<PAGE> 1
As filed with the Securities and Exchange Commission on December 15, 1998
Registration No. 333-69033
================================================================================
SECURITIES AND EXCHANGE COMMISSION
AMENDMENT NO. 1
TO
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. [ ]
================================================================================
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CROSS-REFERENCE SHEET TO FORM S-4 OF
MODTECH HOLDINGS, INC.
PART I. INFORMATION REQUIRED IN THE PROSPECTUS
ITEM NUMBER IN FORM S-4
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Charges and Other
Information
4. Terms of the Transaction
5. Pro Forma Financial Information
6. Material Contacts with the Company Being Acquired
7. Additional Information Required for Reoffering by Persons and
Parties Deemed to be Underwriters.
8. Interests of Named Experts and Counsel
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
11. Incorporation of Certain Information by Reference
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 Than S-2 or S-3
Registrants
LOCATION IN JOINT PROXY STATEMENT/PROSPECTUS
Facing Page; Outside Front Cover Page of Prospectus
Table of Contents; Where You Can Find More Information;
Outside Front Cover Page of Prospectus; Summary; Risk Factors
Summary; The Mergers; Material Provisions of the Merger Agreement; Directors and
Officers of Holdings Following the Mergers; Description of Holdings
Capital Stock; Comparison of Rights of Stockholders
Summary; Unaudited Pro Forma Combined Condensed Financial Statements
Summary; The Mergers; Material Provisions of the Merger Agreement
*
Experts; Legal Matters
*
Summary; Where You Can Find More Information
Where You Can Find More Information
*
*
Summary; The Mergers; The Business of Modtech; Modtech Common Stock Prices and
Dividends; Modtech Management's Discussion and Analysis of Financial
Condition and Results of Operations
1
<PAGE> 3
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 than S-2 or S-3
Companies
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations are to be
Solicited
19. Information if Proxies, Consents or Authorizations are not to be
Solicited in an Exchange Offer
*
*
Summary; The Mergers; The Business of SPI; SPI Management's Discussions and
Analysis of Financial Condition and Results of Operations
Outside Front Cover of Prospectus; Summary; Risk Factors; The Mergers; The
Special Meetings; Material Provisions of the Merger Agreement; Description
of Holdings Capital Stock; Comparison of Rights of Stockholders; Where You
Can Find More Information
*
- ----------
* Not applicable.
2
<PAGE> 4
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:
___________, January __, 1999, 10:00 a.m.
Sheraton Newport Hotel
4545 MacArthur Boulevard
Newport Beach, California 92660
FOR SPI STOCKHOLDERS:
___________, January __, 1999, 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 December __, 1998 and is
first being sent or given to stockholders on or about __________, 1998.
<PAGE> 5
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 January __, 1999, 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"). 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 November 30,
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
December __, 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.,
January __, 1999, 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"). 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"), 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 Common Stock and SPI Preferred
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 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 adjournment or postponement
thereof.
The SPI Board of Directors has fixed the close of business on November 30,
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 adjournment or postponement 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.
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 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.
Sincerely,
/s/ Patrick Van Den Bossche
--------------------------------------
Patrick Van Den Bossche,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Rancho Cucamonga, California
December __, 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
QUESTIONS AND ANSWERS ABOUT THE MODTECH/SPI MERGER............................1
SUMMARY.......................................................................7
The Companies............................................................7
The Special Meetings.....................................................8
Record Date; Voting Power................................................8
Nasdaq Listing of Holdings Common Stock..................................8
Share Ownership of Management and Certain Stockholders...................8
Conflicts of Interest....................................................9
Board of Directors Following the Mergers.................................9
Comparative Per Share Market Price Information...........................9
Approvals................................................................9
Conditions to the Mergers................................................9
Termination of the Merger Agreement.....................................10
Termination Fee.........................................................10
Dissenters' Rights......................................................10
Opinion of Modtech's Financial Advisor..................................11
Forward-Looking Statements May Prove Inaccurate.........................11
Comparative Historical and Pro Forma Per Share Data.....................12
Modtech Selected Financial Data.........................................13
SPI Selected Financial Data.............................................14
Modtech and SPI Selected Unaudited Pro Forma Combined Condensed
Financial Information.................................................16
RISK FACTORS.................................................................17
Risks Related to the Mergers............................................17
Risks Related to Modtech................................................19
Risks Related to SPI....................................................20
THE MERGERS..................................................................22
General.................................................................22
Background of the Mergers...............................................22
Reasons for the Mergers; Recommen-dations of the Boards of Directors....25
Form of the Mergers.....................................................27
Merger Consideration....................................................27
Opinion of Modtech's Financial Advisor..................................28
Procedures for Election of Merger Consideration and Surrender of Stock
Certificates; Fractional Shares.......................................31
Effective Time..........................................................33
Effect on SPI Stock Plan................................................33
Effect on SPI Warrants..................................................33
Effect on Modtech Stock Plans...........................................33
Material Federal Income Tax Consequences................................34
Conflicts of Interest...................................................38
Accounting Treatment....................................................40
Approvals and Consents..................................................40
Nasdaq Listing..........................................................40
Resales of Stock........................................................41
Dissenters' Rights......................................................41
Cautionary Statement Concerning Forward-Looking Statements..............44
THE SPECIAL MEETINGS.........................................................46
Purpose, Time and Place.................................................46
Record Date; Voting Power...............................................46
Votes Required..........................................................47
Share Ownership of Management and Certain Stockholders..................47
Voting of Proxies.......................................................47
Revocability of Proxies.................................................48
Solicitation of Proxies.................................................48
MATERIAL PROVISIONS OF THE MERGER AGREEMENT..................................49
Conditions to Consummation of the
Mergers...............................................................49
Conduct of Business Pending the Mergers.................................49
Termination.............................................................50
Termination Fee.........................................................50
Certain Representations and Warranties..................................52
Indemnification.........................................................52
Fees and Expenses.......................................................53
Amendment and Waiver....................................................54
THE BUSINESS OF HOLDINGS.....................................................55
THE BUSINESS OF MODTECH......................................................56
MODTECH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................................63
MODTECH COMMON STOCK PRICES AND DIVIDENDS....................................69
THE BUSINESS OF SPI..........................................................70
SPI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................................74
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS..................80
DIRECTORS AND OFFICERS OF HOLDINGS FOLLOWING THE MERGERS.....................91
Directors...............................................................91
Compensation of Holdings' Directors and Committees of the Board of
Directors...............................................................93
Holdings' Executive Officers............................................93
i
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Compensation of Holdings' Executive Officers............................94
Compensation of Modtech's Directors and Executive Officers..............94
Compensation of SPI's Directors and Executive Officers..................94
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF HOLDINGS...97
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF MODTECH....99
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF SPI........101
DESCRIPTION OF HOLDINGS CAPITAL STOCK........................................103
COMPARISON OF RIGHTS OF STOCKHOLDERS.........................................105
EXPERTS......................................................................110
LEGAL MATTERS................................................................110
OTHER MATTERS................................................................110
WHERE YOU CAN FIND MORE INFORMATION..........................................110
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
ii
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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:
o Product diversification -- At present, Modtech makes modular
relocatable classrooms, and SPI makes commercial and light
industrial modular buildings.
o 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 neighboring states.
o 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.
o 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 a 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 will be
selected following the mergers. 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.
5. 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 SPI Preferred
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 Common Stock or SPI Preferred 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.
6. 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, which generally requires the Modtech
stockholders and the SPI stockholders (as a group) to own at least
80% of the voting stock and all other classes of stock of Holdings.
This will allow the Modtech stockholders to receive the shares of
Holdings Common Stock and Holdings Series A Preferred Stock tax
free. Such stock 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 of Section 351 of the Internal
Revenue Code.
7. Q: IF I AM AN SPI STOCKHOLDER AND ELECT TO RECEIVE $49.4097 PER SHARE
FOR UP TO 5.9176% OF MY
2
<PAGE> 11
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 Common Stock and SPI
Preferred 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.
8. Q: IF I AM AN SPI STOCKHOLDER, CAN I ELECT TO RECEIVE $49.4097 PER
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.
9. Q: IF I AM AN SPI STOCKHOLDER AND DO NOT ELECT TO RECEIVE $49.4097 PER
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 Common Stock
and SPI Preferred 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.
10. 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 like Modtech Common Stock, but Holdings Series A Preferred
Stock will not be listed.
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
3
<PAGE> 12
depend on the facts of your own situation. You should consult your
tax advisor for a full understanding of the tax consequences of the
mergers to you. See "The Mergers -- Material Federal Income Tax
Consequences."
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 letters of transmittal and
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 ___________, January __, 1999
at 10:00 a.m. and SPI's meeting will take place on ___________,
January __, 1999 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
advisor.
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 advisor.
16. Q: AFTER THE MERGERS ARE COMPLETED, HOW MANY SHARES OF HOLDINGS STOCK
WILL BE OUTSTANDING, WHAT PERCENTAGE OF THESE SHARES WILL BE HELD BY
THE FORMER MODTECH STOCKHOLDERS, AND WHAT PERCENTAGE OF THE SHARES
WILL BE HELD BY FORMER SPI STOCKHOLDERS?
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.
Immediately following the completion of the mergers, the former
Modtech
4
<PAGE> 13
stockholders will own 100% of Holdings Series A Preferred Stock and
65.9% of Holdings Common Stock, and the former SPI stockholders will
own 34.1% of Holdings Common Stock.
17. Q: WHAT VOTE IS REQUIRED FOR APPROVAL?
A: The mergers must be approved:
o 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
o by holders of a majority of the votes entitled to be cast by holders
of the outstanding shares of Modtech Common Stock.
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 Common Stock. You should review "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."
5
<PAGE> 14
20. Q: WHEN ARE THE MERGERS EXPECTED TO OCCUR?
A: We are working to complete the mergers by early 1999.
21. 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.
6
<PAGE> 15
SUMMARY
The mergers described in this Joint Proxy Statement and Prospectus 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 relocatable 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
acquisitions. In its first acquisition, SPI
7
<PAGE> 16
converted the manufacturing facility of a mobile home builder to a fully
operational modular construction facility to provide additional manufacturing
capacity in California. SPI 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 44)
The Special Meeting of Modtech Stockholders will be held at the Sheraton
Newport Hotel, 4545 MacArthur Boulevard, Newport Beach, California, on
___________, January __, 1999 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 _________, January__, 1999 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 44);
You are entitled to vote at your stockholders' meeting if you owned shares
as of the close of business on November 30, 1998, the Record Date.
On the Record Date, there were 333,614 shares of SPI Common Stock and
1,899,720 shares of SPI Preferred Stock entitled to vote at the Meeting of SPI
Stockholders. SPI stockholders are entitled to one vote for each share of SPI
Common Stock and one vote for each share of SPI Preferred Stock held of record
on the Record Date .
On the Record Date, there were 9,871,409 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 38)
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 45)
On the Record Date, directors and executive officers of Modtech owned and
will be entitled to vote 5,100,636 shares of Modtech Common Stock, or
approximately 52% of the voting power of the Modtech Common Stock outstanding on
the Record Date.
8
<PAGE> 17
On the Record Date, directors and executive officers of SPI owned and will
be entitled to vote 2,186,993 shares of SPI Common Stock and SPI Preferred
Stock, or approximately 95% of the voting power of SPI voting stock outstanding
on the Record Date.
CONFLICTS OF INTEREST (PAGE 36)
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 90)
The Board Directors of Holdings will be comprised of Evan M. Gruber,
Charles C. McGettigan, Myron A. Wick and Daniel J. Donahoe III, all of whom are
currently members of the Modtech Board. The Board of Directors of Holdings will
also include 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 after the mergers are completed.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (PAGE 67)
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
of Modtech Common Stock 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 Common
Stock and SPI Preferred Stock are privately held. There were no reported sales
of these shares during 1998.
APPROVALS (PAGE 38)
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 November 19, 1998, the waiting period expired without action being taken by
the Federal Trade Commission.
CONDITIONS TO THE MERGERS (PAGE 47)
We will complete the mergers only if we satisfy several conditions,
including the following:
o holders of 70% of the voting power of the SPI Common Stock and SPI
Preferred Stock and holders of a majority of the voting power of the
Modtech Common Stock vote to adopt the Merger Agreement and to approve the
mergers;
o no legal restraints or prohibitions prevent the consummation of the
Mergers;
o all material approvals and authorizations are received;
o not more than 5% of the Modtech or SPI stockholders exercise their
dissenters' rights.
o 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
9
<PAGE> 18
of fees to, certain financial advisors are executed; and
o our lawyers deliver certain tax opinions.
Unless prohibited by law, either SPI or Modtech could waive a condition
that has not been satisfied and complete the mergers anyway. Neither SPI nor
Modtech intends to waive any material conditions to the mergers, including
receipt of the tax opinions.
TERMINATION OF THE MERGER AGREEMENT (PAGE 49)
We can jointly agree to call off the mergers at any time before completing
them. Either of us can call off the mergers if:
o the other party's stockholders fail to approve the mergers;
o the mergers have not been completed by March 28, 1999;
o any government or court issues an order or takes another action enjoining
or prohibiting one or both of the mergers;
o 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
o 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 49)
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
o the other party's stockholders fail to approve the mergers;
o 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
o 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 39)
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 voting against the mergers and otherwise
following the procedures required by California law will have the right to have
their shares
10
<PAGE> 19
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
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 26)
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 42)
Modtech and SPI have each made forward-looking statements in this Joint
Proxy Statement/Prospectus (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.
11
<PAGE> 20
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 nine months
ended September 30, 1998 (unaudited) and the year ended December 31, 1997, and
(b) the unaudited pro forma per share data of SPI for the nine months ended
September 30, 1998 and the year ended December 31, 1997. The pro forma per share
data for SPI assumes that the acquisitions of Office Master and Rosewood, which
were consummated during 1998, had occurred as of the beginning of the period
presented, except that the book value per share at December 31, 1997 assumes
that the acquisitions occurred on that date. It also sets forth the unaudited
pro forma combined per share data of Modtech and SPI for the nine months ended
September 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 NINE MONTHS ENDED
MODTECH - HISTORICAL: DECEMBER 31, 1997 SEPTEMBER 30, 1998
- --------------------- ----------------- ------------------
<S> <C> <C>
Basic earnings per share.................... $1.47 $1.46
Cash dividends per share.................... - -
Book value per share........................ $5.43(B) $6.31(B)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
SPI - PRO FORMA DECEMBER 31, 1997 SEPTEMBER 30, 1998
- --------------- ----------------- ------------------
<S> <C> <C>
Basic earnings per share.................... $0.90 $0.65
Cash dividends per share.................... - -
Book value per share........................ 5.14(B) 5.97(B)
</TABLE>
<TABLE>
<CAPTION>
MODTECH AND SPI PRO FORMA
COMBINED GIVING EFFECT YEAR ENDED NINE MONTHS ENDED
TO THE MERGERS DECEMBER 31, 1997 SEPTEMBER 30, 1998
- ------------------------- ----------------- ------------------
<S> <C> <C>
Basic earnings per share.................... $0.96 $1.08
Cash dividends per share.................... - -
</TABLE>
<TABLE>
<CAPTION>
MODTECH AND SPI
COMBINED PRO FORMA
BOOK VALUE PER
SHARE AS OF
SEPTEMBER 30, 1998 (A)
----------------------
<S> <C>
$9.12(B)
</TABLE>
(A) Includes goodwill of approximately $10.04 per share.
(B) Book value per share is calculated using basic weighted average shares.
12
<PAGE> 21
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 September 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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 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 $ 98,711 $ 113,119
Cost of goods sold .......................... 21,764 17,766 16,401 42,629 107,367 78,923 87,083
--------- --------- --------- --------- --------- --------- ---------
Gross profit (loss) ......................... (2,106) 2,589 2,985 7,257 26,683 19,788 26,036
Selling, general & administrative expenses... 1,871 1,554 1,613 2,345 5,156 3,544 3,843
Restructuring charge (A) .................... 2,470 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations ............... (6,447) 1,035 1,372 4,912 21,527 16,244 22,193
Interest income (expense), net .............. (565) (471) (387) (422) (909) (823) 694
Other income (expense) ...................... 47 42 (1) (13) 92 72 18
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ........... (6,965) 606 984 4,477 20,711 15,493 22,905
Provision for income taxes .................. (1) (4) (19) (208) (7,703) (5,812) (8,511)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) ........................... (6,966) 602 965 4,269 13,008 9,681 14,394
========= ========= ========= ========= ========= ========= =========
Net income (loss) available for Common
Stock (B).................................. $ (6,966) $ 602 $ 799 $ 4,221 $ 13,008 $ 9,681 $ 14,394
========= ========= ========= ========= ========= ========= =========
Basic earnings (loss) per share (C) ......... $ (2.02) $ 0.19 $ 0.25 $ 0.77 $ 1.47 1.01 1.46
Weighted average shares outstanding (C) ..... 3,455 3,209 3,170 5,461 8,854 9,611 9,871
Diluted earnings (loss) per common
share (C) ................................... $ (2.02) $ 0.11 $ 0.14 $ 0.47 $ 1.31 1.00 1.31
Weighted average shares outstanding (C) ..... 3,455 5,294 6,712 $ 9,041 9,898 9,647 11,000
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 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 $ 29,939 $ 49,797
Total assets ................................ 16,620 15,919 15,154 34,029 68,220 57,952 82,487
Total liabilities ........................... 11,889 7,900 6,411 18,716 20,177 32,783 20,236
Long-term debt, excluding current
portion (D)................................ 6,506 4,400 3,590 7,844 -- 13,908 --
Stockholders' equity ........................ 4,732 8,019 8,743 15,313 48,043 25,169 62,251
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 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% 20.0% 23.0%
Operating margin ............................ (32.8%) 5.1% 7.1% 9.8% 16.1% 16.5% 19.6%
Standard classrooms sold (E)................. 680 698 605 1,610 4,514 3,312 3,059
Backlog at period end (F) ................... $ 6,000 $ 7,000 $ 4,100 $58,000 $71,000 $85,004 $35,566
</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,
and $48,000 for the six months ended June 30, 1996. No shares of the
Company's preferred stock were outstanding during the nine months ended
September 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 nine 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.
13
<PAGE> 22
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 September 30, 1998 and
for the six months ended September 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)
------------------------------------------------------------------------------------------------
| Six
Two | Months
YEAR ENDED Months | Year Ended
Ended | Ended ---------------------
JANUARY 31, March 27, | March 31, Sept. 30, Sept. 30,
-------------------------------------------- -------- | -------- -------- --------
1994 1995 1996 1997 1997 | 1998 1997 1998
-------- -------- -------- -------- -------- | -------- -------- --------
(dollars in thousands except per share data | (unaudited)
and operating data) |
<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 $ 22,712 $ 41,540
Cost of sales .................. 7,378 13,113 10,541 19,035 4,106 | 32,458 17,078 33,322
-------- -------- -------- -------- -------- | -------- -------- --------
Gross profit (B) ............... 1,495 4,019 2,888 5,078 1,927 | 9,722 5,634 8,218
Selling, general and |
administrative expenses ........ 1,312 2,383 2,609 1,644 507 | 2,667 1,109 2,325
Management and monitoring |
fees ........................ -- -- -- -- -- | 225 112 173
Depreciation and amortization... 26 43 49 78 13 | 1,751 728 1,319
-------- -------- -------- -------- -------- | -------- -------- --------
Income from operations ......... 157 1,593 230 3,356 1,407 | 5,079 3,685 4,401
Interest income (expense), net.. 10 21 80 78 21 | (1,439) (725) (1,766)
Other income (expense) ......... -- -- 34 (6) 90 | 36 4 3
-------- -------- -------- -------- -------- | -------- -------- --------
Income before income taxes ..... 167 1,614 344 3,428 1,518 | 3,676 2,964 2,638
Income tax provision ........... 57 518 141 1,409 660 | 1,580 1,269 1,140
-------- -------- -------- -------- -------- | -------- -------- --------
Net income (loss) .............. $ 110 $ 1,096 $ 203 $ 2,019 $ 858 | $ 2,096 $ 1,695 $ 1,498
======== ======== ======== ======== ======== | ======== ======== ========
|
PER SHARE DATA (C): |
Basic net income per share.... | $ 1.30 $ 1.06 $ .67
| ======== ======== ========
|
Diluted net income per share.. | $ 1.12 $ .91 $ .56
| ======== ======== ========
|
Number of shares used in |
computing basic net income |
per share................... | 1,613 1,600 2,245
|
Number of shares used in |
computing diluted net |
income (loss) per share..... | 1,878 1,861 2,665
</TABLE>
14
<PAGE> 23
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Number of structures sold
during period............... 505 1,165 879 1,560 404 2,659 1,436 2.499
Average price per structure... $ 17,570 $ 4,705 $ 15,277 $ 15,457 $ 14,933 $ 15,863 15,816 16,623
BALANCE SHEET DATA:
Working capital (deficit)..... $ 842 $ 1,920 $ 1,701 $ 3,671 $ 4,547 $ 1,170 $ 531 $ (1,110)
Total assets.................. 1,921 3,517 4,511 7,648 9,250 25,768 19,483 50,958
Long-term debt, net........... -- -- -- 13 -- 11,624 9,691 24,860
Total stockholders' equity.... 1,062 2,158 2,361 4,380 5,238 6,702 4,700 13,705
</TABLE>
- ----------
(A) SPI applied purchase accounting upon the 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.
15
<PAGE> 24
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>
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED 1998 OR AS OF
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------------
<S> <C> <C>
(dollars in thousands, except per share data)
INCOME STATEMENT DATA:
Revenues............................................................... $ 214,547 $ 175,660
Net income............................................................. $ 12,435 $ 13,695
Basic earnings per share............................................... $ 0.98 $ 1.08
Diluted earnings per share............................................. $ 0.84 $ 0.92
BALANCE SHEET DATA:
Total assets........................................................... $ 201,890
Borrowings under investment agreements and other debt.................. $ 61,000
Stockholders' equity................................................... $ 115,149
Book value per share................................................... $ 9.12(A)
</TABLE>
(A) Includes goodwill of approximately $10.04 per share.
16
<PAGE> 25
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, 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.
POSSIBLE INABILITY TO INTEGRATE OPERATIONS OF MERGED COMPANIES
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.
POSSIBLE INABILITY TO SERVICE DEBT FOLLOWING THE MERGERS
As of September 30, 1998, Modtech had about $30 million in cash and no
long-term debt. Almost all of Modtech's cash reserves will be used to partially
pay the cash to be received by Modtech and SPI stockholders in the mergers.
Following the mergers, Modtech's assets, together with the assets of SPI, will
be encumbered by approximately $61 million of new debt. The proceeds from this
debt will be used to pay the balance of the cash to be paid in the mergers,
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.
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<PAGE> 26
POTENTIAL CONFLICT BETWEEN DIFFERENT SALES FORCES OF MERGED COMPANIES
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
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.
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 -- Material 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. Holdings does not intend to
obtain key-man life insurance on any of its executive officers. The loss of the
services of these individuals could disrupt operations. 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.
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 which SPI
stockholders elect to receive cash in place of Holdings Common Stock in the SPI
Merger. 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 of its securities 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 Holdings Common
Stock and impair the ability of Holdings to raise capital through the sale of
equity securities.
18
<PAGE> 27
RISKS RELATED TO MODTECH
SALES DEPENDENT ON STATE 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 and is not tied to demand.
Despite a growing student population, Modtech reported losses from 1991 through
1993 when certain school districts experienced budget shortfalls. 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.
CUSTOMERS PRIMARILY LIMITED TO CALIFORNIA SCHOOL DISTRICTS
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 were 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. If state funding
for relocatable classrooms becomes limited or unavailable, a number of school
districts can experience budget shortfalls at the same time. When this has
occurred in the past, Modtech has experienced a material decline in revenues.
LIABILITY FOR FAILURE TO MEET 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 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
19
<PAGE> 28
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 27.7% of SPI's
revenues during the pro forma nine-month period ended September 30, 1998, and
Williams Scotsman accounted for about 28.6% 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 manufacturing facilities to produce modular structures, and
might choose to do so, during an economic downturn in their industry.
20
<PAGE> 29
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
qualified 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.
21
<PAGE> 30
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 Common Stock and SPI Preferred 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 January __, 1999, 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 January __, 1999, 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 Common
Stock and SPI Preferred Stock will be asked to vote upon proposals to approve
and adopt
o 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");
o 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
o 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").
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 Holdings Common Stock, par value $0.01
per share, and its Series A Preferred Stock, par value $0.01 per share 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
Common Stock and SPI Preferred 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 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.
22
<PAGE> 31
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. Following the commencement of negotiations in July, 1998, neither
Modtech nor SPI considered merger, acquisition or joint venture opportunities
with other parties in the modular building industry in place of the
transaction being negotiated.
Discussions in July between the parties included a proposed merger of SPI
with an acquisition subsidiary of Modtech in which, immediately following the
merger, the former stockholders of SPI would own 33.3% of the outstanding shares
of Modtech, and the prior Modtech stockholders would retain a 66.67% interest in
Modtech. A $200 million loan was to be obtained by SPI prior to the closing and
following the closing approximately $154 million of the loan proceeds would be
used to redeem 50% of the original Modtech stockholders' shares, or
approximately 5,614,639 shares, and 15% of the former SPI stockholders' shares,
or approximately 842,196 shares, at a price of $24 to $25 per share. Immediately
following the redemption, the original Modtech shareholders would own 54.05% of
Modtech and the former SPI stockholders would own 45.95% of Modtech's
outstanding shares. 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.
Because of various tax problems associated with the structure discussed in
early July, in early August the structure of the transaction was changed to a
"double wing merger" in which a holding company would be formed and Modtech and
SPI would merge with two separate subsidiaries of the holding company. Instead
of a post-closing redemption of stock, as previously discussed, it was proposed
that the merger consideration include both stock in the holding company and
cash. Having further explored the credit markets since July, the parties
concluded that the $200 million credit facility as originally proposed was not
feasible, and the credit facility was reduced to $100 million. The parties
discussed obtaining the credit facility through the issuance of a high yield
debt instrument. The merger
23
<PAGE> 32
consideration proposed was $84.5 million in common stock of the holding company
and $26.4 million in cash to the SPI stockholders and $112.3 million in common
stock of the holding company and $140.4 million in cash to the Modtech
stockholders. Because of various tax issues of certain SPI stockholders and for
a number of other reasons, it was proposed that SPI stockholders have the option
of electing cash in place of shares in the holding company. The stock of the
holding company was valued at $20 per share based on the then average trading
prices of Modtech's common stock. Immediately following the merger, the former
SPI stockholders would own 42.9% of the holding company, and the former Modtech
stockholders would own 57.1% of the company.
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, the parties discussed reducing the size of the cash
distribution to stockholders in order to comply with corporate state law
distribution requirements. They also discussed seeking a bank credit facility in
place of issuing a high-yield debt instrument. It was proposed that Modtech
stockholders would exchange their shares for approximately $40 million cash and
9,626,113 shares of the holding company's common stock, and SPI stockholders
would exchange their shares for approximately $8 million and 4,873,270 shares.
