc., and is authorized by the makers to execute this
instrument on behalf of the makers.
WITNESS my hand, at office, this _____ day of February, 1998.
My commission expires:
______________________ ______________________________________
Notary Public
14
<PAGE> 1
EXHIBIT 10.10
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only,
May __, 1998, is made by and between David V. Homme and Mary B. Homme, Trustees
under Declaration of Trust dated June 17, 1976 ("Lessor") and Baron Homes, Inc.,
a California corporation ("Lessee"), (collectively the "Parties," or
individually a "Party").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 1612 South Cucamonga Avenue, Ontario, located in
the County of San Bernardino, State of California and generally described as a
concrete tilt-up building containing approximately 54,000 square feet and
approximately 7,900 square foot metal clad building on approximately 251, 577
square feet of land and an office building of approximately 4,500 square feet
located in the front of the 54,000 square foot building ("Premises"). These
buildings are located on Parcels B and C on the attached plot plan marked
Exhibit "A".
1.3 TERM: Five years ("Original Term") commencing _______, 1998
("Commencement Date") and ending January 31, 1997 ("Expiration Date"). (See
Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: Not applicable.
1.5 BASE RENT: $13,500.00 per month payable on the first day of each
month commencing on February 1, 1992 and ending on May 31, 1994; and $15,525.00
per month commencing on June 1, 1994 and ending on January 31, 1997 ("Base
Rent"). (See Paragraph 4 for further provisions.)
1.6 BASE RENT UPON EXECUTION: $13,500.00 as payment of Base Rent for the
period from the Commencement Date through February 29, 1992.
1.7 SECURITY DEPOSIT: $15,000 ("Security Deposit") to be paid at time of
execution. (See Paragraph 5 for further provisions.)
1.8 PERMITTED USE: The premises shall be used and occupied by Lessee for
sale, service and manufacturing of factory built housing and for no other
purpose. (See Paragraph 6 for further provisions.)
1.9 INSURING PARTY: Lessor is the "Insuring Party." (See Paragraph 8 for
further provisions.)
2. PREMISES.
2.1 LETTING: Lessor hereby leases to Lessee the premises as is.
2.2 CONDITION: Lessor shall deliver the Premises to Lessee as is on the
Commencement Date.
2.3 Lessor does not warrant that any of the following were built to code
or a permit taken out for such work: a) metal canopy; b) offices over the
toilets; or c) two story offices inside the building. If it is required by any
governmental agency that these be demolished or removed the rent payments will
remain the same.
2.4 ACCEPTANCE OF PREMISES: Lessee hereby acknowledges: (a) that it has
been advised by the Lessor and Lessee's Broker to satisfy itself with respect to
the condition of the Premises (including but not limited to the electrical, fire
sprinkler systems, fire department requirements, building department
requirements, security, environmental aspects, compliance with Applicable Law,
as defined in Paragraph 6.3) and the present and future suitability of the
Premises for Lessee's intended use, (b) that Lessee has made such investigation
as it deems
<PAGE> 2
necessary with reference to such matters and assumes all responsibility therefor
as the same relate to Lessee's occupancy of the Premises and/or the term of this
Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any
oral or written representations or warranties with respect to the said matters
other than as set forth in this Lease.
3. TERM.
3.1 TERM: The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION: If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this
Lease, however, (including but not limited to the obligations to pay Real
Property taxes and insurance premiums and to maintain the Premises) shall be in
effect during such period. Any such early possession shall not affect nor
advance the Expiration Date of the Original Term.
3.3 DELAY IN POSSESSION: If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is
specified, by the Commencement Date, Lessor shall not be subject to any
liability therefor, or shall such failure affect the validity of this Lease, or
the obligations of Lessee hereunder, or extend the term hereof, but in such
case, Lessee shall not, except as otherwise provided herein, be obligated to pay
rent or perform any other obligation of Lessee under the terms of this Lease
until Lessor delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to Lessor
within ten (10) days thereafter, cancel this Lease, in which event the Parties
shall be discharged from all obligation hereunder; provided, however, that if
such written notice by Lessee is not received by Lessor within said ten (10) day
period, Lessee's right to cancel this Lease shall terminate and be of not
further force or effect. Except as may be otherwise provided, and regardless of
when the term actually commences, if possession is not tendered to Lessee when
required by this Lease and Lessee does not terminate this Lease, as aforesaid,
the period free of the obligation to pay Base Rent, if any, that Lessee would
otherwise have enjoyed shall run from the date of delivery of possession and
continue for a period equal to what Lessee would otherwise have enjoyed under
the terms hereof, but minus any days of delay caused by the acts, changes or
omissions of Lessee.
4. RENT.
4.1 BASE RENT: Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States, without offset or deduction, on or before
the day on which it is due under the terms of this Lease. Base Rent and all
other rent and charges for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated based upon the actual number
of days of the calendar month involved. Payment of Base Rent and other charges
shall be made to Lessor at its address stated herein or to such other persons or
at such other addresses as Lessor may from time to time designate in writing to
Lessee.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall, within ten (10) days after written request therefor,
deposit moneys with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Lessor shall not be required to keep all or
any part of the
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<PAGE> 3
Security Deposit separate from its general accounts. Lessor shall, at the
expiration or earlier termination of the term hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest herein), that portion of the Security
Deposit not used or applied by Lessor. Unless otherwise expressly agreed in
writing by Lessor, no part of the Security Deposit shall be considered to be
held in trust, to bear interest or other increment for its use, or to be
prepayment for any moneys to be paid by Lessee under this Lease.
6. USE.
6.1 USE: Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring premises or properties.
6.2 HAZARDOUS SUBSTANCES:
(a) REPORTABLE USES REQUIRE CONSENT: The term "Hazardous Substance"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph
6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or
below ground storage tank, storage vessel, storage drum or storage container,
(ii) the generation, possession, storage, use, transportation, or disposal of a
Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with, any
governmental authority. Reportable Use shall also include Lessee's being
responsible for the presence in, on or about the Premises of a Hazardous
Substance with respect to which any Applicable Law requires that a notice be
given to persons entering or occupying the Premises or neighboring properties.
Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but
in compliance with all Applicable Law, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of Lessee's
business permitted on the Premises, so long as such use is not a Reportable Use
and does not expose the Premises or neighboring properties to any meaningful
risk of contamination or damage or expose Lessor to any liability therefor. In
addition, Lessor may (but without any obligation to do so) condition its consent
to the use or presence of any Hazardous Substance, activity or storage tank by
Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its
reasonable discretion, deems necessary to protect itself, the public, the
Premises and the environment against damage, contamination or injury and/or
liability therefrom or therefor, including, but not limited to, the installation
(and removal on or before Lease expiration or earlier termination) of reasonably
necessary protective modifications to the Premises (such as concrete
encasements) and/or the deposit of an additional Security Deposit under
Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR: If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance, or a condition involving or resulting
from same, has come to be located in, on, under or about the Premises, other
than as previously consented to by Lessor, Lessee shall immediately give written
notice of such fact to Lessor, Lessee shall immediately give written notice of
such fact to Lessor. Lessee shall also immediately give Lessor a copy of any
statement, report, notice, registration, application, permit, business plan,
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<PAGE> 4
license, claim, action or proceeding given to, or received from, any
governmental authority or private party, or persons entering or occupying the
Premises, concerning the presence, spill, release, discharge of, or exposure to,
any Hazardous Substance or contamination in, on, or about the Premises,
including but not limited to, all such documents as may be involved in any
Reportable Uses involving the Premises.
(c) INDEMNIFICATION: Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees and lenders, if any, and the Premises,
harmless from and against any and all loss of rents and/or damages, liabilities,
judgments, costs, claims, liens, expenses, penalties, permits and attorney's and
consultant's fees arising out of or involving any Hazardous Substance or storage
tank, storage vessel, storage drum or storage container brought onto the
Premises by or for Lessee or under Lessee's control. Lessee's obligations under
this Paragraph 6 shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created or
suffered by Lessee, and the cost of investigation (including consultants' and
attorneys' fees and testing), removal, remediation, restoration and/or abatement
thereof, or of any contamination therein involved, and shall survive the
expiration or earlier termination of this Lease. No termination, cancellation or
release agreement entered into by Lessor and Lessee shall release Lessee from
its obligations under this Lease with respect to Hazardous Substances or storage
tanks, storage vessels, storage drums or storage containers, unless specifically
so agreed by Lessor in writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH LAW: Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "APPLICABLE LAW," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits and the requirements of
any applicable government agencies, fire insurance underwriter or rating bureau,
relating in any manner to the Premises (including but not limited to matters
pertaining to (i) industrial hygiene, (ii) environmental conditions on, in,
under or about the Premises, including soil and groundwater conditions, and
(iii) the use, generation, manufacture, production, installation, maintenance,
removal, transportation, storage, spill or release of any Hazardous Substance or
storage tank), now in effect or which may hereafter come into effect, and
whether or not reflecting a change in policy from any previously existing
policy. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including,
but not limited to, permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Law specified
by Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving failure by
Lessee or the Premises to comply with any Applicable Law.
6.4 INSPECTION; COMPLIANCE: Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the
case of an emergency, and otherwise at reasonable times for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease and all Applicable Law (as defined in Paragraph 6.3), and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
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<PAGE> 5
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES, FIRE
EXTINGUISHERS AND ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS:
(a) Subject to the provisions of Paragraphs 7.2 (Lessor's
obligations to repair), 9 (damage and destruction), and 14 (condemnation),
Lessee shall, at Lessee's sole cost and expense and at all times, keep the
Premises (including the structural and non-structural aspects thereof) and every
par thereof in good order, condition and repair (whether or not such portion of
the Premises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including, without limiting the generality
of the foregoing, all equipment or facilities serving the Premises, such as
plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, fire sprinkler and/or standpipe and hose or other automatic fire
extinguishing system, including fire alarm and/or smoke detection systems and
equipment, fire hydrants, fixtures, walls (interior and exterior), foundations,
ceilings, roofs, floors, windows, doors, plate glass, skylights, driveways,
parking lots, fences, retaining walls, signs, sidewalks and parkways located in,
on, about, or adjacent to the Premises. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises, the elements surrounding same, or neighboring
properties, that was caused or materially contributed to by Lessee, or
pertaining to or involving any Hazardous Substance and/or storage tank brought
onto the Premises by or for Lessee or under its control. Lessee, in keeping the
Premises in good order, condition and repair, shall exercise and perform good
maintenance practices. Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvements thereon or a part thereof in good order, condition and state of
repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contracts, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation equipment
and (ii) fire sprinkler and/or standpipe and hose or other automatic fire
extinguishing systems, including fire alarm and/or smoke detection, and/or
hand-held fire extinguishers (with inspections of same at least one time a year
or as required; and (iii)roof coverage and drainage maintenance; (vi) asphalt
and parking lot maintenance.
7.2 LESSOR'S OBLIGATIONS: Except for the warranties and agreements of
Lessor contained in Paragraphs 9 (relating to destruction of the Premises) and
14 (relating to condemnation of the Premises), it is intended by the Parties
hereto that Lessor have no obligation, in any manner whatsoever, to repair and
maintain the Premises, the improvements located thereon, or the equipment
therein, whether structural or non-structural, all of which obligations are
intended to be that of the Lessee under Paragraph 7.1 hereof. It is the
intention of the Parties that the terms of this Lease govern the respective
obligations of the Parties as to maintenance and repair of the Premises. Lessee
and Lessor expressly waive the benefit of any statute now or hereafter in effect
to the extent it is inconsistent with the terms of this Lease with respect to,
or which affords Lessee the right to make repairs at the expense of Lessor or to
terminate this Lease by reason of any needed repairs.
7.3 UTILITY INSTALLATION; TRADE FIXTURES; ALTERATIONS:
(a) DEFINITIONS; CONSENT REQUIRED: The term "UTILITY INSTALLATIONS"
is used in this Lease to refer to all carpeting, window coverings, air lines,
power panels, electrical distribution, security, fire protection systems,
communication systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing, and fencing in, on or about the Premises. The
term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be
removed without doing material damage to the Premises. The term "ALTERATIONS"
shall mean any modification of the improvements on the Premises from that which
are provided by Lessor under
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<PAGE> 6
the terms of this Lease, other than Utility Installations or Trade Fixtures,
whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY
INSTALLATIONS" are defined as Alterations and/or Utility Installations made by
Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee
shall not make any Alterations or Utility Installations in, on, under or about
the Premises without Lessor's prior written consent. Lessee may, however, make
non-structural Utility Installations to the interior of the Premises (excluding
the roof). Lessee is not allowed to cut holes in the walls or roof, put anything
on the roof, or install any lift system or hang anything on the roof, roof
structures, panelized system, beams, columns or walls without first receiving
written permission and approval from one of the following: John A. Alexander
Company (General Contractor) or one of these engineering firms: Oldham &
Erickson Engineering or Brandow & Johnson, whichever is appropriate. All
expenses incurred by the Lessor in reviewing this request for approval shall be
paid by Lessee.
(b) CONSENT: Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with proposed detailed plans and
specifications, including weights/loads. Each page of these plans and
specifications must have the signature and stamp of a California-licensed
architect or engineer. All consents given by Lessor, whether by virtue of
Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned
upon: (i) Lessee's acquiring all applicable permits required by governmental
authorities, (ii) the furnishing of copies of such permits together with a copy
of the plans and specifications for the Alteration or Utility Installation to
Lessor prior to commencement of the work thereon, and (iii) the compliance by
Lessee with all conditions of said permits in a prompt and expeditious manner.
Any Alterations or Utility Installation s by Lessee during the term of this
lease shall be done in a good and workmanlike manner, with good and sufficient
materials, using 5/8" drywall, and in compliance with all Applicable Law. Lessee
shall promptly upon completion thereof furnish Lessor with as-built plans and
specifications therefor.
(c) INDEMNIFICATION: Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanics' or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility in or on the Premises as provided by
law. If Lessee shall, in good faith, contest the validity of any lien, claim or
demand, then Lessee shall, at its sole expense, defend and protect itself,
Lessor and the Premises against the same and shall pay and satisfy any such
adverse judgment that may be rendered thereon before the enforcement thereof
against the Lessor or the Premises.
7.4 OWNERSHIP; REMOVAL; SURRENDER AND RESTORATION:
(a) OWNERSHIP: Subject to Lessor's right to require their removal
or become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may, at any time and at its option, elect in writing to Lessee, to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain upon
and be surrendered by Lessee with the Premises.
(b) REMOVAL: Unless otherwise agreed in writing, Lessor may
require that any or all Lessee Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease, notwithstanding
their installation may have ben consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
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(c) SURRENDER/RESTORATION: Lessee shall surrender the Premises by
the end of the last day of the Lease term, option periods, hold-over periods, or
extensions, or any earlier termination, date, with all of the improvements,
parts and surfaces thereof clean and free of debris and in good operating order,
condition and state of repair, ordinary wear and tear excepted. "ORDINARY WEAR
AND TEAR" shall not include any damage or deterioration that would have been
prevented by good maintenance practice or by Lessee performing all of its
obligations under this Lease. Except as otherwise agreed or specified in writing
by Lessor, the Premises, as surrendered, shall include the Utility
Installations. The obligation of Lessee shall include the repair of any damage
occasioned by the installation, maintenance or removal of Lessee's Trade
Fixtures, furnishings, equipment, and Alterations and/or Utility Installations,
as well as the removal of any storage tank installed by or for Lessee, and the
removal, replacement, or remediation of any soil, material or ground water
contaminated by Lessee, all as may then be required by Applicable Law and/or
good practice. Lessee's Trade Fixtures shall remain the property of Lessee and
shall be removed by Lessee subject to its obligation to repair and restore the
Premises per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE: The Lessor shall be the Insuring Party,
and, notwithstanding the fact that Lessor is the Insuring Party, Lessee shall
pay for the cost of all insurance required under this paragraph 8, except Lessee
shall not be required to pay for the cost attributable to liability insurance
carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy
periods commencing prior to or extending beyond the lease term shall be prorated
to correspond to the lease term. Payment shall be made by Lessee to Lessor
within ten (10) days following receipt of an invoice for any amount due.
8.2 LIABILITY INSURANCE:
(a) CARRIED BY LESSEE: Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessor (as an additional insured) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises Endorsement" and contain
the "amendment of the Pollution Exclusion: for damage caused by heat, smoke or
fumes from a hostile fire. The policy shall not contain any intra-insured
exclusions as between insured persons or organizations, but shall include
coverage for liability assumed under this Lease as an "insured contract" for the
performance of lessee's indemnity obligations under this Lese. The limits of
said insurance require by this Lease or as carried by lessee shall not, however,
limit the liability of Lessee nor relieve Lessee of any obligation hereunder.
All insurance to be carried by Lessee shall be primary to and not contributory
with any similar insurance carried by Lessor, whose insurance shall be
considered excess insurance only.
(b) CARRIED BY LESSOR: In the event Lessor is the Insuring Party,
Lessor may also maintain liability insurance described in Paragraph 8.2(a)
above, in addition to, and not in lieu of, the insurance required to be
maintained by Lessee. Lessee shall not be named as an additional insured therein
and such liability insurance shall be at Lessor's sole cost and expense.
8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE:
(a) BUILDING AND IMPROVEMENTS: The Insuring Party shall obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds
of trust or ground leases on the Premises ("Lender(s)"), insuring loss or
damages to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by Lenders, but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique
nature or age of the improvements involved, such latter amount is less than full
replacement cost. If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations shall be insured by
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Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available
and commercially appropriate, such policy or policies shall insure against all
risks of direct physical loss or damage (except the perils of flood and/or
earthquake unless required by a Lender), including coverage for any additional
costs resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or replacement
of any undamaged sections of the Premises required to be demolished or removed
by reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered cause of loss. Said policy or policies shall also
contain an agreed valuation provision in lieu of any coinsurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located. If such insurance coverage has a
deductible clause, the deductible amount shall not exceed $10,000 per
occurrence, and Lessee shall be liable for such deductible amount in the event
of an Insured Loss, as defined in Paragraph 9.1(c).
(b) RENTAL VALUE: The Insuring Party shall, in addition, obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full
rental and other charges payable by Lessee to Lessor under this Lease for one
(1) year (including all real estate taxes, insurance costs, and any scheduled
rental increases). Said insurance shall provide that in the event the Lease is
terminated by reason of an insured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one (1) full year's loss of rental
revenues from the date of such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be liable
for any deductible amount in the event of such loss.
(c) ADJACENT PREMISES: If the Premises are part of a larger
building, or if the Premises are part of a group of buildings owned by Lessor
which are adjacent to the Premises, the Lessee shall pay for any increase in the
premiums for the property insurance of such building or buildings if said
increase is caused by Lessee's acts, omissions, use or occupancy of the
Premises.
(d) TENANT'S IMPROVEMENTS: If the Lessor is the Insuring Party, the
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease. If Lessee is the Insuring Party, the policy
carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations
and Utility Installations.