The shares to be received were then being valued at $18 a share. Following the
closing, the former SPI stockholders would own 34.1% of the holding company and
the former Modtech stockholders would own 65.9% of the company. A self-tender
offer to Modtech stockholders followed by a straight merger in place of the
double wing merger structure was also discussed, but rejected as being too time
consuming.
Further refinements to the amount of cash and securities to be received
and the exchange ratios between the Modtech stockholders and the SPI
stockholders were made. Because of the decrease in the cash payable to the
Modtech stockholders that had occurred since the original proposal, it was
determined that in order to ensure that the tax consequences of the Modtech
Merger would be governed by Section 351 of the Internal Revenue Code, the
Modtech stockholders would be offered a combination of voting common stock and
non-voting preferred stock. See "Material Federal Income Tax Consequences."
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 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
24
<PAGE> 33
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:
o 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.
o 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.
o Operating Efficiencies. Modtech and SPI plan to consolidate certain of the
manufacturing and administrative functions of both companies. Modtech and
SPI anticipate potential costs savings from the consolidation of
approximately $250,000 during the 12-month period following completion of
the mergers. 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:
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o the financial presentation of DLJ to the Modtech Board and that firm's
opinion that the cash and securities to be received by the stockholders of
Modtech pursuant to the Merger Agreement is fair to such stockholders from
a financial point of view;
o Modtech's and SPI's complementary businesses, the management, financial
performance and condition of each entity, Modtech's strategic objectives
of diversification, the prospects of other potential merger candidates,
Modtech's competitive position without the mergers, and the positive
recommendations of Modtech's management;
o 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;
o the amount of cash to be received by Modtech stockholders 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;
o 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;
o due diligence review of the financial condition, results of operations and
business prospects of SPI;
o 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
o 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
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UNANIMOUSLY RECOMMENDS THAT ITS STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF
THE MERGER 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
Common Stock and SPI Preferred 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
Common Stock and SPI Preferred 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 Common
Stock and SPI Preferred 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 Common Stock and SPI Preferred Stock,
including those who have elected to receive cash for the maximum 5.9176% of
their SPI Common Stock and SPI Preferred Stock, will have all or a portion of
their remaining SPI Common Stock and SPI Preferred Stock converted into cash
until the cash being paid for SPI Common Stock and SPI Preferred Stock equals
$8,076,133. The conversion will be pro rata among such stockholders electing to
receive cash based on the shares of SPI Common Stock and SPI Preferred 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 Common Stock and SPI Preferred Stock equals $8,076,133.
Any shares of SPI Common Stock and SPI Preferred 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
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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 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 Series A 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 cash and securities to be received in the Modtech
Merger 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
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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.
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. This analysis indicated that, on a pro forma basis, the
mergers would be accretive to Modtech earnings beginning in 1999. 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 did not assume the mergers would result in any synergies.
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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
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. This information was presented solely to provide the
Modtech Board with background information regarding the comparable premiums paid
in selected transactions.
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. Projected cash flow for each of Modtech, SPI and
Holdings was calculated using projections and assumptions provided by the
management of Modtech. DLJ applied a range of multiples (the "terminal
multiples") to the EBITDA of the final projected period as a means to derive an
aggregate value for the projected cash flow beyond the final projected period.
The terminal multiples were derived based on DLJ's judgment as to the
appropriate range of multiples at the end of the projected period. The projected
cash flow and terminal values were then discounted to the present using a range
of discount rates ranging from 9% to 12%, representing DLJ's estimate of the
range of the weighted average cost of capital, analysis of industry prospects
and other subjective judgments. This analysis assumed no synergies and yielded
an implied common equity value range for Holdings of $28.70 to $32.29 per
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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 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. No amount of that fee has been paid. 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, estimated by DLJ to be $65,000. Modtech has also agreed to
indemnify DLJ and certain related persons against certain liabilities in
connection with its engagement, including liabilities under U.S. federal
securities laws. The terms of the engagement agreement were negotiated by the
management of Modtech and DLJ.
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 in the SPI Merger Holdings Common Stock, or, at
the election of each SPI stockholder, cash in place of some stock, (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 Common Stock and SPI Preferred 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.
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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 Common
Stock and SPI Preferred Stock, and, if such certificates are presented to SPI
for transfer, they will be cancelled against delivery of shares of Holdings
Common Stock, and, depending on elections made by SPI stockholders, cash in
place of some stock, pursuant to the Merger Agreement. Until surrendered in
accordance with the Merger Agreement, each certificate for shares of SPI Common
Stock and SPI Preferred Stock will be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender the shares of
Holdings Common Stock, and, depending on the elections made by SPI stockholders,
cash in place of some shares of stock, 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 COMMON STOCK AND SPI PREFERRED STOCK SHOULD NOT SEND ANY OF THEIR
STOCK CERTIFICATES TO SPI OR THE EXCHANGE AGENT AT THIS TIME.
Modtech. In order to receive in the Modtech Merger Holdings Common Stock,
cash, and at the election of each stockholder, Holdings Series A Preferred
Stock, Modtech 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 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 Holdings
Common Stock, cash, and if elected by the Modtech stockholder, Holdings Series A
Preferred Stock, 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 Holdings Common Stock, cash,
and
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if elected by the Modtech stockholder, Holdings Series A Preferred Stock,
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 Certificates of Merger 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 for which the option is exercisable immediately prior to the
completion of the 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 for which the
option is exercisable 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
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Holdings Common Stock for each share of Modtech Common Stock previously covered
by the converted Modtech Option.
MATERIAL 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 Common Stock and SPI Preferred Stock who, pursuant to the
mergers, exchange such stock holdings for the cash and securities set forth in
the Merger Agreement. 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"). Section 351 generally requires the Modtech stockholder
and the SPI stockholders (as a group) to own at least 80% of the voting and all
other classes of stock of Holdings. By satisfying the requirements under Section
351, the Modtech stockholder will receive the shares of Holdings Common Stock
and Holdings Series A Preferred Stock tax free. 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
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 Common Stock and SPI Preferred 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 Common Stock and SPI Preferred
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
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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 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
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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 his or her own tax advisor regarding
the tax treatment of cash received pursuant to the Modtech Merger.
Treatment of Holders of SPI Common Stock and SPI Preferred Stock. Except
as discussed below under "Cash in Lieu of Fractional Shares," a holder of SPI
Common Stock or SPI Preferred Stock that only receives Holdings Common Stock
will not recognize gain or loss. A holder of SPI Common Stock or SPI Preferred
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 Common Stock and each block of SPI
Preferred 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 Common
Stock and the block of SPI Preferred 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 Common Stock or SPI
Preferred 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 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.
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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 Common Stock or SPI
Preferred 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 Common Stock or SPI Preferred 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 Common Stock and SPI
Preferred 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 Common Stock and SPI Preferred 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 or 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
Common Stock and each block of SPI Preferred 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 Common Stock and SPI Preferred Stock surrendered in the mergers was held.
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.
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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 COMMON
STOCK AND SPI PREFERRED 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 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
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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.
Pursuant to the terms of an investment banking services agreement entered
into in June 1998 and approved by Modtech's Board, McGettigan, Wick & Co., Inc.
will receive a $1,250,000 fee for investment banking services rendered in
connection with 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 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 if 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 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
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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 antitrust laws, 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 and the FTC a Notification and
Report Form with respect to the Mergers. SPI's filing was made October 8, 1998,
and the filings of the other three parties were made on October 20, 1998. On
November 19, 1998, the waiting period expired without action being taken by the
FTC.
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.
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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 Common Stock and SPI Preferred
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 securities and cash provided for in the
Merger Agreement, Article 113 authorizes you to dissent from the mergers and
obtain payment of the "fair value" for your shares of SPI Common Stock and SPI
Preferred 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 Common Stock and SPI
Preferred 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 Common Stock
and SPI Preferred 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.
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
Common Stock and SPI Preferred 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 Common Stock and SPI
Preferred 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 Common Stock and SPI
Preferred 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.
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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 Common Stock and SPI
Preferred Stock with SPI. You will still retain all rights of a stockholder,
except the right to transfer your shares of SPI Common Stock and SPI Preferred
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 Common Stock and SPI Preferred 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 Common Stock and SPI Preferred 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 Common Stock and SPI Preferred 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 offered payment of
the fair value of your shares of SPI Common Stock and SPI Preferred 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 Common Stock and SPI Preferred Stock, you
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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 such as Rule 144 of the Securities and Exchange Commission, 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
securities and cash provided for in the Merger Agreement upon completion of the
mergers, 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 voted against
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." If you abstain from voting, your shares cannot qualify as Dissenting
Shares.
The fair market value of your Dissenting Shares is determined as of the
day before the first announce-ment 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 voted against 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.
Modtech will notify you at that time as to whether it considers your shares
subject to restrictions on transfer imposed by it or by law or regulation, and
whether the holders of 5% of the outstanding shares of Modtech Common Stock
voted against the mergers. If more than 5% of the outstanding shares voted
against the mergers, the mergers may be abandoned. See "Material Provisions of
the Merger Agreement."
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 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.
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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 securities and cash to be paid to
Modtech stockholders in connection with the Modtech Merger.
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.
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.
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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 January __, 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 January __, 1999, 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 November 30, 1998
(the "Record Date") as the record date for determining the holders of SPI Common
Stock and SPI Preferred Stock entitled to notice of, and to vote at, the SPI
Special Meeting. Only holders of record of SPI Common Stock and SPI Preferred
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) 333,614 shares of SPI
Common Stock were issued and outstanding and entitled to vote at the SPI Special
Meeting; and (ii) 1,899,720 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 November 30,
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) 9,871,409 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 2,186,993
outstanding shares of SPI Common Stock and SPI Preferred Stock, collectively
representing approximately 95% of the voting power of all classes of SPI Common
Stock and SPI Preferred 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
5,100,636 outstanding shares of Modtech Common Stock, collectively representing
approximately 52 % 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:
o 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;
o delivering to the Secretary of SPI a duly executed proxy bearing a later
date or time than the revoked proxy; or
o 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:
o 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;
o delivering to the Secretary of Modtech a duly executed proxy bearing a
later date or time than the revoked proxy; or
o 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 its 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 has retained any third party to assist it 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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MATERIAL PROVISIONS OF THE MERGER AGREEMENT
The following is a brief summary of the material 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, where permitted by law, waived by the Closing
Date. These conditions include:
o The approval of the Merger Agreement and the mergers by the Modtech and
SPI stockholders;
o 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;
o The expiration or early termination of the waiting period that applies to
the mergers under applicable federal antitrust laws;
o 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;
o The representations and warranties of the other party in the Merger
Agreement shall be accurate;
o 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;
o The receipt of all necessary approvals under state securities laws
relating to the issuance of Holdings Common Stock;
o Holdings shall have a credit facility mutually agreeable to SPI and
Modtech, of which about $49 million will be used to refinance SPI's
existing credit facility and pay part of the cash to be paid to Modtech
stockholders and SPI stockholders in the mergers and transaction expenses;
o No more than 5% of the shares of Modtech Common Stock and no more than 5%
of the aggregate number of shares of SPI Common Stock and SPI Preferred
Stock can have exercised, and not withdrawn, their dissenters' rights;
o 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;
o The absence of any action or proceeding challenging the mergers or seeking
material damages in connection with the mergers;
o 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
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Evan M. Gruber, Patrick Van Den Bossche and Michael G. Rhodes; and
o 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:
o 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:
o 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.
Modtech and SPI do not intend to waive any material conditions to
completion of the mergers, including receipt of the tax opinions.
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.
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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:
o by mutual written consent of Modtech and SPI;
o 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 or fails to perform any of its
material obligations under this Agreement and such breach or failure has
not been cured within 10 days after receipt of written notice of such
failure;
o 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;
o 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
(as 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:
o 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;
o the required approval of the SPI stockholders has not been obtained; or
o the SPI Board has withdrawn or adversely modified its recommendation of
approval of the Merger Agreement or the mergers.
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The termination fee to be paid by SPI will be equal to Modtech's fees and
expenses related to the mergers, plus $2 million. It is estimated that Modtech's
fees and expenses will total $1,125,000.
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 will be entitled to a termination 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:
o 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;
o the required approval of the Modtech stockholders has not been obtained;
or
o 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. It is estimated SPI's fees and
expenses will total $875,000.
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:
o their organization, good standing and corporate power and that of their
subsidiaries;
o ownership of subsidiaries;
o capital structure;
o corporate power to enter into, and due authorization, execution and
delivery of the Merger Agreement;
o the execution and delivery of the Merger Agreement not violating their
charter documents, applicable law, and certain material agreements;
o accuracy of certain reports and financial statements supplied by them and,
in the case of Modtech filed with the Securities and Exchange Commission;
o the absence of undisclosed liabilities;
o the accuracy of information supplied by them in connection with this Joint
Proxy Statement/Prospectus;
o the absence of certain changes or events since the date of the most recent
financial statements provided;
o the absence of pending or threatened litigation, certain labor matters and
compliance with all applicable laws;
o benefit plans and other matters relating to the Employee Retirement Income
Security Act of 1974, as amended, and employment matters;
o filing of tax returns and payment of taxes;
o environmental matters;
o good title to properties and assets free of liens;
o insurance matters; and
o brokers' fees and expenses.
INDEMNIFICATION
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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") 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
indemni-fication 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
incor-poration 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 indemni-fication 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:
o the filings made under applicable anti-trust laws for Modtech, SPI and
their affiliates;
o 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
o 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.
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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, 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 just 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
95.4% of Modtech's total net sales for the years ended December 31, 1996 and
1997 and the nine months ended September 30, 1998, respectively. Modtech's
customers typically pay cash for Modtech's products 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 71.1%, respectively, of Modtech's net sales
during the years ended December 31, 1996 and 1997 and the nine months ended
September 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 13.7%, 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 nine months
ended September 30, 1998 represented approximately 10.6% 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 nine months ended September 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 nine months ended
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September 30, 1998, sales of classrooms to this affiliated leasing company
comprised approximately 2.9%, 2.2% and 2.8%, respectively, of Modtech's net
sales. Sales to one unaffiliated leasing company during the years ended December
31,1996 and 1997, and the nine month period ended September 30, 1998 comprised
approximately 4%, 11% and 5.5%, 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 nine months ended September 30, 1998, sales
of such modular, portable buildings to commercial customers accounted, in the
aggregate, for approximately 5.8%, 1.9% and 4.6%, 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 nine months
ended September 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.
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Subcontractors are typically used for larger utility, grading, concrete and
landscaping jobs. Modtech has a general contractor's license in the State of
California.
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 early 1999.
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 September 30, 1998 was
$35.6 million, compared to backlog of $85.0 million at September 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
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appearance of its buildings, and its reputation for reliability in completion of
its contracts, enable it to maintain a favorable position among its competition.
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
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made available by the State Allocation Board to school districts. Certain
matching funds, usually 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, which was approved by the 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. Implementation of
Senate Bill 50 will not begin until the third week in January 1999. Modtech does
not expect any significant change in its future operating results due to the
implementation of Senate Bill 50.
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
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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 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. At present,
Modtech believes the only substance it handles that is subject to such
environmental laws is paint, and that it is in material compliance with
applicable environmental regulations. The cost of such compliance has not been
significant and no capital expenditures for environmental control facilities are
planned. Modtech investigates each business or property that it acquires or
leases and believes that there are no existing liabilities for non-compliance by
landlords or prior owners with environmental laws and regulations, but there can
be no assurance that historic operations have not resulted in undiscovered
conditions that may require future investigation and/or remediation under
environmental laws. Both the governmental regulations and the costs associated
with complying with environmental laws and regulations are subject to change in
the future.
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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 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
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 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 80.0 77.0
-------- -------- -------- -------- --------
Gross profit ....................... 15.4 14.5 19.9 20.0 23.0
Selling, general &
administrative expenses ............ 8.3 4.7 3.8 3.6 3.4
-------- -------- -------- -------- --------
Income from operations ............. 7.1 9.8 16.1 16.5 19.6
Interest income (expense), net ..... (2.0) (0.8) (0.7) (0.8) 0.6
Other income ....................... -- -- -- -- --
-------- -------- -------- -------- --------
Income before income taxes ......... 5.1 9.0 15.4 15.7 20.2
Provision for income taxes ......... 0.1 0.4 5.7 5.9 7.5
-------- -------- -------- -------- --------
Net income ......................... 5.0% 8.6% 9.7% 9.8% 12.7%
======== ======== ======== ======== ========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Net sales for the nine months ended September 30, 1998 increased to $113.1
million, an increase of $14.4 million, or approximately 14.6%, from $98.7
million for the nine months ended September 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 $26.0 million for the nine months ended September 30,
1998, an increase of about $6.2 million, or 31%, over gross profit of $19.8
million for the same period in 1997. Gross profit as a percentage of net sales
increased to 23% for the nine months ended September 30, 1998, compared to 20%
for the same period in 1997. The increase was due principally to the increase in
production volume which allowed Modtech's assembly line techniques to achieve
greater cost efficiencies.
Selling, general and administrative expenses totaled $3.8 million for the
nine months ended September 30, 1998, representing an increase of $299,000 in
selling, general and administrative expenses incurred for the nine months ended
September 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 nine months ended
September 30, 1998 were 3.4%. The percentage was 3.6% for the same period in
1997.
Due to a higher cash balance and reduced line of credit borrowing, the
nine months ended
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September 30, 1998 reflects net interest income of $694,000, compared to net
interest expense of $823,000 for the same period in 1997, a favorable increase
of $1,517,000, or 184.3%.
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 and third quarters of 1998.
In November 1998, California voters passed a $9.2 billion school bond
issue. As a result, Senate Bill 50 became operative. The bill eliminates the
requirement that at least 30% of all new classroom space added using California
state funds be relocatable classrooms. Instead, under Senate Bill 50, 20% of all
classroom space, both new and existing, must now be relocatable. Implementation
of the bill is expected to begin during the third week of January 1999. Modtech
does not expect any significant change in its future operating results due to
the implementation of Senate Bill 50.
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 which began in 1996 and continued
through 1997, and the implementation during the year of the Class Size Reduction
Program for kindergarten through third grade classes in California's public
elementary schools. As the State's budget deficit continued to improve,
increasing levels of funds became available to school districts for classrooms
purchases.
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 cost efficiencies that resulted
from increased volume.
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 which resulted in an increase in funds available to
school districts for classroom purchases, 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
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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.
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 carryfowards
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 September 30, 1998, Modtech had $30
million in cash. Most of Modtech's cash reserves will be used to partially pay
the cash to be paid in the SPI Merger and the Modtech Merger. During the nine
months ended September 30, 1998, Modtech provided about $22 million in cash from
operating activities.
Modtech's revolving loan facility that was scheduled to expire in
September 2000 was paid off December 4, 1998.
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 consideration, transaction expenses
of the mergers, and to fund working capital needs.
On November 13, 1998, Holdings entered into a commitment letter with
NationsBank, N.A. ("NationsBank") and NationsBanc Montgomery Securities LLC
("Montgomery Securities") pursuant to which NationsBank and Montgomery
Securities have agreed to act as the agent and syndicator for a $100 million
senior credit facility. The commitment letter provides for a $30 million
revolving loan, a 5-year term loan of $45 million, and a delayed draw 5-year
term loan of $25 million. The credit facility will be guaranteed by Modtech and
SPI. It will also be secured by the properties of Modtech, SPI and Holdings, as
well as Holdings' stock ownership in Modtech and SPI. Indebtedness under the
credit facility will bear interest at the lower of (1) LIBOR plus an additional
charge based upon certain financial ratios or (2) NationsBank's prime rate plus
an additional charge based on certain financial ratios.
The credit facility will contain various financial covenants, including
restrictions on additional borrowings. The term loans will be subject to
mandatory repayment in certain events, including from the proceeds of any
securities offerings by
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Holdings. The credit facility will contain customary events of default.
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 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.
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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. When
the year 2000 begins, programs with such date-related logic will not be able to
distinguish between the years 1900 and 2000, potentially causing software and
hardware to fail, generating erroneous calculations or presenting information in
an unusable format.
Modtech is dependent on multiple computer servers and the third-party
computer programs running on them to provide data in support of its accounting
and engineering functions. In recognition of the potential year 2000 problem, in
November 1997, Modtech began a program to replace all of its existing
engineering and accounting software with new software that is warranted by its
vendors as being year 2000 compliant. The software replacement program was
completed in November 1998 at a total cost of approximately $250,000. Following
the mergers, SPI's computer data will be transferred to Modtech's computer
system. Modtech estimates that this transfer will be completed by the end of the
first quarter of 1999 at a cost of approximately $100,000.
Modtech has relationships with various third parties on whom it relies to
provide goods and services necessary for the manufacture and distribution of its
products. These include suppliers and vendors. As part of its determination of
year 2000 readiness, Modtech has identified material relationships with third-
party vendors and is in the process of assessing the status of their compliance
through the use of questionnaires. Modtech expects this process will be
completed by the first quarter of 1999 at a cost of approximately $100,000.
The total cost of Modtech's year 2000 efforts, including hardware,
software, related consulting costs, assessment of third party compliance, and
transfer of SPI data is estimated to be about $500,000, and is not material to
Modtech's financial statements.
Modtech's construction materials are available through numerous
independent sources. Due to the broad diversification of these sources, the risk
associated with potential business interruptions as a result of year 2000
non-compliance by one or more sources is not considered significant.
Modtech's primary customers are California school districts, each of which
obtains its funds for paying Modtech's invoices through the computer system
operated by the State of California. If this system does not properly function
after January 1, 2000, it could result in a temporary shutdown of portions of
the state government, in which case, payment of Modtech's invoices would be
delayed, and new purchase orders may not be processed. If the shutdown lasted
for more than 60 days, Modtech would experience a severe cash shortage and a
material decline in revenue during the period of the government shutdown. The
cash shortage can be alleviated to some degree by borrowings from Modtech's line
of credit and by reductions in work
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force and possible temporary plant closures. Modtech does not believe it can
design or implement any other contingency plans that will mitigate the effects
of such a government shut down.
It is anticipated that the steps Modtech has taken and is continuing to
take to deal with the year 2000 problem will reduce the risk of significant
business interruptions, but there is no assurance that this outcome will be
achieved. Failure to detect and correct all internal instances of non-compliance
or the inability of third parties to achieve timely compliance could result in
the interruption of normal business operations which could, depending on its
duration, have a material adverse effect on Modtech's financial statements.
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<PAGE> 77
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 December 8) .... 20.250 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 90 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 September 30, 1998, SPI's backlog was approximately $7.2 million.
The increase in backlog at September 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 short
order-to-completion cycle which is required by SPI's customers and which is
prevalent in the
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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.
ENVIRONMENTAL MATTERS
SPI 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 SPI in connection with the manufacture of its products. At present, SPI
believes the only substances it handles that are subject to such environmental
laws are paint, paint related products and small amounts of petroleum products.
SPI believes that it is in material compliance with applicable environmental
regulations. The cost of such compliance has not been significant and no capital
expenditures for environmental control
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facilities are planned. SPI investigates each business or property that it
acquires or leases and believes that there are no existing liabilities for
non-compliance by landlords or prior owners with environmental laws and
regulations, but there can be no assurance that historic operations have not
resulted in undiscovered conditions that may require future investigation and/or
remediation under environmental laws. Both the governmental regulations and the
costs associated with complying with environmental laws and regulations are
subject to change in the future.
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 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 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 December 1, 1998, SPI had approximately 490 employees, consisting of
approximately 175 in California and 315 at its other facilities. Of SPI's total
employees, approximately 9 are management level employees, 418 are manufacturing
employees, 17 are employed in design and engineering positions and 46 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 six months ended September 30, 1997 and 1998:
<TABLE>
<CAPTION>
Fiscal year Six months
FISCAL YEAR ENDED ended ended
JANUARY 31, March 31, September 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 24.8 19.8
Selling, general and administrative
expenses ................................. 19.4 6.8 6.3 4.9 5.6
Management and monitoring fees ........... -- -- 0.5 0.5 0.4
Depreciation and amortization ............ 0.4 0.3 4.2 3.2 3.2
Interest income (expense), net ........... 0.6 0.3 (3.4) (3.2) (4.3)
Other income (expense) ................... 0.3 0.0 0.1 0.0 0.0
Income tax provision ..................... 1.1 5.8 3.8 5.6 2.7
-------- -------- -------- -------- --------
Net income ............................... 1.5% 8.5% 4.9% 7.5% 3.6%
======== ======== ======== ======== ========
</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. 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 have been 20.5% for the fiscal year ended
March 31, 1998.
SIX MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
30, 1997
Net Sales. Net sales increased $18.8 million, or 82.9%, to $41.5 million
for the six-month period ended September 30, 1998 from $22.7 million for the
six-month period ended September 30, 1997. The growth in net sales for the 1998
period was the result of the inclusion of sales from Office Master, acquired in
February 1998, and of sales from Rosewood, acquired near the end of April 1998.
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Gross Profit. Gross profit increased $2.6 million, or 45.9%, to $8.2
million for the six-month period ended September 30, 1998 from $5.6 million for
the six-month period ended September 30, 1997. The increase in gross profit was
a result of the increased net sales. The gross profit margin for the six months
ended September 30, 1998 was 19.8%, compared to 24.8% for the six months ended
September 30, 1997. The decrease in gross profit margin for SPI was a result of
lower margins due to the higher direct labor costs of the Office Master and
Rosewood operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.2 million, or 109.6%, to $2.3 million for
the six months ended September 30, 1998 from $1.1 million for the six months
ended September 30, 1997. Selling and administrative expenses as a percentage of
net sales for the six months ended September 30, 1998 increased to 5.6%, as
compared to 4.9% for the six months ended September 30, 1997. The increase in
selling, general 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 $148,000 for the six months ended September
30, 1998, as compared with $100,000 for the six months ended September 30, 1997.
An additional $25,000 in monitoring fees were paid pursuant to an agreement with
the fund managers of certain of SPI's equity investors for the six months ended
September 30, 1998, as compared to $12,000 for the six months ended September
30, 1997.
Depreciation and Amortization. Depreciation and amortization increased
$591,000, or 81.2%, to $1.3 million for the six months ended September 30, 1998
from $728,000 for the six months ended September 30, 1997. The increase was
primarily attributable to the amortization of goodwill, and consulting and
non-compete agreements arising from the acquisitions consummated during the last
year.
Interest Income (Expense), Net. Net interest expense increased $1.0
million, or 143.6%, to $1.8 million for the six months ended September 30, 1998
from $725,000 for the six months ended September 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 decreased $197,000, or 11.6%, to $1.5 million for
the six months ended September 30, 1998 from $1.7 million for the six months
ended September 30, 1997. Net income, as a percentage of net sales was 3.6%, as
compared to 7.5% for the six-month period ended September 30, 1997. The decrease
in net income, both in total and as a percentage of net sales, reflects the
effect of lower gross profit margins for the acquisitions and interest expense
on the debt incurred to fund these 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
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$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
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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<PAGE> 85
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
Mergers will be adequate to support its operations for at least the next 12
months.