8.4 LESSEE'S PROPERTY INSURANCE:
8.5 INSURANCE POLICIES: Insurance required hereunder shall be carried
with companies duly licensed to transact business in the state where the
Premises are located, and maintaining during the policy term a "General
Policyholders Rating" of at least a B+, V, or such other rating as may be
required by a Lender having a lien on the Premises, as set forth in the most
current issue of "Best's Insurance Guide." Lessee shall not do or permit to be
done anything which shall invalidate the insurance policies referred to in this
Paragraph 8. Lessor shall cause to be delivered to Lessee certified copies of
policies of insurance or certificates evidencing the existence and amounts of
such insurance required to be carried by Lessor under this Lease. Lessee shall
cause to be delivered to Lessor certified copies of policies of insurance or
certificates evidencing the existence and amounts of such insurance required to
be carried by Lessee under this Lease. If Lessee does not promptly within seven
(7) days provide Lessor with certified copies of or certificates evidencing the
existence of policies of insurance required hereunder, then Lessor may order
such insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand. If Lessor shall fail to procure and
maintain the insurance required to be carried by Lessor under this Paragraph 8,
then Lessee may, but shall not be required to, procure and maintain the same,
but at Lessee's expense.
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8.6 WAIVER OF SUBROGATION: Without affecting any other rights or
remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured against
under Paragraph 8. The effect of such releases and waivers of the right to
recover damages shall not be limited by the amount of insurance carried or
required, or by any deductibles applicable thereto.
8.7 INDEMNITY: Except for Lessor's negligence and/or breach of express
warranties Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees, or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well founded or not. In case any action or proceeding be brought against
Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor
shall defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY: Except as otherwise specifically
provided herein, Lessor shall not be liable for injury or damage to the person
or goods, wares, merchandise or other property of Lessee, Lessee's employees,
contractors, invitees, customers, or any other person in or about the Premises,
whether such damage or injury is caused by or results from fire, steam,
electricity, gas water or rain, or from the breakage, leakage, obstruction or
other defects of pipes, fire sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures, or from any other cause, whether the said
injury or damage results from conditions arising upon the Premises or upon other
portions of the building of which the Premises are a part, or from other sources
or places, and regardless of whether the cause of such damage or injury or the
means of repairing the same is accessible or not. Lessor shall not be liable for
any damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under
no circumstances be liable for injury to Lessee's business or for any loss of
income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS:
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, the repair cost of which damage or destruction is less
than 50% of the then Replacement Cost of the Premises immediately prior to such
damage or destruction, excluding from such calculation the value of the land and
Lessee Owned Alterations and Utility Installations.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "INSURED LOSS" shall mean damage or destruction to improvements
on the Premises, other than Lessee Owned Alterations and Utility Installations,
which was caused by an event required to be covered by the insurance described
in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits
involved.
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(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
9.2 PARTIAL DAMAGE - INSURED LOSS: If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall repair such damage (but not Lessee's
Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as
reasonably possible and this Lease shall continue in full force and effect;
provided, however, that Lessee shall, at Lessor's election, make the repair of
any damage or destruction the total cost to repair of which is $10,000 or less.
9.3 PARTIAL DAMAGE - UNINSURED LOSS: If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within ten (10) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION: Notwithstanding any other provision hereof, if a
Premise's Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate immediately following
the date of such Premise's Total Destruction. If the damage or destruction was
caused by a negligent or willful act of Lessee this Lease shall terminate in one
hundred twenty (120) days. In the event, however, that the damage or destruction
was caused by Lessee, Lessor shall have the right to recover Lessor's damages
from Lessee except as released and waived in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM: If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("Exercise Period"), (i) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If lessee duly exercises such option during
said Exercise period and provides lessor with funds (or adequate assurance
thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's
expense repair such damage as soon as reasonably possible and this lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during said Exercise Period, then Lessor may at
Lessor's option terminate this Lease as of the expiration of said sixty (60) day
period following the occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within ten (10) days after the expiration
of the Exercise Period, notwithstanding any term of provision in the grant of
option to the contrary.
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9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES:
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage - Insured Loss), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed one year), shall
be abated in proportion to the degree to which Lessee's use of the Premises is
impaired. Except for abatement of Base Rent, Real Property Taxes, insurance
premiums, and other charges, if any, as aforesaid, all other obligations of
Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such repair or
restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice, of Lessee's
election to terminate this Lease on a date not less than sixty (60) days
following the giving of such notice. If Lessee gives such notice to Lessor and
such Lenders and such repair or restoration is not commenced within thirty (30)
days after receipt of such notice, this Lease shall terminate as of the date
specified in said notice. If Lessor or a Lender commences the repair or
restoration of the Premises within thirty (30) days after receipt of such
notice, this Lease shall continue in full force and effect. "Commence" as used
in this Paragraph 9 shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever first occurs.
9.7 HAZARDOUS SUBSTANCE CONDITIONS: If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate
and remediate such Hazardous Substance Condition, if required, as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to investigate
and remediate such condition exceeds twelve (12) times the then monthly Base
Rent or $100,000, whichever is greater, give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
Hazardous Substance Condition of Lessor's desire to terminate this lese as of
the date sixty (60) days following the giving of such notice. In the event
Lessor elects to give such notice of Lessor's intention to terminate this Lease,
Lessee shall have the right, within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
investigation and remediation of such Hazardous Substance Condition totally at
Lessee's expense and without reimbursement from Lessor except to the extent of
an amount equal to twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater. Lessee shall provide Lessor with the funds required of
Lessee or satisfactory assurance thereof within thirty (30) days following
Lessee's said commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such investigation and remediation
as soon as reasonably possible and the required funds are available. If Lessee
does not give such notice and provide the required funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination. If a Hazardous Substance Condition
occurs for which Lessee is not legally responsible, there shall be abatement of
Lessee's obligations under this lese to the same extent s provided in Paragraph
9.6(a) for a period of not to exceed twelve months.
9.8 TERMINATION - ADVANCE PAYMENTS: Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit
as has not been or is not then required to be, used by Lessor under the terms of
this Lease.
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9.9 WAIVE STATUTES: Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES:
(a) Lessee shall reimburse Lessor for all Real Property Taxes (as
defined in Paragraph 10.2) which are applicable to the Premises during the term
of this Lease. All such payments shall be made by Lessee to Lessor within ten
(10) days following receipt of an invoice for any amount due. If any such taxes
to be paid by Lessee shall cover any period of time prior to or after the
expiration or earlier termination of the tern hereof, Lessee's share of such
taxes shall be equitably prorated to cover only the period of time within the
tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for
any overpayment after such proration.
10.2 DEFINITION OF "REAL PROPERTY TAXES:" As used herein, the term "Real
Property Taxes" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom and/or Lessor's
business of leasing the Premises. The term "Real Property Taxes" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in Applicable Law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
this Lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties.
10.3 JOINT ASSESSMENT: If the Premises are not separately assessed,
Lessee's liability shall be a equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive. At this time, the Lessee's portion shall be sixty-eight
percent (68%) of the Real Property Taxes.
10.4 PERSONAL PROPERTY TAXES: Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. If any of
Lessee's said personal property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days
after receipt of a written statement together with a copy of the tax invoice,
setting forth the taxes applicable to Lessee's property. Lessee is to pay all
personal property taxes.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.
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12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED:
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"assignment") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
forty-nine percent (49%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction,
or series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of the execution
by Lessor of this Lease or at the time of the most recent assignment to which
Lessor has consented, or as it exists immediately prior to said transaction or
transactions constituting such reduction, at whichever time said Net Worth of
Lessee was or is greater, shall be considered an assignment of this Lease by
Lessee to which Lessor may reasonably withhold its consent. "NET WORTH OF
LESSEE" for purposes of this Lease shall be the net worth of Lessee (excluding
any guarantors) established under generally accepted accounting principles
consistently applied.
(d) An assignment or subletting of Lessee's interest in this
Lease without Lessor's specific prior written consent shall, at Lessor's option,
be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a noncurable Breach, Lessor
shall have the right to either: (i) terminate this Lease, or (ii) upon thirty
(30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to
fair market value or one hundred ten percent (110%) of the Base Rent then in
effect, whichever is greater. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such breach and market value
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
(without the Lease being considered an encumbrance or any deduction for
depreciation or obsolescence, and considering the Premises at its highest and
best use and in good condition), or one hundred ten percent (100%) of the price
previously in effect, whichever is greater, (ii) any index-oriented rental or
price adjustment formulas contained in this Lease shall be adjusted to require
that the base index be determined with reference to the index applicable to the
time of such adjustment, and (iii) any fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased in the same ratio as the new
market rental bears to the Base Rent in effect immediately prior to the market
value adjustment.
(e) Any mortgage obligation, lien or loan, whether recorded or
not, obtained or entered into by Lessee shall take a secondary position to any
and all obligations and requirements of this Lease.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
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(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the sublessee.
However, Lessor may consent to subsequent assignments or any amendments or
modifications thereto without notifying Lessee or anyone else liable on the
Lease or sublease and without obtaining their consent, and such action shall not
relieve such persons from liability under this Lease or sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
anyone else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to, the intended use
and/or required modification of the Premises, if any, together with all
necessary documents and accompanied with a nonrefundable deposit of $1,000 or
ten percent (10%) of the current monthly Base Rent, whichever is greater, as
reasonable consideration for Lessor's considering and processing the request for
consent.. Lessee shall furnish signed balance sheets, income statements, and tax
returns for the proposed assignee or sublessee, for the past three (3) years,
certified by proposed assignee or sublessee to be true and correct. Lessee
agrees to provide Lessor with such other or additional information and/or
documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed,
for the benefit of Lessor, to have assumed and agreed to conform and comply with
each and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING: The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of this or any
other assignment of such sublease to Lessor, nor by reason of the collection of
the rents from a sublease, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other
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charges due and to become due under the sublease. Sublessee shall rely upon any
such statement and request from Lessor and shall pay such rents and other
charges to Lessor without any obligation or right to inquire as to whether such
Breach exists and notwithstanding any notice from or claim from Lessee to the
contrary. Lessee shall have no right or claim against said sublessee, or, until
the Breach has been cured, against Lessor, for any such rents and other charges
so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior Defaults
or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH: A "Default" is defined as a failure by the Lessee
to observe, comply with or perform any of the terms, covenants, conditions or
rules applicable to Lessee under this Lease. A "Breach" is defined as the
occurrence of any one or more of the following Defaults, and, where a grace
period for cure after notice is specified herein, the failure by Lessee to cure
such Default prior to the expiration of the applicable grace period, and shall
entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance required under this lease, or the failure of Lessee to
fulfill any obligation under this Lease which endangers or threatens life or
property, where such failure continues for a period of five (5) days following
written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable Law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
or (vi) the execution of any document requested under Paragraph 42 (easements),
or (vii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice by or on behalf
of Lessor Lessee.
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(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease that are to be observed, complied with or performed by
Lessee, other than those described in subparagraphs (a), (b) or (d), above,
where such Default continues for a period of thirty (30) days after written
notice thereof by or on behalf of Lessor to Lessee; provided, however, that if
the nature of Lessee's Default is such that more than thirty (30) days are
reasonably required for its cure, then it shall not be deemed to be a Breach of
this Lease by Lessee if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making
by Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. ss.101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this subparagraph (e) is contrary to any Applicable
Law, such provision shall be of no force or effect, and not affect the validity
of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee hereunder was materially false.
13.2 REMEDIES: If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its option,
may require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Default or Breach of this Lease shall not waive Lessor's
right to recover damages under this Paragraph. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve therein the right to recover all
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or any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under subparagraphs 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such
case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and
under the unlawful detainer statute shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two such grace periods shall constitute both an unlawful detainer
and a Breach of this Lease entitling Lessor to the remedies provided for in this
Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's Breach
and abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH: Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions," shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, as any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph shall not be deemed a waiver by Lessor of the provisions of this
Paragraph unless specifically so stated in writing by Lessor at the time of such
acceptance.
13.4 LATE CHARGES: Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by the Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
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13.5 BREACH BY LESSOR: Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by the holders of any ground lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days after such notice
are reasonably required for its performance, then Lessor shall not be in breach
of this Lease if performance is commenced within such thirty (30) day period and
thereafter diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the land area
not occupied by any building, is taken by condemnation, Lessee may, at Lessee's
option, to be exercised in writing ten (10) days after Lessor shall have given
Lessee written notice of such taking (or in the absence of such notice, within
ten (10) days after the condemning authority shall have taken possession)
terminate this Lease as of the date the condemning authority takes such
possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
floor area of the Premises. No reduction of Base Rent shall occur if the only
portion of the Premises taken is land on which there is no building. Any award
for the taking of all or any part of the Premises under the power of eminent
domain or any payment made under threat of the exercise of such power and shall
be the property of Lessor, whether such award shall be made as compensation for
diminution in value of the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any
compensation separately awarded to Lessee for Lessee's relocation expenses
and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall promptly to the extent
of its net severance damage received, over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.
15. BROKER'S FEE. No Brokers are named in Paragraph 1.10 and there are no
procuring causes of this Lease.
16. TENANCY STATEMENT.
16.1 Each Party (as "Responding Party") shall within ten (10) days after
written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "TENANCY STATEMENT" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.
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17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises. In the
event of a transfer of Lessor's title or interest in the Premises or in this
Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit)
any unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15, upon such transfer or assignment
and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lese thereafter to be performed by the Lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the Lessor
shall be binding only upon the Lessor as herein above defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received within thirty (30) days
following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease and all
exhibits and addenda attached hereto contain all agreements between the Parties
with respect to any matter mentioned herein, and no other prior or
contemporaneous agreement or understanding shall be effective. Lessor and Lessee
each represents and warrants to the Brokers that it has made, and is relying
solely upon, its own investigation as to the nature, quality, character and
financial responsibility of the other party to this Lease and as to the nature,
quality and character of the Premises. Brokers have no responsibility with
respect thereto or with respect to any Default or Breach hereof by either Party.
23. NOTICES.
23.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier service) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail or overnight courier, with postage prepaid, and shall be deemed
sufficiently given if served in a manner specified in this Paragraph 23. The
addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for the purpose of mailing or delivering notices to
Lessee. A copy of all notices required or permitted to be given to Lessor
hereunder shall be concurrently transmitted to such party or parties at such
addresses as Lessor may from time to time hereafter designate by written notice
to Lessee.
23.2 Any notices sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If notice is received on a
Saturday, Sunday or legal holiday, it shall be deemed received on the next
business day. All notices sent must be evidenced by a signed receipt from the
recipient.
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24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any preceding Default or
Breach by Lessee of any provision hereof, other than the failure of Lessee to
pay the particular rent so accepted.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. HOLDING OVER. If Lessee remains in possession of the Premises or any
part thereof after the expiration of the term hereof, such occupancy shall be a
quarter-to-quarter tenancy upon all of the provisions of this Lease pertaining
to the obligations of Lessee, except that the rent payable shall be one hundred
fifty percent (150%) of the rent payable immediately preceding the termination
date of this Lease, and all options, if any, granted under the terms of this
Lease shall be deemed terminated and be of no further effect during said
quarter-to-quarter tenancy.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION: This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 ATTORNMENT: Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior Lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior Lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
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30.3 NON-DISTURBANCE: With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the
Lender that Lessee's possession and this Lease, including any Options granted
hereby, will not be disturbed so long as Lessee is not in Breach hereof and
attorns to the record owner of the Premises.
30.4 SELF-EXECUTING: Subject to Paragraph 30.3 above, the agreements
contained in this Paragraph 30 shall be effective without the execution of any
further documents; provided, however, that, upon written request from Lessor or
a Lender in connection with a sale, financing or refinancing of the Premises,
Lessee and Lessor shall execute such further writings as may be reasonably
required to separately document any such subordination or non-subordination,
attornment and/or non-disturbance agreement as is provided for herein, subject
to Lessee receiving the non-disturbance agreement as provided in Paragraph 30.3
above.
31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding
to enforce the terms hereof or declare rights hereunder, the Prevailing Party
(as hereafter defined) or Broker in any such proceeding, action, or appeal
thereon, shall be entitled to reasonable attorney's fees. Such fees may be
awarded in the same suit or recovered in a separate suit, whether or not such
action or proceeding is pursued to decision or judgment. The term, "Prevailing
Party" shall include, without limitation, a Party who substantially obtains or
defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party of its claim or
defense. The attorney's fees award shall not be computed in accordance with any
court fee schedule, but shall be such as to fully reimburse all attorney's fees
reasonably incurred. Lessor shall be entitled to reasonable attorney's fees,
costs and expenses incurred in the preparation and service of notices of Default
and consultations in connection therewith, whether or not a legal action is
subsequently commenced in connection with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred twenty (120) days of the term
hereof place on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding, anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business
provided that such signs are not larger than four (4) feet in width by eight (8)
feet in length. The installation of any sign on the Premises by or for Lessee
shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility
Installations, Trade Fixtures and Alterations).
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
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36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to an
act by or for the other Party, such consent shall not be unreasonably withheld
or delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a
condition to considering any such request by Lessee, require that the cost
Lessor will incur shall be refunded to Lessee without interest. Lessor's consent
to any act, assignment of this Lease or subletting of the Premises by Lessee
shall not constitute an acknowledgment that no Default or Breach by Lessee of
this Lease exists, nor shall such consent be deemed a waiver of any then
existing Default or Breach, except as may be otherwise specifically stated in
writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. GUARANTOR.
37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11,
the form of the guaranty to be executed by each such Guarantor shall be in the
form most recently published by the American Industrial Real Estate Association,
and each said Guarantor shall have the same obligations as Lessee under this
Lease, including but not limited to the obligation to provide the Tenancy
Statement and information called for by Paragraph 16.
37.2 It shall constitute a Default of the Lessee under this Lease if any
such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a)
evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signatures of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Lessor (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises
and the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION: As used in this Paragraph 39 the word "Option" has the
following meaning: the right or option to extend the term of this Lease or to
renew this Lease.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE: Each Option granted to Lessee
in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof,
and cannot be voluntarily or involuntarily assigned or exercised by any person
or entity other than said original Lessee while the original Lessee is in full
and actual possession of the Premises and without the
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intention of thereafter assigning or subletting. The Options, if any, herein
granted to Lessee are not assignable, either as a part of an assignment of this
Lease or separately or apart therefrom, and no Option may be separated from this
Lease in any manner, by reservation or otherwise.
39.3 MULTIPLE OPTIONS: In the event that Lessee has any multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options to extend or renew this Lease has been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS:
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provisions in the grant of Option to the contrary (i) during
the period commencing with the giving of any notice of Default under Paragraph
13.1 and continuing until the noticed Default is cured, or (ii) during the
period of time any monetary obligation due Lessor from Lessee is unpaid.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, care and cleanliness of the ground, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred in
connection therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement, rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represent and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
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<PAGE> 24
46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.
This Lease shall become binding upon Lessor and Lessee only after being fully
executed by Lessor and Lessee and upon receipt by Lessor of the initial rent,
security deposit and other consideration to be paid by Lessee upon execution of
this Lease.