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<PAGE> 86
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 at September 30, 1998, SPI
has available the following: (i) a secured revolving loan of up to $6.5 million;
(ii) a secured term loan of $20.8 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 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
was provided by 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. When
the year 2000 begins, programs with such date-related logic will not be able to
distinguish between the years 1900 and 2000, potentially causing software and
hardware to fail, generating erroneous calculations or presenting information in
an unusable format.
SPI is dependent on multiple computer servers and the third-party computer
programs running on them to provide data in support of its accounting and
engineering functions. In recognition of the potential year 2000 problem, in
March 1998, SPI began a program to evaluate and upgrade all of its existing
engineering and accounting software with new
78
<PAGE> 87
software that is warranted by its vendors as being year 2000 compliant. The
software replacement program was to have been completed in the first quarter of
1999. Following the mergers, SPI's computer data will be transferred
to Modtech's computer system, which SPI has been advised is year 2000 compliant.
It is estimated that this transfer will be completed by the end of the first
quarter of 1999 at a cost of approximately $100,000.
SPI has relationships with various third parties on whom it relies to
provide goods and services necessary for the manufacture and distribution of its
products. As part of its determination of year 2000 readiness, SPI has
identified material relationships with certain of these third-party vendors and
is in the process of assessing the status of their compliance through the use of
questionnaires. SPI expects this process will be completed by the first quarter
of 1999 at a cost of approximately $10,000.
SPI's construction materials are available through numerous independent
sources. Due to the broad diversification of these sources, the risk associated
with potential business interruptions as a result of year 2000 non-compliance by
one or more sources is not considered significant.
Contingency plans are under development but will not be finalized until
the third-party assessments are completed in early 1999, and then only if it
appears that SPI or its suppliers and customers will not be year 2000 compliant,
and that such non-compliance will have a material adverse impact on SPI's
operations.
The total cost of SPI's year 2000 efforts, including hardware, software,
related consulting costs, assessment of third-party compliance, and transfer of
SPI data is estimated to be about $125,000, and is not material to SPI's
financial statements.
SPI sells its products through numerous independent dealers. Two of these
dealers, GE Capital Modular Space and Williams Scotsman, accounted for
approximately 54% of SPI's revenues for the six-month period ended September 30,
1998. Both GE Capital Modular and Williams Scotsman have advised SPI that they
have active year 2000 compliance programs. A temporary shutdown by either of
these companies will be mitigated by computer back-up and hard copy data to be
catalogued for all transaction records before and after January 1, 2000. January
1, 2000 occurs at SPI's low demand season. SPI expects transactions will be at
their lowest volume, and balances due SPI can be easily re-established in the
event of computer malfunction. A short-term cash shortage could be alleviated by
line of credit borrowings.
It is anticipated that the steps SPI has taken and is continuing to take
to deal with the year 2000 problem will reduce the risk of significant business
interruptions, but there is no assurance that this outcome will be achieved.
Failure to detect and correct all internal instances of non-compliance or the
inability of third parties to achieve timely compliance could result in the
interruption of normal business operations which could, depending on its
duration, have a material adverse effect on SPI's financial statements.
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.
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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 nine months ended September 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
September 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. The cost to acquire SPI will be
allocated to the assets acquired and the liabilities assumed according to their
estimated fair values as of the date of acquisition. The allocation is dependent
upon certain valuations and other studies that have not yet progressed to a
stage where there is sufficient information to make a definitive allocation.
Accordingly, the purchase allocation adjustments made in connection with the
preparation of the unaudited pro forma combined condensed financial information
are preliminary, and have been made solely for the purpose of preparing such
unaudited pro forma combined financial information; however, no material effect
on the statements of operations is anticipated. 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 Common Stock
and SPI Preferred 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 Common Stock and SPI Preferred Stock instead of shares
of Holdings Common Stock and elections will be adjusted, if necessary, to ensure
that 164,735 shares of SPI Common Stock and SPI Preferred 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 in the SPI Merger to
be received by SPI stockholders in the SPI Merger was determined using the
average closing price of Modtech Common Stock on the Nasdaq National Market for
the five-day trading period before and after September 28, 1998. The total
purchase price, including estimated transaction costs, was $105,648,000.
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<PAGE> 89
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 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 ....... $ 30,450 $ 341 (B) $ (25,748) $ 5,043
Contracts receivable, net ....... 19,827 5,995 25,822
Costs in excess of billings ..... 13,738 -- 13,738
Inventories ..................... 2,828 4,405 7,233
Due from affiliates ............. 694 -- 694
Deferred tax asset .............. 2,094 135 (C) (135) 2,094
Other current assets ............ 402 407 809
----------- ----------- ----------- -----------
Total current assets ...... 70,033 11,283 (25,883) 55,433
Property and equipment, net ..... 12,221 2,087 14,308
Other assets:
Deferred tax asset ............ 99 62 (C) (62) 99
Other assets .................. 134 3,753 (D,E) 1,445 5,332
Costs in excess of net assets
of business acquired, net ... -- 33,773 (F,G) 92,945 126,718
----------- ----------- ----------- -----------
$ 82,487 $ 50,958 $ 68,445 $ 201,890
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable and
accrued liabilities ......... $ 13,834 $ 4,755 (H) $ 750 $ 19,339
Billings in excess of costs ... 6,402 -- 6,402
Revolving credit facility ..... -- 2,724 (I,J) 13,276 16,000
Current portion of long-term
debt ........................ -- 4,914 (J,K) 1,086 6,000
----------- ----------- ----------- -----------
Total current liabilities . 20,236 12,393 15,112 47,741
Long-term debt .................. -- 24,860 (J,K) 14,140 39,000
----------- ----------- ----------- -----------
Total liabilities ......... 20,236 37,253 29,252 86,741
----------- ----------- ----------- -----------
Stockholders' Equity
Common stock ................ 100 6 (L,M) 40 146
Preferred stock ............... -- 10,106 (L,M) (10,102) 4
Additional paid-in capital .... 39,573 -- (A,M,N) 52,848 92,421
Retained earnings ............. 22,578 3,593 (L) (3,593) 22,578
----------- ----------- ----------- -----------
Total Stockholders' Equity 62,251 13,705 39,193 115,149
$ 82,487 $ 50,958 $ 68,445 $ 201,890
=========== =========== =========== ===========
</TABLE>
See the accompanying notes to the unaudited pro forma combined condensed
financial statements.
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<PAGE> 90
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 7,324 (F,G) 2,324 14,804
----------- ----------- ----------- -----------
Income from operations ... 21,527 7,852 (2,324) 27,055
Interest expense, net .......... (908) (4,041) (D,E,J,O,P) (809) (5,758)
Other income ................... 92 195 287
----------- ----------- ----------- -----------
Income before income taxes 20,711 4,006 (3,133) 21,584
Income tax expense ............. 7,703 1,950 (Q) (324) 9,329
----------- ----------- ----------- -----------
Net income ............... $ 13,008 $ 2,056 $ (2,809) $ 12,255
=========== =========== =========== ===========
Basic earnings per share........ $ 1.47 $ 0.96 (R)
=========== ===========
Number of shares
used in computing basic
earnings per share............. 8,854 12,622 (R)
=========== ===========
Diluted earnings per share...... $ 1.31 $ 0.83 (S)
=========== ===========
Number of shares
used in computing diluted
earnings per share............. 9,898 14,845 (S)
=========== ===========
</TABLE>
See the accompanying notes to the unaudited pro forma combined condensed
financial statements.
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<PAGE> 91
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 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 ......................... $ 113,119 $ 62,541 $ $ 175,660
Cost of goods sold ................ 87,083 51,462 138,545
----------- ----------- ----------- -----------
Gross profit ................ 26,036 11,079 -- 37,115
----------- ----------- ----------- -----------
Selling, general and admin-
istrative expenses ............... 3,843 5,351 (F,G) 1,743 10,937
----------- ----------- ----------- -----------
Income from operations ...... 22,193 5,728 (1,743) 26,178
Interest income (expense), net .... 694 (2,907) (D,E,J,O,P) (741) (2,954)
Other income ...................... 18 38 56
----------- ----------- ----------- -----------
Income before income taxes .. 22,905 2,859 (2,484) 23,280
Income taxes ...................... 8,511 1,370 (Q) (296) 9,585
----------- ----------- ----------- -----------
Net income .................. $ 14,394 $ 1,489 $ (2,188) $ 13,695
=========== =========== =========== ===========
Basic earnings per share........... $ 1.46 $ 1.08 (R)
=========== ===========
Number of shares
used in computing basic
earnings per share................ 9,877 12,622 (R)
=========== ===========
Diluted earnings per share......... $ 1.31 $ 0.92 (S)
=========== ===========
Number of shares
used in computing diluted
earnings per share................ 11,000 14,845 (S)
=========== ===========
</TABLE>
See the accompanying notes to the unaudited pro forma combined condensed
financial statements.
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<PAGE> 92
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 acquisition of SPI for an estimated aggregate purchase price,
including estimated transaction costs, of $105,648,000, which is subject to
adjustment and is summarized as follows:
<TABLE>
<S> <C>
Modtech Holdings Common Stock offered hereby ............... $ 87,627,000
Fair value of stock options offered hereby ................. 5,195,000
Cash paid to SPI stockholders .............................. 8,076,000
Estimated acquisition costs ................................ 4,750,000
------------
Total ............................................ $105,648,000
============
</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 .......... 16,000,000
Cash paid to SPI Stockholders .............................. (8,076,000)
Cash distribution to Modtech Stockholders .................. (39,924,000)
Retirement of SPI Indebtedness ............................. (32,498,000)
Payment of Estimated Debt Issuance Costs ................... (2,250,000)
Payment of Estimated Merger Costs .......................... (4,000,000)
------------
Net cash distribution ............................ $(25,748,000)
============
</TABLE>
C. To eliminate current deferred tax assets of $135,000 and non-current
deferred tax assets of $62,000 not available to the Company.
D. To eliminate unamortized SPI debt issuance costs of $805,000 and the
related amortization expense of debt issuance costs of $170,000 and
$128,000 for the year ended December 31, 1997 and the nine months ended
September 30, 1998, respectively.
E. 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 $338,000 for the fiscal year ended December 31, 1997
and the nine months ended September 30, 1998, respectively.
F. To record (i) $126,718,000 for the excess of the consideration paid over
the preliminary estimate of the fair value of net liabilities assumed, to
be amortized over 40 years and (ii) to record goodwill amortization of
$3,168,000 and $2,376,000 for the year ended December 31, 1997 and the
nine months ended September 30, 1998, respectively. The preliminary
purchase price allocation of the SPI acquisition is as follows:
<TABLE>
<S> <C>
Current assets ................................. $ 11,147,000
Property, plant and equipment .................. 2,087,000
Other tangible assets .......................... 189,000
Identifiable intangible assets ................. 2,760,000
Current liabilities ............................ (4,755,000)
Current portion of long-term debt .............. (7,638,000)
Long-term debt ................................. (24,860,000)
-------------
Net liabilities assumed .................. (21,070,000)
Total Estimated Aggregate Purchase Price ....... (105,648,000)
Goodwill ....................................... $ 126,718,000
=============
</TABLE>
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<PAGE> 93
G. To eliminate $33,773,000 of goodwill previously recorded by SPI and the
related amortization expense of $844,000 and $633,000 for the year ended
December 31, 1997 and the nine months ended September 30, 1998,
respectively.
H. To record the recognition of liabilities related to certain merger costs.
I. To record the assumed incurrence of $16,000,000 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 transaction costs.
J. To eliminate the $32,498,000 of SPI indebtedness, including $4,914,000
classified as current and $2,724,000 under the revolving credit facility,
which will be retired by Modtech, and to eliminate the related interest
expense of $4,046,000 and $2,900,000 for the year ended December 31, 1997
and the nine months ended September 30, 1998.
K. 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.
L. To eliminate the equity of SPI, which includes common stock of $6,000,
preferred stock of $10,106,000 and retained earnings of $3,593,000.
M. To reflect the equity adjustments necessary to reflect the acquisition of
SPI under the purchase method of accounting. Such adjustment had the
effect of increasing common stock by $46,000 to record the common stock
par value and increasing additional paid-in capital by $92,776,000 and
preferred stock by $4,000.
N. To record the repurchase of Modtech common stock for $39,924,000 cash in
connection with the Modtech Merger.
O. To record interest expense on borrowings under the New Term Loan of
$3,375,000 and $2,531,000 for the fiscal year ended December 31, 1997 and
the nine months ended September 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 $42,000 for the year ended December 31, 1997
and the nine months ended September 30, 1998, respectively.
P. To record interest expense on borrowings under the New Revolving Credit
Facility of $1,200,000 and $900,000 for the year ended December 31, 1997
and the nine months ended September 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 $20,000 and $15,000 for the year ended December 31, 1997
and the nine months ended September 30, 1998, respectively.
Q. To record the income tax effects of the pro forma adjustments at a pro
forma effective tax rate of 40%.
R. 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 $78,000 for the year ended December 31, 1997 and the nine months ended
September 30, 1998, respectively.
S. 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.
85
<PAGE> 94
RECONCILIATION OF CERTAIN ADJUSTMENTS TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENT ADJUSTMENTS
BALANCE SHEET:
(1) Other assets: (D) $(805,000); (E) $2,250,000 = $1,445,000
(2) Costs in excess of net assets of business acquired, net: (G)
$(33,773,000); (F) 126,718,000 = $92,945,000
(3) Revolving credit facility: (I) $12,000,000; (J) $(2,724,000) = $9,276,000
(4) Current portion of long-term debt: (J) $(4,914,000); (K) $6,000,000 =
$1,086,000
(5) Long-term debt, less current portion: (J) $(24,860,000); (K) $39,000,000 =
$14,140,000
(6) Additional paid-in-capital: (A) $87,627,000; (M) $(46,000); (A)
$5,195,000; (N) $(39,924,000), (M) ($4,000) = $52,848,000
(7) Common stock: (L) $(6,000); (M) $46,000 = $40,000
(8) Preferred stock: (L) $(10,106,000); (M) $4,000 = $(10,102,000)
INCOME STATEMENT (YEAR ENDED DECEMBER 31, 1997):
(1) Selling, general and administrative expenses: (F) $3,168,000; (G)
$(844,000) = $2,324,000
(2) Interest expense, net: (D) $170,000; (E) $(450,000); (J) $4,046,000; (O)
$(3,375,000); (P) $(1,200,000) = $(809,000)
INCOME STATEMENT (NINE MONTHS ENDED SEPTEMBER 30, 1998):
(1) Selling, general and administrative expenses: (F) $2,376,000; (G)
$(633,000) = $1,743,000
(2) Interest income (expense), net: (D) $128,000; (E) $(338,000); (J)
$2,900,000; (O) $(2,531,000); (P) $(900,000) = $(741,000)
86
<PAGE> 95
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 Pro Forma
1/1-3/27/97 3/28-12/31/97 Office Master Rosewood Consolidation Notes 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 (1,399) (F) 1,950
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) ...... $ 1,144 $ 1,758 $ (7) $ 1,631 $ (2,470) $ 2,056
=========== =========== =========== =========== =========== ===========
Basic earnings
per share..................... (D) $ 0.90
===========
Number of shares used in
computing basic earnings
per share .................... (E) 2,296
===========
Diluted earnings per share ..... (D) $ 0.78
===========
Number of shares used in
computing diluted
earnings per share ........... (E) 2,643
===========
</TABLE>
- ----------
See notes on following page
87
<PAGE> 96
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 each such 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.
88
<PAGE> 97
SPI HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 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 ......................... $ 52,465 $ 1,206 $ 8,870 $ -- $ 62,541
Cost of goods sold ................ 41,989 1,039 7,532 902 (G) 51,462
------------ ------------ ------------ ------------ ------------
Gross profit ................ 10,476 167 1,338 (902) 11,079
------------ ------------ ------------ ------------ ------------
Selling, general and admin-
istrative expenses ............... 3,154 155 1,098 (1,205) (G,H) 3,202
Management and monitoring
fees ............................. 229 -- -- -- 229
Depreciation and amortiza-
tion ............................ 1,840 -- 26 54 (B,G) 1,920
------------ ------------ ------------ ------------ ------------
Income from operations ...... 5,253 12 214 249 5,728
Interest income (expense), net (2,150) 5 (61) (701) (C) (2,907)
Other income ...................... 35 -- 3 -- 38
------------ ------------ ------------ ------------ ------------
Income (loss) before provision
for income taxes ............ 3,138 17 156 (452) 2,859
Provision (benefit) for
income taxes ................ 1,466 (5) 64 (155) (F) 1,370
------------ ------------ ------------ ------------ ------------
Net income .................. $ 1,672 $ 22 $ 92 $ (297) $ 1,489
============ ============ ============ ============ ============
Pro forma earnings per
share ............................. (D) $ 0.65
============
Pro forma number of shares
used in computing earnings
per share ....................... (E) 2,296
============
Pro forma diluted earnings per
share ........................... (D) $ 0.55
============
Pro forma number of shares
used in computing diluted
earnings per share ............... (E) 2,722
============
</TABLE>
- ----------
See notes on following page
89
<PAGE> 98
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
respective dates of acquisitions.
(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. The effective tax rate reflects non-deductible
goodwill amortization arising from the acquisitions.
(G) Represents reclassification of certain salaries and production-related
depreciation expense, totaling $752,000 and $150,000, 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.
90
<PAGE> 99
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.
<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 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.
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>
91
<PAGE> 100
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME (AND YEAR FIRST BECAME DURING THE PAST FIVE YEARS
A DIRECTOR OF SPI) 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, the
manager of two mezzanine debt
funds, 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>
92
<PAGE> 101
At each of the first three stockholders' meetings of Holdings following
the Effective Time, the Board of Directors of Holdings 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. As
used in this Section, the term "Independent Directors" shall mean a person other
than an officer, employee or affiliate of Holdings or its subsidiaries or any
other individual having a relationship which, in the opinion of the Board of
Directors of Holdings, would interfere with the exercise of independent judgment
in carrying out the responsibilities of a director.
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.
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 45 Chief Executive Officer and Director
Patrick Van Den Bossche 37 President and Director
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 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.
93
<PAGE> 102
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.
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 $9,600
Officer and Director
Ronald West Senior Vice President-- 150,020 275,000 9,600
Manufacturing
</TABLE>
- ----------
(A) Amounts shown include compensation for services rendered in all capacities
to SPI during the year ended March 31, 1998.
(B) Includes all cash bonuses earned during the year ended March 31, 1998 and
paid during the year ended March 31, 1998 or subsequent thereto.
(C) Amounts shown include SPI's contribution to the named individual's profit
sharing plan.
94
<PAGE> 103
SPI STOCK OPTION GRANTS
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following discloses options granted during the fiscal year ended March
31, 1998 for the SPI Named Executives:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ANNUAL RATES OF STOCK PRICE
APPRECIATION FOR OPTION TERM
INDIVIDUAL GRANTS (D)(E)
---------------------------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR
OPTION/SARS EMPLOYEES BASE
GRANTED IN FISCAL PRICE EXPIRATION 5% ANNUAL 10% ANNUAL
NAME (#) YEAR ($/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, 2008 $14,858 $37,652
Bossche
2,538(B) 4.1% $4.725 February 24, 2000 1,859 2,518
----- ---- ------- -------
7,538 12.3% $16,717 $40,170
Ronald West 5,000(A) 8.2% $4.725 February 24, 2008 $14,858 $37,652
</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.
(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.
95
<PAGE> 104
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)(2)
-------------------------------- ---------------------------------
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 Common Stock and SPI
Preferred Stock subject to such option or warrant.
(3) Does not include the cash (approximately $236,409) to be received in the
SPI Merger upon the conversion of warrants and vested options held by Mr.
Van Den Bossche.
(4) Does not include the cash (approximately $133,494) to be received in the
SPI Merger 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.
EMPLOYMENT AGREEMENTS
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. The life insurance policy and 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 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.
96
<PAGE> 105
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 Common
Stock and SPI Preferred 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 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.
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<PAGE> 106
(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.
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<PAGE> 107
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)(M).............................................. 2,369,811 24.0
Daniel J. Donahoe III.................................................... 7,500 --
Myron A. Wick, III(G)(M)................................................. 2,369,811 24.0
Jon D. Gruber(I)(M)...................................................... 4,604,721 46.6
Gruber & McBaine Capital Management(K)(M)................................ 2,172,410 22.0
Proactive Partners, L.P.(L)(M)........................................... 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.
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<PAGE> 108
(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) 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.
(M) 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.
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<PAGE> 109
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF SPI
The table below sets forth certain information regarding beneficial
ownership of the SPI Common Stock and SPI Preferred Stock as of December 11,
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 SPI Common Stock or SPI
Preferred 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 Plan"), but does not give effect to the ability
of SPI stockholders to elect cash for a portion of their SPI Common Stock or SPI
Preferred 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 (8 people).......................... 2,305,745 82.96
</TABLE>
- ----------
(A) 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 Common Stock and SPI Preferred 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 Common Stock and SPI Preferred 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.
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<PAGE> 110
(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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<PAGE> 111
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 designated Series A Preferred Stock
("Holdings Series A Preferred Stock").
The following summary of the material 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 in the Modtech Merger to
those Modtech stockholders electing to receive it. 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 transaction or
series of related transactions; (ii) a sale of all or
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<PAGE> 112
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:
o dilution of the voting power of the Holdings Common Stock;
o the further subordination of the rights of holders of Holdings Common
Stock to share in Holdings' assets upon liquidation; and
o 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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<PAGE> 113
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 the material 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 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:
o election of directors
o duties and liabilities of officers and directors
o dividends and other distributions
o meetings of stockholders
o amendments to the articles or certificates of incorporation
o mergers and sales of all or substantially all of the corporation's assets
o 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."
Number of Directors. Under the Modtech Bylaws, the Modtech Board is
comprised of between five and
105
<PAGE> 114
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 the 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:
o breach of the directors' duty of loyalty to Holdings or its stockholders;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o unlawful dividends or redemptions or purchases of stock; or
o 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 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
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<PAGE> 115
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 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
107
<PAGE> 116
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:
o 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
o 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.
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
108
<PAGE> 117
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.
109
<PAGE> 118
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, Denver,
Colorado, 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 Preferred 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 a part of the
Registration Statement
110
<PAGE> 119
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, June 30, 1998 and September 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
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
111
<PAGE> 120
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.
112
<PAGE> 121
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 September 30, 1998 (unaudited) .................................................. F-24
Condensed Consolidated Statements of Income for the three months ended and nine
months ended September 30, 1997 and 1998 (unaudited) ................................ F-25
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 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 three- and six-months ended September 30, 1997
and 1998 (unaudited) ................................................................ F-53
Condensed Consolidated Cash Flows for the three- and six-months ended September 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> 122
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> 123
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> 124
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> 125
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> 126
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> 127
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> 128
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> 129
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> 130
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> 131
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> 132
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> 133
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> 134
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> 135
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> 136
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> 137
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> 138
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> 139
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> 140
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> 141
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> 142
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> 143
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> 144
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> 145
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> 146
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> 147
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> 148
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
Legistrature 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> 149
Modtech, Inc. has announced that it has entered into a definitive agreement to
purchase 100% of the equity of SPI Manufacturing, Inc. ("SPI"), a provately 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> 150
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> 151
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> 152
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> 153
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> 154
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> 155
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 $6,702
====== ====== ====== ====== ====== ======
</TABLE>
(1) Effective March 28, 1997, SPI Holdings, Inc. acquired the Predecessor
entity. Because the acquisition was accounted for as a purchase, the
post-acquisition period is not comparable to the pre-acquisition periods.
The accompanying notes are an integral part of these consolidated statements.
F-35
<PAGE> 156
SPI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ 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> 157
<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> 158
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> 159
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> 160
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> 161
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> 162
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> 163
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> 164
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> 165
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> 166
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> 167
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> 168
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> 169
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> 170
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
$2.0 million plus additional consideration based on future
earnings.
c. Proposed merger (unaudited)
The Company has entered into a Plan of Reorganization and Merger
dated September 28, 1998 with Modtech, Inc. Under terms of the
agreement, all equity instruments will be converted into equity
instruments of Modtech Holdings, Inc. or redeemed for cash.
F-50
<PAGE> 171
SPI HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ In Thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30,
1998
-------------
<S> <C>
CURRENT ASSETS:
Cash $ 341
Accounts receivable, net of allowance
for doubtful accounts of $117 5,995
Inventories 4,405
Prepaid and other assets 542
-------------
Total current assets 11,283
-------------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization 2,087
-------------
OTHER ASSETS:
Goodwill, net 33,773
Deferred loan fees, net 804
Covenants not to compete, net 2,760
Other assets 251
-------------
Total assets $ 50,958
=============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-51
<PAGE> 172
SPI HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ In Thousands)
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30,
1998
-------------
<S> <C>
CURRENT LIABILITIES:
Accounts payable $ 3,333
Accrued liabilities 1,422
Revolving line of credit 2,724
Current portion of long-term debt 4,914
-------------
Total current liabilities 12,393
-------------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 24,860
-------------
Total liabilities 37,253
-------------
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 $8.00 per share;
shares authorized, 500,000 shares issued and
outstanding 4,000
Class A-6, stated value $16.04 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 3,593
-------------
Total shareholders' equity 13,705
-------------
$ 50,958
=============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-52
<PAGE> 173
SPI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months ended For the Six Months ended
September 30, September 30,
----------------------------- -----------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 12,875 $ 20,615 $ 22,712 $ 41,540
COST OF SALES 9,502 16,606 17,078 33,322
---------- ---------- ---------- ----------
Gross profit 3,373 4,009 5,634 8,218
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Selling and
administrative 610 1,141 1,109 2,325
Management and
monitoring fees 56 89 112 173
Depreciation and
amortization 421 652 728 1,319
---------- ---------- ---------- ----------
1,087 1,882 1,949 3,817
---------- ---------- ---------- ----------
Income from
operations 2,286 2,127 3,685 4,401
---------- ---------- ---------- ----------
OTHER INCOME/(EXPENSE):
Interest expense, net (343) (932) (725) (1,766)
Miscellaneous income 3 2 4 3
---------- ---------- ---------- ----------
(340) (930) (721) (1,763)
---------- ---------- ---------- ----------
Income before
provision for
income taxes 1,946 1,197 2,964 2,638
PROVISION FOR INCOME
TAXES 830 590 1,269 1,140
---------- ---------- ---------- ----------
Net income $ 1,116 $ 607 $ 1,695 $ 1,498
========== ========== ========== ==========
PRO FORMA PER SHARE DATA-
NET INCOME PER SHARE:
Basic $ 0.70 $ 0.26 $ 1.06 $ 0.67
Diluted $ 0.60 $ 0.22 $ 0.91 $ 0.56
WEIGHTED AVERAGE NUMBER
OF SHARES:
Basic 1,600 2,296 1,600 2,245
Diluted 1,866 2,722 1,861 2,665
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-53
<PAGE> 174
SPI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ In Thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months ended For the Six Months ended
September 30, September 30,
----------------------------- -----------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided
by (used in)
operating
activities $ 2,131 $ (454) $ 422 916
---------- ---------- ---------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of equipment
and leasehold
improvements (908) (37) (969) (257)
Payments under non-
compete agreement (600) -- (600) --
Repayment of notes
receivable from related
party -- -- 1,600 --
Investment in Rosewood,
net of cash received -- -- -- (24,452)
---------- ---------- ---------- ----------
Net cash provided
by (used in)
investing
activities (1,508) (37) 31 (24,709)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on
notes payable (3,720) (1,862) (5,120) (3,183)
Additions to notes
payable 3,200 1,100 4,431 21,197
Proceeds from issuance
of common stock -- 70 -- 5,000
---------- ---------- ---------- ----------
Net cash provided
by (used in)
financing
activities (520) (692) (689) 23,014
---------- ---------- ---------- ----------
NET INCREASE (DECREASE)
IN CASH 103 (1,183) (236) (779)
CASH, beginning of period 652 1,524 991 1,120
---------- ---------- ---------- ----------
CASH, end of period $ 755 $ 341 $ 755 $ 341
========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash paid during the
period for interest $ 351 $ 891 $ 740 $ 1,870
========== ========== ========== ==========
Cash paid during the
period for income taxes $ 865 $ 1,137 $ 2,255 $ 1,137
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-54
<PAGE> 175
SPI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 1998, the results of
operations and cash flows for the three- and six-month periods ended
September 30, 1997 and September 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 and six-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 at September 30, 1998:
<TABLE>
<S> <C>
Raw materials $ 3,900
Work-in-process 463
Finished goods 42
--------
$ 4,405
========
</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
September 30, 1998.
F-55
<PAGE> 176
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>
Per share
Income Shares Amount
--------- --------- ---------
<S> <C> <C> <C>
Three months ended September 30, 1998:
Basic Net Income per Share $ 607 2,296 $ 0.26
Effect of Dilutive Securities -- 426 (0.04)
--------- --------- ---------
Diluted Net Income per share $ 607 2,722 $ 0.22
========= ========= =========
Three months ended September 30, 1997:
Basic Net Income per Share $ 1,116 1,600 $ 0.70
Effect of Dilutive Securities -- 266 (0.10)
--------- --------- ---------
Diluted Net Income per share $ 1,116 1,866 $ 0.60
========= ========= =========
Six months ended September 30, 1998:
Basic Net Income per Share $ 1,498 2,245 $ 0.67
Effect of Dilutive Securities -- 420 (0.11)
--------- --------- ---------
Diluted Net Income per share $ 1,498 2,665 $ 0.56
========= ========= =========
Six months ended September 30, 1997:
Basic Net Income per Share $ 1,695 1,600 $ 1.06
Effect of Dilutive Securities -- 261 (0.15)
--------- --------- ---------
Diluted Net Income per share $ 1,695 1,861 $ 0.91
========= ========= =========
</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
and the non-deductibility of goodwill amortization.
F-56
<PAGE> 177
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>
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 4,000 -- 4,000
Series A-6
issuance -- -- 62 1,000 -- 1,000
Series A-3
warrants
issued -- -- -- 506 -- 506
Net income -- -- -- -- 1,497 1,497
BALANCE, --------- --------- --------- --------- --------- ---------
September 30, 1998 334 $ 6 1,961 $ 10,106 $ 3,593 $ 13,705
========= ========= ========= ========= ========= =========
</TABLE>
At the time Rosewood was purchased, the number of shares of A-5 and A-6
stock were subject to adjustment based on additional analysis of the value
of the Company. The value of these shares is fixed. 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.
8. Subsequent events
a. Proposed acquisition
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. No
assurance can be provided that the transaction will be consummated
b. Proposed merger
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-57
<PAGE> 178
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.
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 16, 1998
F-58
<PAGE> 179
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> 180
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> 181
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> 182
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> 183
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> 184
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> 185
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.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
March 17, 1998.
F-65
<PAGE> 186
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
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> 187
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
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> 188
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
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> 189
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
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> 190
<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> 191
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
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.
F-71
<PAGE> 192
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 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 --
============ ========
</TABLE>
F-72
<PAGE> 193
Amounts due on the note payable in future years are as follows:
<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> 194
(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> 195
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> 196
ANNEX I
================================================================================
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
by and between
MODTECH, INC.
and
SPI HOLDINGS, INC.
-------------------------------
Dated as of September 28, 1998
-------------------------------
================================================================================
<PAGE> 197
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE I
THE MERGERS ............................................................. 2
1.1 Organization of Holdings ....................................... 2
1.2 Directors and Officers of Holdings ............................. 2
1.3 Modtech Sub Merger ............................................. 3
1.4 SPI Sub Merger ................................................. 3
1.5 The Closing .................................................... 3
1.6 Effective Time ................................................. 4
1.7 Effects of the Mergers ......................................... 4
1.8 Directors and Officers of the Surviving Entities ............... 4
ARTICLE II
CONVERSION OF SECURITIES ................................................ 5
2.1 Conversion of Securities ....................................... 5
2.2 Conversion of Modtech Shares ................................... 5
2.3 Modtech Election, Allocation and Conversion Procedures ......... 6
2.4 Additional Exchange Procedures ................................. 8
2.5 Dissenting Modtech Shares ...................................... 9
2.6 Modtech Options ................................................ 10
2.7 Conversion of SPI Shares ....................................... 11
2.8 SPI Election, Allocation and Conversion Procedures ............. 12
2.9 Additional Exchange Procedures ................................. 14
2.10 Dissenting SPI Shares .......................................... 16
2.11 SPI Options .................................................... 17
2.12 SPI Warrants ................................................... 18
2.13 Cancellation of Shares ......................................... 18
2.14 No Transfer after the Effective Time ........................... 18
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MODTECH ............................... 18
3.1 Existence; Good Standing; Corporate Authority .................. 18
3.2 Authorization; Validity and Effect of Agreement ................ 19
3.3 Capitalization ................................................. 19
3.4 Subsidiaries ................................................... 20
3.5 Other Interests ................................................ 20
3.6 No Conflict; Required Filings and Consents ..................... 20
3.7 Compliance ..................................................... 21
3.8 SEC Documents .................................................. 21
3.9 Litigation ..................................................... 22
</TABLE>
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<TABLE>
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3.10 Absence of Certain Changes ..................................... 22
3.11 Environmental Matters .......................................... 22
3.12 Real Properties ................................................ 23
3.13 Tangible Personal Property ..................................... 24
3.14 Intellectual Property .......................................... 24
3.15 Absence of Changes in Modtech Benefit Plans .................... 24
3.16 ERISA Compliance ............................................... 25
3.17 Taxes .......................................................... 27
3.18 Contracts; Debt Instruments .................................... 28
3.19 Insurance ...................................................... 30
3.20 Interests of Officers and Directors ............................ 30
3.21 No Brokers ..................................................... 30
3.22 Customers ...................................................... 30
3.23 Suppliers ...................................................... 30
3.24 Employees ...................................................... 30
3.25 Product Liability .............................................. 31
3.26 Information in Joint Proxy Statement/Prospectus and Form S-4.... 31
3.27 Disclosure ..................................................... 31
3.28 Fairness Opinion ............................................... 31
3.29 Year 2000 Matters .............................................. 31
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SPI ................................... 32
4.1 Existence; Good Standing; Authority ............................ 32
4.2 Authorization; Validity and Effect of Agreement ................ 32
4.3 Capitalization ................................................. 33
4.4 Subsidiaries ................................................... 33
4.5 Other Interests ................................................ 33
4.6 No Conflict; Required Filings and Consents ..................... 34
4.7 Compliance ..................................................... 34
4.8 Financial Statements ........................................... 35
4.9 Litigation ..................................................... 35
4.10 Absence of Certain Changes ..................................... 35
4.11 Environmental Matters .......................................... 36
4.12 Real Properties ................................................ 36
4.13 Tangible Personal Property ..................................... 37
4.14 Intellectual Property .......................................... 37
4.15 Absence of Changes in SPI Benefit Plans ........................ 37
4.16 ERISA Compliance ............................................... 38
4.17 Taxes .......................................................... 40
4.18 Contracts; Debt Instruments .................................... 41
4.19 Insurance ...................................................... 43
4.20 Interests of Officers and Directors ............................ 43
</TABLE>
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<TABLE>
<S> <C> <C>
4.21 No Brokers ..................................................... 43
4.22 Customers ...................................................... 43
4.23 Suppliers ...................................................... 44
4.24 Employees ...................................................... 44
4.25 Product Liability .............................................. 44
4.26 Information in Joint Proxy Statement/Prospectus and Form S-4 ... 44
4.27 Disclosure ..................................................... 44
4.28 Year 2000 Matters .............................................. 44
ARTICLE V
COVENANTS ............................................................... 45
5.1 Conduct of Business by Modtech or SPI .......................... 45
5.2 Meetings of Stockholders ....................................... 46
5.3 Further Assurance and Cooperation .............................. 47
5.4 Certain Filings and Consents ................................... 47
5.5 Publicity ...................................................... 48
5.6 Joint Proxy Statement/Prospectus and Form S-4 .................. 48
5.7 Listing Application ............................................ 48
5.8 Further Action ................................................. 48
5.9 Lockup Agreements .............................................. 49
5.10 Expenses........................................................ 49
5.11 Notice of Change in Representations and Warranties ............. 49
5.12 Consents ....................................................... 49
5.13 Letter of Modtech's Accountants ................................ 49
5.14 Letter of SPI's Accountants .................................... 50
5.15 Registration Statement on Form S-8 ............................. 50
5.16 Tax Matters Certificates ....................................... 50
5.17 Assumption of Obligations by Holdings, Modtech Sub and SPI Sub.. 50
5.19 Development of Holdings Business Plan .......................... 51
5.20 Payment of Transaction Fees; Transaction Advisory Agreement .... 51
5.21 Retention of Holdings' Financial Advisor ....................... 51
5.22 Deregistration of Modtech Shares ............................... 51
ARTICLE VI
CONDITIONS .............................................................. 51
6.1 Conditions to Each of Modtech's and SPI's
Obligation to Effect the Mergers ............................... 51
6.2 Conditions to Obligation of Modtech to Effect the Mergers....... 53
6.3 Conditions to Obligation of SPI to Effect the Mergers .......... 54
ARTICLE VII
TERMINATION, WAIVER AND AMENDMENT ....................................... 55
7.1 Termination or Abandonment ..................................... 55
7.2 Effect of Termination .......................................... 56
</TABLE>
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<TABLE>
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7.3 Amendment or Supplement ........................................ 57
7.4 Extension of Time; Waiver, Etc ................................. 57
ARTICLE VIII
INDEMNIFICATION ......................................................... 58
8.1 Indemnification ................................................ 58
ARTICLE IX
GENERAL PROVISIONS ...................................................... 59
9.1 Non-survival of Representations and Warranties ................. 59
9.2 Notices ........................................................ 59
9.3 Assignment; Binding Effect ..................................... 60
9.4 Entire Agreement ............................................... 60
9.5 Governing Law .................................................. 61
9.6 Counterparts ................................................... 61
9.7 Headings 61 ....................................................
9.8 Interpretation ................................................. 61
9.9 Incorporation of Schedules ..................................... 61
9.10 Severability ................................................... 61
9.11 Enforcement of Agreement ....................................... 61
ARTICLE X
DEFINITIONS ............................................................. 62
10.1 Defined Terms ................................................. 62
</TABLE>
SCHEDULES
Schedule I Schedule of Modtech Shareholders to be Allocated Holdings Preferred
Stock
DISCLOSURE SCHEDULES
Modtech Disclosure Schedule
SPI Disclosure Schedule
LIST OF EXHIBITS
Exhibit A Form of Certificate of Incorporation of Holdings
Exhibit B Form of Bylaws of Holdings
Exhibit C Form of Certificate of Designation for Holdings Preferred Stock
Exhibit D Form of Voting Agreement
Exhibit E Form of Certificate of Merger to be filed in California
Exhibit F Form of Articles of Merger to be filed in Colorado
Exhibit G Form of Transaction Advisory Agreement
Exhibit H Form of Registration Rights Agreement
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AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
Agreement and Plan of Reorganization and Merger (this "Agreement"),
dated as of September 28, 1998, by and between Modtech, Inc., a California
corporation ("Modtech") and SPI Holdings, Inc., a Colorado corporation ("SPI").
RECITALS
A. The Board of Directors of Modtech deems it advisable and in the best
interest of Modtech and its stockholders to consummate, and has approved,
including for purposes of Section 1101 of the General Corporation Law of the
State of California (the "CGCL"), the business combination transactions provided
for herein; and the Board of Directors of SPI deems it advisable and in the best
interest of SPI and its stockholders to consummate, and has approved, including
for purposes of Section 7-111-101 of the Colorado Business Corporation Act (the
"CBCA"), the business combination transactions provided for herein, in which:
(1) Modtech and SPI will form a Delaware corporation, Modtech
Holdings, Inc. ("Holdings"); and
(2) Because of a number of operational differences between
Modtech and SPI, the Board of Directors of each of Modtech and SPI have
deemed it advisable to maintain the separate existence of Modtech and
SPI following the consummation of the transactions provided for herein;
accordingly, Holdings will form two subsidiaries, a Delaware
corporation which will merge with and into Modtech with Modtech
continuing as the surviving corporation (the "Modtech Merger"), and a
Colorado corporation which will merge with and into SPI with SPI
continuing as the surviving corporation (the "SPI Merger" and, together
with the Modtech Merger, the "Mergers"), and (i) all issued and
outstanding Modtech Shares (as hereinafter defined) and all vested
Modtech Options (as hereinafter defined) will be converted into the
right to receive, in the aggregate, 9,481,118 shares of common stock,
par value $.01 per share, of Holdings ("Holdings Common Stock"),
388,939 shares of Series A Preferred Stock, par value $.01 per share,
of Holdings ("Holdings Preferred Stock") and $39,923,472 in cash, and
(ii) all issued and outstanding SPI Shares (as hereinafter defined),
all vested SPI Options (as hereinafter defined) and all exercisable SPI
Warrants (as hereinafter defined) will be converted into the right to
receive, in the aggregate, 4,974,462 shares of Holdings Common Stock
and $8,076,133 in cash, all as more fully set forth below;
B. For federal income tax purposes, it is intended that the SPI Merger
shall qualify as a "reorganization" within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"), and the Modtech Merger
(together with the SPI Merger) shall qualify as an "exchange" under Section 351
of the Code; and
C. Modtech and SPI desire to make certain representations, warranties
and agreements in connection with the Mergers and also to prescribe various
conditions to the Mergers.
Capitalized terms used in this Agreement and not otherwise defined
herein shall have the meanings set forth in Section 10.1 hereof.
<PAGE> 202
ARTICLE I
THE MERGERS
1.1 Organization of Holdings. As promptly as practicable following the
execution of this Agreement, Modtech and SPI shall cause Holdings to be
organized under the laws of the State of Delaware. The initial certificate of
incorporation and bylaws of Holdings shall be substantially in the forms
attached hereto as Exhibit A and Exhibit B, respectively. The certificate of
designation for the Holdings Preferred Stock shall be substantially in the form
attached hereto as Exhibit C. The authorized capital stock of Holdings shall
consist of 25,000,000 shares of Holdings Common Stock and 5,000,000 shares of
Holdings Preferred Stock, of which 680 shares of Holdings Common Stock will be
issued to Modtech and 320 shares of Holdings Common Stock will be issued to SPI.
Prior to the Effective Time (as hereinafter defined), Modtech and SPI shall
cause Holdings to provide for the issuance of Holdings Common Stock pursuant to
the Mergers.
1.2 Directors and Officers of Holdings.
(a) Upon formation of Holdings, the Board of Directors of Holdings will
consist of seven directors. Modtech and SPI shall cause to be elected as initial
directors of Holdings Evan M. Gruber, Patrick Van Den Bossche, Charles C.
McGettigan, Myron A. Wick III, Daniel Donahoe, Charles A. Hamilton and Charles
R. Gwirtsman. Each director shall remain in office until his successor is duly
elected or appointed and qualified or until such director's earlier death,
resignation or removal in accordance with the certificate of incorporation and
bylaws of Holdings.
(b) As of the Effective Time, the Board of Directors of Holdings will
consist of nine directors, including the individuals set forth in Section
1.2(a), one additional Independent Director to be selected by SPI and one
additional Independent Director to be selected by the Board of Directors of
Holdings. Each director shall remain in office until his successor is duly
elected or appointed and qualified or until such director's earlier death,
resignation or removal in accordance with the certificate of incorporation and
bylaws of Holdings. In addition, Proactive Partners, LP ("Proactive Partners")
and KRG Capital Partners, LLC ("KRG Capital") shall each be permitted to
designate one non-voting observer, who may be changed from time to time, and who
shall be permitted to attend all meetings of the Board of Directors of Holdings.
(c) Upon formation of Holdings and as of the Effective Time, Evan M.
Gruber shall be the Chairman and Chief Executive Officer of Holdings, Patrick
Van Den Bossche shall be the President of Holdings and Michael G. Rhodes shall
be the Chief Operating Officer and Chief Financial Officer of Holdings.
(d) At each of the first three stockholder's meetings of Holdings
following the Effective Time the Board of Directors of Holdings 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; (4) two designees of KRG Capital; and (5) three joint designees of
Proactive Partners and KRG Capital, all three of whom will be Independent
Directors. As used in this Section, the term "Independent Director" shall mean
a person other than an officer, employee or affiliate of Holdings or its
subsidiaries or any other individual having a relationship which, in the
opinion of the Board of Directors of Holdings, would interfere with the
exercise of independent judgement in carrying out the responsibilities of a
director.
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1.3 Modtech Sub Merger .
(a) As promptly as practicable after the formation of Holdings, Modtech
and SPI shall cause Holdings to form a wholly-owned corporation called Modtech
Merger Sub, Inc. ("Modtech Sub") under the laws of the State of Delaware.
Modtech and SPI shall cause Holdings to cause Modtech Sub to execute and deliver
this Agreement and to merge with and into Modtech. Modtech shall be the
surviving corporation in the Modtech Merger and as a result thereof shall become
a wholly-owned subsidiary of Holdings.
(b) The certificate of incorporation and bylaws of Modtech Sub shall be
in such form as shall be determined by Holdings. Upon formation of Modtech Sub,
Holdings shall elect Evan M. Gruber, Michael G. Rhodes and Patrick Van Den
Bossche as directors of Modtech Sub and such Board of Directors, by unanimous
written consent, shall appoint the officers of Modtech Sub.
(c) Modtech shall use its best efforts to cause the Modtech Merger to
be consummated in accordance with the terms of this Agreement. Modtech and SPI
shall cause Holdings to execute a written consent under Section 228 of the
Delaware General Corporation Law (the "DGCL"), as the sole stockholder of
Modtech Sub, to the execution, delivery and performance of this Agreement by
Modtech Sub.
1.4 SPI Sub Merger .
(a) As promptly as practicable after the formation of Holdings, Modtech
and SPI shall cause Holdings to form a wholly-owned corporation called SPI
Merger Sub, Inc. ("SPI Sub") under the laws of the State of Colorado. Modtech
and SPI shall cause Holdings to cause SPI Sub to execute and deliver this
Agreement and to merge with and into SPI. SPI shall be the surviving corporation
in the SPI Merger and as a result thereof shall become a wholly-owned subsidiary
of Holdings.
(b) The articles of incorporation and bylaws of SPI Sub shall be in
such form as shall be determined by Holdings. Upon formation of SPI Sub,
Holdings shall elect Evan M. Gruber, Patrick Van Den Bossche and Ronald R.
Procunier as directors of SPI Sub and such Board of Directors, by unanimous
written consent, shall appoint the officers of SPI Sub.
(c) SPI shall use its best efforts to cause the SPI Merger to be
consummated in accordance with the terms of this Agreement. Modtech and SPI
shall cause Holdings to execute a written consent under Section 7-107-104 of the
CBCA, as the sole stockholder of SPI Sub, to the execution, delivery and
performance of this Agreement by SPI Sub.
1.5 The Closing . The closing (the "Closing") of the transactions
contemplated by this Agreement will take place at the offices of Gibson, Dunn &
Crutcher LLP, 4 Park Plaza, Irvine, California, at 10:00 a.m., local time, as
soon as practicable following the date on which the last of the conditions set
forth in Article 6 is satisfied or waived in accordance herewith or at such
other
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place, time or date as Modtech and SPI may agree. The date on which the Closing
occurs is hereinafter referred to as the "Closing Date".
1.6 Effective Time . On the Closing Date, (i) Modtech will cause a
certificate of merger in the form attached hereto as Exhibit D to be filed with
the Secretary of State of the State of California as provided in Section 1103 of
the CGCL in order to effect the Modtech Merger; and (ii) SPI will cause articles
of merger in the form attached hereto as Exhibit E to be filed with the
Secretary of State of the State of Colorado as provided in Section 7-111-105 of
the CBCA in order to effect the SPI Merger. Upon completion of such filings, the
respective Mergers will become effective in accordance with the CGCL and CBCA.
The time and date on which the Mergers become effective is herein referred to as
the "Effective Time".
1.7 Effects of the Mergers . At the Effective Time,
(a) The separate existence of Modtech Sub shall cease and Modtech Sub
shall be merged with and into Modtech, with Modtech continuing as the surviving
corporation (as such, "New Modtech");
(b) The separate existence of SPI Sub shall cease and SPI Sub shall be
merged with and into SPI with SPI continuing as the surviving corporation (as
such, "New SPI" and, together with New Modtech, the "Surviving Entities"); and
(c) The Mergers shall have all the effects of applicable law,
including, without limitation, the applicable provisions of the CGCL and the
CBCA.
1.8 Directors and Officers of the Surviving Entities .
(a) The members of the Board of Directors of New Modtech will be the
members of the Board of Directors of Modtech Sub immediately prior to the
Effective Time and the members of the Board of Directors of New SPI will be the
members of the Board of Directors of SPI Sub immediately prior to the Effective
Time. All of the members of the Board of Directors of New Modtech and New SPI
will serve until their respective successors are duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the articles of incorporation and bylaws of New Modtech or New SPI, as the
case may be.
(b) The officers of New Modtech will be the officers of Modtech Sub
immediately prior to the Effective Time and the officers of New SPI will be the
officers of SPI Sub immediately prior to the Effective Time. Such persons will
continue as officers of New Modtech and New SPI until their respective
successors have been duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with the articles of
incorporation and bylaws of New Modtech or New SPI, as the case may be.
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ARTICLE II
CONVERSION OF SECURITIES
2.1 Conversion of Securities of Merger Entities. As of the Effective
Time, by virtue of the Mergers and without any action on the part of the holder
of any securities of the entities involved: (i) each outstanding share of common
stock of Modtech Sub, par value $0.01 per share, which is issued and outstanding
immediately prior to the Effective Time, shall be converted into and become one
(1) share of common stock of New Modtech and (ii) each outstanding share of
common stock of SPI Sub, par value $0.01 per share, which is issued and
outstanding immediately prior to the Effective Time, shall be converted into and
become one (1) share of common stock of New SPI.
2.2. Conversion of Modtech Shares .
(a) As of the Effective Time, by virtue of the Modtech Merger and
without any action on the part of the holder of any securities of the entities
involved, each share of Common Stock, par value $0.01 per share, of Modtech
("Modtech Common Stock" or "Modtech Shares") issued and outstanding immediately
prior to the Effective Time (other than (x) Modtech Shares owned by Modtech or
any of its Subsidiaries or any other Modtech Shares designated as treasury
shares (collectively, the "Modtech Treasury Shares") and (y) any Dissenting
Modtech Shares (as defined in Section 2.5(b))) will, by virtue of the Modtech
Merger, be converted into:
(A) cash in an amount equal to $3.7293, subject to
adjustment as hereinafter provided (the "Modtech Per Share
Cash Stock Consideration"), and
(B) 0.8508 fully paid and nonassessable shares of
Holdings Common Stock (the "Modtech Exchange Ratio"), (the
"Modtech Per Share Common Stock Consideration");
provided, however, that, subject to the election, allocation and
conversion procedures set forth in Section 2.3:
(C) the holders of Modtech Shares may elect to
receive fully paid and nonassessable shares of Holdings
Preferred Stock (the "Modtech Per Share Preferred Stock
Consideration") in lieu of receiving an equal number of shares
of Holdings Common Stock, provided, that, no holder of Modtech
Shares may elect to receive Holdings Preferred Stock for more
than 3.94% (rounded down to the nearest whole share) of such
Record Holders ownership of Holdings Common Stock, and,
provided further, that in the aggregate no greater than
388,939 shares of Holdings Preferred Stock may be issued
pursuant to such elections (such aggregate number of shares,
the "Modtech Preferred Stock Number").
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(D) The maximum number of shares of Holdings
Preferred Stock set forth in paragraph (C) above may be
adjusted upward or downward by the Exchange Agent on the
Closing Date upon receipt by the Exchange Agent of a notice
from Modtech specifying the amount of such adjustment
necessary to ensure that the Modtech Merger meets the minimum
requirements for qualification as a transaction under Section
351 the Code.
(b) At the Effective Time, each Modtech Treasury Share shall, by virtue
of the Modtech Merger and without any action on the part of the holders of any
securities of the entities involved, be canceled and extinguished and shall
cease to exist, and no exchange or payment shall be made therefor.
2.3 Modtech Election, Allocation and Conversion Procedures .
(a) Subject to the allocation and conversion procedures set forth in
Section 2.3(b), each Record Holder of Modtech Shares will be entitled to elect
to receive one share of Holdings Preferred Stock in lieu of each share of
Holdings Common Stock such Record Holder would otherwise receive, provided, such
Holdings Preferred Stock may not exceed 3.94% of the Holdings Common Stock such
Record Holder would receive but for such election. All other Modtech Shares held
by such Record Holders ("Modtech No-Election Shares") shall be converted into
the Modtech Per Share Common Stock Consideration as set forth above. Any Record
Holder who delivers to the Exchange Agent an Election Form electing to receive
Holdings Preferred Stock for greater than 3.94% of the Holdings Common Stock
such Record Holder would receive but for such election shall be deemed to have
elected to receive Holdings Preferred Stock for only 3.94% of the Holdings
Common Stock such Record Holder would receive but for such election. The
percentage of Holdings Common Stock that each Record Holder may convert to
Holdings Preferred Stock may be adjusted upward or downward by the Exchange
Agent on the Closing Date in accordance with the adjustments, if any, made in
the Modtech Preferred Stock Number pursuant to Section 2.2(a)(D) above. If such
adjustment is made, each electing Record Holder's election will be adjusted pro
rata based on the original percentage elected.