47. PROPERTY OWNED BY LESSOR. The following is a listing of property owned
by the lessor: Telephone system, two air conditioning units that service the
office building, seven bridge cranes with rails, one jib crane, built-in desks,
shelves and cabinets in the office building, one spray booth, an one dust
collector system. This property is being turned over to Lessee in excellent
working condition and it is the responsibility of the Lessee to maintain the
property and return the property in excellent condition.
48. AMENDMENTS: This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's rights or obligations hereunder, Lessee agrees to
make such reasonable non-monetary modifications to this Lease as may be
reasonably required by an institutional, insurance company, or pension plan
Lender in connection with the obtaining of normal financing or refinancing of
the property of which the Premises are a part.
49. MULTIPLE PARTIES: Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
50. ROOF ACCESS. With the exception of the following contractors, air
conditioning contractors, electrical contractors, and roof/skylight maintenance
companies employed pursuant to Paragraph 7.1 of this Lease, no one else is
allowed to get on the roof of the building without first receiving Lessor's
prior written permission.
51. OPTION TO EXTEND.
(a) Lessor hereby grants to Lessee the option to extend the term of
this Lease for a five (5) year period (the "Option Period") commencing when the
prior term expires upon each and all of the following terms and conditions:
(i) Lessee gives to Lessor, and Lessor actually receives, on a
date which is prior to the date that the Option Period would commence (if
exercised) by at least six (6) and not more than nine (9) months, a written
notice (in accordance with the provisions of Paragraph 23) of the exercise of
this option to extend this Lease for said additional term, time being of the
essence. If said notification of the exercise of this option to extend is not so
given and received, this option shall automatically expire;
(ii) The provisions of Paragraph 39, including the provision
relating to default of Lessee set forth in Paragraph 39.4 of this Lease are
conditions of this option to extend;
(iii) All of the terms and conditions of this Lease except
where specifically modified by this option shall apply;
(iv) Subject to increases pursuant to Paragraph 52, the monthly
Base Rent for each month of the Option Period shall be calculated as follows:
(a) As used herein, the term "C.P.I." shall mean the
Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of
Labor for Urban Wage Earners and Clerical Workers, Los
Angeles-Anaheim-Riverside, California (1982-84=100), "All Items," herein
referred to as "C.P.I."
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<PAGE> 25
(b) The rental amount of $15,525 shall be multiplied by a
fraction the numerator of which shall be the C.P.I. of the calendar month that
is three (3) months prior to the month during which the Option Period commences
and the denominator of which shall be the C.P.I. for the calendar month that is
three (3) months prior to the month in which the original term commenced.
Subject to increases pursuant to Paragraph 52, the sum calculated shall
constitute the new monthly Base Rent during the Option Period, but, in no event,
shall such new monthly Base Rent be less than the Base Rent payable for the
month immediately preceding the commencement of the Option Period.
(c) Pending receipt of the required C.P.I. and
determination of the actual adjustment, Lessee shall pay an estimated adjusted
rental, as reasonably determined by Lessor by reference to the then available
C.P.I. information. Upon notification of the actual adjustment after publication
of the required C.P.I., any overpayment shall be credited against the next
installment of rent due, and any underpayment shall be immediately due and
payable by Lessee. Lessor's failure to request payment of an estimated or actual
rent adjustment shall not constitute a waiver of the right to any adjustment
provided for in the Lease or this addendum.
(d) In the event the compilation and/or publication of the
C.P.I. shall be transferred to any other governmental department or bureau or
agency or shall be discontinued, then the index most nearly the same as the
C.P.I. shall be used to make such calculation. In the event that Lessor and
Lessee cannot agree on such alternative index, then the matter shall be
submitted for decision to the American Arbitration Association in accordance
with the then rules of said association and the decision of the arbitrators
shall be binding upon the Parties. The cost of said arbitrators shall be paid
equally by Lessor and Lessee.
52. OPTION. RENT ESCALATION. On the first day of the thirty-first month of
the Option Period, the monthly Base Rent calculated pursuant to Paragraph 51 of
this Lese shall be adjusted by increasing said rent by six percent (6%).
53. INTENTIONALLY OMITTED.
54. Amendments to Lease re Rent Adjustments
54.1 Upon the adjustment of the Base Rent payable as provided in this
Lease, the Parties shall immediately execute an amendment to this Lease stating
the new monthly rent payable. Lessor's failure to effectuate a rental adjustment
on the date provided for shall not be deemed a waiver of the right to make that
adjustment.
55. CONFIDENTIALITY.
55.1 Lessee shall not, without Lessor's prior written consent in each
instance, disclose, disseminate or release by any means or methods copies,
summaries or other reports concerning this Lease to parties other than legal
counsel.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS
OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE REAL
ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE COUNSEL AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE.
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The Parties hereto have executed this Lease at the place on the dates
specified above to their respective signatures.
LESSOR: LESSEE:
Executed at: Executed at:
_____________________________________ ______________________________________
on __________________________________ on ___________________________________
by LESSOR: by LESSEE:
DAVID V. HOMME & MARY B. HOMME, BARON HOMES, INC.
TRUSTEES under Declaration of Trust
dated June 17, 1976
By __________________________________ a _______________________ corporation
DAVID V. HOMME
By __________________________________ By ___________________________________
MARY B. HOMME Name Printed ______________________
Title______________________________
By ___________________________________
Name Printed ______________________
Title _____________________________
Address: ____________________________ Address: _____________________________
_____________________________________ ______________________________________
Tel. No. ____________________________ Tel. No. _____________________________
Title:_______________________________ Title: President
Address:_____________________________ Address: _____________________________
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EXHIBIT 10.11
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
(Do not use this form for Multi-Tenant Property)
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
March 27, 1997, is made by and between TOTH ENTERPRISES, a California general
partnership ("LESSOR") and RONFRAN INCORPORATED d/b/a STANDARD PACIFIC
INDUSTRIES, ("LESSEE"), (collectively the "PARTIES", or individually a "PARTY").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 9550 Hermosa Avenue, Rancho Cucamonga, located in
the County of San Bernardino, State of California and generally described as
(describe briefly the nature of the property) N/A ("PREMISES"). (See Paragraph 2
for further provisions.)
1.3 TERM: Five (5) years and 0 months ("ORIGINAL TERM") commencing March
27, 1997 ("COMMENCEMENT DATE") and ending March 31, 2002 ("EXPIRATION DATE").
(See Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE"). (See Paragraphs 3.2
and 3.3 for further provisions.)
1.5 BASE RENT: $20,000.00 per month ("BASE RENT"), payable on the first
day of each month commencing March 27, 1997. (See Paragraph 4 for further
provisions.)
If this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted.
1.6 BASE RENT PAID Upon the Commencement Date as Base Rent for the
period beginning on the Commencement Date.
1.7 SECURITY DEPOSIT: $24,000 ("SECURITY DEPOSIT"). (See Paragraph 5 for
further provisions.)
1.8 PERMITTED USE: Manufacturing of modular buildings and related
offices (See Paragraph 6 for further provisions.)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY" unless otherwise
stated herein. (See Paragraph 8 for further provisions.)
1.10 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by N/A ("GUARANTOR"). (See Paragraph 37 for further provisions.)
1.11 ADDENDA. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 50 through 54 and Exhibits all of which constitute a part of this
Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which Lessor
and Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
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2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system, lighting, air conditioning, heating, and
loading doors, if any, in the Premises, and all other non-structural portions of
the Premises, other than those constructed by Lessee, shall be in good operating
condition on the Commencement Date. If a non-compliance with said warranty
exists as of the Commencement Date, Lessor shall, except as otherwise provided
in this Lease, promptly after receipt of written notice from Lessee setting
forth with specificity the nature and extent of such non-compliance, rectify
same at Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within six (6) months after the Commencement
Date, correction of that non-compliance shall be the obligation of Lessee at
Lessee's sole cost and expense, unless such obligation is otherwise the
responsibility of Lessor as provided herein, and in such case shall be promptly
performed by Lessor at Lessor's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to
be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within six (6)
months following the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense, unless such
obligation is otherwise the responsibility of Lessor as provided herein, and in
such case shall be promptly performed by Lessor at Lessor's sole cost and
expense.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised to satisfy itself with respect to the condition of the Premises
(including but not limited to the electrical and fire sprinkler systems,
security, environmental aspects, compliance with Applicable Law, as defined in
Paragraph 6.3) and the present and future suitability of the Premises for
Lessee's intended use, (b) that Lessee has made such investigation as it deems
necessary with reference to such matters and assumes all responsibility therefor
as the same relate to Lessee's occupancy of the Premises and/or the term of this
Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any
oral or written representations or warranties with respect to the said matters
other than as set forth in this Lease, or as otherwise set forth in that certain
Stock Purchase Agreement dated as of December 6, 1996 by and among SPI Holdings,
Inc., Frank Toth and Ronald Toth, as amended (the "Stock Purchase Agreement"),
and the representations and warranties contained within the Stock Purchase
Agreement relating to the Premises are hereby incorporated by reference into
this Lease.
3. TERM. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
4. RENT.
4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States, without offset or deduction (except as
hereafter provided), on or before the day on which it is due under the terms of
this Lease. Base Rent and all other rent and charges for any period during the
term hereof which is for less than one (1) full calendar month shall be prorated
based upon the actual number of days of the calendar month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated herein
or to such other persons or at such other addresses as Lessor may from time to
time designate in writing to Lessee.
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5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall, within ten (10) days after written request therefor,
deposit moneys with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Lessor shall not be required to keep all or
any part of the Security Deposit separate from its general accounts. Lessor
shall, at the expiration or earlier termination of the term hereof and after
Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to
the last assignee, if any, of Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no part of the Security Deposit shall be considered
to be held in trust, to bear interest or other increment for its use, or to be
prepayment for any moneys to be paid by Lessee under this Lease.
6. USE.
6.1 USE Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring premises or properties. Lessor
hereby agrees to not unreasonably withhold or delay its consent to any written
request by Lessee, Lessee's assignees or subtenants, and by prospective
assignees and subtenants of the Lessee, its assignees and subtenants, for a
modification of said permitted purpose for which the Premises may be used or
occupied, so long as the same will not impair the structural integrity of the
improvements on the Premises, the mechanical or electrical systems therein, is
not significantly more burdensome to the Premises and the improvements thereon,
and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to
withhold such consent, Lessor shall, within five (5) business days, give a
written notification of same, which notice shall include an explanation of
Lessor's reasonable objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) USES REQUIRING CONSENT. The term "HAZARDOUS SUBSTANCE" as used
in this Lease shall mean any product, substance, chemical, material or waste
whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statue or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph
6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or
below ground storage tank, (ii) the generation, possession, storage,
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use, transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority. Reportable Use shall
also include Lessee's being responsible for the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, but in compliance with all Applicable Law, use any
ordinary and customary materials reasonably required to be used by Lessee in the
normal course of Lessee's business permitted on the Premises, so long as such
use is not a Reportable Use and does not expose the Premises or neighboring
properties to any meaningful risk of contamination or damage or expose Lessor to
any liability therefor. In addition, Lessor may (but without any obligation to
do so) condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefrom or therefor, including, but
not limited to, the installation (and removal on or before Lease expiration or
earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance, or a condition involving or resulting
from same, has come to be located in, on, under or about the Premises, other
than as previously consented to by Lessor, Lessee shall immediately give written
notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy
of any statement, report, notice, registration, application, permit, business
plan, license, claim, action or proceeding given to, or received from, any
governmental authority or private party, or persons entering or occupying the
Premises, concerning the presence, spill, release, discharge of, or exposure to,
any Hazardous Substance or contamination in, on, or about the Premises,
including but not limited to, all such documents as may be involved in any
Reportable Uses involving the Premises. If any Hazardous Substances in amounts
or otherwise in violation of any Applicable Law are discovered on the Premises
that were caused by Lessor, its agents, employees, contractors or invitees,
Lessor shall promptly cause such Hazardous Substances to be removed in
compliance with all Applicable Law at Lessor's sole cost and expense and shall
indemnify, defend and hold Lessee harmless in connection therewith. In the event
of a contamination not caused by Lessor, its agents, employees, contractors or
invitees, the terms of Paragraph 9.7 below shall govern.
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee, or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but
not be limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
investigation (including consultants's and attorney's fees and testing),
removal, remediation, restoration and/or abatement thereof, or of any
contamination therein involved, and shall survive the expiration or earlier
termination of this Lease. No termination, cancellation or release agreement
entered into by Lessor and Lessee shall release Lessee from its obligations
under this Lease. No termination, cancellation or release agreement entered into
by Lessor and Lessee shall release Lessee from its obligations under this Lease
with respect to Hazardous Substances or storage tanks, unless specifically so
agreed by Lessor in writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "APPLICABLE LAW" which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants,
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easements and restrictions of record, permits, the requirements of any
applicable fire insurance underwriter or rating bureau, and the recommendations
of Lessor's engineers and/or consultants, relating in any manner to the Premises
(including but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill or release of
any Hazardous Substance or storage tank), now in effect or which may hereafter
come into effect, and whether or not reflecting a change in policy from any
previously existing policy. Lessee shall, within twenty (20) days after receipt
of Lessor's written request, provide Lessor with copies of all documents and
information, including, but not limited to, permits, registrations, manifests,
applications, reports and certificates, evidencing Lessee's compliance with any
Applicable Law specified by Lessor, and shall immediately upon receipt, notify
Lessor in writing (with copies of any documents involved) of any threatened or
actual claim, notice, citation, warning, complaint or report pertaining to or
involving failure by Lessee or the Premises to comply with any Applicable Law.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the
case of an emergency, and otherwise at reasonable times during normal business
hours upon prior written notice for the purpose of inspecting the condition of
the Premises and for verifying compliance by Lessee with this Lease and all
Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or
consultants in connection therewith and/or to advise Lessor with respect to
Lessee's activities, including but not limited to the installation, operation,
use, monitoring, maintenance, or removal of any Hazardous Substance or storage
tank on or from the Premises. The costs and expenses of any such inspections
shall be paid by the party requesting same, unless a Default or Breach of this
Lease, violation of Applicable Law, or a contamination, caused or materially
contributed to by Lessee is found to exist or be imminent, or unless the
inspection is requested or ordered by a governmental authority as the result of
any such existing or imminent violation or contamination. In any such case,
Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may
be, for the costs and expenses of such inspections.
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty
as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.),
7.2 (Lessor's obligation to repair), 9 (damage and destruction) and 14
(condemnation), Lessee shall, at Lessee's sole cost and expense and at all
times, keep the Premises and every part thereof in good order, condition and
repair, and non-structural if such portion of the Premises requiring repairs, or
the means of repairing the same, are reasonably or readily accessible to Lessee,
and whether or not the need for such repairs occurs as a result of Lessee's use,
any prior use, the elements or the age of such portion of the Premises,
including, without limitation, the generality of the foregoing, all equipment or
facilities serving the Premises, such as plumbing, heating, air conditioning,
ventilating, electrical, lighting facilities, boilers, fired or unfired pressure
vessels, fire sprinkler and/or standpipe and hose or other automatic fire
extinguishing system, including fire alarm and/or smoke detection systems and
equipment, fire hydrants, fixtures, walls (interior and exterior),
non-structural portions of the roofs, floors, windows, doors, plate glass,
skylights, landscaping, driveways, parking lots, fences, retaining walls, signs,
sidewalks, and parkways located in, on, about, or adjacent to the Premises.
Lessee shall not cause or permit any Hazardous Substance to be spilled or
released in, on, under or about the Premises (including through the plumbing or
sanitary sewer system) and shall promptly, at Lessee's expense, take all
investigatory and/or remedial action reasonably recommended, whether or not
formally ordered or required, for the cleanup
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of any contamination of, and for the maintenance, security and/or monitoring of
the Premises, the elements surrounding same, or neighboring properties, that was
caused or materially contributed to by Lessee, or pertaining to or involving any
Hazardous Substance and/or storage tank brought onto the Premises by or for
Lessee or under its control. Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance practices.
Lessee's obligations shall include restorations, replacements or renewals when
necessary to keep the Premises and all improvements thereon or a part thereof in
good order, condition and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contracts, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation equipment
and (ii) fire sprinkler and/or standpipe and hose or other automatic fire
extinguishing systems, including fire alarm and/or smoke detection.
7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of
Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3
(relating to compliance with covenants, restrictions and building code), 9
(relating to destruction of the Premises) and 14 (relating to condemnation of
the Premises), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, the
improvements located thereon, or the equipment therein, whether structural or
non-structural, all of which obligations are intended to be that of the Lessee
under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of
this Lease govern the respective obligations of the Parties as to maintenance
and repair of the Premises. Lessee and Lessor expressly waive the benefit of any
statute now or hereafter in effect to the extent it is inconsistent with the
terms of this Lease with respect to, or which affords Lessee the right to make
repairs at the expense of Lessor or to terminate this Lease by reason of any
needed repairs. Notwithstanding anything to the contrary in this Paragraph 7 or
elsewhere in the Lease, Lessor shall keep, repair and maintain all structural
portions of the buildings and improvements on the Premises, including, without
limitation, structural walls and foundations in a good and operative condition
at its sole cost and expense, except where these structural elements have been
modified by Lessee, or its subtenants, employees or agents. Lessor shall also
make all repairs or replacement to any underground utility lines or pipes.
Lessor agrees to promptly commence any such necessary repairs, maintenance or
replacements to the above-referenced portions of the Premises upon receipt of a
written notice from Lessee of the need for such repairs, maintenance or
replacements. Notwithstanding the foregoing, any repairs, maintenance or
replacements necessitated by the negligence of Lessee, its agents or employees
shall be made by Lessor at the expense of Lessee, to the extent not covered by
insurance.
7.3 UTILITY INSTALLATION; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS"
is used in this Lease to refer to all carpeting, window coverings, air lines,
power panels, electrical distribution, security, fire protection systems,
communication systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing, and fencing in, on or about the Premises. The
term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be
removed without doing material damage to the Premises. The term "ALTERATIONS"
shall mean any modification of the improvements on the Premises from that which
are provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED
ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or
Utility Installations made by Lessee that are not yet owned by Lessor as defined
in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent. Lessee may, however, make non-structural Utility Installations to the
interior
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of the Premises (excluding the roof), as long as they are not visible from the
outside, do not involve puncturing, relocating or removing the roof or any
existing walls, and the cumulative cost thereof during the term of this Lease as
extended does not exceed Fifty Thousand dollars ($50,000.00).
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with proposed detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable
permits required by governmental authorities, (ii) the furnishing of copies of
such permits together with a copy of the plans and specifications for the
Alteration or Utility Installation to Lessor prior to commencement of the work
thereon, (iii) the compliance by Lessee with all conditions of said permits in a
prompt and expeditious manner. Any alterations or Utility Installations by
Lessee during the term of this Lease shall be done in a good and workmanlike
manner, with good and sufficient materials, and in compliance with all
Applicable Law, Lessee shall promptly upon completion thereof furnish Lesor with
plans and specifications therefor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanics' or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility in or on the Premises as provided by
law. If Lessee shall, in good faith, contest the validity of any lien, claim or
demand, then Lessee shall, at its sole expense defend and protect itself, Lessor
and the Premises against the same and shall pay and satisfy any such adverse
judgment that may be rendered thereon before the enforcement thereof against the
Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor in an amount equal to one and one-half
times the amount of such contested lien, claim or demand, indemnifying Lessor
against liability for the same, as required by law for the holding of the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorney's fees and cost in participating in such
action if Lessor shall decide it is to its best interest to do so.