(b) Not later than two business days after the Election Deadline,
Holdings shall cause the Exchange Agent to effect the allocations and
conversions among the Record Holders of Modtech Shares of rights to receive the
Modtech Per Share Common Stock Consideration or the Modtech Per Share Preferred
Stock Consideration in the Modtech Merger as follows:
(i) If the number of Modtech Preferred Stock Election Shares
(on the basis of Election Forms received by the Election Deadline) is
less than the Modtech Preferred Stock Number, then
(A) all Modtech Preferred Stock Election Shares shall
be deemed, as of the Effective Time, to have become and been
converted into the right to receive the Modtech Per Share
Preferred Stock Consideration,
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(B) the Exchange Agent shall convert (pro rata
according to the total number of Modtech No-Election Shares
held by each such Record Holder set forth on Schedule I on the
Record Date) into Modtech Preferred Stock Election Shares
("Converted Modtech No-Election Shares") a sufficient number
of Modtech No-Election Shares such that the remainder of (x)
the Modtech Preferred Stock Election Shares plus (y) the
Converted Modtech No-Election Shares shall equal as closely as
practicable the Modtech Preferred Stock Number, and all
Converted Modtech No-Election Shares shall be deemed, as of
the Effective Time, to have become and been converted into the
right to receive the Modtech Per Share Preferred Stock
Consideration, and
(C) the Modtech No-Election Shares that are not
Converted Modtech No-Election Shares shall be deemed, as of
the Effective Time, to have become and been converted into the
right to receive the Modtech Per Share Common Stock
Consideration.
(c) On the Mailing Date, Holdings shall mail an Election Form and a
letter of transmittal (the "Letter of Transmittal") to each Record Holder of
Modtech Shares. To be effective, an Election Form must be properly completed,
signed and actually received by the Exchange Agent not later than the Election
Deadline and must be accompanied by the certificates representing all the
Modtech Shares ("Modtech Certificates") as to which the Election is being made
(or an appropriate guarantee of delivery by an eligible organization). Holdings
shall have reasonable discretion, which it may delegate in whole or in part to
the Exchange Agent, to determine whether Election Forms have been properly
completed, signed and timely submitted or to disregard defects in Election
Forms; such decisions of Holdings (or of the Exchange Agent) shall be conclusive
and binding. Neither Holdings nor the Exchange Agent shall be under any
obligation to notify any person of any defect in an Election Form submitted to
the Exchange Agent, except that if Holdings determines not to disregard a
defect, Holdings shall notify Modtech of such defect and provide a reasonable
opportunity for the defect to be cured by the subject Record Holder. The
Exchange Agent shall also make, and Holdings shall verify, all computations
contemplated by this Section 2.3, and all such computations shall be conclusive
and binding on the Record Holders of Modtech Shares, absent manifest error. The
Exchange Agent shall promptly provide Modtech with a copy of the completed
computation. Modtech Shares covered by an Election Form which is not effective
shall be deemed to be Modtech No-Election Shares. Once an Election is made, it
may not be revoked unless such revocation has been communicated in writing to
the Exchange Agent prior to the Election Deadline.
(d) No fractional interests in shares of Holdings Common Stock or
Holdings Preferred Stock, and no certificates representing such fractional
interests, shall be issued upon the surrender for exchange of Modtech
Certificates or upon the exercise of Modtech Options. In lieu of any fractional
share, Holdings shall pay to each Record Holder of Modtech Shares, or to the
holder of a Modtech Option upon the exercise thereof, who otherwise would be
entitled to receive a fractional interest in a share of Holdings Common Stock or
Holdings Preferred Stock, an amount of cash (without interest) determined by
multiplying (i) closing price of Modtech Common Stock on the last
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trading day on Nasdaq prior to the Closing Date by (ii) the fractional interest
to which such Record Holder would otherwise be entitled.
2.4 Additional Exchange Procedures .
(a) The Letter of Transmittal which accompanies the Election Form
(which shall specify that delivery shall be effected and the risk of loss and
title to the Modtech Certificates (and the Modtech Shares and consideration
therefor represented by such Modtech Certificates) shall pass after the
Effective Time only upon proper delivery of such Modtech Certificates to the
Exchange Agent) will advise the Record Holders of Modtech Certificates of the
procedure for surrendering to the Exchange Agent, Modtech Certificates in
exchange for either the certificates representing the Modtech Per Share Cash
Consideration, the Modtech Per Share Common Stock Consideration or the Modtech
Per Share Preferred Stock Consideration (the "Modtech Merger Consideration").
(b) Each Record Holder of Modtech Shares that have been converted into
a right to receive the Modtech Merger Consideration shall, upon surrender to the
Exchange Agent of a Modtech Certificate or Certificates together with a properly
completed Letter of Transmittal, be entitled to receive the Modtech Merger
Consideration as provided herein.
(c) Until so surrendered, each Modtech Certificate, and each Modtech
Share represented thereby, shall, at and after the Effective Time, represent for
all purposes only the right to receive the Modtech Merger Consideration as
provided herein, and nothing else, subject to applicable law in the case of
Modtech Dissenting Shares.
(d) If any of the Modtech Merger Consideration is to be issued to a
person other than the Record Holder of the Modtech Shares formerly represented
by the Modtech Certificate or Certificates surrendered with respect thereto, it
shall be a condition to such issuance that the Modtech Certificate or
Certificates so surrendered shall be properly endorsed or otherwise be in proper
form for transfer and that the person requesting such issuance shall pay to the
Exchange Agent any transfer or other taxes required as a result of such issuance
to a person other than the Record Holder of such Modtech Shares or shall
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not payable.
(e) At and after the Record Date, there shall be no further
registration or transfers of Modtech Shares (other than transfers by operation
of law), and the stock ledgers of Modtech shall be closed. After the Effective
Time, Modtech Certificates presented to the Exchange Agent for transfer shall be
canceled and exchanged for the Modtech Merger Consideration provided for,
without interest, and in accordance with the procedures set forth, in this
Article 2.
(f) One hundred eighty (180) days after the Effective Time, any
Holdings Common Stock or cash made available to the Exchange Agent that remains
unclaimed by the Record Holders of Modtech Shares shall be returned to Holdings,
upon its demand therefor. Any such Record Holder who has not delivered Modtech
Certificates to the Exchange Agent in accordance with this Section
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2.4 prior to that time shall thereafter look only to the Holdings (and only as
general creditors thereof) for the Modtech Merger Consideration in respect of
any Modtech Shares formerly requested thereby. Notwithstanding the foregoing,
neither Holdings nor the Exchange Agent shall be liable to any Record Holder of
Modtech Shares for any securities delivered or any cash paid to a public
official pursuant to applicable escheat or abandoned property laws or for any
securities or cash retained by Holdings as permitted by any such law.
(g) No dividends, interest or other distributions with respect to the
Modtech Merger Consideration shall be paid to the holder of any unsurrendered
Modtech Certificates until such Modtech Certificates are surrendered as provided
in this Section 2.4. Upon such surrender, there shall be paid, without interest,
to the person in whose name any Modtech Per Share Common Stock Consideration is
registered, all dividends and other distributions payable in respect of such
securities on a date subsequent to, and in respect of a record date after, the
Effective Time.
(h) In the event that any Modtech Certificates shall have been lost,
stolen or destroyed, the Exchange Agent shall pay in respect of such lost,
stolen or destroyed certificate, upon the making of an affidavit of that fact by
the holder thereof, the Modtech Merger Consideration as may be provided pursuant
to this Agreement; provided, however, that Holdings may, in its sole discretion
and as a condition precedent to the payment thereof, require the owner of such
lost, stolen or destroyed certificate to deliver an indemnity agreement or a
bond in such sum as it may reasonably direct as indemnity against any claim that
may be made against Holdings, New Modtech or the Exchange Agent or any other
party with respect to the certificate alleged to have been lost, stolen or
destroyed.
(i) If the Record Holder of any Modtech Shares shall become entitled to
receive payment for such shares pursuant to Section 1101 of the CGCL and Section
2.5, such payment shall be made by Holdings in accordance with Section 2.5.
(j) (i) Payments of Modtech Per Share Cash Consideration and payments
in lieu of fractional shares shall be made by check mailed by the Exchange Agent
at the Effective Time, and (ii) certificates representing Modtech Per Share
Common Stock Consideration and Modtech Per Share Preferred Stock Consideration
shall be delivered by hand or mailed by certified mail, return receipt
requested, at the Effective Time; provided the Modtech Certificates have been
provided by the surrendering shareholder to the Exchange Agent in compliance
with Section 2.4. At the time of such payment or mailing, a statement setting
forth in reasonable detail the calculation of the Modtech Merger Consideration
being paid to each Record Holder shall also be mailed to each Record Holder.
Risk of loss shall remain on Holdings until such certificate for Holdings Common
Stock is actually received by the surrendering shareholder.
2.5 Dissenting Modtech Shares .
(a) Notwithstanding any provision of this Agreement to the contrary,
any Modtech Shares held by a holder who has demanded and perfected his demand
for the fair value of his shares in
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accordance with Chapter 13 of the CGCL and as of the Effective Time has neither
effectively withdrawn nor lost his right to demand such fair value (a
"Dissenting Modtech Shareholder") shall not represent a right to receive any
part of the Modtech Merger Consideration, but in lieu thereof the holder thereof
shall be entitled to only such rights as are granted by the CGCL.
(b) Notwithstanding any provision of this Agreement to the contrary, if
any Dissenting Modtech Shareholder demanding the fair value of such Dissenting
Modtech Shareholder's Modtech Shares ("Dissenting Modtech Shares") under the
CGCL shall effectively withdraw or lose (through failure to perfect or
otherwise) his right to a determination of the fair value of his shares, then as
of the Effective Time or the occurrence of such event, whichever later occurs,
such Dissenting Modtech Shares shall automatically be converted into and
represent only the right to receive the fair market value of such Modtech Shares
upon surrender of the certificate or certificates representing such Dissenting
Modtech Shares.
(c) Modtech shall give SPI prompt notice of any demands by a Dissenting
Modtech Shareholder for payment, or notices of intent to demand payment received
by Modtech under the CGCL, and SPI shall have the right to participate in all
negotiations and proceedings with respect to such demands. Modtech shall not,
except with the prior written consent of SPI (which will not be unreasonably
withheld or delayed) or as otherwise required by law, make any payment with
respect to, or settle, or offer to settle, any such demands.
2.6 Modtech Options .
(a) At the Effective Time, adjustments shall be made to the then
outstanding options to purchase Modtech Shares (each, a "Modtech Option"), to
accelerate the vesting of Modtech Options held by those holders whose Modtech
Options are not at least 75% vested. Such Modtech Options shall be accelerated,
pro rata on the basis of the number of unvested Modtech Options held by such
holders of Modtech Options, with the effect that, in the aggregate, all then
outstanding Modtech Options (which theretofore have been granted under Modtech's
1989, 1994 and 1996 Stock Option Plans (the "Modtech Stock Option Plans")) shall
be vested to the extent of 75% of the Modtech Shares covered thereby.
(b) At the Effective Time, after giving effect to the adjustment
contemplated by Section 2.6(a), on an aggregate basis per holder of Modtech
Options:
(i) 14.6709% of all Modtech Options held by such holder which
are vested and exercisable shall be converted into the right to receive
$25.00 per share in cash (less the applicable per share exercise price
of each such Modtech Option and less applicable withholding taxes); and
(ii) each remaining Modtech Option held by such holder,
whether vested or unvested, shall be converted into an option to
acquire, on substantially the same terms and conditions as were
applicable under such Modtech Option immediately prior to the Effective
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Time, except as otherwise set forth in this Section 2.6, for each
Modtech Share subject to such Modtech Option, one (1) share of Holdings
Common Stock at a price per share equal to the original exercise price
of such Modtech Options.
(c) Except as set forth in this Section 2.6, any and all rights under
any provisions of the Modtech Stock Option Plans or in any other plan, program
or arrangement providing for the issuance or grant of any other interest in
respect of the capital stock of Modtech or any Subsidiary thereof shall be
canceled as of the Effective Time. As soon as practicable following the date of
this Agreement, and, in any event, prior to the Effective Time, the Board of
Directors of Modtech (or, if appropriate, the Compensation and Stock Option
Committee thereof) and Modtech shall take all action necessary to give effect to
the provisions of this Section 2.6 and to ensure that no Person shall have any
right under any Modtech Stock Option Plan (or any Modtech Option granted
thereunder) following the Effective Time except for the right to exercise
Modtech Options for shares of Holdings Common Stock as provided in this Section
2.6. As soon as practicable following the date of this Agreement, and, in any
event, prior to the Effective Time, the Board of Directors of Modtech (or, if
appropriate, any committee thereof) and Modtech shall take all action necessary
to either terminate any other plan, program or arrangement with respect to,
including any right to acquire, equity securities of Modtech, or to amend or
modify such other plans, programs or arrangements to provide for the issuance of
shares of Holdings Common Stock in lieu of equity securities of Modtech or New
Modtech.
2.7 Conversion of SPI Shares . To effectuate the SPI Merger and subject
to the terms and conditions of this Agreement:
(a) At the Effective Time, by virtue of the SPI Merger and without any
action on the part of the holder of any securities of the entities involved:
(i) Each share of Common Stock, no par value per share, of SPI
("SPI Common Stock"), and each share of Series A-1 Convertible
Preferred Stock, no par value per share, of SPI ("SPI Series A-1
Preferred Stock"), Series A-2 Convertible Preferred Stock, no par value
per share, of SPI ("SPI Series A-2 Preferred Stock"), Series A-3
Convertible Preferred Stock, no par value per share, of SPI ("SPI
Series A-3 Preferred Stock"), Series A-4 Convertible Preferred Stock,
no par value per share, of SPI ("SPI Series A-4 Preferred Stock"),
Series A-5 Convertible Preferred Stock, no par value per share, of SPI
("SPI Series A-5 Preferred Stock") and Series A-6 Convertible Preferred
Stock, no par value per share, of SPI ("SPI Series A-6 Preferred
Stock") (shares of SPI Common Stock, SPI Series A-1 Preferred Stock,
SPI Series A-2 Preferred Stock, SPI Series A-3 Preferred Stock, SPI
Series A-4 Preferred Stock, SPI Series A-5 Preferred Stock and SPI
Series A-6 Preferred Stock are collectively referred to herein as "SPI
Shares") issued and outstanding immediately prior to the Effective Time
(other than (x) SPI Shares owned by SPI or any of its Subsidiaries or
any other SPI Shares designated as treasury shares (collectively, the
"SPI Treasury Shares") and (y) any SPI Dissenting Shares (as defined in
Section 2.10)) shall be canceled and
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extinguished and be converted into and become a right to receive, at
the election of each holder thereof, but subject to the other
provisions of this Section 2.7,
(A) cash in an amount equal to $49.4097, subject to
adjustment as hereinafter provided (the "SPI Per Share Cash
Consideration"), or
(B) 1.8785 fully paid and nonassessable shares of
Holdings Common Stock (the "SPI Exchange Ratio"), subject to
adjustment as hereinafter provided (the "SPI Per Share Stock
Consideration");
provided, however, that, subject to the election, allocation and
conversion procedures set forth in Section 2.8:
(C) no Record Holder of SPI Shares may elect to
receive the SPI Per Share Cash Consideration for more than
5.9176% of the aggregate number of SPI Shares held by such
Record Holder rounded down to the nearest whole share
(provided that Record Holders of SPI Shares electing to
receive the SPI Per Share Cash Consideration may receive more
than 5.9176% pursuant to the allocation procedures set forth
in Section 2.8);
(D) only 5.9176% of the aggregate number of SPI
Shares outstanding on the Record Date shall be converted into
the right to receive the SPI Per Share Cash Consideration
(such number of shares, the "SPI Cash Number"); and
(E) 94.0728% of the aggregate number of SPI Shares
outstanding on the Record Date shall be converted into the
right to receive the SPI Per Share Stock Consideration (such
number of shares, the "SPI Stock Number").
(b) At the Effective Time, each SPI Treasury Share shall, by virtue of
the SPI Merger and without any action on the part of the holders of any
securities of the entities involved, be canceled and extinguished and shall
cease to exist, and no exchange or payment shall be made therefor.
2.8 SPI Election, Allocation and Conversion Procedures .
(a) Subject to the allocation and conversion procedures set forth in
Section 2.8(b), each Record Holder of SPI Shares will be entitled (i) to elect
to receive Holdings Common Stock for some or all of the SPI Shares ("SPI Stock
Election Shares") held by such Record Holder, (ii) to elect to receive cash for
up to, but not more than, 5.9176% of the SPI Shares ("SPI Cash Election Shares")
held by such Record Holder or (iii) to indicate that such Record Holder makes no
such election for some or all of the SPI Shares ("SPI No-Election Shares") held
by such Record Holder. All Elections pursuant to this Section 2.8(a) shall be
made on an Election Form. Any Record Holder who delivers to the Exchange Agent
an Election Form electing to receive SPI Cash Election Shares for greater than
5.9176% of the SPI Shares held by such Record Holder shall be deemed to have
elected SPI
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Cash Election Shares for only 5.9176% of the SPI Shares held by such Record
Holder. Any SPI Shares with respect to which the Record Holder thereof shall
not, as of the Election Deadline, have properly submitted to the Exchange Agent
a properly completed Election Form shall be deemed to be SPI No-Election Shares.
A Record Holder acting in different capacities or acting on behalf of other
Record Holders in any way shall be entitled to submit an Election Form for each
capacity in which such Record Holder so acts with respect to each Record Holder
for which it so acts.
(b) Not later than two business days after the Election Deadline,
Holdings shall cause the Exchange Agent to effect the allocations and
conversions among the Record Holders of SPI Shares of rights to receive the SPI
Per Share Stock Consideration or the SPI Per Share Cash Consideration in the SPI
Merger as follows:
(i) If the number of SPI Stock Election Shares (on the basis
of Election Forms received by the Election Deadline) is greater than
the SPI Stock Number, then
(A) all SPI Cash Election Shares shall be deemed, as
of the Effective Time, to have become and been converted into
the right to receive the SPI Per Share Cash Consideration,
(B) the Exchange Agent shall convert (pro rata
according to the total number of SPI Stock Election Shares
held by each Record Holder who has elected to receive the SPI
Per Share Cash Consideration) into SPI Cash Election Shares
("Converted SPI Stock Election Shares") a sufficient number of
SPI Stock Election Shares held by those Record Holders who
have elected to receive the SPI Per Share Cash Consideration
such that the remainder of (x) the SPI Stock Election Shares
less (y) the Converted SPI Stock Election Shares shall equal
as closely as practicable the SPI Stock Number, and all
Converted SPI Stock Election Shares shall be deemed, as of the
Effective Time, to have become and been converted into the
right to receive the SPI Per Share Cash Consideration,
(C) if the remainder of the SPI Stock Election Shares
less the Converted SPI Stock Election Shares is greater than
the SPI Stock Number, the Exchange Agent shall convert (pro
rata according to each Record Holder's total number of SPI
No-Election Shares) into Cash Election Shares ("Converted SPI
No-Election Shares") a sufficient number of SPI No-Election
Shares such that the remainder of (x) the SPI Stock Election
Shares less (y) the Converted SPI Stock Election Shares and
less the Converted SPI No-Election Shares shall equal as
closely as practicable the SPI Stock Number, and all Converted
SPI No-Election Shares shall be deemed, as of the Effective
Time, to have become and been converted into the right to
receive the SPI Per Share Cash Consideration, and
(D) the SPI No-Election Shares and the SPI Stock
Election Shares that are not Converted SPI Stock Election
Shares or Converted SPI No-Election Shares shall
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be deemed, as of the Effective Time, to have become and been
converted into the right to receive the SPI Per Share Stock
Consideration.
(c) On the Mailing Date, Holdings shall mail an Election Form and a
Letter of Transmittal to each Record Holder of SPI Shares. To be effective, an
Election Form must be properly completed, signed and actually received by the
Exchange Agent not later than the Election Deadline and must be accompanied by
the certificates representing all the SPI Shares ("SPI Certificates") as to
which the Election is being made (or an appropriate guarantee of delivery by an
eligible organization). Holdings shall have reasonable discretion, which it may
delegate in whole or in part to the Exchange Agent, to determine whether
Election Forms have been properly completed, signed and timely submitted or to
disregard defects in Election Forms; such decisions of Holdings (or of the
Exchange Agent) shall be conclusive and binding. Neither Holdings nor the
Exchange Agent shall be under any obligation to notify any person of any defect
in an Election Form submitted to the Exchange Agent, except that if Holdings
determines not to disregard a defect, Holdings shall notify SPI of such defect
and provide a reasonable opportunity for the defect to be cured by the subject
Record Holder. The Exchange Agent shall also make, and Holdings shall verify,
all computations contemplated by this Section 2.8, and all such computations
shall be conclusive and binding on the Record Holders of SPI Shares, absent
manifest error. The Exchange Agent shall promptly provide SPI with a copy of the
completed computation. SPI Shares covered by an Election Form which is not
effective shall be deemed to be SPI No-Election Shares. Once an Election is
made, it may not be revoked unless such revocation has been communicated in
writing to the Exchange Agent prior to the Election Deadline.
(d) No fractional interests in shares of Holdings Common Stock, and no
certificates representing such fractional interests, shall be issued upon the
surrender for exchange of SPI Certificates or upon the exercise of SPI Options.
In lieu of any fractional share, Holdings shall pay to each Record Holder of SPI
Shares, or to the holder of an SPI Option upon the exercise thereof, who
otherwise would be entitled to receive a fractional interest in a share of
Holdings Common Stock an amount of cash (without interest) determined by
multiplying (i) the closing price of Modtech Common Stock on the last trading
day on Nasdaq prior to the Closing Date by (ii) the fractional interest to which
such Record Holder would otherwise be entitled.
2.9 Additional Exchange Procedures.
(a) The Letter of Transmittal which accompanies the Election Form
(which shall specify that delivery shall be effected and the risk of loss and
title to the SPI Certificates (and the SPI Shares and consideration therefor
represented by such SPI Certificates) shall pass after the Effective Time only
upon proper delivery of such SPI Certificates to the Exchange Agent) will advise
the Record Holders of SPI Certificates of the procedure for surrendering to the
Exchange Agent, SPI Certificates in exchange for either the certificates
representing the SPI Per Share Stock Consideration or the SPI Per Share Cash
Consideration (either, "SPI Merger Consideration").
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(b) Each Record Holder of SPI Shares that have been converted into a
right to receive the SPI Merger Consideration shall, upon surrender to the
Exchange Agent of a SPI Certificate or Certificates together with a properly
completed Letter of Transmittal, be entitled to receive the SPI Merger
Consideration as provided herein.
(c) Until so surrendered, each SPI Certificate, and each SPI Share
represented thereby, shall, at and after the Effective Time, represent for all
purposes only the right to receive the SPI Merger Consideration as provided
herein, and nothing else, subject to applicable law in the case of SPI
Dissenting Shares.
(d) If any of the SPI Merger Consideration is to be issued to a person
other than the Record Holder of the SPI Shares formerly represented by the SPI
Certificate or Certificates surrendered with respect thereto, it shall be a
condition to such issuance that the SPI Certificate or Certificates so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the person requesting such issuance shall pay to the Exchange
Agent any transfer or other taxes required as a result of such issuance to a
person other than the Record Holder of such SPI Shares or shall establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
(e) At and after the Record Date, there shall be no further
registration or transfers of SPI Shares (other than transfers by operation of
law), and the stock ledgers of SPI shall be closed. After the Effective Time,
SPI Certificates presented to the Exchange Agent for transfer shall be canceled
and exchanged for the SPI Merger Consideration provided for, without interest,
and in accordance with the procedures set forth, in this Article 2.
(f) One hundred eighty (180) days after the Effective Time, any
Holdings Common Stock or cash made available to the Exchange Agent that remains
unclaimed by the Record Holders of SPI Shares shall be returned to Holdings,
upon its demand therefor. Any such Record Holder who has not delivered SPI
Certificates to the Exchange Agent in accordance with this Section 2.9 prior to
that time shall thereafter look only to the Holdings (and only as general
creditors thereof) for the SPI Merger Consideration in respect of any SPI Shares
formerly requested thereby. Notwithstanding the foregoing, neither Holdings nor
the Exchange Agent shall be liable to any Record Holder of SPI Shares for any
securities delivered or any cash paid to a public official pursuant to
applicable escheat or abandoned property laws or for any securities or cash
retained by Holdings as permitted by any such law.
(g) No dividends, interest or other distributions with respect to the
SPI Merger Consideration shall be paid to the holder of any unsurrendered SPI
Certificates until such SPI Certificates are surrendered as provided in this
Section 2.9. Upon such surrender, there shall be paid, without interest, to the
person in whose name any SPI Per Share Stock Consideration is registered, all
dividends and other distributions payable in respect of such securities on a
date subsequent to, and in respect of a record date after, the Effective Time.
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(h) In the event that any SPI Certificates shall have been lost, stolen
or destroyed, the Exchange Agent shall pay in respect of such lost, stolen or
destroyed certificate, upon the making of an affidavit of that fact by the
holder thereof, the SPI Merger Consideration as may be provided pursuant to this
Agreement; provided, however, that Holdings may, in its sole discretion and as a
condition precedent to the payment thereof, require the owner of such lost,
stolen or destroyed certificate to deliver an indemnity agreement or a bond in
such sum as it may reasonably direct as indemnity against any claim that may be
made against Holdings, New SPI or the Exchange Agent or any other party with
respect to the certificate alleged to have been lost, stolen or destroyed.
(i) If the Record Holder of any SPI Shares shall become entitled to
receive payment for such shares pursuant to Sections 7-113-101 through 7-113-302
of the CBCA and Section 2.10, such payment shall be made by Holdings in
accordance with Section 2.10.
(j) (i) Payments of SPI Per Share Cash Consideration and payments in
lieu of fractional shares shall be made by check mailed by the Exchange Agent at
the Effective Time, and (ii) certificates representing SPI Per Share Stock
Consideration shall be delivered by hand or mailed by certified mail, return
receipt requested, at the Effective Time; provided the SPI Certificates have
been provided by the surrendering shareholder to the Exchange Agent in
compliance with Section 2.9. At the time of such payment or mailing, a statement
setting forth in reasonable detail the calculation of the SPI Merger
Consideration being paid to each Record Holder shall also be mailed to each
Record Holder. Risk of loss shall remain on Holdings until such certificate for
Holdings Common Stock is actually received by the surrendering shareholder.
2.10 Dissenting SPI Shares.
(a) Notwithstanding any provision of this Agreement to the contrary,
any SPI Shares held by a holder who has demanded and perfected his demand for
the fair value of his shares in accordance with Sections 7-113-101 through
7-113-302 of the CBCA and as of the Effective Time has neither effectively
withdrawn nor lost his right to demand such fair value (a "Dissenting SPI
Shareholder") shall not represent a right to receive any part of the SPI Merger
Consideration, but in lieu thereof the holder thereof shall be entitled to only
such rights as are granted by the CBCA.