7.4 OWNERSHIP; REMOVAL; SURRENDER AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal
or become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may, at any time and at its option, elect in writing to Lessee, to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain upon
and be surrendered by Lessee with the Premises.
(b) REMOVAL. Lessor may require the removal at any time of all or
any part of any Lessee Owned Alterations or Utility Installations made without
the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date, with
all of the improvements, parts and surfaces thereof clean and free of debris and
in good operating order, condition and state of repair, ordinary wear and tear
and damage from casualty (not caused or otherwise the obligation of Lessee to
repair as provided in Paragraph 9 below) and condemnation excepted. "ORDINARY
WEAR AND TEAR" shall not include any damage or deterioration that would have
been prevented by good maintenance practice or by Lessee performing all of its
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obligations under this Lease. Except as otherwise agreed or specified in writing
by Lessor, the Premises, as surrendered, shall include the Utility
Installations. The obligation of Lessee shall include the repair of any damage
occasioned by the installation, maintenance or removal of Lessee's Trade
Fixtures, furnishings, equipment, and Alterations and/or Utility Installations,
as well as the removal of any storage tank installed by or for Lessee, and the
removal, replacement, or remediation of any soil, material or ground water
contaminated by Lessee, all as may then be required by Applicable Law and/or
good service practice. Lessee's Trade Fixtures shall remain the property of
Lessee and shall be removed by Lessee subject to its obligation to repair and
restore the Premises per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is
the Insuring Party, Lessee shall pay for all insurance required under this
Paragraph 8 except to the extent of the cost attributable to liability insurance
carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy
periods commencing prior to, or extending beyond, the Lease term shall be
prorated to correspond to the Lease term. Payment shall be made by Lessee to
Lessor within ten (10) days following receipt of an invoice for any amount due.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee and Lessor (as an additional insured) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an occurrence basis
providing single limit coverage in an amount not less than $1,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises"
Endorsement and contain the "Amendment of the Pollution Exclusion" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not contain
any intra-insured exclusions as between insured persons or organizations, but
shall include coverage of liability assumed under this Lease as an "insured
contract" for the performance of Lessee's indemnity obligations under this
Lease. The limits of said insurance required by this Lease or as carried by
Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of
any obligation hereunder. All insurance to be carried by Lessee shall be primary
to and not contributory with any similar insurance carried by Lessor, whose
insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party,
Lessor may also maintain liability insurance described in Paragraph 8.2(a)
above, in addition to, and not in lieu of, the insurance required to be
maintained by Lessee. Lessee shall not be named as an additional insured therein
and such liability insurance shall be at Lessor's sole cost and expense.
8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds
of trust or ground leases on the Premises ("Lender(s)"), insuring loss or
damages to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by Lenders, but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique
nature or age of the improvements involved, such latter amount is less than full
replacement cost. If Lessor is the Insuring Party,
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however, Lessee Owned Alterations and Utility Installations shall be insured by
Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available
and commercially appropriate, such policy or policies shall insure against all
risks of direct physical loss or damage (except the perils of flood and/or
earthquake), including coverage for any additional costs resulting from debris
removal and reasonable amounts of coverage for the enforcement of any ordinance
or law regulating the reconstruction or replacement of any undamaged sections of
the Premises required to be demolished or removed by reason of the enforcement
of any building, zoning, safety or land use laws as the result of a covered
cause of loss. Said policy or policies shall also contain an agreed valuation
provision in lieu of any coinsurance clause, waiver of subrogation, and
inflation guard protection causing an increase in the annual property insurance
coverage amount by a factor of not less than the adjusted U.S. Department of
Labor Consumer Price Index for All Urban Consumers for the city nearest to where
the Premises are located. If such insurance coverage has a deductible clause,
the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall
be liable for such deductible amount in the event of an Insured Loss, as defined
in Paragraph 9.1(c).
(b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full
rental and other charges payable by Lessee to Lessor under this Lease for one
(1) year (including all real estate taxes, insurance costs, and any scheduled
rental increases). Said insurance shall provide that in the event the Lease is
terminated by reason of an insured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one (1) full year's loss of rental
revenues from the date of such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be liable
for any deductible amount in the event of such loss.
(c) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party, the
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease. If Lessee is the Insuring Party, the policy
carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations
and Utility Installations.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at is cost shall either by separate policy, or endorsement
to a policy already carried, maintain insurance coverage on all of Lessee's
personal property, Lessee Owned Alterations and Utility Installations in, on, or
about the Premises similar in coverage to that carried by the Insuring Party
under Paragraph 8.3. Such insurance shall be at least eighty percent (80%) of
the full replacement cost coverage. The proceeds from any such insurance shall
be used by Lessee for the replacement of personal property or the restoration of
Lessee Owned Alterations and Utility Installations except in the event of a
termination of this Lease and in such case Lessee shall retain the insurance
proceeds and shall not replace such personal property or restore the Lessee
Owned Alterations and Utility Installations. Lessee shall be the Insuring Party
with respect to the insurance required by this Paragraph 8.4 and shall provide
Lessor with written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least a B+, V, or other such rating as may be required by a Lender having
a lien on the Premises, as set forth in the most current issue of "Best's
Insurance Guide." Lessee shall not do or permit to be done anything which shall
invalidate the insurance policies referred to in this Paragraph 8. If Lessee is
the Insuring Party, Lessee shall cause to be delivered to Lessor certified
copies of policies of such
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insurance or certificates evidencing the existence and amounts of such insurance
with the insureds and loss payable clauses as required by this Lease. No such
policy shall be cancellable or subject to modification except after thirty (30)
days prior written notice to Lessor. Lessee shall, at least thirty (30) days
prior to the expiration of such policies, furnish Lessor with evidence of
renewals or "Insurance binders" evidencing renewal thereof, or Lessor may order
such insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to
procure and maintain the insurance required to be carried by the Insuring Party
under this Paragraph 8, the other Party may, but shall not be required to,
procure and maintain the same, but at Lessee's expense.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured against
under Paragraph 8. The effect of such releases and waivers of the right to
recover damages shall not be limited by the amount of insurance carried or
required, or by any deductibles applicable thereto.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties or breach of Lessor's obligations hereunder, Lessee shall indemnify,
protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's
master or ground lessor, partners and Lenders, from and against any and all
claims, loss of rents and/or damages, costs liens, judgments, penalties,
permits, attorney's and consultant's fees, expenses and/or liabilities arising
out of, involving, or in dealing with, the occupancy of the Premises by Lessee,
the conduct of Lessee's business, any act, omission or neglect of Lessee, its
agents, contractors, employees, or invitees, and out of any Default or Breach by
Lessee in the performance in a timely manner of any obligation on Lessee's part
to be performed under this Lease. The foregoing shall include, but not be
limited to, the defense or pursuit of any claim or any action or proceeding
involved therein, and whether or not (in the case of claims made against Lessor)
litigated and/or reduced to judgment, and whether well founded or not. In case
any action or proceeding be brought against Lessor by reason of any of the
foregoing matters, Lessee upon notice from Lessor shall defend the same at
Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall
cooperate with Lessee in such defense. Lessor need not have first paid any such
claim in order to be so indemnified.
8.8 LESSOR INDEMNITY. Except for Lessee's negligence and/or breach of
express warranties or breach of Lessee's obligations hereunder, Lessor shall
indemnify, protect, defend and hold harmless Lessee and its assigns, subtenants,
agents and employees from and against any and all claims, loss of rents and/or
damages, costs, liens, judgments, penalties, attorneys' and consultants' fees,
expense, and/or liabilities arising out of, involving , or in dealing with any
act, omission or neglect of Lessor, its agents, contractors, employees and out
of any Default or Breach by Lessor in the performance in a timely manner of any
obligation on Lessor's part to be performed under this Lease. The foregoing
shall include, but not be limited to, the defense or pursuit of any claim or any
action or proceeding involved therein, and whether or not (in the case of claims
made against Lessee) litigated and/or reduced to judgment, and whether
well-founded or not. In case any action or proceeding be brought against Lessee
by reason of any of the foregoing matters, Lessor upon notice from Lessee shall
defend the same at Lessor's expense by counsel reasonably satisfactory to Lessee
and Lessee shall cooperate with Lessor in such defense. Lessee need not have
first paid any such claim in order to be indemnified.
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8.9 EXEMPTION OF LESSOR FROM LIABILITY. Except for Lessor's negligence
or a breach of its obligations hereunder, Lessor shall not be liable for injury
or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said injury or damage results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstance be liable for injury to Lessee's
business or for any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, the repair cost of which damage or destruction is less
than 50% of the then Replacement Cost of the Premises immediately prior to such
damage or destruction, excluding from such calculation the value of the land and
Lessee Owned Alterations and Utility Installations.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee Owned Alterations and Utility Installations
the repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "INSURED LOSS" shall mean damage or destruction to improvements
on the Premises, other than Lessee Owned Alterations and Utility Installations,
which was caused by an event required to be covered by the insurance described
in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits
involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on or under the
Premises.
9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the insurance
proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not in force or the
insurance proceeds are not sufficient to effect such repair, the Insuring Party
shall promptly contribute the shortage in proceeds (except as to the deductible
which is Lessee's responsibility) as and when required to complete said repairs.
In the event, however, the shortage in proceeds was due to the fact that, by
reason of the unique nature of the improvements, full replacement cost insurance
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coverage was not commercially reasonable and available, Lessor shall have no
obligation to pay for the shortage in insurance proceeds or to fully restore the
unique aspects of the Premises unless Lessee provides Lessor with the funds to
cover same, or adequate assurance thereof, within ten (10) days following
receipt of written notice of such shortage and request therefor. If Lessor
receives said funds or adequate assurance thereof within said ten (10) day
period, the party responsible for making the repairs shall complete them as soon
as reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. If in such case Lessor does not so elect, then this Lease
shall terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage due to flood or earthquake shall
be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that
there may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within twenty (20) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessee's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last twelve (12)
months of the initial term of this Lease, or during the last six (6) months of
any option term, there is damage for which the cost to repair exceeds one (1)
month's Base Rent, whether or not an Insured Loss, Lessor or Lessee may, at
their option, terminate this Lease effective sixty (60) days following the date
of occurrence of such damage by giving written notice to the other party of such
election to do so within thirty (30) days after the date of the occurrence of
such damage. Provided, however, if Lessee at that time has an exercisable option
to extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("Exercise Period"), (i) exercising such option and (ii)
providing Lessor with any shortage
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in insurance proceeds (or adequate assurance thereof) needed to make the
repairs. If Lessee duly exercises such option during said Exercise Period and
provides Lessor with the required funds (or adequate assurance thereof) to cover
any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair
such damage as soon as reasonably possible and this Lease shall continue in full
force and effect. If Lessee fails to exercise such option and provide such funds
or assurance during said Exercise Period, then Lessor may at Lessor's option
terminate this Lease as of the expiration of said sixty (60) day period
following the occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within ten (10) days after the expiration of the
Exercise Period, notwithstanding any term or provision in the grant of option to
the contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage - Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues, shall be abated in proportion
to the degree to which Lessee's use of the Premises is impaired. Except for
abatement of Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, as aforesaid, all other obligations of Lessee hereunder shall
be performed by Lessee, and Lessee shall have no claim against Lessor for any
damage suffered by reason of any such repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice, of Lessee's
election to terminate this Lease on a date not less than sixty (60) days
following the giving of such notice. If Lessee gives such notice to Lessor and
such Lenders and such repair or restoration is not commenced within thirty (30)
days after receipt of such notice, this Lease shall terminate as of the date
specified in said notice. If Lessor or a Lender commences the repair or
restoration of the Premises within thirty (30) days after receipt of such
notice, this Lease shall continue in full force and effect. "Commence" as used
in this Paragraph shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever first occurs. Notwithstanding anything contained in this
Paragraph 9 to the contrary, in the event that following any damage or casualty
to the Premises (except where caused by the negligence of Lessee, its agents or
employees), Lessor has not substantially completed the repair, reconstruction or
rebuilding of the Premises or if Lessee has not reopened for business within one
hundred eighty (180) days from the date of casualty, Lessee may thereafter elect
to cancel this Lease upon written notice to Lessor, and thereafter neither Party
shall have any further obligation to the other.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate
and remediate such Hazardous Substance Condition, if required, as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to investigate
and remediate such condition exceeds twelve (12) times the then monthly Base
Rent or $100,000, whichever is greater, give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
hazardous Substance Condition of Lessor's desire to terminate this Lease as of
the date sixty (60) days following the giving of such notice. In the event
Lessor elects to give such notice of Lessor's intention to terminate this Lease,
Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to
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Lessor of Lessee's commitment to pay for the investigation and remediation of
such Hazardous Substance Condition totally at Lessee's expense and without
reimbursement from Lessor except to the extent of an amount equal to twelve (12)
times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall
provide Lessor with the funds required of Lessee or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such investigation and remediation as soon as reasonably
possible and the required funds are available. If Lessee does not give such
notice and provide the required funds or assurance thereof within the times
specified above, this Lease shall terminate as of the date specified in lessor's
notice of termination. If a Hazardous Substance Condition occurs for which
Lessee is not legally responsible, there shall be abatement of Lessee's
obligations under this Lease to the same extent as provided in paragraph 9.6(a)
for a period of not to exceed twelve (12) months.
9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit
as has not been, or is not then required to be, used by Lessor under the terms
of this Lease.
9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises during the term of this
Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least
ten (10) days prior to the delinquency date of the applicable installment.
Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes
have been paid. If any such taxes to be paid by Lessee shall cover any period of
time prior to or after the expiration or earlier termination of the term hereof,
Lessee's share of such taxes shall be equitably prorated to cover only the
period of time within the tax fiscal year this Lease is in effect, and Lessor
shall reimburse Lessee for any overpayment after such proration. If Lessee shall
fail to pay any Real Property Taxes required by this Lease to be paid by Lessee,
Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor
therefor upon demand.
10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom and/or Lessor's
business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in applicable law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
this lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties. Notwithstanding the foregoing, Lessee, as the
tenant hereunder, shall have no obligation to pay any increase in Real Property
Taxes, if any, attributable to a transfer or change in ownership of the Premises
during the Lease term or any renewal term.
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10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be a equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. If any of
Lessee's said personal property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b).
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent, such consent not to be
unreasonably withheld, conditioned or delayed. Notwithstanding anything to the
contrary contained in Paragraph 12, Lessee may freely assign or sublet this
Lease to Lessee's parent, subsidiary, successor, or any affiliate corporation or
entity, to another corporation or entity by reason of a merger or consolidation,
in connection with an asset or stock sale (whether it be a public or private
sale), to another entity under the management or control of Lessee, or in
connection with a public or private offering, without Lessor's prior written
consent.
(b) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent (unless, pursuant to Paragraph
12.1(a), such assignment or subletting does not require the consent of Lessor)
shall, at Lessor's option, be a Default curable after notice per Paragraph
13.1(c).
(c) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
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(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent, and such
action shall not relieve such persons from liability under this Lease or
sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises. Lessee agrees to provide Lessor
with such other or additional information and/or documentation as may be
reasonably requested by Lessor. Lessee agrees to reimburse Lessor for such
actual and reasonable costs paid by Lessor to third parties in connection with
reviewing Lessee's requests for consent to assignment or subletting (when such
consents are required under this Lease), such reimbursement to be made within
thirty (30) days following Lessee's receipt of an itemized statement detailing
the nature, payee and amount of such costs.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed,
for the benefit of Lessor, to have assumed and agreed to conform and comply with
each and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of this or any
other assignment of such sublease to Lessor, nor by reason of the collection of
the rents from a sublease, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a
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written notice from Lessor stating that a Breach exists in the performance of
Lessee's obligations under this Lease, to pay to Lessor the rents and other
charges due and to become due under the sublease. Sublessee shall rely upon any
such statement and request from Lessor and shall pay such rents and other
charges to Lessor without any obligation or right to inquire as to whether such
Breach exists and notwithstanding any notice from or claim from Lessee to the
contrary. Lessee shall have no right or claim against said sublessee, or, until
the Breach has been cured, against Lessor, for any such rents and other charges
so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior Defaults
or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The sublessee
shall have a right of reimbursement and offset from and against Lessee for any
such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee
to observe, comply with or perform any of the terms, covenants, conditions or
rules applicable to Lessee under this Lease. A "BREACH" is defined as the
occurrence of any one or more of the following Defaults, and, where a grace
period for cure after notice is specified herein, the failure by Lessee to cure
such Default prior to the expiration of the applicable grace period, shall
entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises, provided, however, that Lessee shall
not be in default in the event of such vacation or abandonment if Lessee shall
maintain liability insurance (and provide Lessor with a satisfactory certificate
of insurance) covering the vacated or abandoned Premises and shall pay any
additional premium increase in Lessor's insurance policies required to be
maintained hereunder attributable to such vacation or abandonment.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, where such failure continues for a period of ten (10) days
following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) the inspection, maintenance and
service contracts required under Paragraph 7.1(b), (ii) a Tenancy Statement per
Paragraphs 16 or 37, (iv) the subordination or non-subordination of this Lease
per Paragraph 30, where any such failure continues for a period of twenty (20)
days following written notice by or on behalf of Lessor to Lessee.