(b) Notwithstanding any provision of this Agreement to the contrary, if
any Dissenting SPI Shareholder demanding the fair value of such Dissenting SPI
Shareholder's SPI Shares ("Dissenting SPI Shares") under the CBCA shall
effectively withdraw or lose (through failure to perfect or otherwise) his right
to a determination of the fair market value of his shares, then as of the
Effective Time or the occurrence of such event, whichever later occurs, such
Dissenting SPI Shares shall automatically be converted into and represent only
the right to receive the fair market value of such Dissenting SPI Shares upon
surrender of the certificate or certificates representing such Dissenting SPI
Shares.
(c) SPI shall give Modtech prompt notice of any demands by a Dissenting
SPI Shareholder for payment, or notices of intent to demand payment received by
SPI under the CBCA,
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and Modtech shall have the right to participate in all negotiations and
proceedings with respect to such demands. SPI shall not, except with the prior
written consent of Modtech (which will not be unreasonably withheld or delayed)
or as otherwise required by law, make any payment with respect to, or settle, or
offer to settle, any such demands.
2.11 SPI Options.
(a) At the Effective Time, adjustments shall be made to the then
outstanding options to purchase SPI Shares (each, an "SPI Option"), such that
seventy-five percent (75%) of the then outstanding SPI Options (which
theretofore have been granted under SPI's Second Amended and Restated 1997 Stock
Option Plan (the "SPI Stock Option Plan")) shall become vested.
(b) At the Effective Time, after giving effect to the adjustment
contemplated by Section 2.10(a), on an aggregate basis per holder of SPI
Options:
(i) 5.9176% of all SPI Options held by such holder which are
vested and exercisable shall be converted into the right to receive
$49.4097 per share in cash (less the applicable per share exercise
price of each such SPI Option and less applicable withholding taxes);
and
(ii) each remaining SPI Option held by such holder, whether
vested or unvested, shall be converted into an option to acquire, on
substantially the same terms and conditions as were applicable under
such SPI Option immediately prior to the Effective Time, except as
otherwise set forth in this Section 2.10, for each SPI Share subject to
such SPI Option, 1.8785 shares of Holdings Common Stock at a price per
share (rounded upward to the nearest whole cent) equal to (i) the
aggregate exercise price for SPI Shares purchasable pursuant to such
SPI Option (without regard to vesting provisions) divided by (ii) the
number of full shares of Holdings Common Stock deemed purchasable
pursuant to such SPI Option.
(c) Except as set forth in this Section 2.11, any and all rights under
any provisions of the SPI Stock Option Plans or in any other plan, program or
arrangement providing for the issuance or grant of any other interest in respect
of the capital stock of SPI or any Subsidiary thereof shall be canceled as of
the Effective Time. As soon as practicable following the date of this Agreement,
and, in any event, prior to the Effective Time, the Board of Directors of SPI
(or, if appropriate, the Compensation and Stock Option Committee thereof) and
SPI shall take all action necessary to give effect to the provisions of this
Section 2.11 and to ensure that no Person shall have any right under any SPI
Stock Option Plan (or any SPI Option granted thereunder) following the Effective
Time except for the right to exercise SPI Options for shares of Holdings Common
Stock as provided in this Section 2.11. As soon as practicable following the
date of this Agreement, and, in any event, prior to the Effective Time, the
Board of Directors of SPI (or, if appropriate, any committee thereof) and SPI
shall take all action necessary to either terminate any other plan, program or
arrangement with respect to, including any right to acquire, equity securities
of SPI, or to amend or modify such
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other plans, programs or arrangements to provide for the issuance of shares of
Holdings Common Stock in lieu of equity securities of SPI or New SPI.
2.12 SPI Warrants.
(a) All outstanding warrants to purchase SPI Shares (each, an "SPI
Warrant"), shall be deemed exercised immediately prior to the Effective Time.
(b) At the Effective Time:
(i) 5.9176% of all SPI Warrants held by each holder of SPI
Warrants shall be converted into the right to receive $49.4097 per
share in cash (less the applicable per share exercise price of each
such SPI Warrant); and
(ii) each remaining SPI Warrant held by such holder, upon the
payment by the holder of the exercise price thereof, shall be converted
into the right to receive 1.8785 shares of Holdings Common Stock.
2.13 Cancellation of Shares. All shares of Holdings Common Stock
outstanding immediately prior to the Effective Time will be canceled.
2.14 No Transfer after the Effective Time. No transfers of Modtech
Shares will be made on the stock transfer books of Modtech, and no transfers of
SPI Shares will be made on the books of SPI, after the close of business on the
day prior to the date of the Effective Time.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MODTECH
Modtech hereby represents and warrants to SPI as follows:
3.1 Existence; Good Standing; Corporate Authority. Modtech and each of
its Subsidiaries is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization, with the power and authority
to own and operate its businesses as presently conducted. Section 3.1 of the
Disclosure Schedule sets forth the state of incorporation of Modtech and each of
its Subsidiaries, and lists each jurisdiction in which Modtech and each of its
Subsidiaries is qualified as a foreign corporation. Modtech and each of its
Subsidiaries is duly qualified as a foreign corporation or other entity to do
business and is in good standing in each jurisdiction where the character of its
Properties or the nature of its activities makes such qualification necessary,
except for such failures of Modtech and any of its Subsidiaries to be so
qualified as would not have a Material Adverse Effect. Modtech has previously
provided SPI with true and correct copies of its articles of incorporation and
bylaws and the charter documents and bylaws or other organizational documents of
each of its Subsidiaries, as currently in effect.
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3.2 Authorization; Validity and Effect of Agreement. Modtech has the
requisite corporate power and authority to execute, deliver and perform its
obligations under this Agreement, every other document or agreement to be
executed by Modtech under this Agreement (each a "Modtech Transaction Document")
and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement by Modtech and the performance by
Modtech of its obligations hereunder, the execution and delivery of each of the
Modtech Transaction Documents by Modtech and the performance of its obligations
thereunder and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by the Board of Directors of Modtech and all
other necessary corporate action on the part of Modtech, other than the adoption
and approval of this Agreement by the stockholders of Modtech, and no other
corporate proceedings on the part of Modtech are necessary to authorize this
Agreement, the Modtech Transaction Documents and the transactions contemplated
hereby and thereby (assuming due authorization, execution and delivery by the
other party or parties thereto). The Board of Directors of Modtech has approved
for the purposes of Section 1101 of the CGCL the agreement of merger contained
in this Agreement and the Modtech Merger. This Agreement has been duly and
validly executed and delivered by Modtech and constitutes a legal, valid and
binding obligation of Modtech, enforceable against it in accordance with its
terms, except to the extent that such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
affecting the enforcement of creditors' rights generally or by general
principles of equity. Each Modtech Transaction Document has been, or, as of the
Effective Time, will have been, duly and validly authorized, executed and
delivered by Modtech, and constitutes or will constitute as of such time a
legally valid and binding obligation of Modtech, enforceable against it in
accordance with its terms, except to the extent that such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws affecting the enforcement of creditors' rights generally or by
general principles of equity.
3.3 Capitalization. The authorized capital stock of Modtech consists
of 20,000,000 shares of Modtech Common Stock and 5,000,000 shares of preferred
stock having a par value of $0.01 per share ("Modtech Preferred Stock"), none of
which shares have been designated. As of the date hereof, 9,871,409 shares of
Modtech Common Stock and no shares of Modtech Preferred Stock are issued and
outstanding. As of the date hereof, Modtech Options to acquire 1,625,658 Modtech
Shares are outstanding, 1,219,244 of which will be vested as of the Effective
Time in accordance with Section 2.06. All of the issued and outstanding Modtech
Shares are validly issued, fully paid and non-assessable and no class of Modtech
stock is entitled to preemptive rights. As of the date hereof, except for
Modtech Stock Option Plans, there are no existing options, warrants, calls,
subscriptions, convertible securities or other securities, agreements,
commitments, or obligations which would require Modtech to issue or sell shares
of Modtech Common Stock or any other equity securities, or securities
convertible into or exchangeable or exercisable for shares of Modtech Common
Stock or any other equity securities of Modtech or any of its Subsidiaries.
Modtech has no commitments or obligations to purchase or redeem any shares of
Modtech Common Stock. Set forth in Section 3.3 of the Disclosure Schedule is a
complete list of the Modtech Options held by the executive officers of Modtech
which are outstanding as of the date hereof, which list sets forth, for
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each such holder of a Modtech Option, the number of Modtech Shares subject
thereto, the number of vested options, the exercise price and the expiration
date thereof.
3.4 Subsidiaries. Set forth in Section 3.4 of the Disclosure Schedule
is a complete list of Modtech's Subsidiaries. All of the outstanding shares of
capital stock of each of Modtech's Subsidiaries are validly issued, fully paid,
non-assessable and free of preemptive rights or rights of first refusal. Except
as set forth in Section 3.4 of the Disclosure Schedule, Modtech owns, directly
or indirectly, all of the issued and outstanding capital stock and other
ownership interests of each of its Subsidiaries, free and clear of all
Encumbrances, and there are no existing options, warrants, calls, subscriptions,
convertible securities or other securities, agreements, commitments or
obligations of any character relating to the outstanding capital stock or other
securities of any Subsidiary of Modtech or which would require any Subsidiary of
Modtech to issue or sell any shares of its capital stock, ownership interests or
securities convertible into or exchangeable for shares of its capital stock or
ownership interests.
3.5 Other Interests. Except as set forth in Section 3.4 of the
Disclosure Schedule, neither Modtech nor any of Modtech's Subsidiaries owns,
directly or indirectly, any interest or investment (whether equity or debt) in
any corporation, partnership, limited liability company, joint venture,
business, trust or other Person (other than Modtech Subsidiaries).
3.6 No Conflict; Required Filings and Consents.
(a) Except as set forth in Section 3.6(a) of the Disclosure Schedule,
neither the execution and delivery of this Agreement and the Modtech Transaction
Documents, nor the performance by Modtech of its obligations hereunder and
thereunder, nor the consummation of the transactions contemplated hereby or
thereby, will: (i) assuming receipt of the Modtech Stockholder Approvals (as
defined below), conflict with Modtech's articles of incorporation or bylaws;
(ii) assuming satisfaction of the requirements set forth in Section 3.6(b)
below, violate any statute, law, ordinance, rule or regulation applicable to
Modtech or any of its Subsidiaries or any of their Properties or assets; or
(iii) violate, breach, be in conflict with or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or permit the termination of any provision of, or result in the termination of,
the acceleration of the maturity of, or the acceleration of the performance of
any obligation of Modtech or any of its Subsidiaries, or result in the creation
or imposition of any Encumbrance upon any Properties, assets or business of
Modtech or any of its Subsidiaries under, any note, bond, indenture, mortgage,
deed of trust, lease, franchise, permit, authorization, license, contract,
instrument or other agreement or commitment or any order, judgment or decree to
which Modtech or any of its Subsidiaries is a party or by which Modtech or any
of its Subsidiaries or any of their respective assets or Properties is bound or
encumbered, or give any Person the right to require Modtech or any of its
Subsidiaries to purchase or repurchase any notes, bonds or instruments of any
kind except, in each case, for such violations, conflicts, defaults or other
occurrences which would not have, and would not reasonably be expected to have,
a Material Adverse Effect.
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(b) Except (i) for applicable requirements, if any, of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder (the
"Exchange Act"), the Securities Act of 1933, as amended, and the rules and
regulations thereunder (the "Securities Act"), and state securities or "blue
sky" laws ("Blue Sky Laws"), (ii) for the pre-merger notification requirements
of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations thereunder (the "HSR Act"), (iii) for the filing of
certificates of merger pursuant to the CGCL, (iv) for the Modtech Stockholder
Approvals (as defined below) or (v) with respect to matters set forth in
Sections 3.6(a) or 3.6(b) of the Disclosure Schedule, no consent, approval or
authorization of, permit from, or declaration, filing or registration with, any
governmental or regulatory authority, or any other Person is required to be made
or obtained by Modtech or its Subsidiaries in connection with the execution,
delivery and performance of this Agreement, the Modtech Transaction Documents
and the consummation of the transactions contemplated hereby and thereby except
where the failure to obtain such consent, approval, authorization, permit or
declaration or to make such filing or registration would not have a Material
Adverse Effect.
3.7 Compliance. Modtech and each of its Subsidiaries is in compliance
with all foreign, federal, state and local laws and regulations applicable to
its operations or with respect to which compliance is a condition of engaging in
the business thereof, except to the extent that failure to comply would not have
a Material Adverse Effect. Neither Modtech nor any of its Subsidiaries has
received any notice asserting a failure, or possible failure, to comply with any
such law or regulation, the subject of which notice has not been resolved as
required thereby or otherwise to the satisfaction of the party sending the
notice, except for such failure as would not have a Material Adverse Effect. Set
forth in Section 3.7 of the Disclosure Schedule is a complete list of all
material permits, licenses and franchises from governmental agencies held by
Modtech and its Subsidiaries. Modtech and its Subsidiaries have all material
permits, licenses and franchises from governmental agencies required to conduct
their respective businesses as they are now being conducted and all such
permits, licenses and franchises will remain in effect after the Effective Time,
except for such failures to remain effective that would not have a Material
Adverse Effect.
3.8 SEC Documents.
(a) Set forth in Section 3.8 of the Disclosure Schedule is a complete
list of all registration statements, proxy or information statements, forms,
reports and other documents required to be filed by Modtech with the Securities
and Exchange Commission (the "SEC") since January 1, 1996 (collectively, the
"Modtech SEC Reports"). Modtech has delivered or made available to SPI true and
complete copies of each SEC Reports. As of their respective dates, the Modtech
SEC Reports and any registration statements, reports, forms, proxy or
information statements and other documents filed by Modtech with the SEC after
the date of this Agreement (i) complied or, with respect to those not yet filed,
will comply, in all material respects with the applicable requirements of the
Securities Act and the Exchange Act and (ii) did not or, with respect to those
not yet filed, will not, contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
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(b) Neither Modtech nor any of its Subsidiaries has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
that would be required to be reflected on, or reserved against in, a balance
sheet of Modtech or in the notes thereto, prepared in accordance with GAAP
consistently applied, except for (i) liabilities or obligations that were so
reserved on, or reflected in (including the notes to), the consolidated balance
sheet of Modtech as of June 30, 1998 and (ii) liabilities or obligations arising
in the ordinary course of business (including trade indebtedness) since June 30,
1998 which would not have a Material Adverse Effect.
3.9 Litigation. Except as set forth in Section 3.9 of the Disclosure
Schedule, there is no Action instituted, pending or, to the best knowledge of
Modtech, threatened, which, if adversely decided, would, directly or indirectly,
have a Material Adverse Effect, nor is there any outstanding judgment, decree,
or injunction or any statute, rule or order of any domestic or foreign court,
governmental department, commission or agency which has or would have a Material
Adverse Effect.
3.10 Absence of Certain Changes.
(a) Except for the transactions expressly contemplated hereby, since
August 14, 1998, Modtech and its Subsidiaries have conducted their respective
businesses only in the ordinary and usual course consistent with past practices
and there has not been any change in Modtech's business, operations, condition
(financial or otherwise), results of operations, business prospects, assets,
liabilities, working capital or reserves, except for changes contemplated hereby
or changes which have not had a Material Adverse Effect. From August 14, 1998
through the date of this Agreement, neither Modtech nor any of its Subsidiaries
has taken any of the actions prohibited by Section 5.1 hereof.
(b) Since December 31, 1997, to the best knowledge of Modtech, there
has been no change in (i) the demand in the California public school system for
the products manufactured and sold by Modtech and its Subsidiaries, (ii) the
competitive environment in which Modtech and its Subsidiaries conduct business,
(iii) the regulatory standards or guidelines applicable to the business
conducted by Modtech and its Subsidiaries, (iv) the legislation applicable to
the business conducted by Modtech and its Subsidiaries, (v) the relationship
between Modtech or its Subsidiaries on the one hand, and any customers or
suppliers of Modtech or its Subsidiaries or the owners of any Properties
utilized by Modtech or its Subsidiaries on the other hand, any of which would
have a Material Adverse Effect.
3.11 Environmental Matters.
(a) There are no existing uncured notices of noncompliance, notices of
violation, administrative actions, or lawsuits against Modtech or any of its
Subsidiaries arising under Environmental Laws or relating to the use, handling,
storage, treatment, recycling, generation, or release of Hazardous Materials at
any of the Properties, nor has Modtech received any uncured notification of any
allegation of any responsibility for any disposal, release, or threatened
release at
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any location of any Hazardous Materials, except in any such case which would not
be reasonably expected to have a Material Adverse Effect.
(b) To the best knowledge of Modtech, there have been no spills or
releases of Hazardous Materials at any of the Properties in excess of quantities
reportable under Environmental Laws, except in any such case which would not be
reasonably expected to have a Material Adverse Effect.
(c) There are no consent decrees, consent orders, judgments, judicial
or administrative orders, or Encumbrances by any governmental authority relating
to any Environmental Law which have not already been fully satisfied and which
regulate, obligate, or bind Modtech or any of its Subsidiaries, except in any
such case which would not be reasonably expected to have a Material Adverse
Effect.
(d) Except as set forth in Section 3.11(d) of the Disclosure Schedule,
no Properties or Facilities are listed on the federal National Priorities List,
the federal Comprehensive Environmental Response Compensation Liability
Information System list, or any similar state listing of sites known to be
contaminated with Hazardous Materials.
3.12 Real Properties. Section 3.12 of the Disclosure Schedule lists
all Properties owned by Modtech and its Subsidiaries and all Leased Real Estate
leased by Modtech or any of its Subsidiaries. Except as set forth in Section
3.12 of the Disclosure Schedule, neither Modtech nor any of its Subsidiaries
currently owns, and neither Modtech nor any of its Subsidiaries or any of their
respective predecessors have ever owned, fee title to any Properties. Modtech
has delivered or caused to be delivered to SPI complete and accurate copies of
the Leases which relate to the Leased Real Estate, together with all amendments
or supplements thereto. Modtech has not received written notice of condemnation
or eminent domain proceedings pending or threatened against any Leased Real
Estate. Except as disclosed in Section 3.12 of the Disclosure Schedule, Modtech
has not received any notice from any city, village or other Person of any
zoning, ordinance, building, fire or health code or other legal violation in
respect of any Leased Real Estate. The Leases are in full force and effect and
are valid, binding and enforceable in accordance with their respective terms;
(i) no amount payable under any Lease is past due; (ii) Modtech is in compliance
in all material respects with all commitments and obligations on its part to be
performed or observed under each Lease and is not aware of the failure by any
other party to any Lease to comply in all material respects with all of its
commitments and obligations; (iii) Modtech has not received any written notice
(A) of a default, offset or counterclaim under any Lease, or, any other
communication calling upon it to comply with any provision of any Lease or
asserting noncompliance, or asserting Modtech has waived or altered its rights
thereunder, and no event or condition has happened or presently exists which
constitutes a default or, after notice or lapse of time or both, would
constitute a default under any Lease on the part of Modtech or, to the best
knowledge of Modtech, any other party, or (B) of any Action against any party
under any Lease which if adversely determined would result in such Lease being
terminated or cut off; and (iv) Modtech has not assigned, mortgaged, pledged or
otherwise encumbered its interest, if any, under any Lease.
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3.13 Tangible Personal Property. Except as disclosed in Section 3.13
of the Disclosure Schedule, Modtech and its Subsidiaries (i) have good and valid
title to all the tangible personal property material to its business and
reflected in the latest audited financial statements included in Modtech SEC
Reports as being owned by Modtech and its Subsidiaries or acquired after the
date thereof (except properties sold or otherwise disposed of in the ordinary
course of business since the date thereof), free and clear of all Encumbrances
except Permitted Encumbrances, and (ii) are collectively the lessee of all
tangible personal property material to Modtech's business and reflected as
leased in the latest audited financial statements included in Modtech SEC
Reports (or on the books and records of Modtech as of the date thereof) or
acquired after the date thereof (except for leases that have expired by their
terms or that have been transferred in the ordinary course of business) and are
in possession of the properties purported to be leased thereunder, and each such
lease is valid and in full force and effect without default thereunder by the
lessee or, to Modtech's knowledge, the lessor. Each of Modtech and each of its
Subsidiaries enjoys peaceful and undisturbed possession under all such leases.
Such owned and leased tangible personal property is in good working order,
reasonable wear and tear excepted.
3.14 Intellectual Property. Section 3.14 of the Disclosure Schedule
sets forth a listing of all intellectual property rights utilized by Modtech or
its Subsidiaries other than intellectual property rights relating to the plans
and designs for structures manufactured by Modtech and its Subsidiaries. The
ownership, operation and conduct by Modtech and its Subsidiaries of its
business, as presently owned, operated, and conducted, does not infringe upon or
conflict in any respect with any patent, copyright, trademark, trade name,
service mark, brand name, any related regulations or other intellectual property
rights of any other Person, and to the knowledge of Modtech no other Person is
infringing upon any such rights of Modtech and its Subsidiaries, in each case,
other than as set forth in Section 3.14 of the Disclosure Schedule.
3.15 Absence of Changes in Modtech Benefit Plans. Section 3.15 of the
Disclosure Schedule sets forth a listing of all Modtech Benefit Plans (as
defined below). Except as required under this Agreement, since December 31,
1997, there has not been (i) any acceleration, amendment or change of the period
of exercisability or vesting of any Modtech Options under the Modtech Option
Plans (including any discretionary acceleration of the exercise periods or
vesting by Modtech's Board of Directors or any committee thereof or any other
persons administering the Modtech Option Plans) or authorization of cash
payments in exchange for any Modtech Options under the Modtech Option Plan, (ii)
any adoption or material amendment by Modtech or any of its Subsidiaries of any
collective bargaining agreement or any bonus, pension, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase, stock
option, phantom stock, stock appreciation right, retirement, vacation,
severance, disability, death benefit, hospitalization, medical, worker's
compensation, disability, supplementary unemployment benefits, or other plan,
arrangement or understanding (whether or not legally binding) or any employment
agreement providing compensation or benefits to any current or former employee,
officer, director or independent contractor of Modtech or any of its
Subsidiaries or any beneficiary thereof or entered into, maintained or
contributed to, as the case may be, by Modtech or any of its Subsidiaries
(collectively, "Modtech Benefit Plans"), or (iii) any adoption of, or amendment
to, or change in
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employee participation or coverage under, any Modtech Benefit Plans which would
increase materially the expense of maintaining such Modtech Benefit Plans above
the level of the expense incurred in respect thereof for the year ended December
31, 1997.
3.16 ERISA Compliance.
(a) Section 3.16(a) of the Disclosure Schedule contains a list of all
"employee pension benefit plans" (defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), "employee welfare
benefit plans" (defined in Section 3(l) of ERISA) and all other Modtech Benefit
Plans. With respect to each Modtech Benefit Plan, Modtech has delivered or made
available to SPI a true, correct and complete copy of: (A) each writing
constituting a part of such Modtech Benefit Plan, including without limitation
all plan documents, benefit schedules, trust agreements, and insurance contracts
and other funding vehicles; (B) the most recent Annual Report (Form 5500 Series)
and accompanying schedule, if any; (C) the current summary plan description, if
any; (D) the most recent annual financial report, if any; and (E) the most
recent determination letter from the United States Internal Revenue Service, if
any.
(b) Section 3.16(b) of the Disclosure Schedule identifies each Modtech
Benefit Plan that is intended to be a "qualified plan" within the meaning of
Section 401(a) of the Code ("Qualified Plans"). The Internal Revenue Service has
issued a favorable determination letter with respect to each Qualified Plan that
has not been revoked, and there are no existing circumstances nor any events
that have occurred that could adversely affect the qualified status of any
Qualified Plan or the related trust.
(c) Modtech and its Subsidiaries have complied, and are now in
compliance, in all material respects with all provisions of ERISA, the Code, and
all laws and regulations applicable to the Modtech Benefit Plans of which the
failure to comply with would have a Material Adverse Effect. No prohibited
transaction has occurred with respect to any Modtech Benefit Plan. All
contributions required to be made to any Modtech Benefit Plan by applicable law
or regulation or by any plan document or other contractual undertaking, and all
premiums due or payable with respect to insurance policies funding any Modtech
Benefit Plan, for any period through the date hereof have been timely made or
paid in full or, to the extent not required to be made or paid on or before the
date hereof, have been fully reflected in Modtech SEC Reports.
(d) No Modtech Benefit Plan is subject to Title IV or Section 302 of
ERISA or Section 412 or 4971 of the Code. None of Modtech, its Subsidiaries and
their respective ERISA Affiliates (as defined below) has at any time since
September 2, 1974, contributed to or been obligated to contribute to any
"multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA or any
plan with two or more contributing sponsors at least two of whom are not under
common control, within the meaning of Section 4063 of ERISA. There does not now
exist, nor do any circumstances exist that could result in, any Controlled Group
Liability (as defined below) that would be a liability of Modtech or any of its
Subsidiaries following the Closing. "ERISA Affiliate" for purposes of this
Section means, with respect to any entity, trade or business, any other entity,
trade or business that
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is a member of a group described in Section 414(b), (c), (m) or (o) of the Code
or Section 4001(b)(1) of ERISA that includes the first entity, trade or
business, or that is a member of the same "controlled group" as the first
entity, trade or business pursuant to Section 4001(a)(14) of ERISA. "Controlled
Group Liability" for purposes of this Section means any and all liabilities
under (i) Title IV of ERISA, (ii) Section 302 of ERISA, (iii) Sections 412 and
4971 of the Code, (iv) the continuation coverage requirements of Section 601 et
seq. of ERISA and Section 4980B of the Code, and (v) corresponding or similar
provisions of foreign laws or regulations, other than such liabilities that
arise solely out of, or relate solely to, the Modtech Benefit Plans.
(e) Except as set forth in Modtech SEC Reports or in Section 3.16(e) of
the Disclosure Schedule, neither Modtech nor any of its Subsidiaries has any
liability for life, health, medical or other welfare benefits to former
employees or beneficiaries or dependents thereof, except for health continuation
coverage as required by Section 4980B of the Code or Part 6 of Title I of ERISA
and at no expense to Modtech and its Subsidiaries.
(f) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (either alone or in
conjunction with any other event) result in, cause the accelerated vesting or
delivery of, or increase the amount or value of, any payment or benefit to any
employee of Modtech or any of its Subsidiaries. Without limiting the generality
of the foregoing, no amount paid or payable by Modtech or any of its
Subsidiaries in connection with the transactions contemplated hereby (either
solely as a result thereof or as a result of such transactions in conjunction
with any other event) will be an "excess parachute payment" within the meaning
of Section 280G of the Code.