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(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b), or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making
by Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. ss.101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this subparagraph (e) is contrary to any applicable
law, such provision shall be of no force or effect, and not affect the validity
of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee was materially false.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its option,
may require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
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portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Default or Breach of this Lease shall not waive Lessor's
right to recover damages under this Paragraph. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve therein the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under subparagraphs 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such
case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and
under the unlawful detainer statute shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two such grace periods shall constitute both an unlawful detainer
and a Breach of this Lease entitling Lessor to the remedies provided for in this
Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's Breach
and abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by the Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within ten (10) days after
written notice that such amount is due, provided that the first such late charge
in any calendar year shall not be imposed until ten (10) days after written
notice that such amount is past due (which ten (10) day period may run
concurrently with a notice of default given to Lessee pursuant to Paragraph
13.1(b) above), then Lessee shall pay to Lessor a late charge equal to six
percent (6%) of such overdue amount. The parties hereby agree that such late
charge represents a fair and reasonable estimate of the costs Lessor will incur
by reason of late payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's Default or Breach with respect
to such overdue amount, nor prevent Lessor from exercising any of the other
rights and remedies granted hereunder. In the event that a late charge is
payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
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<PAGE> 20
13.4 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.4, a
reasonable time shall in no event be less than thirty (30) days (or such shorter
time period in the event of an emergency) after receipt by Lessor, and by the
holders of any ground lease, mortgage or deed of trust covering the Premises
whose name and address shall have been furnished Lessee in writing for such
purpose, of written notice specifying wherein such obligation of Lessor has not
been performed; provided, however, that if the nature of Lessor's obligation is
such that more than thirty (30) days after such notice are reasonably required
for its performance, then Lessor shall not be in breach of this Lease if
performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion. If Lessor fails to perform any obligation,
after written notice and within the time period, as set forth herein, Lessee
shall thereafter have the right to perform such obligation on behalf of Lessor
and shall be entitled to deduct all reasonable out-of-pocket actual costs of
performing such obligation from Base Rent and additional rent payable by Lessee
hereunder; provided, however, that if Lessor has failed to perform any such
obligation, such dispute shall be submitted to arbitration in accordance with
Paragraph 54 of this Lease prior to Lessee exercising its right to deduct such
costs pursuant to this sentence.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "CONDEMNATION"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the land area
not occupied by any building, is taken by condemnation, Lessee may, at Lessee's
option, to be exercised in writing within twenty (20) days after Lessor shall
have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent and all items of additional
rent shall be reduced in the same proportion as the rentable floor area of the
Premises taken bears to the total rentable floor area of the building located on
the Premises. No reduction of Base Rent shall occur if the only portion of the
Premises taken is land on which there is no building. Any award for the taking
of all or any part of the Premises under the power of eminent domain or any
payment made under threat of the exercise of such power and shall be the
property of Lessor, whether such award shall be made as compensation for
diminution in value of the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any
compensation awarded for Lessee's relocation expenses and/or loss of Lessee's
Trade Fixtures. In the event that this Lease is not terminated by reason of such
condemnation, Lessor shall to the extent of its net severance damages received,
over and above the legal and other expenses incurred by Lessor in the
condemnation matter, repair any damage to the Premises caused by such
condemnation, except to the extent that Lessee has been reimbursed therefor by
the condemning authority. Lessee may, at its option, participate with Lessor in
any condemnation matter affecting the Premises.
15. BROKER'S FEE. Lessee and Lessor each represent and warrant to the other
that it has had no dealings with any person, firm, broker or finder in
connection with the negotiation of this Lease and/or the consummation of the
transaction contemplated hereby, and that no broker or other person, firm or
entity is entitled to any commission or finder's fee in connection with said
transaction. Lessee and Lessor do each hereby agree to indemnify, protect,
defend and hold the other harmless from and against liability for compensation
or charges which may be claimed by any such unnamed broker, finder or other
similar party by reason of any dealings or actions of the indemnifying Party,
including any costs, expenses, attorneys' fees reasonably incurred with respect
thereto.
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<PAGE> 21
16. TENANCY STATEMENT.
16.1 Each Party (as "RESPONDING PARTY") shall within twenty (20) days
after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "TENANCY STATEMENT" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the event of
a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15, upon such transfer or assignment
the written assumption by such transferee of the Lessor's obligations hereunder
(other than obligations or responsibilities related to or otherwise arising from
the Stock Purchase Agreement), and delivery of the Security Deposit, as
aforesaid, the prior Lessor shall be relieved of all liability with respect to
the obligations and/or covenants under this Lease thereafter to be performed by
the Lessor. Subject to the foregoing, the obligations and/or covenants in this
Lease to be performed by the Lessor shall be binding only upon the Lessor as
herein above defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due either party
hereunder, other than late charges, not received within thirty (30) days
following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.3.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS. Except with respect to the Stock Purchase
Agreement, this Lease contains all agreements between the Parties with respect
to any matter mentioned herein, and no other prior or contemporaneous agreement
or understanding shall be effective.
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<PAGE> 22
23. NOTICES.
23.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier service) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for the purpose of mailing or delivering notices to
Lessee. A copy of all notices required or permitted to be given to Lessor
hereunder shall be concurrently transmitted to such party or parties at such
addresses as Lessor may from time to time hereafter designate by written notice
to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received on
a Sunday or legal holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any preceding Default or
Breach by Lessee of any provision hereof, other than the failure of Lessee to
pay the particular rent so accepted. Any payment given Lessor by Lessee may be
accepted by Lessor on account of moneys or damages due Lessor, notwithstanding
any qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. HOLD OVER BY LESSEE. If Lessee, with Lessor's consent, remains in
possession of the Premises or any part thereof after the expiration of the term
hereof, such occupancy shall be a tenancy from month to month upon all of the
provisions of this Lease.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
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<PAGE> 23
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. Subject to Paragraph 30.3 below, this Lease and any
Option granted hereby shall be subject and subordinate to any ground lease,
mortgage, deed of trust, or other hypothecation or security device
(collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon the
real property of which the Premises are a part, to any and all advances made on
the security thereof, and to all renewals, modifications, consolidations,
replacements and extensions thereof. Lessee agrees that the Lenders holding any
such Security Device shall have no duty, liability or obligation to perform any
of the obligations of Lessor under this Lease, but that in the event of Lessor's
default with respect to any such obligation, Lessee will give any Lender whose
name and address have been furnished Lessee in writing for such purpose notice
of Lessor's default and allow such Lender thirty (30) days following receipt of
such notice for the cure of said default before invoking any remedies Lessee may
have by reason thereof. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the
Lender in form reasonably acceptable to Lessee, that Lessee's possession and
this Lease, including any options to extend the term hereof, will not be
disturbed so long as Lessee is not in Breach hereof and attorns to the record
owner of the Premises. Within thirty (30)) days after the mutual execution of
this Lease, Lessor shall use its best efforts to provide such non-disturbance
agreement for any Lender with a Security Device in place as of the date of this
Lease.
30.4 SELF-EXECUTING. Subject to Lessee receiving the non-disturbance
agreement as provided in Paragraph 30.3 above, the agreements contained in this
Paragraph 30 shall be effective without the execution of any further documents;
provided, however, that, upon written request from Lessor or a Lender in
connection with a sale, financing or refinancing of the Premises, Lessee and
Lessor shall execute such further writings as may be reasonably required to
separately document any such subordination or non-subordination, attornment
and/or non-disturbance agreement as is provided for herein, subject to Lessee
receiving the non-disturbance agreement as provided in Paragraph 30.3 above.
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<PAGE> 24
31. ATTORNEY'S FEES. If any Party brings an action or proceeding to enforce
the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter
defined) in any such proceeding, action, or appeal thereon, shall be entitled to
reasonable attorney's fees. Such fees may be awarded in the same suit or
recovered in a separate suit, whether or not such action or proceeding is
pursued to decision or judgment. The term, "PREVAILING PARTY" shall include,
without limitation, a Party who substantially obtains or defeats the relief
sought, as the case may be, whether by compromise, settlement, judgment, or the
abandonment by the other Party of its claim or defense. The attorney's fees
award shall not be computed in accordance with any court fee schedule, but shall
be such as to fully reimburse all attorney's fees reasonably incurred. Lessor
shall be entitled to reasonable attorney's fees, costs and expenses incurred in
the preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times during normal business hours upon
prior written notice for the purpose of showing the same to prospective
purchasers, lenders, or lessees, and making such alterations, repairs,
improvements or additions to the Premises or to the building of which they are a
part, as Lessor may reasonably deem necessary. Lessor may at any time during the
last one hundred twenty (120) days of the term hereof place on or about the
Premises any ordinary "For Lease" signs. All such activities of Lessor shall be
without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent.
34. SIGNS. The installation of any sign on the Premises by or for Lessee
shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility
Installations, Trade Fixtures and Alterations). Lessee shall not place any signs
on the roof of any building on the Premises without Lessor's prior written
consent, which consent may be withheld in Lessor's sole and absolute discretion.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. CONSENTS. Wherever in this Lease the consent of a Party is required to
an act by or for the other Party, such consent shall not be unreasonably
withheld or delayed. Lessee agrees to reimburse Lessor for such actual and
reasonable costs paid by Lessor to third parties in connection with reviewing
Lessee's requests for consent, such reimbursement to be made within thirty (30)
days following Lessee's receipt of an itemized statement detailing the nature,
payee and amount of such costs.
37. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises
and the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
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<PAGE> 25
38. OPTIONS.
38.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend; (b) the right of first refusal to lease the Premises or
the right of first offer to lease the Premises; (c) the right to purchase the
Premises or the right of first refusal to purchase the Premises, or the right of
first offer to purchase the Premises.
38.2 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options to extend or renew this Lease has been validly exercised.
38.3 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provisions in the grant of Option to the contrary (i) during
the period commencing with the giving of any notice of Default under Paragraph
13.1 and continuing until the noticed Default is cured, or (ii) during the
period of time any monetary obligation due Lessor from Lessee is unpaid (without
regard to whether notice thereof is given Lessee), or (iii) during the time
Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to
Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not
the Defaults are cured, during the twelve (12) month period immediately
preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).
(c) All rights of lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of Default under Paragraph 13.1 during any
twelve (12) month period, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease.
39. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
40. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement, rights, dedication, map or restrictions.
41. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.
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<PAGE> 26
42. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represent and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
43. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions
44. OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.
45. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
46. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF
ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES
AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS
LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY
SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A
STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE
PROPERTY IS LOCATED SHOULD BE CONSULTED.
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<PAGE> 27
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Executed at ___________________________ Executed at __________________________
on ____________________________________ on ___________________________________
by LESSOR: By LESSEE:
SIERRA INVESTMENTS, WHITE CAP INDUSTRIES, CORP.,
a Nevada general partnership a California corporation
By:____________________________________ By:_________________________________
Name:__________________________________ Name: Greg Grosch
Title:_________________________________ Title: President
Address: Address: 3120 Airway Avenue
Costa Mesa, CA 92626
Tel No: (714) 850-0900
Fax No: (714) 850-1634
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<PAGE> 28
ADDENDUM TO STANDARD
INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
This ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
("Addendum") is made and entered into by and between TOTH ENTERPRISES, a
California general partnership ("Lessor") and RONFRAN INCORPORATED d/b/a
STANDARD PACIFIC INDUSTRIES ("Lessee"), as of the date set forth on the first
page of that certain Standard Industrial/Commercial Single-Tenant Lease - Net
('Lease") between lessor and Lessee to which this Addendum is attached and
incorporated. The terms, covenants and conditions set forth herein are intended
to and shall have the same force and effect as if set forth in the Lease. To the
extent the provisions of this Addendum are inconsistent with any provisions of
the Lease, the Addendum shall supersede and control.
47. RENT INCREASES. Upon the anniversary date of the Commencement Date of
the Original Term and every year thereafter (except for the first year of any
option term which shall be determined pursuant to the provisions of Paragraph
1.3 of the Lease, or during any subsequent year of an option term if the
appraisal provides that the Base rent should be held constant for one (1) or
more years) the said monthly rental amount shall be adjusted as hereinafter
provided, but in no event shall the monthly rent after the adjustment be less
than the monthly rent paid immediately prior to the said adjustment.
The adjustment shall be calculated in the following manner: multiply the
monthly rent paid immediately prior to the adjustment by a fraction, which is
the amount of increase by which the current Consumer Price Index has increased
over the prior year's Consumer Price Index.
The Consumer Price Index shall be the United States Department of Labor
Consumer Price Index, All Items, Los Angeles-Riverside-San Bernardino area
(1982-84 = 100). The current Consumer Price Index for the above fraction shall
be the Index for the month immediately preceding the month of the rent
adjustment. The prior year's Consumer Price Index shall be the Index for the
twelfth (12th) month immediately preceding the current Consumer Price Index.
If the Consumer Price Index is at any time hereafter no longer
published, a comparable index generally accepted and employed by the U.S.
Government shall be used.
48. LESSOR'S IMPROVEMENTS. Notwithstanding anything to the contrary set
forth in the Lease, all improvements on the Premises as of the Commencement Date
are hereby deemed to be the property of Lessor.
49. OPTION TO PURCHASE. Lessee shall have a right of first refusal during
the Lease term or renewal term to purchase the Premises and Lessor shall not
enter into a purchase contract or similar agreement for the Premises without
given written notice to Lessor, as provided herein. At such time as Lessor is
ready to sell the Premises, Lessor shall give written notice to Lessee
("Lessor's Notice") of the terms and conditions of the terms and conditions of
such proposed purchase along with a photocopy of a bona fide offer and
counteroffer, if any, duly executed by the prospective purchase and Lessor.
Lessee shall have a period of fifteen (15) business days after receipt of the
Lessor's Notice in which to elect to exercise its right of first refusal to
purchase on the terms and conditions set forth in the Lessor's Notice. If Lessee
does not exercise its right of first refusal, then Lessor may sell the Premises
to the purchaser on the proposed terms and conditions set forth in Lessor's
Notice. In the event Lessor does not consummate a sale with the proposed
purchaser on the terms and conditions provided in Lessor's Notice (or on terms
no more favorable to such purchaser) within five (5) months of Lessee's receipt
of Lessor's Notice, this right of first refusal shall again apply in the manner
set forth herein. Lessee's decision (or its deemed decision) not to exercise its
right of first refusal following
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<PAGE> 29
receipt of the Lessor's Notice shall not result in termination of or otherwise
affect Lessee's option granted in Paragraph 54 hereunder. Lessor hereby grants
to Lessee the exclusive right and option to purchase the Premises (including the
existing cranes, crane ways, and other fixtures in the building) at any time
after the second anniversary of the Commencement Date and prior to Expiration
Date of the Lease, as may be extended. The Option shall be exercised, if at all,
by written notice from Lessee to Lessor stating Lessee's unconditional election
to acquire the Premises and all improvements (the "Option Notice"). Upon
Lessee's delivery of the Option Notice, Lessor will be obligated to sell to
Lessee and Lessee will be obligated to purchase from lessor at the Closing
within ninety (90) days of the Option Notice, the Premises. The purchase price
shall be determined by having the Lessor and Lessee each name one appraiser
competent to appraise the value of the Premises and if the two appraisers cannot
agree upon a value within (30) days, they shall appoint a third appraiser and
the decision of the majority shall be binding upon all parties. The appraisers
shall separately appraise the cranes for purposes of determining the Premises'
fair market value.
50. CONDITIONS OF PREMISES. Notwithstanding anything to the contrary set
forth in the Lease, and as a material inducement to the execution and delivery
of the Lease by Lessor and the performance by Lessor of Lessor's duties and
obligations thereunder, Lessee does hereby acknowledge, represent, warrant and
agree to and with Lessor that Lessee is leasing the Premises in its current
"AS-IS / WHERE IS condition "WITH ALL FAULTS" as of the Commencement Date, and
neither Lessor nor any agent, or employee of Lessor has made any representation
or warranty regarding the Premises (except as expressly set forth in the Lease,
if at all), and Lessor (except as provided in Lease) has no obligation to repair
or correct any fact, circumstances, conditions or facts regarding the Premises
or to compensate Lessee for same.
51. ARBITRATION. Any and all disputes with respect to this Lease, shall be
settled by arbitration in accordance with the Commercial Arbitration Rules of
the American Arbitration Association by a panel of three arbitrators appointed
pursuant to such Rules, and judgment upon the award rendered by such arbitrators
may be entered in any court having jurisdiction. Such arbitrators shall not have
the authority or power to reform, alter, amend or modify andy of the terms or
conditions of this Lease or to enter an award which reforms, alters, amends or
modifies such terms or conditions. The decision of such arbitrators shall be in
writing, setting forth both findings of fact and of law, and shall be final and
conclusive upon the parties; and no suit at law or in equity based on such
dispute, controversy or claim shall be instituted by any party hereto, other
than to enforce the award of such arbitrators. Such arbitration shall be
conducted in Ontario, California, or in such other location as the parties
thereto may agree.
IN WITNESS WHEREOF, the parties hereto have executed this Addendum the
date and year first above written.
LESSOR LESSEE
TOTH ENTERPRISES, RONFRAN INCORPORATED,
a California general partnership a California corporation
___________________________________ ___________________________________
By: By:
Its: Its:
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<PAGE> 1
EXHIBIT 10.12
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
(Do not use this form for Multi-Tenant Property)
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
August 29, 1997, is made by and between THE ROSENFIELD FAMILY TRUST ("LESSOR")
and ARIZONA MILLWORK, INC., a Colorado corporation doing business as Rosewood
Enterprises ("LESSEE"), (collectively the "PARTIES", or individually a "PARTY").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 5301 West Madison Avenue, located in the County
of Maricopa, State of Arizona and generally described as (describe briefly the
nature of the property) approximately 10 acres of land improved with a building
containing approximately 40,000 square feet ("PREMISES"). (See Paragraph 2 for
further provisions.)
1.3 TERM: Five (5) years and 0 months ("ORIGINAL TERM") commencing
August 29, 1997 ("COMMENCEMENT DATE") and ending August 28, 2002 ("EXPIRATION
DATE"). (See Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: ("EARLY POSSESSION DATE"). (See Paragraphs 3.2 and
3.3 for further provisions.)
1.5 BASE RENT: $16,300.00 per month ("BASE RENT"), payable on the first
day of each month commencing March 27, 1997. (See Paragraph 4 for further
provisions.) If this box is checked, there are provisions in this Lease for the
Base Rent to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $ as Base Rent for the period
1.7 SECURITY DEPOSIT: -0- ("SECURITY DEPOSIT"). (See Paragraph 5 for
further provisions.)
1.8 PERMITTED USE: Manufacture of modular buildings (See Paragraph 6 for
further provisions.)
1.9 INSURING PARTY. Lessee is the "INSURING PARTY" unless otherwise
stated herein. (See Paragraph 8 for further provisions.)
1.10 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by Donald Procunier and gail Procunier ("GUARANTOR"). (See Paragraph
35 for further provisions.)
1.11 ADDENDA. Attached hereto is an Addendum or Addenda consisting of
Paragraphs N/A through N/A and Exhibits all of which constitute a part of this
Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which Lessor
and Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
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<PAGE> 2
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system, lighting, air conditioning, heating, and
loading doors, if any, in the Premises, other than those constructed by Lessee,
shall be in good operating condition on the Commencement Date. If a
non-compliance with said warranty exists as of the Commencement Date, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within thirty
(30) days after the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility Installations (as defined in Paragraph 6.3(a)) made or to
be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within six (6)
months following the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Brokers to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 5.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or the
term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has
made any oral or written representations or warranties with respect to the said
matters other than as set forth in this Lease.
2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
3. TERM. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
4. RENT.
4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States, without offset or deduction, on or before
the day on which it is due under the terms of this Lease. Base Rent and all
other rent and charges for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated based upon the actual number
of days of the calendar month involved. Payment of Base Rent and other charges
shall be made to Lessor at its address stated herein or to such other persons or
at such other addresses as Lessor may from time to time designate in writing to
Lessee.