(g) No labor organization or group of employees of Modtech or any of
its Subsidiaries has made a pending demand for recognition or certification, and
there are no representation or certification proceedings or petitions seeking a
representation proceeding presently pending or threatened to be brought or
filed, with the National Labor Relations Board or any other labor relations
tribunal or authority. There are no organizing activities, strikes, work
stoppages, slowdowns, lockouts, material arbitrations or material grievances, or
other material labor disputes pending or, to the knowledge of Modtech,
threatened against or involving Modtech or any of its Subsidiaries.
(h) There are no pending or, to Modtech's knowledge, threatened claims,
and the fiduciaries of the Modtech Benefit Plans have not advised Modtech that
with respect to their duties to the Modtech Benefit Plans or the assets or any
of the trusts under any of the Modtech Benefit Plans, there are any pending or
threatened claims (other than claims for benefits in the ordinary course),
lawsuits or arbitrations which have been asserted or instituted against the
Modtech Benefit Plans, which could reasonably be expected to result in any
material liability of Modtech or any of its Subsidiaries to the Pension Benefit
Guaranty Corporation, the Department of Treasury, the Department of Labor or any
multiemployer benefit plan.
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3.17 Taxes.
(a) Modtech and its Subsidiaries have duly prepared and filed federal,
state, local and foreign Returns which were required to be filed by or in
respect of Modtech and its Subsidiaries, or any of their Properties, income
and/or operations. As of the time they were filed, such Returns accurately
reflected the material facts regarding the income, business, Assets, operations,
activities, status of the entity on whose behalf the Return was filed, and any
other information required to be shown thereon. No extension of time within
which Modtech or any of its Subsidiaries may file any Return is currently in
force.
(b) With respect to all amounts in respect of Taxes imposed on Modtech
or any of its Subsidiaries or for which Modtech or any of its Subsidiaries is or
could be liable, whether to taxing authorities or to other Persons, all material
amounts required to be paid by or on behalf of Modtech or any of its
Subsidiaries to taxing authorities or others have been paid.
(c) Except as set forth in Section 3.17(c) of the Disclosure Schedule,
Modtech has not been advised that there is any review or audit in process by any
taxing authority of any Tax liability of Modtech or any of its Subsidiaries
currently in progress. Modtech and its Subsidiaries have not received any
written notice of any pending or threatened audit by the Internal Revenue
Service or any state, local or foreign agency of any Returns or Tax liability of
Modtech or any of its Subsidiaries for any period. Modtech and its Subsidiaries
currently have no unpaid deficiencies assessed by the Internal Revenue Service
or any state, local or foreign taxing authority arising out of any examination
of any of the Returns of Modtech or any of its Subsidiaries nor, to the
knowledge of Modtech, is there reason to believe that any material deficiency
will be assessed.
(d) No agreements are in force or are currently being negotiated by or
on behalf of Modtech or any of its Subsidiaries for any waiver or for the
extension of any statute of limitations governing the time of assessments or
collection of any Tax. No closing agreements or compromises concerning Taxes of
Modtech or any Subsidiaries are currently pending.
(e) Modtech and its Subsidiaries have withheld from each payment made
to any of their respective officers, directors and employees, the amount of all
applicable Taxes, including, but not limited to, income tax, social security
contributions, unemployment contributions, backup withholding and other
deductions required to be withheld therefrom by any Tax law and have paid the
same to the proper Taxing authorities within the time required under any
applicable Tax law.
(f) There are no Encumbrances for Taxes, whether imposed by any
federal, state, local or foreign taxing authority, outstanding against any
Assets owned by Modtech or its Subsidiaries, except for Encumbrances for Taxes
that are not yet due and payable. None of the Assets owned by Modtech or its
Subsidiaries is property that is required to be treated as being owned by any
other Person pursuant to the safe harbor lease provisions of former Section
168(f)(8) of the Code. None of the assets owned by Modtech or its Subsidiaries
directly or indirectly secures any debt, the interest on which is tax-exempt
under Section 103(a) of the Code. None of the Assets owned by Modtech
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or its Subsidiaries is "tax-exempt use property" within the meaning of Section
168(h) of the Code. None of Modtech or any of its Subsidiaries is a person other
than a United States person within the meaning of the Code.
(g) Neither Modtech nor any of its Subsidiaries is a party to any
agreement, contract, or arrangement for compensating any employee that,
individually or collectively, could give rise to the payment of any amount
(whether in cash or property, including Modtech Shares or other Equity
Interests) that would not be deductible pursuant to the terms of Sections
162(a)(1), 162(m), 162(n) or 280G of the Code.
(h) Neither Modtech nor any of its Subsidiaries anticipate the
assessment of any additional Taxes against Modtech or any of its Subsidiaries
nor is Modtech or any of its Subsidiaries aware of any unresolved questions,
claims or disputes concerning the liability for Taxes of Modtech or any of its
Subsidiaries which would exceed by more than $1,000,000 the reserves established
on the consolidated balance sheet of Modtech as of June 30, 1998.
3.18 Contracts; Debt Instruments.
(a) Except as otherwise disclosed in Section 3.18 of the Disclosure
Schedule, neither Modtech nor any of its Subsidiaries is a party to or subject
to:
(i) any collective bargaining or other agreements with labor
unions, trade unions, employee representatives, work committees, guilds
or associations representing employees of Modtech and its Subsidiaries;
(ii) any employment, consulting, severance, termination, or
indemnification agreement, contract or arrangement, including any oral
agreement, contract or arrangement which requires the payment of over
$75,000, with any current or former officer, consultant, director or
employee;
(iii) any lease for real or personal property in which the
amount of payments which Modtech is required to make, or is expected to
receive, on an annual basis exceeds $50,000;
(iv) any agreement, contract, instrument, arrangement or
commitment to repurchase assets previously sold or leased, or to
indemnify or otherwise compensate the purchaser in respect thereof;
(v) any agreement, contract, policy, license, document,
instrument, arrangement or commitment that materially limits the
freedom of Modtech or any of its Subsidiaries to compete in any line of
business;
(vi) any agreement or contract relating to any outstanding
commitment for material capital expenditures, or any partially or fully
executory agreement or contract
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relating to the acquisition or disposition of rights or assets other
than those entered into in the ordinary course consistent with past
practices;
(vii) any sale-leaseback, conditional sale, exclusive dealing,
brokerage, finder's fee contract or agreement; or
(viii) any other agreement, contract, policy, license,
document, instrument, arrangement or commitment not made in the
ordinary course of business which is material to Modtech and its
Subsidiaries taken as a whole and which is not otherwise disclosed in
the Disclosure Schedules.
(b) None of Modtech, its Subsidiaries and, to the knowledge of Modtech,
none of the other parties to any of the contracts and agreements identified in
Sections 3.18(a) and (c) of the Disclosure Schedule or otherwise disclosed in
Modtech SEC Reports is in default under or has terminated any such contract or
agreement, or in any way expressed to Modtech an intent to materially reduce or
terminate the amount of its business with Modtech or any of its Subsidiaries in
the future.
(c) Set forth in Section 3.18(c) of the Disclosure Schedule is (A) a
list of all loan or credit agreements, notes, bonds, mortgages, indentures and
other agreements and instruments pursuant to which any indebtedness of Modtech
or any of its Subsidiaries is outstanding or may be incurred, (B) the respective
principal amounts currently outstanding thereunder, and (C) any interest rate
swaps, caps, floors or option agreements or similar interest rate risk
management agreements. Except as set forth in Section 3.18(c) of the Disclosure
Schedule, all such indebtedness is prepayable at any time without penalty,
subject to the notice provisions of the agreements governing such indebtedness
(which, except as set forth in Section 3.18(c)of the Disclosure Schedule, do not
require a notice period of more than thirty days). For purposes of this Section
3.18(c), "indebtedness" shall mean, with respect to any Person, without
duplication, (A) all obligations of such Person for borrowed money, or with
respect to deposits or advances of any kind to such Person, (B) all obligations
of such Person evidenced by bonds, debentures, notes or similar instruments, (C)
all obligations of such Person upon which interest charges are customarily paid,
(D) all obligations of such person under conditional sale or other title
retention agreements relating to property purchased by such Person, (E) all
obligations of such Person issued or assumed as the deferred purchase price of
property or services (excluding obligations of such Person to creditors for raw
materials, inventory, services and supplies incurred in the ordinary course of
such Person's business), (F) all capitalized lease obligations of such Person,
(G) all indebtedness of others secured by any Lien on property or assets owned
or acquired by such Person, whether or not the obligations secured thereby have
been assumed, (H) all obligations of such Person under interest rate or currency
swap transactions (valued at the termination value thereof), (I) all letters of
credit issued for the account of such Person, (J) all obligations of such Person
to purchase securities (or other property) which arises out of or in connection
with the sale of the same or substantially similar securities or property, and
(K) all guarantees and arrangements having the economic effect of a guarantee of
such Person of any indebtedness of any other person.
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3.19 Insurance. Modtech and its Subsidiaries are covered by valid and
currently effective insurance policies issued in favor of Modtech that are
customary for companies of similar size and financial condition which conduct
similar businesses. All such policies are in full force and effect, all premiums
due thereon have been paid and Modtech has complied with the provisions of such
policies with respect to which the failure to comply with would result in a
cancellation of such policies. Neither Modtech nor any of its Subsidiaries has
received any written notice from or on behalf of any insurance carrier issuing
policies or binders relating to or covering Modtech and its Subsidiaries that
there will be a cancellation or non-renewal of existing policies or binders, or
material modification of any of the methods of doing business, will be required.
3.20 Interests of Officers and Directors. Except as disclosed in
Modtech SEC Reports, neither any of Modtech's or any of its Subsidiaries'
officers, directors or material shareholders, nor any member of their respective
immediate families or any entity with respect to which any such person is an
Affiliate, has any material interest in any property, real or personal, tangible
or intangible, used in or pertaining to the business of Modtech or its
Subsidiaries, or any other business relationship with Modtech or any of its
Subsidiaries.
3.21 No Brokers. Except as set forth in Section 3.21 of the Disclosure
Schedule, no broker, finder, investment banker, or other Person or firm is
entitled to any brokerage, finder's or other similar fee or commission in
connection with this Agreement or the transactions contemplated hereby based
upon arrangements made by or on behalf of Modtech, any of its Subsidiaries or
any of their respective directors, officers or employees.
3.22 Customers. Section 3.22 of the Disclosure Schedule sets forth a
list of the names of the twenty (20) most significant jobs (by revenue) of
Modtech and its Subsidiaries for goods or products ordered from Modtech or any
of its Subsidiaries and the amount of revenue accrued for each such job
completed or in progress during the nine-month period ended September 1, 1998.
Neither Modtech nor any of its Subsidiaries has received any notice that any
significant customer of Modtech or any of its Subsidiaries has ceased, will
cease, or has significantly reduced, or will significantly reduce its ordering
of goods or products from Modtech or any of its Subsidiaries, nor are Modtech or
any of its Subsidiaries aware of any circumstances that could reasonably be
anticipated to cause any such reduction or cessation of orders.
3.23 Suppliers. Section 3.23 of the Disclosure Schedule sets forth a
list of the names of the fifteen (15) most significant suppliers of raw
materials and other goods to Modtech and its Subsidiaries for the nine-month
period ended September 1, 1998. Neither Modtech nor any of its Subsidiaries has
received any notice that any such supplier will cease selling raw materials or
other goods to them at any time after the Closing or materially alter the terms
of such sales (other than normal price increases), nor is Modtech or any of its
Subsidiaries aware of any circumstances that could reasonably be anticipated to
cause such suppliers to make such changes.
3.24 Employees. To the best knowledge of Modtech, no executive, key
employee or group of employees has any plans to terminate employment with
Modtech or any of its Subsidiaries.
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Neither Modtech nor any of its Subsidiaries is a party to or bound by a
collective bargaining agreement, nor does Modtech have any knowledge of any
organizational effort presently being made or threatened by or on behalf of any
labor union with respect to the employees of Modtech or its Subsidiaries.
3.25 Product Liability. Each product manufactured by Modtech or any of
its Subsidiaries has been manufactured, sold, delivered and installed in all
material respects in accordance with applicable plans, specifications, laws
(including building codes and regulations) and applicable industry standards.
3.26 Information in Joint Proxy Statement/Prospectus and Form S-4.
Information supplied by Modtech or any of its Subsidiaries for inclusion or
incorporation by reference in (i) the Joint Proxy Statement/Prospectus (as
hereinafter defined) (or any amendment thereof or supplement thereto), at the
date mailed to Modtech stockholders and SPI stockholders and at the time of the
respective meetings of the Modtech stockholders and of the SPI stockholders
contemplated hereby, and (ii) the Form S-4 (as hereinafter defined) at any time
the Form S-4 is filed with the SEC, at any time it is amended or supplemented
and at any time it becomes effective under the Securities Act, will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
3.27 Disclosure. The representative and warranties of Modtech
contained in this Agreement are true and correct in all material respects and do
not omit any material fact necessary to make the statements contained therein,
in light of the circumstances under which they were made, not misleading. There
is no fact known to Modtech which has not been disclosed to SPI in the
Disclosure Schedule and Modtech SEC Reports, taken as a whole, which has had, or
would reasonably be expected to have, a Material Adverse Effect.
3.28 Fairness Opinion. Modtech has engaged Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ") who has rendered an opinion to the
effect that, from a financial point of view, the Modtech Merger Consideration to
be received by the holders of Modtech Shares pursuant to this Agreement is fair
to such holders of Modtech Shares (the "Fairness Opinion").
3.29 Year 2000 Matters. To the best knowledge of Modtech, the
information systems utilized by Modtech and each of its Subsidiaries are capable
of properly recognizing date sensitive information when the year changes to
2000, and as such, the year change to 2000, as it relates to the information
systems of Modtech and its Subsidiaries, will not result in a material
disruption of the business of Modtech or any of its Subsidiaries.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SPI
SPI hereby represents and warrants to Modtech as follows:
4.1 Existence; Good Standing; Authority. SPI and each of its
Subsidiaries is duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization, with the power and authority to
own and operate its businesses as presently conducted. Section 4.1 of the
Disclosure Schedule sets forth the state of incorporation of SPI and each of its
Subsidiaries, and lists each jurisdiction in which SPI and each of its
Subsidiaries is qualified as a foreign corporation. SPI and each of its
Subsidiaries is duly qualified as a foreign corporation or other entity to do
business and is in good standing in each jurisdiction where the character of its
Properties or the nature of its activities makes such qualification necessary,
except for such failures of SPI and any of its Subsidiaries to be so qualified
as would not have a Material Adverse Effect. SPI has previously provided Modtech
with true and correct copies of its articles of incorporation and bylaws and the
charter documents and bylaws or other organizational documents of each of its
Subsidiaries, as currently in effect.
4.2 Authorization; Validity and Effect of Agreement. SPI has the
requisite corporate power and authority to execute, deliver and perform its
obligations under this Agreement, every other document or agreement to be
executed by SPI under this Agreement (each an "SPI Transaction Document") and to
consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement by SPI and the performance by SPI of its obligations
hereunder, the execution and delivery of each of the SPI Transaction Documents
by SPI and the performance of its obligations thereunder and the consummation of
the transactions contemplated hereby and thereby have been duly authorized by
the Board of Directors of SPI and all other necessary corporate action on the
part of SPI, other than the adoption and approval of this Agreement by the
stockholders of SPI, and no other corporate proceedings on the part of SPI are
necessary to authorize this Agreement, the SPI Transaction Documents and the
transactions contemplated hereby and thereby (assuming due authorization,
execution and delivery by the other party or parties thereto). The Board of
Directors of SPI has approved for the purposes of Section 7-111-101 of the CBCA
the agreement of merger contained in this Agreement and the SPI Merger. This
Agreement has been duly and validly executed and delivered by SPI and
constitutes a legal, valid and binding obligation of SPI, enforceable against it
in accordance with its terms, except to the extent that such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws affecting the enforcement of creditors' rights generally or by
general principles of equity. Each SPI Transaction Document has been, or, as of
the Effective Time, will have been, duly and validly authorized, executed and
delivered by SPI, and constitutes or will constitute as of such time a legally
valid and binding obligation of SPI, enforceable against it in accordance with
its terms, except to the extent that such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
affecting the enforcement of creditors' rights generally or by general
principles of equity.
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4.3 Capitalization. The authorized capital stock of SPI consists 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. As of the date hereof, 333,614 shares of SPI Common Stock, 994,335 shares
of Series A-1 Preferred Stock, 272,051 shares of Series A-2 Preferred Stock, no
shares of Series A-3 Preferred Stock, 133,334 shares of Series A-4 Preferred
Stock, 500,000 shares of Series A-5 Preferred Stock and 62,333 (subject to
adjustment as set forth in Section 4.3 of the Disclosure Schedule) shares of
Series A-6 Preferred Stock are issued and outstanding. As of the date hereof,
SPI Options to acquire 217,085 (subject to adjustment as set forth in Section
4.3 of the Disclosure Schedule) SPI Shares are outstanding, 162,814 of which
will be vested as of the Effective Time in accordance with Section 2.11, and
warrants to acquire 320,829 SPI Shares are outstanding, all of which are
currently exercisable. All of the issued and outstanding SPI Shares are validly
issued, fully paid and non-assessable and no class of SPI stock is entitled to
preemptive rights. As of the date hereof, except for the SPI Stock Option Plan,
and except as set forth in Section 4.3 of the Disclosure Schedule, there are no
existing options, warrants, calls, subscriptions, convertible securities or
other securities, agreements, commitments, or obligations which would require
SPI to issue or sell shares of SPI Common Stock, SPI Preferred Stock or any
other equity securities, or securities convertible into or exchangeable or
exercisable for SPI Shares or any other equity securities of SPI or any of its
Subsidiaries. Except as set forth in Section 4.3 of the Disclosure Schedule, SPI
has no commitments or obligations to purchase or redeem any SPI Shares. Set
forth in Section 4.3 of the Disclosure Schedule is a complete list of the SPI
Options held by the executive officers of SPI which are outstanding as of the
date hereof, which list sets forth, for each such holder of an SPI Option, the
number of SPI Shares subject thereto, the number of vested options, the exercise
price and the expiration date thereof.
4.4 Subsidiaries. Set forth in Section 4.4 of the Disclosure Schedule
is a complete list of SPI's Subsidiaries. All of the outstanding shares of
capital stock of each of SPI's Subsidiaries are validly issued, fully paid,
non-assessable and free of preemptive rights or rights of first refusal. SPI
owns, directly or indirectly, all of the issued and outstanding capital stock
and other ownership interests of each of its Subsidiaries, free and clear of all
Encumbrances, and there are no existing options, warrants, calls, subscriptions,
convertible securities or other securities, agreements, commitments or
obligations of any character relating to the outstanding capital stock or other
securities of any Subsidiary of SPI or which would require any Subsidiary of SPI
to issue or sell any shares of its capital stock, ownership interests or
securities convertible into or exchangeable for shares of its capital stock or
ownership interests.
4.5 Other Interests. Except as set forth in Section 4.4 of the
Disclosure Schedule, neither SPI nor any of SPI's Subsidiaries owns, directly or
indirectly, any interest or investment (whether equity or debt) in any
corporation, partnership, limited liability company, joint venture, business,
trust or other Person.
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4.6 No Conflict; Required Filings and Consents.
(a) Except as set forth in Section 4.6(a) of the Disclosure Schedule,
neither the execution and delivery of this Agreement and the SPI Transaction
Documents, nor the performance by SPI of its obligations hereunder and
thereunder, nor the consummation of the transactions contemplated hereby or
thereby, will: (i) assuming receipt of the SPI Stockholder Approvals (as defined
below), conflict with SPI's articles of incorporation or bylaws; (ii) assuming
satisfaction of the requirements set forth in Section 4.6(b) below, violate any
statute, law, ordinance, rule or regulation applicable to SPI or any of its
Subsidiaries or any of their Properties or assets; or (iii) violate, breach, be
in conflict with or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or permit the
termination of any provision of, or result in the termination of, the
acceleration of the maturity of, or the acceleration of the performance of any
obligation of SPI or any of its Subsidiaries, or result in the creation or
imposition of any Encumbrance upon any Properties, assets or business of SPI or
any of its Subsidiaries under, any note, bond, indenture, mortgage, deed of
trust, lease, franchise, permit, authorization, license, contract, instrument or
other agreement or commitment or any order, judgment or decree to which SPI or
any of its Subsidiaries is a party or by which SPI or any of its Subsidiaries or
any of their respective assets or Properties is bound or encumbered, or give any
Person the right to require SPI or any of its Subsidiaries to purchase or
repurchase any notes, bonds or instruments of any kind except, in each case, for
such violations, conflicts, defaults or other occurrences which would not have,
and would not reasonably be expected to have, a Material Adverse Effect.
(b) Except (i) for applicable requirements, if any, of the Exchange
Act, the Securities Act and the Blue Sky Laws, (ii) for the pre-merger
notification requirements of the HSR Act, (iii) for the filing of certificates
of merger pursuant to the CBCA, (iv) for the SPI Stockholder Approvals (as
defined below) or (v) with respect to matters set forth in Sections 4.6(a) or
4.6(b) of the Disclosure Schedule, no consent, approval or authorization of,
permit from, or declaration, filing or registration with, any governmental or
regulatory authority, or any other Person is required to be made or obtained by
SPI or its Subsidiaries in connection with the execution, delivery and
performance of this Agreement, the SPI Transaction Documents and the
consummation of the transactions contemplated hereby and thereby except where
the failure to obtain such consent, approval, authorization, permit or
declaration or to make such filing or registration would not have a Material
Adverse Effect.
4.7 Compliance. SPI and each of its Subsidiaries is in compliance with
all foreign, federal, state and local laws and regulations applicable to its
operations or with respect to which compliance is a condition of engaging in the
business thereof, except to the extent that failure to comply would not have a
Material Adverse Effect. Neither SPI nor any of its Subsidiaries has received
any notice asserting a failure, or possible failure, to comply with any such law
or regulation, the subject of which notice has not been resolved as required
thereby or otherwise to the satisfaction of the party sending the notice, except
for such failure as would not have a Material Adverse Effect. Set forth in
Section 4.7 of the Disclosure Schedule is a complete list of all material
permits, licenses and franchises from governmental agencies held by SPI and its
Subsidiaries. SPI and its Subsidiaries
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have all material permits, licenses and franchises from governmental agencies
required to conduct their respective businesses as they are now being conducted
and all such permits, licenses and franchises will remain in effect after the
Effective Time, except for such failures to remain effective that would not have
a Material Adverse Effect.
4.8 Financial Statements.
(a) SPI has delivered or made available to Modtech true and complete
copies of the financial statements set forth in Section 4.8 of the Disclosure
Schedule (collectively, the "SPI Financial Statements"). Each of the
consolidated and consolidating balance sheets included in the SPI Financial
Statements (including the related notes and schedules) presents fairly, in all
material respects, the consolidated financial position of SPI and its
Subsidiaries as of its date, and each of the consolidated and consolidating
statements of income and cash flows included in the SPI Financial Statements
(including any related notes and schedules) presents fairly, in all material
respects, the results of operations or cash flows, as the case may be, of SPI
and its Subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to normal year-end audit adjustments), in each case in
accordance with GAAP consistently applied during the periods involved, except as
may be noted therein.
(b) Neither SPI nor any of its Subsidiaries has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
that would be required to be reflected on, or reserved against in, a
consolidated balance sheet of SPI or in the notes thereto, prepared in
accordance with GAAP consistently applied, except for (i) liabilities or
obligations that were so reserved on, or reflected in (including the notes to),
the consolidated balance sheet of SPI as of June 30, 1998 and (ii) liabilities
or obligations arising in the ordinary course of business (including trade
indebtedness) since June 30, 1998 which would not have a Material Adverse
Effect.
4.9 Litigation. Except as set forth in Section 4.9 of the Disclosure
Schedule, there is no Action instituted, pending or, to the best knowledge of
SPI, threatened, which, if adversely decided, would, directly or indirectly,
have a Material Adverse Effect, nor is there any outstanding judgment, decree,
or injunction or any statute, rule or order of any domestic or foreign court,
governmental department, commission or agency which has or would have any
Material Adverse Effect.
4.10 Absence of Certain Changes.
(a) Except for the transactions expressly contemplated hereby, since
March 31, 1998, SPI and its Subsidiaries have conducted their respective
businesses only in the ordinary and usual course consistent with past practices
and there has not been any change in SPI's business, operations, condition
(financial or otherwise), results of operations, business prospects, assets,
liabilities, working capital or reserves, except for changes contemplated hereby
or changes which have not had a Material Adverse Effect. From March 31, 1998
through the date of this Agreement, neither SPI nor any of its Subsidiaries has
taken any of the actions prohibited by Section 5.1 hereof.
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(b) Since December 31, 1997, to the best knowledge of SPI, there has
been no change in (i) the demand for the products manufactured and sold by SPI
and its Subsidiaries, (ii) the competitive environment in which SPI and its
Subsidiaries conduct business, (iii) the regulatory standards or guidelines
applicable to the business conducted by SPI and its Subsidiaries, (iv) the
legislation applicable to the business conducted by SPI and its Subsidiaries,
(v) the relationship between SPI or its Subsidiaries on the one hand, and any
customers or suppliers of SPI or its Subsidiaries or the owners of any
Properties utilized by SPI or its Subsidiaries on the other hand, any of which
would have a Material Adverse Effect.
4.11 Environmental Matters.
(a) There are no existing uncured notices of noncompliance, notices of
violation, administrative actions, or lawsuits against SPI or any of its
Subsidiaries arising under Environmental Laws or relating to the use, handling,
storage, treatment, recycling, generation, or release of Hazardous Materials at
any of the Properties, nor has SPI received any uncured notification of any
allegation of any responsibility for any disposal, release, or threatened
release at any location of any Hazardous Materials, except in any such case
which would not be reasonably expected to have a Material Adverse Effect.
(b) To the best knowledge of SPI, there have been no spills or releases
of Hazardous Materials at any of the Properties in excess of quantities
reportable under Environmental Laws, except in any such case which would not be
reasonably expected to have a Material Adverse Effect.
(c) There are no consent decrees, consent orders, judgments, judicial
or administrative orders, or Encumbrances by any governmental authority relating
to any Environmental Law which have not already been fully satisfied and which
regulate, obligate, or bind SPI or any of its Subsidiaries, except in any such
case which would not be reasonably expected to have a Material Adverse Effect.
(d) Except as set forth in Section 4.11(d) of the Disclosure Schedule,
no Properties or Facilities are listed on the federal National Priorities List,
the federal Comprehensive Environmental Response Compensation Liability
Information System list, or any similar state listing of sites known to be
contaminated with Hazardous Materials.