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<PAGE> 3
5. USE.
5.1 USE Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring premises or properties.
5.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statue or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph
5.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or
below ground storage tank, (ii) the generation, possession, storage, use,
transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority. Reportable Use shall
also include Lessee's being responsible for the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, but in compliance with all Applicable Law, use any
ordinary and customary materials reasonably required to be used by Lessee in the
normal course of Lessee's business permitted on the Premises, so long as such
use is not a Reportable Use and does not expose the Premises or neighboring
properties to any meaningful risk of contamination or damage or expose Lessor to
any liability therefor. In addition, Lessor may (but without any obligation to
do so) condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefrom or therefor, including, but
not limited to, the installation (and removal on or before Lease expiration or
earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance, or a condition involving or resulting
from same, has come to be located in, on, under or about the Premises, other
than as previously consented to by Lessor, Lessee shall immediately give written
notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy
of any statement, report, notice, registration, application, permit, business
plan, license, claim, action or proceeding given to, or received from, any
governmental authority or private party, or persons entering or occupying the
Premises,
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<PAGE> 4
concerning the presence, spill, release, discharge of, or exposure to, any
Hazardous Substance or contamination in, on, or about the Premises, including
but not limited to, all such documents as may be involved in any Reportable Uses
involving the Premises.
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee, or under
Lessee's control. Lessee's obligations under this Paragraph 5 shall include, but
not be limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
investigation (including consultants's and attorney's fees and testing),
removal, remediation, restoration and/or abatement thereof, or of any
contamination therein involved, and shall survive the expiration or earlier
termination of this Lease. No termination, cancellation or release agreement
entered into by Lessor and Lessee shall release Lessee from its obligations
under this Lease. No termination, cancellation or release agreement entered into
by Lessor and Lessee shall release Lessee from its obligations under this Lease
with respect to Hazardous Substances or storage tanks, unless specifically so
agreed by Lessor in writing at the time of such agreement.
5.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "APPLICABLE LAW" which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to (i)
industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, (iii) the use, generation,
manufacture, production, installation, maintenance, removal, transportation,
storage, spill or release of any Hazardous Substance or storage tank), now in
effect or which may hereafter come into effect, and whether or not reflecting a
change in policy from any previously existing policy. Lessee shall, within five
(5) days after receipt of Lessor's written request, provide Lessor with copies
of all documents and information, including, but not limited to, permits,
registrations, manifests, applications, reports and certificates, evidencing
Lessee's compliance with any Applicable Law specified by Lessor, and shall
immediately upon receipt, notify Lessor in writing (with copies of any documents
involved) of any threatened or actual claim, notice, citation, warning,
complaint or report pertaining to or involving failure by Lessee or the Premises
to comply with any Applicable Law.
5.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in
Paragraph 7.3(a)) shall have the right to enter the Premises at any time, in the
case of an emergency, and otherwise at reasonable times for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease and all Applicable Laws (as defined in Paragraph 5.3), and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
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<PAGE> 5
6. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
6.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty
as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.),
6.2 (Lessor's obligation to repair), 8 (damage and destruction) and 13
(condemnation), Lessee shall, at Lessee's sole cost and expense and at all
times, keep the Premises and every part thereof in good order, condition and
repair, and non-structural (whether or not such portion of the Premises
requiring repair, or the means of repairing the same, are reasonably or readily
accessible to Lessee, and whether or not the need for such repairs occurs as a
result of Lessee's use, any prior use, the elements or the age of such portion
of the Premises, including, without limiting the generality of the foregoing,
all equipment or facilities serving the Premises, such as plumbing, heating, air
conditioning, ventilating, electrical, lighting facilities, boilers, fired or
unfired pressure vessels, fire sprinkler and/or standpipe and hose or other
automatic fire extinguishing system, including fire alarm and/or smoke detection
systems and equipment, fire hydrants, fixtures, walls (interior and exterior),
non-structural portions of the roofs, floors, windows, doors, plate glass,
skylights, landscaping, driveways, parking lots, fences, retaining walls, signs,
sidewalks, and parkways located in, on, about, or adjacent to the Premises.
Lessee shall not cause or permit any Hazardous Substance to be spilled or
released in, on, under or about the Premises (including through the plumbing or
sanitary sewer system) and shall promptly, at Lessee's expense, take all
investigatory and/or remedial action reasonably recommended, whether or not
formally ordered or required, for the cleanup of any contamination of, and for
the maintenance, security and/or monitoring of the Premises, the elements
surrounding same, or neighboring properties, that was caused or materially
contributed to by Lessee, or pertaining to or involving any Hazardous Substance
and/or storage tank brought onto the Premises by or for Lessee or under its
control. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair. If Lessee occupies the Premises for seven (7) years or
more, Lessor may require Lessee to repaint the exterior of the buildings on the
Premises as reasonably required, but not more frequently than once every seven
(7) years.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contracts, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation equipment
and (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or
standpipe and hose or other automatic fire extinguishing systems, including fire
alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof
covering and drain maintenance and (vi) asphalt and parking lot maintenance.
6.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of
Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3
(relating to compliance with covenants, restrictions and building code), 8
(relating to destruction of the Premises) and 13 (relating to condemnation of
the Premises), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, the
improvements located thereon, or the equipment therein, whether structural or
non-structural, all of which obligations are intended to be that of the Lessee
under Paragraph 6.1 hereof. It is the intention of the Parties that the terms of
this Lease govern the respective obligations of the Parties as to maintenance
and repair of the Premises. Lessee and Lessor expressly waive the benefit of any
statute now or hereafter in effect to the extent it is inconsistent with the
terms of this Lease with respect to, or which affords Lessee the right to make
repairs at the expense of Lessor or to terminate this Lease by reason of any
needed repairs.
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<PAGE> 6
6.3 UTILITY INSTALLATION; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS"
is used in this Lease to refer to all carpeting, window coverings, air lines,
power panels, electrical distribution, security, fire protection systems,
communication systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing, and fencing in, on or about the Premises. The
term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be
removed without doing material damage to the Premises. The term "ALTERATIONS"
shall mean any modification of the improvements on the Premises from that which
are provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED
ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or
Utility Installations made by Lessee that are not yet owned by Lessor as defined
in Paragraph 6.4(a). Lessee shall not make any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent which shall not be unreasonably withheld or delayed. Lessee may,
however, make non-structural Utility Installations to the interior of the
Premises (excluding the roof), as long as they are not visible from the outside,
do not involve puncturing, relocating or removing the roof or any existing
walls, and the cumulative cost thereof during the term of this Lease as extended
does not exceed $25,000.00.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with proposed detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 6.3(a) or by subsequent specific
consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable
permits required by governmental authorities, (ii) the furnishing of copies of
such permits together with a copy of the plans and specifications for the
Alteration or Utility Installation to Lessor prior to commencement of the work
thereon, (iii) the compliance by Lessee with all conditions of said permits in a
prompt and expeditious manner. Any alterations or Utility Installations by
Lessee during the term of this Lease shall be done in a good and workmanlike
manner, with good and sufficient materials, and in compliance with all
Applicable Law, Lessee shall promptly upon completion thereof furnish Lessor
with as-built plans and specifications therefor. Lessor may (but without
obligation to do so) condition its consent to any requested Alteration or
Utility Installation that costs $10,000 or more upon Lessee's providing Lessor
with a lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility installation and/or upon Lessee's
posting an additional Security Deposit with lessor under Paragraph 36 hereof.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanics' or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility in or on the Premises as provided by
law. If Lessee shall, in good faith, contest the validity of any lien, claim or
demand, then Lessee shall, at its sole expense defend and protect itself, Lessor
and the Premises against the same and shall pay and satisfy any such adverse
judgment that may be rendered thereon before the enforcement thereof against the
Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor in an amount equal to one and one-half
times the amount of such contested lien, claim or demand, indemnifying Lessor
against liability for the same, as required by law for the holding of the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorney's fees and cost in participating in such
action if Lessor shall decide it is to its best interest to do so.
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6.4 OWNERSHIP; REMOVAL; SURRENDER AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal
or become the owner thereof as hereinafter provided in this Paragraph 6.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may, at any time and at its option, elect in writing to Lessee, to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per subparagraph 6.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain upon
and be surrendered by Lessee with the Premises.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date, with
all of the improvements, parts and surfaces thereof clean and free of debris and
in good operating order, condition and state of repair, ordinary wear and tear
excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration
that would have been prevented by good maintenance practice or by Lessee
performing all of its obligations under this Lease. Except as otherwise agreed
or specified in writing by Lessor, the Premises, as surrendered, shall include
the Utility Installations. The obligation of Lessee shall include the repair of
any damage occasioned by the installation, maintenance or removal of Lessee's
Trade Fixtures, furnishings, equipment, and Alterations and/or Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good practice. Lessee's Trade Fixtures shall remain the property of
Lessee and shall be removed by Lessee subject to its obligation to repair and
restore the Premises per this Lease.
7. INSURANCE; INDEMNITY.
7.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is
the Insuring Party, Lessee shall pay for all insurance required under this
Paragraph 7 except to the extent of the cost attributable to liability insurance
carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy
periods commencing prior to, or extending beyond, the Lease term shall be
prorated to correspond to the Lease term. Payment shall be made by Lessee to
Lessor within ten (10) days following receipt of an invoice for any amount due.
7.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee and Lessor (as an additional insured) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an occurrence basis
providing single limit coverage in an amount not less than
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$1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of
Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for
damage caused by heat, smoke or fumes from a hostile fire. The policy shall not
contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage of liability assumed under this Lease
as an "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance required by this Lease or as
carried by Lessee shall not, however, limit the liability of Lessee nor relieve
Lessee of any obligation hereunder. All insurance to be carried by Lessee shall
be primary to and not contributory with any similar insurance carried by Lessor,
whose insurance shall be considered excess insurance only.
7.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds
of trust or ground leases on the Premises ("Lender(s)"), insuring loss or
damages to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by Lenders, but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique
nature or age of the improvements involved, such latter amount is less than full
replacement cost. If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations shall be insured by Lessee under Paragraph
6.4 rather than by Lessor. If the coverage is available and commercially
appropriate, such policy or policies shall insure against all risks of direct
physical loss or damage (except the perils of flood and/or earthquake unless
required by Lender), including coverage for any additional costs resulting from
debris removal and reasonable amounts of coverage for the enforcement of any
ordinance or law regulating the reconstruction or replacement of any undamaged
sections of the Premises required to be demolished or removed by reason of the
enforcement of any building, zoning, safety or land use laws as the result of a
covered cause of loss. Said policy or policies shall also contain an agreed
valuation provision in lieu of any coinsurance clause, waiver of subrogation,
and inflation guard protection causing an increase in the annual property
insurance coverage amount by a factor of not less than the adjusted U.S.
Department of Labor Consumer Price Index for All Urban Consumers for the city
nearest to where the Premises are located. If such insurance coverage has a
deductible clause, the deductible amount shall not exceed $1,000 per occurrence,
and Lessee shall be liable for such deductible amount in the event of an Insured
Loss, as defined in Paragraph 9.1(c).
(b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full
rental and other charges payable by Lessee to Lessor under this Lease for one
(1) year (including all real estate taxes, insurance costs, and any scheduled
rental increases). Said insurance shall provide that in the event the Lease is
terminated by reason of an insured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be liable
for any deductible amount in the event of such loss.
(c) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party, the
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease. If Lessee is the Insuring Party, the policy
carried by Lessee under this Paragraph 7.3 shall insure Lessee Owned Alterations
and Utility Installations.
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7.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 7.5, Lessee at is cost shall either by separate policy or, at Lessor's
option, by endorsement to a policy already carried, maintain insurance coverage
on all of Lessee's personal property, Lessee Owned Alterations and Utility
Installations in, on, or about the Premises similar in coverage to that carried
by the Insuring Party under Paragraph 7.3. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for the
replacement of personal property or the restoration of Lessee Owned Alterations
and Utility Installations. Lessee shall be the Insuring Party with respect to
the insurance required by this Paragraph 7.4 and shall provide Lessor with
written evidence that such insurance is in force.
7.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least a B+, V, or other such rating as may be required by a Lender having
a lien on the Premises, as set forth in the most current issue of "Best's
Insurance Guide." Lessee shall not do or permit to be done anything which shall
invalidate the insurance policies referred to in this Paragraph 7. If Lessee is
the Insuring Party, Lessee shall cause to be delivered to Lessor certified
copies of policies of such insurance or certificates evidencing the existence
and amounts of such insurance with the insureds and loss payable clauses as
required by this Lease. No such policy shall be cancellable or subject to
modification except after thirty (30) days prior written notice to Lessor.
Lessee shall, at least thirty (30) days prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "Insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon
demand. If the Insuring Party shall fail to procure and maintain the insurance
required to be carried by the Insuring Party under this Paragraph 7, the other
Party may, but shall not be required to, procure and maintain the same, but at
Lessee's expense.
7.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured against
under Paragraph 7. The effect of such releases and waivers of the right to
recover damages shall not be limited by the amount of insurance carried or
required, or by any deductibles applicable thereto.
7.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees, or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well founded or not. In case any action or proceeding be brought against
Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor
shall defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be so indemnified.
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7.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said injury or damage results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstance be liable for injury to Lessee's
business or for any loss of income or profit therefrom.
8. DAMAGE OR DESTRUCTION.
8.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, the repair cost of which damage or destruction is less
than 50% of the then Replacement Cost of the Premises immediately prior to such
damage or destruction, excluding from such calculation the value of the land and
Lessee Owned Alterations and Utility Installations.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee Owned Alterations and Utility Installations
the repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "INSURED LOSS" shall mean damage or destruction to improvements
on the Premises, other than Lessee Owned Alterations and Utility Installations,
which was caused by an event required to be covered by the insurance described
in Paragraph 6.3(a), irrespective of any deductible amounts or coverage limits
involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 5.2(a), in, on or under the
Premises.
8.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is
an insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the insurance
proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not in force or the
insurance proceeds are not sufficient to effect such repair, the Insuring Party
shall promptly contribute the shortage in proceeds (except as to the deductible
which is Lessee's responsibility) as and when required to complete said repairs.
In the event, however, the shortage in proceeds
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was due to the fact that, by reason of the unique nature of the improvements,
full replacement cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance thereof
within said ten (10) day period, the party responsible for making the repairs
shall complete them as soon as reasonably possible and this Lease shall remain
in full force and effect. If Lessor does not receive such funds or assurance
within said period, Lessor may nevertheless elect by written notice to Lessee
within ten (10) days thereafter to make such restoration and repair as is
commercially reasonable with Lessor paying any shortage in proceeds, in which
case this Lease shall remain in full force and effect. If in such case Lessor
does not so elect, then this Lease shall terminate sixty (60) days following the
occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall
in no event have any right to reimbursement from Lessor for any funds
contributed by Lessee to repair any such damage or destruction. Premises Partial
Damage due to flood or earthquake shall be subject to Paragraph 8.3 rather than
Paragraph 8.2, notwithstanding that there may be some insurance coverage, but
the net proceeds of any such insurance shall be made available for the repairs
if made by either Party.
8.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 12), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within ten (10) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
8.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 7.6.
8.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of the occurrence of
such damage. Provided, however, if Lessee at that time has an exercisable option
to extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("Exercise Period"), (i) exercising such option and
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(ii) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs. If Lessee duly exercises such
option during said Exercise Period and provides Lessor with funds (or adequate
assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at
Lessor's expense repair such damage as soon as reasonably possible and this
Lease shall continue in full force and effect. If Lessee fails to exercise such
option and provide such funds or assurance during said Exercise Period, then
Lessor may at Lessor's option terminate this Lease as of the expiration of said
sixty (60) day period following the occurrence of such damage by giving written
notice to Lessee of Lessor's election to do so within ten (10) days after the
expiration of the Exercise Period, notwithstanding any term or provision in the
grant of option to the contrary.
8.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in Paragraph 8.2 (Partial
Damage - Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b), shall be abated
in proportion to the degree to which Lessee's use of the Premises is impaired.
Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and
other charges, if any, as aforesaid, all other obligations of Lessee hereunder
shall be performed by Lessee, and Lessee shall have no claim against Lessor for
any damage suffered by reason of any such repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 8 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises
within ninety (90) days after such obligation shall accrue, Lessee may, at any
time prior to the commencement of such repair or restoration, give written
notice to Lessor and to any Lenders of which Lessee has actual notice of
Lessee's election to terminate this Lease on a date not less than sixty (60)
days following the giving of such notice. If Lessee gives such notice to Lessor
and such Lenders and such repair or restoration is not commenced within thirty
(30) days after receipt of such notice, this Lease shall terminate as of the
date specified in said notice. If Lessor or a Lender commences the repair or
restoration of the Premises within thirty (30) days after receipt of such
notice, this Lease shall continue in full force and effect. "Commence" as used
in this Paragraph shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever first occurs.
8.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 12), Lessor may at Lessor's option either (i) investigate
and remediate such Hazardous Substance Condition, if required, as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to investigate
and remediate such condition exceeds twelve (12) times the then monthly Base
Rent or $100,000, whichever is greater, give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
Hazardous Substance Condition of Lessor's desire to terminate this Lease as of
the date sixty (60) days following the giving of such notice. In the event
Lessor elects to give such notice of Lessor's intention to terminate this Lease,
Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
investigation and remediation of such Hazardous Substance Condition totally at
Lessee's expense and without reimbursement from Lessor except to the extent of
an amount equal to twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater. Lessee shall provide Lessor with the funds required of
Lessee or satisfactory assurance thereof within thirty (30) days
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following Lessee's said commitment. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible and the required funds are available.
If Lessee does not give such notice and provide the required funds or assurance
thereof within the times specified above, this Lease shall terminate as of the
date specified in Lessor's notice of termination. If a Hazardous Substance
Condition occurs for which Lessee is not legally responsible, there shall be
abatement of Lessee's obligations under this Lease to the same extent as
provided in Paragraph 8.6(a) for a period of not to exceed twelve months.
8.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 8, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit
as has not been, or is not then required to be, used by Lessor under the terms
of this Lease.
8.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
9. REAL PROPERTY TAXES.
9.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 9.2, applicable to the Premises during the term of this
Lease. Subject to Paragraph 9.1(b), all such payments shall be made at least ten
(10) days prior to the delinquency date of the applicable installment. Lessee
shall promptly furnish Lessor with satisfactory evidence that such taxes have
been paid. If any such taxes to be paid by Lessee shall cover any period of time
prior to or after the expiration or earlier termination of the term hereof,
Lessee's share of such taxes shall be equitably prorated to cover only the
period of time within the tax fiscal year this Lease is in effect, and Lessor
shall reimburse Lessee for any overpayment after such proration. If Lessee shall
fail to pay any Real Property Taxes required by this Lease to be paid by Lessee,
Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor
therefor upon demand.
(b) ADVANCE PAYMENT. In order to insure payment when due and before
delinquency of any or all Real Property Taxes, Lessor reserves the right, at
Lessor's option, upon a Default to estimate the current Real Property Taxes
applicable to the Premises, and to require such current year's Real Property
Taxes to be paid in advance to Lessor by Lessee, either (i) in a lump sum equal
to the installment due, at least twenty (20) days prior to the applicable
delinquency date, or (ii) monthly in advance with the payment of the Base Rent.
If Lessor elects to require payment monthly in advance, the monthly payment
shall be that equal monthly amount which, over the number of months remaining
before the month in which the applicable tax installment would become delinquent
(and without interest thereon), would provide a fund large enough to fully
discharge before delinquency the estimated installment of taxes to be paid. When
the actual amount of the applicable tax bill is known, the amount of such equal
monthly advance payment shall be adjusted as required to provide the fund needed
to pay the applicable taxes before delinquency, if the amounts paid to Lessor by
Lessee under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Real Property Taxes as the same become due,
Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are
necessary to pay such obligations. All moneys paid to Lessor under this
Paragraph may be intermingled with other moneys of Lessor and shall not bear
interest. In the event of a Breach by Lessee in the performance of the
obligations of Lessee under this Lease, then any balance of funds paid to Lessor
under the provisions of this Paragraph may, subject to proration as provided in
Paragraph 9.1(a), at the option of Lessor, be treated as an additional Security
Deposit under Paragraph 5.
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9.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in applicable law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
this lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties.
9.3 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. If any of
Lessee's said personal property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property or, at Lessor's option, as provided in Paragraph 9.1(b).
10. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.
11. ASSIGNMENT AND SUBLETTING.
11.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of the execution
by Lessor of this Lease or at the time of the most recent assignment to which
Lessor has consented, or as it exists immediately prior to said transaction or
transactions constituting such reduction, at whichever time said Net Worth of
Lessee was or is greater, shall be considered an assignment of this Lease by
Lessee to this Lessor may reasonably withhold its consent. "Net Worth of Lessee"
for purposes of this Lease shall be the net worth of Lessee (excluding any
guarantors) established under generally accepted accounting principles
consistently applied.
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(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1(c), or a noncurable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a noncurable Breach, Lessor
shall have the right to either; (i) terminate this Lease, or (ii) upon thirty
(30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to
fair market rental value or one hundred ten percent (110%) of the Base Rent then
in effect, whichever is greater. Pending determination of the new fair market
rental value, if disputer by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and market value
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
(without the Lease being considered an encumbrance or any deduction for
depreciation or obsolescence, and considering the Premises at its highest and
best use and in good condition), or one hundred ten percent (110%) of the price
previously in effect, whichever is greater, (ii) any index-oriented rental or
price adjustment formulas contained in this Lease shall be adjusted to require
that the base index be determined with reference to the index applicable to the
time of such adjustment, and (iii) any fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased in the same ratio as the new
market rental bears to the Base Rent in effect immediately prior to the market
value adjustment.
11.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent, and such
action shall not relieve such persons from liability under this Lease or
sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
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(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $1,000 or ten percent (10%) of the current monthly
Base Rent, whichever is greater, as reasonable consideration for Lessor's
considering and processing the request for consent. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may be
reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed,
for the benefit of Lessor, to have assumed and agreed to conform and comply with
each and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described Paragraph 11.1(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased to an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
amount required to establish such Security Deposit a condition to Lessor's
consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment
or subletting, may require that the amount and adjustment structure of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment structure for property similar to the Premises as then constituted.
11.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 12.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of this or any
other assignment of such sublease to Lessor, nor by reason of the collection of
the rents from a sublease, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without any obligation or right to
inquire as to whether such Breach exists and notwithstanding any notice from or
claim from Lessee to the contrary. Lessee shall have no right or claim against
said sublessee, or, until the Breach has been cured, against Lessor, for any
such rents and other charges so paid by said sublessee to Lessor.
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(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior Defaults
or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The sublessee
shall have a right of reimbursement and offset from and against Lessee for any
such Defaults cured by the sublessee.
12. DEFAULT; BREACH; REMEDIES.
12.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $250.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said Default. A "DEFAULT" is defined as a
failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH"
is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 12.2
and/or 12.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with applicable law per
Paragraph 5.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 6.1(b), (iii) the recission of an unauthorized assignment or
subletting per Paragraph 11.1(b), (iv) a Tenancy Statement per Paragraphs 14 or
35, (v) the subordination or non-subordination of this Lease per Paragraph 28
(vi) the guaranty of the performance of Lessee's Default is such that more than
thirty (30) days after written notice thereof by or on behalf of Lessor to
Lessee; provided, however, that if the nature of Lessee's obligations under this
Lease if required under Paragraphs 1.11 and 35, (vii) the execution of any
document requested under Paragraph 39 (easements), or (viii) any other
documentation or information which Lessor may reasonably required of Lessee
under the terms of this Lease,, where any such failure continues for a period of
ten (10) days following written notice by or on behalf of Lessor to Lessee.
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(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted hereof, that are to be
observed, complied with or performed by Lessee, other than those described in
subparagraphs (a), (b), or (c), above, where such Default continues for a period
of thirty (30) days after written notice thereof by or on behalf of Lessor to
Lessee; provided, however, that if the nature of Lessee's Default is such that
more than thirty (30) days are reasonably required for its cure, then it shall
not be deemed to be a Breach of this Lease by Lessee if Lessee commences such
cure within said thirty (30) day period and thereafter diligently prosecutes
such cure to completion.
(e) The occurrence of any of the following events: (i) the making
by Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. ss.101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this subparagraph (e) is contrary to any applicable
law, such provision shall be of no force or effect, and not affect the validity
of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee was materially false when made.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed; (i) the death of a guarantor, (ii) the termination of a guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a
guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurance or security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the guarantors that existed at the time of execution of this Lease.
12.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its option,
may require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 12.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of
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the award of the unpaid rent which had been earned at the time of termination;
(ii) the worth at the time of award of the amount by which the unpaid rent which
would have been earned after termination until the time of award exceeds the
amount of such rental loss that the Lessee proves could have been reasonably
avoided; (iii) the worth at the time of award of the amount by which the unpaid
rent for the balance of the term after the time of award exceeds the amount of
such rental loss that the Lessee proves could be reasonably avoided; and (iv)
any other amount necessary to compensate Lessor for all the detriment
proximately caused by the Lessee's failure to perform its obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom, including but not limited to the cost of recovering possession of the
Premises, expenses of reletting, including necessary renovation and alteration
of the Premises, reasonable attorneys' fees, and that portion of the leasing
commission paid by Lessor applicable to the unexpired term of this Lease. The
worth at the time of award of the amount referred to in provision (iii) of the
prior sentence shall be computed by discounting such amount at the discount rate
of the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default
or Breach of this Lease shall not waive Lessor's right to recover damages under
this Paragraph. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve therein the right to recover all or any part thereof in a separate suit
for such rent and/or damages. If a notice and grace period required under
subparagraphs 12.1(b), (c) or (d) was not previously given, a notice to pay rent
or quit, or to perform or quit, as the case may be, given to Lessee under any
statute authorizing the forfeiture of leases for unlawful detainer shall also
constitute the applicable notice for grace period purposes required by
subparagraphs 12.1(b), (c) or (d). In such case, the applicable grace period
under subparagraphs 12.1(b), (c) or (d) and under the unlawful detainer statute
shall run concurrently after the one such statutory notice, and the failure of
Lessee to cure the Default within the greater of the two such grace periods
shall constitute both an unlawful detainer and a Breach of this Lease entitling
Lessor to the remedies provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect
after Lessee's Breach and abandonment and recover the rent as it becomes due,
provided Lessee has the right to sublet or assign, subject only to reasonable
limitations. See Paragraphs 11 and 34 for the limitations on assignment and
subletting which limitations Lessee and Lessor agree are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the appointment
of a receiver to protect the Lessor's interest under the Lease, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
12.3 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by the Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within five (5) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to five percent (5%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
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reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
12.4 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 12.4, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by the holders of any ground lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days after such notice
are reasonably required for its performance, then Lessor shall not be in breach
of this Lease if performance is commenced within such thirty (30) day period and
thereafter diligently pursued to completion.
13. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "CONDEMNATION"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the land area
not occupied by any building, is taken by condemnation, Lessee may, at Lessee's
option, to be exercised in writing within ten (10) days after Lessor shall have
given Lessee written notice of such taking (or in the absence of such notice,
within ten (10) days after the condemning authority shall have taken possession)
terminate this Lease as of the date the condemning authority takes such
possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power and shall be the property of Lessor, whether such
award shall be made as compensation for diminution in value of the leasehold or
for the taking of the fee, or as severance damages; provided, however, that
Lessee shall be entitled to any compensation awarded for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is
not terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above the legal and other expenses
incurred by Lessor in the condemnation matter, repair any damage to the Premises
caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.
14. TENANCY STATEMENT.
14.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after
written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "TENANCY STATEMENT" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
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14.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.
15. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the event of
a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Upon such transfer or assignment and delivery of the Security
Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with
respect to the obligations and/or covenants under this Lease thereafter to be
performed by the Lessor. Subject to the foregoing, the obligations and/or
covenants in this Lease to be performed by the Lessor shall be binding only upon
the Lessor as herein above defined.
16. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
17. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 12.3.
18. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.
19. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
20. NO PRIOR OR OTHER AGREEMENTS. This Lease contains all agreements between
the Parties with respect to any matter mentioned herein, and no other prior or
contemporaneous agreement or understanding shall be effective.
21. NOTICES.
21.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier service) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 21.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for the purpose of mailing or delivering notices to
Lessee. A copy of all notices required or permitted to be given to Lessor
hereunder shall be concurrently transmitted to such party or parties at such
addresses as Lessor may from time to time hereafter designate by written notice
to Lessee.
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21.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or certified mail. If notice is
received on a Sunday or legal holiday, it shall be deemed received on the next
business day.
22. WAIVERs. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any preceding Default or
Breach by Lessee of any provision hereof, other than the failure of Lessee to
pay the particular rent so accepted. Any payment given Lessor by Lessee may be
accepted by Lessor on account of moneys or damages due Lessor, notwithstanding
any qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
23. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
24. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
25. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
26. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
27. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
28. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
28.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of
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Lessor's default with respect to any such obligation, Lessee will give any
Lender whose name and address have been furnished Lessee in writing for such
purpose notice of Lessor's default and allow such Lender thirty (30) days
following receipt of such notice for the cure of said default before invoking
any remedies Lessee may have by reason thereof. If any Lender shall elect to
have this Lease and/or any Option granted hereby superior to the lien of its
Security Device and shall give written notice thereof to Lessee, this Lease and
such Options shall be deemed granted hereby superior to the lien of its Security
Device and shall give written notice thereof to Lessee, this Lease and such
Options shall be deemed prior to such Security Device, notwithstanding the
relative dates of the documentation or recordation thereof.
28.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
28.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
28.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
28.4 SELF-EXECUTING. The agreements contained in this Paragraph 28 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
29. ATTORNEY'S FEES. If any Party brings an action or proceeding to enforce
the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter
defined) in any such proceeding, action, or appeal thereon, shall be entitled to
reasonable attorney's fees. Such fees may be awarded in the same suit or
recovered in a separate suit, whether or not such action or proceeding is
pursued to decision or judgment. The term, "PREVAILING PARTY" shall include,
without limitation, a Party who substantially obtains or defeats the relief
sought, as the case may be, whether by compromise, settlement, judgment, or the
abandonment by the other Party of its claim or defense. The attorney's fee award
shall not be computed in accordance with any court fee schedule, but shall be
such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall
be entitled to reasonable attorney's fees, costs and expenses incurred in the
preparation and service of notices of Default and consultations in connection
therewith, whether or not a legal action is subsequently commenced in connection
with such Default or resulting Breach.
30. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part, as Lessor may reasonably deem necessary. Lessor may at any time
during the last one hundred twenty (120) days of the term hereof place on or
about the Premises any ordinary "For Lease" signs. All such activities of Lessor
shall be without abatement of rent or liability to Lessee.
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31. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
32. SIGNS. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.
33. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
34. CONSENTS.
(a) Except for Paragraph 31 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 11.2(e) (applicable to assignment or subletting), Lessor may, as a
condition to considering any such request by Lessee, require that Lessee deposit
with Lessor an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will
incur in considering and responding to Lessee's request. Except as otherwise
provided, any unused portion of said deposit shall be refunded to Lessee without
interest. Lessor's consent to any act, assignment of this Lease or subletting of
the Premises by Lessee shall not constitute an acknowledgment that no Default or
Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver
of any then existing Default or Breach, except as may be otherwise specifically
stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor.
35. GUARANTOR.
35.1 If there are to be any Guarantors of this Lease per Paragraph 1.11,
the form of the guaranty to be executed by each such Guarantor shall be in the
form most recently published by the American Industrial Real Estate Association,
and each said Guarantor shall have the same obligations as Lessee under this
Lease, including but not limited to the obligation to provide the Tenancy
Statement and information called for by Paragraph 16.
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35.2 It shall constitute a Default of the Lessee under this Lease if any
such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a)
evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signatures of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
36. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises
and the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
37. OPTIONS.
37.1 DEFINITION. As used in this Paragraph 37 the word "OPTION" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend; (b) the right of first refusal to lease the Premises or
the right of first offer to lease the Premises; (c) the right to purchase the
Premises or the right of first refusal to purchase the Premises, or the right of
first offer to purchase the Premises, or the right to purchase other property of
Lessor, or the right of first refusal to purchase other property of Lessor, or
the right of first offer to purchase other property of Lessor.
37.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee
in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof,
and cannot be voluntarily or involuntarily assigned or exercised by any person
or entity other than said original Lessee while the original Lessee is in full
and actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
37.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised.
37.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i) during
the period commencing with the giving of any notice of Default under Paragraph
12.1 and continuing until the noticed Default is cured, or (ii) during the
period of time any monetary obligation due Lessor from Lessee is unpaid (without
regard to whether notice thereof is given Lessee), or (iii) during the time
Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to
Lessee three (3) or more notices of Default under Paragraph 12.1, whether or not
the Defaults are cured, during the twelve (12) month period immediately
preceding the exercise of the Option.
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(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 37.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three or more notices of Default under Paragraph 12.1 during any twelve
month period, whether or not the Defaults are cured, or (iii) if Lessee commits
a Breach of this Lease.
38. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
39. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement, rights, dedication, map or restrictions.
40. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.
41. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represent and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
42. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions
43. OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.
44. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
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LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF
ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES
AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS
LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY
SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A
STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE
PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Executed at _______________________________ Executed at _______________________
on ________________________________________ on ________________________________
by LESSOR: By LESSEE:
THE ROSENFIELD FAMILY TRUST, ARIZONA MILLWORK, INC., a Colorado
corporation doing business as
Rosewood Enterprises
By:_________________________________ By:________________________________
Name: Edith Rosenfield Name: Donald Procunier
Title: Trustee Title: President
Address: 5415 Nagle Avenue Address: 5301 West Madison Avenue
Van Nuys, California 91401 Phoenix, Arizona 85043
Tel No: (818) 789-2999 Tel No: (602) 233-1903
(818) 786-6843 Fax No: (602) 233-9458
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ADDENDUM TO LEASE
The following shall constitute an Addendum (the "Addendum") to that
certain Standard Industrial/Commercial Single-Tenant lease-Net (the "Lease")
made August 29, 1997 by and between Phillip Rosenfield and Edith Rosenfield, as
Trustees of The Rosenfield Family Trust ("Lessor") and Arizona Millwork, Inc.,
doing business as Rosewood Enterprises ("Lessee") with respect to those certain
premises located at 5301 West Madison, Phoenix Arizona 85043 (the "Premises").
49. INCORPORATION. This Addendum and the terms contained herein shall be
incorporated into and constitute a part of the Lease with the same force and
effect as if stated therein verbatim. All capitalized terms contained but not
defined herein shall have the meanings ascribed to them in the Lease. In the
event of a conflict between the Lease and this Addendum, this Addendum shall
control. Except otherwise noted, references to "the Lease" contained either in
the Lease or in this Addendum shall refer to the Lease and this Addendum.
50. ORIGINAL LEASE. Lessor and Lessee are currently parties to that certain
Lease dated August 29, with respect to the Premises (the "Original Lease," and
with this Lease, the "Leases"). The parties wish to terminate the Original Lease
prior to its stated expiration date and to enter into this Lease in order to
revise the terms of Lessee's leasing of the Premises from Lessor, but without
affecting their relationship of landlord and tenant with respect to the
Premises. The execution and delivery of this Lease is concurrent and
simultaneous with the termination of the Original Lease for all purposes so that
there is no gap whatsoever in the Lessee's right to possession of, and
responsibility for, the Premises pursuant to the terms of the respective Leases.
Notwithstanding the termination of the Original Lease, the Lessor retains all of
the rights and remedies reserved to it thereunder with respect to any act,
omission or circumstance arising during the term of the Original Lease, and
nothing contained herein shall be deemed to constitute a release and/or waiver
with respect to any such matter. The base rent and other amounts payable under
the respective Leases shall be prorated between the Leases based on the length
of the respective periods covered by such payments, as reflected on a schedule
to be prepare and agreed to by the parties.
51. DELIVERY OF POSSESSION. Given the Lessee's prior and continuing possession
and control of the Premises, the Lessor is making absolutely no representations
and/or warranties with respect to the condition thereof or its compliance with
any covenants, restrictions and building codes. Lessee acknowledges that by
virtue of its possession and control thereof, it has had a full, complete and
continuing opportunity to assess the condition of the Premises, and accepts it
in its "as-is" condition.
52. RENT ESCALATION. Beginning in the fourth year of the Original Term (as
defined in Paragraph 1.3 hereof) and continuing in each subsequent year of the
Original Term and may Option Term thereafter (each, a "Subsequent Year"), the
Base Rent shall be increased by the
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percentage by which the Consumer Price Index for All Items, All Urban Consumers
for the West Region (1982-1984=100) ("CPI") published by the United States
Department of Labor, Bureau of Labor Statistics (the "Index") for the Comparison
Month, as defined below, increases in comparison to the Index for the calendar
month which is four (4) months prior to the first month of the Original Term
(the "Base Month"). The Index for the Base Month shall be compared with the
Index for the same calendar month for each Subsequent Year ("Comparison Month").
If the Index for any Comparison Month is higher than the Index for the Base
Month, then the Base Rent for each Subsequent Year following such Comparison
Month shall be increased with the first month of such Subsequent Year, over the
Base Rent payable during the first year of the Original Term, by a percentage
which shall be calculated by dividing the Index for the Base Month into that
number which represents the difference between the Index for the Base Month and
the Index for such Comparison Month. In no event shall the Base Rent for any
Subsequent Year be less than the Base Rent payable during the previous year of
the Original Term. By way of illustration only, the Base Rent payable for the
first year of the Original Term shall be $16,300. If the Original Term begins on
August 1, 1997, the Base Month shall be April 1997. For purposes of
illustration, this example will assume the Index for such month is 161.1. In
calculating the Base Rent for the second year of the Original Term, the Index
for the Base Month will then be compared with the Index for the Comparison Month
of April 1998. This illustration will assume that Index to be 169. Since the
Index for the Comparison Month is four and nine-tenths percent (4.9%) higher
than the Index of the Base Month, the Base Rent commencing on August 1, 1998
would be four and nine-tenths percent (4.9%) higher than the Base Rent Index, or
publish the same less frequently, or alter the same in some other manner, then
Lessor shall adopt a substitute index or substitute procedure which reasonably
reflects and monitors consumer prices.
53. OPTION TO EXTEND TERM. Lessor hereby grants to Lessee an option (the
"Option") to extend the term of this Lease for a period of five (5) years from
the Expiration Date ("Option Term"). In addition to the terms and conditions set
out in the Lease (including specifically, but without limitation, Section 37
thereof) exercise of the Option is subject to the following conditions:
a. The Option must be exercised, if at all, by written notice (the
"Option Notice") delivered by Lessee to Lessor not later than nine (9) months
prior to the end of the Original Term.
b. Provided Lessee has properly and timely exercised the Option, the
term of the Lease shall be extended by the Option Term, and all terms, covenants
and conditions of the Lease shall remain unmodified and in full force and effect
(other than paragraph 37 relating to the granting of Options and paragraph 1.6
relating to Base Rent). The Base Rent for the Option Term shall be calculated in
accordance with the rent escalation provisions set forth in paragraph 52 hereof.
Initials ___
___
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54. RIGHT TO TERMINATE. Provided the following conditions are satisfied, the
Lessee shall have the right to terminate this Lease on at least six (6) months
prior written notice to the Lessor:
a. The Lessee shall have paid to the Lessor all principal, interest
and other charges due under the Note, as hereinafter defined;
b. Any such exercise shall be conditioned upon an absence of any
Default, in the manner described in Paragraph 37.4; and
c. The Lessee shall not have exercised its Option, as hereinafter
defined, to extend the term of the Lease.
55. RIGHT OF FIRST REFUSAL. In the event that the Lessor shall wish to sell the
Premises or any interest therein to any third party (other than a transaction to
a person or persons or to an entity related to the Lessor), the Lessee shall
have a right of first refusal to purchase the Premises on the same terms and
conditions. Within ten (10) days following its acceptance of a written offer to
purchase the Premises, the Lessor shall transmit a complete copy of said offer
to the Lessee. The Lessee shall have ten (10) days following its receipt of said
offer to notify the Lessee of its intention to complete the acquisition of the
Premises on the same terms and conditions, and sixty (60) days thereafter to
complete the acquisition.
56. LESSOR'S SALE OF PREMISES. Subject to the right of first refusal granted to
Lessee pursuant to Section 55 hereof, the Lessor shall have the right to sell,
exchange or transfer the Premises and all or any part of its interest therein
(collectively, a "Transfer") at any time. In the event of a Transfer, Tenant
agrees to recognize and attorn to the transferee, as lessor hereunder, and
Lessor shall be and is hereby entirely freed and relieved of all liability under
any and all of its covenants and obligations contained in or derived from this
Lease, provided that (a) the interest of the Lessor in any funds then in the
hands of the Lessor in which Lessee has an interest shall be turned over,
subject to such interest, to the then transferee, and (b) notice of such
Transfer shall be given to Lessee as required by law. A holder of a mortgage,
deed of trust or other encumbrance to which this Lease is or may be subordinate
shall only be responsible for the Security Deposit to the extent that such
holder shall have actually received the Security Deposit or a portion thereof.
57. GUARANTEE. Donald Procunier and Gail Procunier ("Guarantors") are
guaranteeing performance of all of the obligations of the Lessee under this
Lease. To evidence that obligation, the Guarantors are concurrently delivering
to the Lessor its guarantee of even date herewith (the "Guarantee"). Pursuant to
the Guarantee, the Guarantors are also guaranteeing the obligations of the
Lessee as Maker under that certain Secured Promissory Note of even date herewith
in favor of Lessor as Holder in the original principal amount of $1,000,000 (the
"Note").
58. CROSS DEFAULT. In addition to (but not in limitation of) all of the rights
and remedies of the Lessor hereunder, at the option of the Lessor, a Default
under the terms of this Lease shall constitute an Event of Default under one or
more of the Transaction Documents, as hereinafter
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___
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defined, enabling the Lessor, at its option, to exercise all of its rights and
remedies thereunder. Additionally, at the option of Lessor, an Event of Default
under any of the Transaction Documents, as hereinafter defined, shall constitute
a Default under this Lease, enabling the Lessor, at its option, to exercise all
of its rights and remedies hereunder. The term "Transaction Documents" shall
mean the Note, the Guarantee, that certain Security Agreement of even date
herewith by and between the Lessor as Secured Party and the Lessee as Debtor.
59. INSURANCE REQUIREMENTS. The Lessor and Lessee may modify the insurance
requirements of the Lease from time to time in a writing executed by both
parties.
"Lessor"
THE ROSENFIELD FAMILY TRUST
By: ________________________________
Phillip Rosenfield, Trustee
THE ROSENFIELD FAMILY TRUST
By: ________________________________
Edith Rosenfield, Trustee
"Lessee"
ARIZONA MILLWORK, INC.
a Colorado corporation doing
business as Rosewood Enterprises
By: ________________________________
Donald Procunier, President
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___
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SEE AMENDMENTS TO LEASE CONTAINED IN SECTIONS 4, 5 AND 6.
CONSENT OF LANDLORD TO CHANGE OF CONTROL OF ROSEWOOD
This CONSENT OF LANDLORD TO CHANGE OF CONTROL OF ROSEWOOD (this
"Agreement") effective as of the 17" day of April, 1998, by and between ROSEWOOD
ENTERPRISES, INC., an Arizona corporation formerly known as ARIZONA MILLWORK,
INC. ("Rosewood") and THE ROSENFIELD FAMILY TRUST (the "Lessor") (Rosewood and
Lessor are sometimes hereinafter referred to collectively as the "Parties").
RECITALS
WHEREAS, on the date of this Agreement the shareholders of Rosewood are
selling their shares of Rosewood stock to SPI Manufacturing, Inc., a California
corporation (the "SPI");
WHEREAS, following such sale, SPI intends to operate Rosewood as a
wholly owned subsidiary of SPI, and intends to continue the operations conducted
on the premises located at 5301 West Madison Avenue, Phoenix, Arizona (the
"Premises") leased by Rosewood under that certain Standard Industrial/Commercial
Single-Tenant Lease-Net, dated August 29, 1997 (the "Lease"), by and between the
Lessor and Rosewood; and
WHEREAS, pursuant to Section 11. 1 (b), a transfer of twenty-five
percent (25%) or more of the voting control of Rosewood constitutes an
assignment under the Lease requiring the consent of Lessor.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties agree as follows:
1. Lessor hereby consents to the assignment of the Lease resulting from
the change in control of Rosewood described in the recitals to this Agreement.
2. Lessor hereby certifies for the benefit of SPI and Rosewood:
(a) Lessor is the fee owner of the Premises, which are leased to
Rosewood;
(b) The Premises are occupied by Rosewood pursuant to the Lease, with
lease terms and provision for rental payments, including any rental increases
and deferred rent, as indicated on Exhibit A;
(c) Rosewood took possession of the Premises covered by the Lease on the
date shown on Exhibit A;
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<PAGE> 33
(d) To Lessor's knowledge, as of the date of this Agreement, Rosewood
has fully performed its obligations under the Lease, including payment of all
rent which has come due; there are no remaining conditions to Lessor's
obligations under the Lease; to Lessor's knowledge, no default or event of
default has occurred in Rosewood's obligations under the Lease; Lessor claims no
offsets or charges against Rosewood or defenses to enforcement of the Lease; and
Rosewood has not prepaid rentals more than one month in advance;
(e) To Lessor's knowledge, as of the date of this Agreement, the
existing a plumbing, roofing, fire sprinkler system, lighting, heating, and air
conditioning in the Premises are in good operating condition.
(f) To Lessor's knowledge, as of the date of this Agreement, all
improvements on the Premises comply with all applicable covenants or
restrictions of record and applicable building codes, regulations and ordinances
in effect on the Effective Date.
(g) As used in this Agreement, the following terms shall have the
following meanings:
(1) "Hazardous Materials" means any dangerous, toxic or hazardous
pollutant, contaminant, chemical, waste, material or substance, including but
not limited to gasoline, diesel fuels, waste oils or other petroleum products,
as defined in or governed by any federal, state or local law, statute, code,
ordinance, regulation, rule or other requirement relating to such substance or
otherwise relating to the environment or human health or safety. including,
without limitation, any waste, material, substance, pollutant or contaminant
(including but not limited to gasoline, diesel fuels, waste oils or other
petroleum products) that might cause any injury to human health or safety or to
the environment or might subject the Company to any imposition of costs or
liability under any Environmental Law.
(2) "Environmental Laws" means all applicable federal, state,
local and foreign laws, rules, regulations, codes, ordinances, orders, decrees,
directives, permits, licenses and judgments relating to pollution, contamination
or protection of the environment (including. without limitation, all applicable
federal, state, local and foreign laws, rules, regulations, codes, ordinances,
orders, decrees, directives, permits, licenses and judgments relating to
Hazardous Materials in effect as of the date of this Agreement).
(3) "Release" shall mean the spilling, leaking, disposing,
discharging, emitting, depositing, ejecting, leaching, escaping or any other
release or threatened release, however defined, whether intentional or
unintentional, of any Hazardous Material.
(h) Lessor has reviewed the Phase I Environmental Site Assessment Report
dated April 1998 pertaining to the Premises.
(i) To Lessor's knowledge, as of the date of this Agreement, the
Premises are in compliance with all applicable Environmental Laws.
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<PAGE> 34
(j) The Lessor has obtained, and maintained in full force and effect,
all environmental permits, licenses, certificates of compliance, approvals and
other authorizations necessary to own the Premises ("Environmental Permits"). To
Lessor's knowledge, activities conducted on the Premises have been in compliance
with all terms and conditions of the Environmental Permits and Lessor has filed
all reports and notifications required to be filed under and pursuant to all
applicable Environmental Laws.
(k) To Lessor's knowledge, no Hazardous Materials are located on the
Premises, or have been generated, treated, contained, handled, located, used,
manufactured, processed, buried, incinerated, deposited, stored, or released on,
under or about any part of the Premises or the Ancillary Properties, (ii) the
Premises and any improvements thereon, contain no asbestos, urea formaldehyde,
radon at levels above natural background, polychlorinated biphenyls (PCBs) or
pesticides, and (iii) no aboveground or underground storage tanks are located
on, under or about the Premises or have been located on, under or about the
Premises and then subsequently been removed or filled. If any such storage tanks
exist on, under or about the Premises, such storage tanks have been duly
registered with all appropriate governmental entities and are otherwise in
compliance with all applicable Environmental Laws.
(l) Lessor has not received, nor to Lessor's knowledge is there
proposed, threatened or anticipated with respect to the Premises, any notice,
demand, request for information, complaint, summons, investigation, order,
agreement or litigation alleging in any manner that the Lessor is, or might be
potentially responsible for, any Release of Hazardous Materials, or any costs
arising under or violation of Environmental Laws. There is no condition on the
Premises which is in violation of any applicable governmental requirements
relating to Hazardous Materials.
(m) The Premises are not and have not been listed on the United States
Environmental Protection Agency National Priorities List of Superfund Sites, or
any other list, schedule, law, inventory or record of hazardous or solid waste
sites maintained by any federal, state or local agency, and Lessor is not and
has not been designated as a "potentially responsible party" with respect to any
such sites, to Lessors knowledge.
(n) To Lessor's knowledge, no part of the Premises has been used as a
landfill, dump or other disposal, storage, transfer, handling or treatment area
for Hazardous Materials, or as a gasoline service station or a facility for
selling, dispensing, storing, transferring, disposing or handling petroleum
and/or petroleum products.
(o) To Lessor's knowledge, there are no wells of any nature currently
located, or previously located. on or in the Premises and no water or soil
sampling, testing or analysis has been conducted on or for the benefit of the
Premises.
3. The foregoing representations are made by Lessor with the knowledge
and understanding that Rosewood and SPI will rely upon the accuracy and
completeness thereof, and Lessor acknowledges that it will be bound by these
representations.
4. The Lease is hereby amended by deleting the last sentence of Section
8.8.
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<PAGE> 35
5. The Lease is hereby amended to provide that any consent required
under Section 12 shall not be unreasonably withheld by Lessor.
6. The Lease is hereby amended by deleting Section 54.
7. This Agreement shall be binding on and inure to the benefit of the
Parties hereto, their respective heirs, executors, administrators,
beneficiaries, successors in interest and assigns.
8. This Agreement may be executed in one or more counterparts, any one
of which need not contain the signatures of more than one party, but all such
counterparts taken together will constitute one and the same instrument.
9. This Agreement shall be governed by the substantive laws of the State
of California.
IN WITNESS WHEREOF, the Parties have executed this Agreement on the day
and year first above written.
ROSEWOOD ENTERPRISES, INC.
formerly known as
ARIZONA MILLWORK, INC.
By: __________________________________
Name: Ronald R. Procunier
Title: President
THE ROSENFIELD FAMILY TRUST
By: __________________________________
Name: Phillip Rosenfield
Title: Trustee
By: __________________________________
Name: Edith Rosenfield
Title: Trustee
-35-
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
Modtech, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Joint Proxy Statement/Prospectus.
KPMG Peat Marwick LLP
Orange County, California
October 26, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and all references to our Firm) included in or made a part of this registration
statement.
ARTHUR ANDERSEN LLP
Orange County, California
October 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,628,851
<SECURITIES> 0
<RECEIVABLES> 37,531,132
<ALLOWANCES> 0
<INVENTORY> 3,931,505
<CURRENT-ASSETS> 56,593,962
<PP&E> 16,012,812
<DEPRECIATION> 4,783,649
<TOTAL-ASSETS> 68,220,257
<CURRENT-LIABILITIES> 20,177,338
<BONDS> 0
0
0
<COMMON> 48,042,919
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 68,220,257
<SALES> 134,050,485
<TOTAL-REVENUES> 134,050,485
<CGS> 107,367,035
<TOTAL-COSTS> 107,367,035
<OTHER-EXPENSES> 5,155,987
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,004,198
<INCOME-PRETAX> 20,710,919
<INCOME-TAX> 7,702,634
<INCOME-CONTINUING> 13,008,285
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,008,285
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.31
</TABLE>
<PAGE> 1
EXHIBIT 99.1
MODTECH, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Modtech, Inc. ("Modtech") hereby appoints
Evan M. Gruber and Michael G. Rhodes as attorneys, agents, and proxies of the
undersigned, with full power of substitution in each of them, to vote, in the
name and on behalf of the undersigned at the Special Meeting of Stockholders
(the "Special Meeting") of Modtech to be held on December __, 1998 at 10:00
a.m., at the Sheraton Newport Hotel, 4545 MacArthur Boulevard, Newport Beach,
California 92660, and at all adjournments thereof, all of the shares of Common
Stock of Modtech which the undersigned would be entitled to vote if personally
present, with all powers the undersigned would possess if personally present.
PROPOSAL: To approve and adopt the Agreement and Plan of Reorganization and
Merger, dated September 28, 1998 (the "Merger Agreement"), by and between
Modtech and SPI Holdings, Inc., a Colorado corporation, and to approve the
transactions contemplated thereby, including the merger of Modtech with Modtech
Sub, Inc., a Delaware corporation.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The undersigned hereby acknowledge receipt of the Notice of Special Meeting
and the Joint Proxy Statement/Prospectus (the "Proxy Statement") dated
___________, 1998 relating to the Special Meeting.
ALL SHARES WILL BE VOTED AS SPECIFIED. IF THE PROXY IS SIGNED AND SENT BUT
NO CHOICE IS SPECIFIED, THE SHARES WILL BE VOTED FOR APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT. SHARES WILL BE VOTED AT THE DISCRETION OF THE PROXY
HOLDERS AS TO ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE MEETING FOR
WHICH DISCRETIONARY AUTHORITY MAY BE GRANTED. PROXIES NOT RECEIVED OR VOTES TO
ABSTAIN WILL BE TREATED AS VOTES AGAINST THE PROPOSALS.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER HEREIN
SPECIFIED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS INDICATED, THIS
PROXY WILL BE VOTED FOR APPROVAL OF THE PROPOSED MERGER AND IN ACCORDANCE WITH
THE DISCRETION OF THE PROXIES ON ANY OTHER MATTERS TO COME BEFORE THE ANNUAL
MEETING.
Please sign exactly as your name appears below, date and return this card
promptly using the enclosed envelope. Executors, administrators, guardians,
officers of corporations, and others signing in a fiduciary capacity should
state their full titles as such.
Dated _______________________, 1998
___________________________________
Signature
___________________________________
Signature (if held jointly)
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE URGED TO
MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY, USING THE ENCLOSED ENVELOPE.
<PAGE> 1
EXHIBIT 99.2
SPI HOLDINGS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of SPI Holdings, Inc. ("SPI") hereby appoints
Patrick Van Den Bossche and Ronald West as attorneys, agents, and proxies of the
undersigned, with full power of substitution in each of them, to vote, in the
name and on behalf of the undersigned at the Special Meeting of Stockholders
(the "Special Meeting") of SPI to be held on December __, 1998 at 10:00 a.m., at
9550 Hermosa Avenue, Rancho Cucamonga, California 91730, and at all adjournments
thereof, all of the shares of Common Stock and Preferred Stock of SPI which the
undersigned would be entitled to vote if personally present, with all powers the
undersigned would possess if personally present.
PROPOSAL: To approve and adopt the Agreement and Plan of Reorganization and
Merger, dated September 28, 1998 (the "Merger Agreement") by and between SPI and
Modtech, Inc., a California corporation, and to approve the transactions
contemplated thereby, including the merger of SPI with SPI Sub, Inc., a Delaware
corporation.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The undersigned hereby acknowledge receipt of the Notice of Special Meeting
and the Joint Proxy Statement/Prospectus (the "Proxy Statement") dated
___________, 1998 relating to the Special Meeting.
ALL SHARES WILL BE VOTED AS SPECIFIED. IF THE PROXY IS SIGNED AND SENT BUT
NO CHOICE IS SPECIFIED, THE SHARES WILL BE VOTED FOR APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT. SHARES WILL BE VOTED AT THE DISCRETION OF THE PROXY
HOLDERS AS TO ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE MEETING FOR
WHICH DISCRETIONARY AUTHORITY MAY BE GRANTED. PROXIES NOT RECEIVED OR VOTES TO
ABSTAIN WILL BE TREATED AS VOTES AGAINST THE PROPOSALS.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER HEREIN
SPECIFIED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS INDICATED, THIS
PROXY WILL BE VOTED FOR APPROVAL OF THE PROPOSED MERGER AND IN ACCORDANCE WITH
THE DISCRETION OF THE PROXIES ON ANY OTHER MATTERS TO COME BEFORE THE ANNUAL
MEETING.
Please sign exactly as your name appears below, date and return this card
promptly using the enclosed envelope. Executors, administrators, guardians,
officers of corporations, and others signing in a fiduciary capacity should
state their full titles as such.
Dated _______________________, 1998
___________________________________
Signature
___________________________________
Signature (if held jointly)
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE URGED TO
MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY, USING THE ENCLOSED ENVELOPE.