4.12 Real Properties. Neither SPI nor any of its Subsidiaries
currently owns, and neither SPI nor any of its Subsidiaries or any of their
respective predecessors have ever owned, fee title to any Properties. Section
4.12 of the Disclosure Schedule lists all Leased Real Estate leased by SPI or
any of its Subsidiaries. SPI has delivered or caused to be delivered to Modtech
complete and accurate copies of the Leases which relate to the Leased Real
Estate, together with all amendments or supplements thereto. SPI has not
received written notice of condemnation or eminent domain proceedings pending or
threatened against any Leased Real Estate. Except as disclosed in Section 4.12
of the Disclosure Schedule, SPI has not received any notice from any city,
village or other Person of any zoning, ordinance, building, fire or health code
or other legal violation in respect of
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any Leased Real Estate. The Leases are in full force and effect and are valid,
binding and enforceable in accordance with their respective terms; (i) no amount
payable under any Lease is past due; (ii) SPI is in compliance in all material
respects with all commitments and obligations on its part to be performed or
observed under each Lease and is not aware of the failure by any other party to
any Lease to comply in all material respects with all of its commitments and
obligations; (iii) SPI has not received any written notice (A) of a default,
offset or counterclaim under any Lease, or, any other communication calling upon
it to comply with any provision of any Lease or asserting noncompliance, or
asserting SPI has waived or altered its rights thereunder, and no event or
condition has happened or presently exists which constitutes a default or, after
notice or lapse of time or both, would constitute a default under any Lease on
the part of SPI or, to the best knowledge of SPI, any other party, or (B) of any
Action against any party under any Lease which if adversely determined would
result in such Lease being terminated or cut off; and (iv) SPI has not assigned,
mortgaged, pledged or otherwise encumbered its interest, if any, under any
Lease.
4.13 Tangible Personal Property. Except as disclosed in Section 4.13
of the Disclosure Schedule, SPI and its Subsidiaries (i) have good and valid
title to all the tangible personal property material to its business and
reflected in the latest audited consolidated financial statements of SPI as
being owned by SPI and its Subsidiaries or acquired after the date thereof
(except properties sold or otherwise disposed of in the ordinary course of
business since the date thereof), free and clear of all Encumbrances except
Permitted Encumbrances, and (ii) are collectively the lessee of all tangible
personal property material to SPI's business and reflected as leased in the
latest audited consolidated financial statements of SPI (or on the books and
records of SPI as of the date thereof) or acquired after the date thereof
(except for leases that have expired by their terms or that have been
transferred in the ordinary course of business) and are in possession of the
properties purported to be leased thereunder, and each such lease is valid and
in full force and effect without default thereunder by the lessee or, to SPI's
knowledge, the lessor. Each of SPI and each of its Subsidiaries enjoys peaceful
and undisturbed possession under all such leases. Such owned and leased tangible
personal property is in good working order, reasonable wear and tear excepted.
4.14 Intellectual Property. Section 4.14 of the Disclosure Schedule
sets forth a listing of all intellectual property rights utilized by SPI or its
Subsidiaries other than intellectual property rights relating to the plans and
designs for structures manufactured by SPI and its Subsidiaries. The ownership,
operation and conduct by SPI and its Subsidiaries of its business, as presently
owned, operated, and conducted, does not infringe upon or conflict in any
respect with any patent, copyright, trademark, trade name, service mark, brand
name, any related regulations or other intellectual property rights of any other
Person, and to the knowledge of SPI no other Person is infringing upon any such
rights of SPI and its Subsidiaries, in each case.
4.15 Absence of Changes in SPI Benefit Plans. Section 4.15 of the
Disclosure Schedule sets forth a listing of all SPI Benefit Plans (as defined
below). Except as set forth in Section 4.15 of the Disclosure Schedule, and
except as required under this Agreement, since March 31, 1998, there has not
been (i) any acceleration, amendment or change of the period of exercisability
or vesting of any SPI Options under the SPI Option Plans (including any
discretionary acceleration of
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the exercise periods or vesting by SPI's Board of Directors or any committee
thereof or any other persons administering the SPI Option Plans) or
authorization of cash payments in exchange for any SPI Options under the SPI
Option Plan, (ii) any adoption or material amendment by SPI or any of its
Subsidiaries of any collective bargaining agreement or any bonus, pension,
profit sharing, deferred compensation, incentive compensation, stock ownership,
stock purchase, stock option, phantom stock, stock appreciation right,
retirement, vacation, severance, disability, death benefit, hospitalization,
medical, worker's compensation, disability, supplementary unemployment benefits,
or other plan, arrangement or understanding (whether or not legally binding) or
any employment agreement providing compensation or benefits to any current or
former employee, officer, director or independent contractor of SPI or any of
its Subsidiaries or any beneficiary thereof or entered into, maintained or
contributed to, as the case may be, by SPI or any of its Subsidiaries
(collectively, "SPI Benefit Plans"), or (iii) any adoption of, or amendment to,
or change in employee participation or coverage under, any SPI Benefit Plans
which would increase materially the expense of maintaining such SPI Benefit
Plans above the level of the expense incurred in respect thereof for the fiscal
year ended March 31, 1998.
4.16 ERISA Compliance.
(a) Section 4.16(a) of the Disclosure Schedule contains a list of all
"employee pension benefit plans" (defined in Section 3(2) of ERISA), "employee
welfare benefit plans" (defined in Section 3(l) of ERISA) and all other SPI
Benefit Plans. With respect to each SPI Benefit Plan, SPI has delivered or made
available to Modtech a true, correct and complete copy of: (A) each writing
constituting a part of such SPI Benefit Plan, including without limitation all
plan documents, benefit schedules, trust agreements, and insurance contracts and
other funding vehicles; (B) the most recent Annual Report (Form 5500 Series) and
accompanying schedule, if any; (C) the current summary plan description, if any;
(D) the most recent annual financial report, if any; and (E) the most recent
determination letter from the United States Internal Revenue Service, if any.
(b) Section 4.16(b) of the Disclosure Schedule identifies each SPI
Benefit Plan that is intended to be a "qualified plan" within the meaning of
Section 401(a) of the Code ("Qualified Plans"). The Internal Revenue Service has
issued a favorable determination letter with respect to each Qualified Plan that
has not been revoked, and, except as set forth in Section 4.16(b) of the
Disclosure Schedule, there are no existing circumstances nor any events that
have occurred that could adversely affect the qualified status of any Qualified
Plan or the related trust.
(c) Except as set forth in Section 4.16(c) of the Disclosure Schedule,
SPI and its Subsidiaries have complied, and are now in compliance, in all
material respects with all provisions of ERISA, the Code, and all laws and
regulations applicable to the SPI Benefit Plans of which the failure to comply
with would have a Material Adverse Effect. No prohibited transaction has
occurred with respect to any SPI Benefit Plan. All contributions required to be
made to any SPI Benefit Plan by applicable law or regulation or by any plan
document or other contractual undertaking, and all premiums due or payable with
respect to insurance policies funding any SPI Benefit Plan, for any period
through the date hereof have been timely made or paid in full or, to the
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extent not required to be made or paid on or before the date hereof, have been
fully reflected in the latest audited consolidated financial statements of SPI.
(d) No SPI Benefit Plan is subject to Title IV or Section 302 of ERISA
or Section 412 or 4971 of the Code. None of SPI, its Subsidiaries and their
respective ERISA Affiliates (as defined below) has at any time since September
2, 1974, contributed to or been obligated to contribute to any "multiemployer
plan" within the meaning of Section 4001(a)(3) of ERISA or any plan with two or
more contributing sponsors at least two of whom are not under common control,
within the meaning of Section 4063 of ERISA. There does not now exist, nor do
any circumstances exist that could result in, any Controlled Group Liability (as
defined below) that would be a liability of SPI or any of its Subsidiaries
following the Closing. "ERISA Affiliate" for purposes of this Section means,
with respect to any entity, trade or business, any other entity, trade or
business that is a member of a group described in Section 414(b), (c), (m) or
(o) of the Code or Section 4001(b)(1) of ERISA that includes the first entity,
trade or business, or that is a member of the same "controlled group" as the
first entity, trade or business pursuant to Section 4001(a)(14) of ERISA.
"Controlled Group Liability" for purposes of this Section means any and all
liabilities under (i) Title IV of ERISA, (ii) Section 302 of ERISA, (iii)
Sections 412 and 4971 of the Code, (iv) the continuation coverage requirements
of Section 601 et seq. of ERISA and Section 4980B of the Code, and (v)
corresponding or similar provisions of foreign laws or regulations, other than
such liabilities that arise solely out of, or relate solely to, the SPI Benefit
Plans.
(e) Except as set forth the latest audited consolidated financial
statements of SPI or in Section 4.16(e) of the Disclosure Schedule, neither SPI
nor any of its Subsidiaries has any liability for life, health, medical or other
welfare benefits to former employees or beneficiaries or dependents thereof,
except for health continuation coverage as required by Section 4980B of the Code
or Part 6 of Title I of ERISA and at no expense to SPI and its Subsidiaries.
(f) Except as set forth in the latest audited consolidated financial
statements of SPI or in Section 4.16(f) of the Disclosure Schedule, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (either alone or in conjunction with any
other event) result in, cause the accelerated vesting or delivery of, or
increase the amount or value of, any payment or benefit to any employee of SPI
or any of its Subsidiaries. Without limiting the generality of the foregoing, no
amount paid or payable by SPI or any of its Subsidiaries in connection with the
transactions contemplated hereby (either solely as a result thereof or as a
result of such transactions in conjunction with any other event) will be an
"excess parachute payment" within the meaning of Section 280G of the Code.
(g) Except as set forth in Section 4.16(g) of the Disclosure Schedule,
no labor organization or group of employees of SPI or any of its Subsidiaries
has made a pending demand for recognition or certification, and there are no
representation or certification proceedings or petitions seeking a
representation proceeding presently pending or threatened to be brought or
filed, with the National Labor Relations Board or any other labor relations
tribunal or authority. There are no organizing activities, strikes, work
stoppages, slowdowns, lockouts, material arbitrations or material
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grievances, or other material labor disputes pending or, to the knowledge of
SPI, threatened against or involving SPI or any of its Subsidiaries.
(h) There are no pending or, to SPI's knowledge, threatened claims, and
the fiduciaries of the SPI Benefit Plans have not advised SPI that with respect
to their duties to the SPI Benefit Plans or the assets or any of the trusts
under any of the SPI Benefit Plans, there are any pending or threatened claims
(other than claims for benefits in the ordinary course), lawsuits or
arbitrations which have been asserted or instituted against the SPI Benefit
Plans, which could reasonably be expected to result in any material liability of
SPI or any of its Subsidiaries to the Pension Benefit Guaranty Corporation, the
Department of Treasury, the Department of Labor or any multiemployer benefit
plan.
4.17 Taxes.
(a) SPI and its Subsidiaries have duly prepared and filed federal,
state, local and foreign Returns which were required to be filed by or in
respect of SPI and its Subsidiaries, or any of their Properties, income and/or
operations. As of the time they were filed, such Returns accurately reflected
the material facts regarding the income, business, Assets, operations,
activities, status of the entity on whose behalf the Return was filed, and any
other information required to be shown thereon. No extension of time within
which SPI or any of its Subsidiaries may file any Return is currently in force.
(b) With respect to all amounts in respect of Taxes imposed on SPI or
any of its Subsidiaries or for which SPI or any of its Subsidiaries is or could
be liable, whether to taxing authorities or to other Persons, all material
amounts required to be paid by or on behalf of SPI or any of its Subsidiaries to
taxing authorities or others have been paid.
(c) SPI has not been advised that there is any review or audit in
process by any taxing authority of any Tax liability of SPI or any of its
Subsidiaries currently in progress. SPI and its Subsidiaries have not received
any written notice of any pending or threatened audit by the Internal Revenue
Service or any state, local or foreign agency of any Returns or Tax liability of
SPI or any of its Subsidiaries for any period. SPI and its Subsidiaries
currently have no unpaid deficiencies assessed by the Internal Revenue Service
or any state, local or foreign taxing authority arising out of any examination
of any of the Returns of SPI or any of its Subsidiaries nor, to the knowledge of
SPI, is there reason to believe that any material deficiency will be assessed.
(d) No agreements are in force or are currently being negotiated by or
on behalf of SPI or any of its Subsidiaries for any waiver or for the extension
of any statute of limitations governing the time of assessments or collection of
any Tax. No closing agreements or compromises concerning Taxes of SPI or any
Subsidiaries are currently pending.
(e) SPI and its Subsidiaries have withheld from each payment made to
any of their respective officers, directors and employees, the amount of all
applicable Taxes, including, but not
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limited to, income tax, social security contributions, unemployment
contributions, backup withholding and other deductions required to be withheld
therefrom by any Tax law and have paid the same to the proper Taxing authorities
within the time required under any applicable Tax law.
(f) There are no Encumbrances for Taxes, whether imposed by any
federal, state, local or foreign taxing authority, outstanding against any
Assets owned by SPI or its Subsidiaries, except for Encumbrances for Taxes that
are not yet due and payable. None of the Assets owned by SPI or its Subsidiaries
is property that is required to be treated as being owned by any other Person
pursuant to the safe harbor lease provisions of former Section 168(f)(8) of the
Code. None of the assets owned by SPI or its Subsidiaries directly or indirectly
secures any debt, the interest on which is tax-exempt under Section 103(a) of
the Code. None of the Assets owned by SPI or its Subsidiaries is "tax-exempt use
property" within the meaning of Section 168(h) of the Code. None of SPI or any
of its Subsidiaries is a person other than a United States person within the
meaning of the Code.
(g) Neither SPI nor any of its Subsidiaries is a party to any
agreement, contract, or arrangement for compensating any employee that,
individually or collectively, could give rise to the payment of any amount
(whether in cash or property, including SPI Shares or other Equity Interests)
that would not be deductible pursuant to the terms of Sections 162(a)(1),
162(m), 162(n) or 280G of the Code.
(h) Neither SPI nor any of its Subsidiaries anticipate the assessment
of any additional Taxes against SPI or any of its Subsidiaries nor is SPI or any
of its Subsidiaries aware of any unresolved questions, claims or disputes
concerning the liability for Taxes of SPI or any of its Subsidiaries which would
exceed by more than $500,000 the reserves established on the consolidated
balance sheet of SPI as of June 30, 1998.
4.18 Contracts; Debt Instruments.
(a) Except as otherwise disclosed in Section 4.18(a) of the Disclosure
Schedule, neither SPI nor any of its Subsidiaries is a party to or subject to:
(i) any collective bargaining or other agreements with labor
unions, trade unions, employee representatives, work committees, guilds
or associations representing employees of SPI and its Subsidiaries;
(ii) any employment, consulting, severance, termination, or
indemnification agreement, contract or arrangement, including any oral
agreement, contract or arrangement which requires the payment of over
$75,000, with any current or former officer, consultant, director or
employee;
(iii) any lease for real or personal property in which the
amount of payments which SPI is required to make, or is expected to
receive, on an annual basis exceeds $50,000;
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(iv) any agreement, contract, instrument, arrangement or
commitment to repurchase assets previously sold or leased, or to
indemnify or otherwise compensate the purchaser in respect thereof;
(v) any agreement, contract, policy, license, document,
instrument, arrangement or commitment that materially limits the
freedom of SPI or any of its Subsidiaries to compete in any line of
business or with any person;
(vi) any agreement or contract relating to any outstanding
commitment for material capital expenditures, or any partially or fully
executory agreement or contract relating to the acquisition or
disposition of rights or assets other than those entered into in the
ordinary course consistent with past practices;
(vii) any sale-leaseback, conditional sale, exclusive dealing,
brokerage, finder's fee contract or agreement; or
(viii) any other agreement, contract, policy, license,
document, instrument, arrangement or commitment not made in the
ordinary course of business which is material to SPI and its
Subsidiaries taken as a whole and which is not otherwise disclosed in
the Disclosure Schedules.
(b) None of SPI, its Subsidiaries and, to the knowledge of SPI, none of
the other parties to any of the contracts and agreements identified in Sections
4.18(a) and (c) of the Disclosure Schedule is in default under or has terminated
any such contract or agreement, or in any way expressed to SPI an intent to
materially reduce or terminate the amount of its business with SPI or any of its
Subsidiaries in the future.
(c) Set forth in Section 4.18(c) of the Disclosure Schedule is (A) a
list of all loan or credit agreements, notes, bonds, mortgages, indentures and
other agreements and instruments pursuant to which any indebtedness of SPI or
any of its Subsidiaries is outstanding or may be incurred, (B) the respective
principal amounts currently outstanding thereunder, and (C) any interest rate
swaps, caps, floors or option agreements or similar interest rate risk
management agreements. Except as set forth in Section 4.18(c) of the Disclosure
Schedule, all such indebtedness is prepayable at any time without penalty,
subject to the notice provisions of the agreements governing such indebtedness
(which, except as set forth in Section 4.18(c) of the Disclosure Schedule, do
not require a notice period of more than thirty days). For purposes of this
Section 4.18(c), "indebtedness" shall mean, with respect to any Person, without
duplication, (A) all obligations of such Person for borrowed money, or with
respect to deposits or advances of any kind to such Person, (B) all obligations
of such Person evidenced by bonds, debentures, notes or similar instruments, (C)
all obligations of such Person upon which interest charges are customarily paid,
(D) all obligations of such person under conditional sale or other title
retention agreements relating to property purchased by such Person, (E) all
obligations of such Person issued or assumed as the deferred purchase price of
property or services (excluding obligations of such Person to creditors for raw
materials, inventory, services and
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supplies incurred in the ordinary course of such Person's business), (F) all
capitalized lease obligations of such Person, (G) all indebtedness of others
secured by any Lien on property or assets owned or acquired by such Person,
whether or not the obligations secured thereby have been assumed, (H) all
obligations of such Person under interest rate or currency swap transactions
(valued at the termination value thereof), (I) all letters of credit issued for
the account of such Person, (J) all obligations of such Person to purchase
securities (or other property) which arises out of or in connection with the
sale of the same or substantially similar securities or property, and (K) all
guarantees and arrangements having the economic effect of a guarantee of such
Person of any indebtedness of any other person.
4.19 Insurance. SPI and its Subsidiaries are covered by valid and
currently effective insurance policies issued in favor of SPI that are customary
for companies of similar size and financial condition which conduct similar
businesses; provided, that SPI currently does not have in force any directors
and officers liability insurance coverage. All such policies are in full force
and effect, all premiums due thereon have been paid and SPI has complied with
the provisions of such policies with respect to which the failure to comply with
would result in a cancellation of such policies. Neither SPI nor any of its
Subsidiaries has received any written notice from or on behalf of any insurance
carrier issuing policies or binders relating to or covering SPI and its
Subsidiaries that there will be a cancellation or non-renewal of existing
policies or binders, or material modification of any of the methods of doing
business, will be required.
4.20 Interests of Officers and Directors. Except as set forth in
Section 4.20 of the Disclosure Schedule, neither any of SPI's or any of its
Subsidiaries' officers, directors or material shareholders nor any member of
their respective immediate families or any entity with respect to which any such
person is an Affiliate, has any material interest in any property, real or
personal, tangible or intangible, used in or pertaining to the business of SPI
or its Subsidiaries, or any other business relationship with SPI or any of its
Subsidiaries.
4.21 No Brokers. Except as set forth in Section 4.21 of the Disclosure
Schedule, no broker, finder, investment banker, or other Person or firm is
entitled to any brokerage, finder's or other similar fee or commission in
connection with this Agreement or the transactions contemplated hereby based
upon arrangements made by or on behalf of SPI, any of its Subsidiaries or any of
their respective directors, officers or employees.
4.22 Customers. Section 4.22 of the Disclosure Schedule sets forth a
list of the names of the twenty (20) most significant customers (by revenue) of
SPI and its Subsidiaries that ordered goods or products from SPI or any of its
Subsidiaries and the amount for which each such customer was invoiced during the
12-month period ended March 31, 1998. Neither SPI nor any of its Subsidiaries
has received any notice that any significant customer of SPI or any of its
Subsidiaries has ceased, will cease, or has significantly reduced, or will
significantly reduce its ordering of goods or products from SPI or any of its
Subsidiaries, nor are SPI or any of its Subsidiaries aware of any circumstances
that could reasonably be anticipated to cause any such reduction or cessation of
orders.
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4.23 Suppliers. Section 4.23 of the Disclosure Schedule sets forth a
list of the names of the twenty (20) most significant suppliers of raw materials
and other goods to SPI and its Subsidiaries for the 12-month period ended March
31, 1998. Neither SPI nor any of its Subsidiaries has received any notice that
any such supplier will cease selling raw materials or other goods to them at any
time after the Closing or materially alter the terms of such sales (other than
normal price increases), nor is SPI or any of its Subsidiaries aware of any
circumstances that could reasonably be anticipated to cause such suppliers to
make such changes.
4.24 Employees. To the best knowledge of SPI, no executive, key
employee or group of employees has any plans to terminate employment with SPI or
any of its Subsidiaries. Except as set forth in Section 4.24 of the Disclosure
Schedule, neither SPI nor any of its Subsidiaries is a party to or bound by a
collective bargaining agreement, nor does SPI have any knowledge of any
organizational effort presently being made or threatened by or on behalf of any
labor union with respect to the employees of SPI or its Subsidiaries.
4.25 Product Liability. Each product manufactured by SPI and its
Subsidiaries has been manufactured, sold, delivered and installed in all
material respects in accordance with applicable plans, specifications, laws
(including building codes and regulations) and applicable industry standards.
4.26 Information in Joint Proxy Statement/Prospectus and Form S-4.
Information supplied by SPI or any of its Subsidiaries for inclusion or
incorporation by reference in (i) the Joint Proxy Statement/Prospectus (as
hereinafter defined) (or any amendment thereof or supplement thereto), at the
date mailed to SPI stockholders and Modtech stockholders and at the time of the
respective meetings of the SPI stockholders and of the Modtech stockholders
contemplated hereby, and (ii) the Form S-4 (as hereinafter defined) at any time
the Form S-4 is filed with the SEC, at any time it is amended or supplemented
and at any time it becomes effective under the Securities Act, will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
4.27 Disclosure. The representations and warranties of SPI contained
in this Agreement are true and correct in all material respects and do not omit
any material fact necessary to make the statements contained therein, in light
of the circumstances under which they were made, not misleading. There is no
fact known to SPI which has not been disclosed to Modtech in the Disclosure
Schedule and the latest audited consolidated financial statements of SPI, taken
as a whole, which has had, or would reasonably be expected to have, a Material
Adverse Effect.
4.28 Year 2000 Matters. To the best knowledge of SPI, the information
systems utilized by SPI and each of its Subsidiaries are capable of properly
recognizing date sensitive information when the year changes to 2000, and as
such, the year change to 2000, as it relates to the information systems of SPI
and its Subsidiaries, will not result in a material disruption of the business
of SPI or any of its Subsidiaries.
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ARTICLE V
COVENANTS
5.1 Conduct of Business by Modtech or SPI. Commencing the date after
the date hereof and at all times prior to the Effective Time or the date, if
any, on which this Agreement is earlier terminated pursuant to Article 7 hereof
(the "Termination Date"), and except as may be required pursuant to this
Agreement, or as disclosed or contemplated in the Disclosure Schedule (including
the agreements and contemplated agreements referred to therein, and the
consummation of the transactions contemplated by such agreements) or as may be
consented to in writing by the other, Modtech and SPI:
(a) shall, and shall cause each of their respective Subsidiaries to,
conduct their respective operations according to their ordinary and usual course
of business; provided, however, that this provision shall not prohibit the
acquisition by SPI of a nonresidential modular building manufacturer located in
the Southeastern United States or the other transactions contemplated to be
consummated in connection therewith on terms substantially similar to those
discussed with the chief executive officer of Modtech (the "Proposed
Acquisition"); and provided, further, that SPI shall be permitted to update its
Disclosure Schedules to reflect the completion of the Proposed Acquisition, and
that any such updating shall not constitute a breach of any of the
representations or warranties of SPI made herein, or any other provision of this
Agreement;
(b) shall, and shall cause each of their respective Subsidiaries to,
use their best efforts to preserve intact their respective business
organizations and good will in all material respects, keep available the
services of their respective partners, officers and employees as a group and
maintain satisfactory relations with lessees, suppliers, distributors,
customers, banks and others having business relationships with them;
(c) shall confer on a regular and frequent basis with one or more
representatives of the other to report operational matters of a material nature
and the general status of ongoing operations, subject to compliance with
applicable law;
(d) shall notify the other of any emergency or other change in the
normal course of their or their respective Subsidiaries' respective businesses
or in the operation of their or their respective Subsidiaries' Properties and of
any governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated) if such emergency, change,
complaint, investigation or hearing or the effect thereof would be material to
the business, operations or financial condition of either Modtech or SPI and
their respective Subsidiaries, as the case may be, taken as a whole;
(e) shall not declare or pay any dividends on their outstanding shares
of capital stock;
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(f) shall not, except as otherwise provided in this Agreement, enter
into or amend in any material respect any employment, severance or similar
agreement or any agreement or agreement in principle with respect to, any
merger, consolidation or business combination (other than the Mergers), any
acquisition of a material amount of assets or securities, any disposition of a
material amount of assets or securities or any release or relinquishment of any
material contract rights not in the ordinary course of business; provided,
however, that this provision shall not prohibit the Proposed Acquisition by SPI;
(g) shall not propose or adopt any amendments of their respective
organizational documents;
(h) shall not issue any shares of their capital stock (except upon
exercise of warrants and options issued and outstanding on the date hereof),
effect any stock split, issue any debt securities or borrow any money (other
than bank borrowings in the ordinary course of business consistent with past
practice, borrowings by SPI necessary to consummate the Proposed Acquisition),
or otherwise change its capitalization as it existed on the date hereof;
(i) shall not grant, confer or award any options, warrants, calls,
subscriptions, convertible securities or other securities, or enter into any
agreements, commitments or obligations which would require Modtech or SPI to
acquire any shares of its capital stock except pursuant to employee benefit
plans, programs or arrangements in existence on the date hereof, in the ordinary
course of business and consistent with past practice;
(j) shall not purchase or redeem any shares of their own capital stock,
Modtech Shares or SPI Shares; and
(k) shall not agree in writing, or otherwise, to take any of the
foregoing actions or any action which would make any of their respective
representations or warranties in Articles III or IV hereof untrue or incorrect.
5.2 Meetings of Stockholders. Each of Modtech and SPI will take all
action necessary in accordance with applicable law and its organizational
documents to convene a meeting of its stockholders as promptly as practicable to
consider and vote upon the adoption of this Agreement and the transactions
contemplated hereby, as required by applicable law. The Boards of Directors of
Modtech and SPI will recommend that their respective stockholders vote in favor
of such adoption, and Modtech and SPI will each take all lawful action to
solicit such approval, including, without limitation, timely mailing the Joint
Proxy Statement/Prospectus; provided, however, that nothing contained in this
Section 5.2 shall prohibit either Modtech or SPI from taking and disclosing to
its stockholders a position contemplated by Rule 14e-2(a) promulgated under the
Exchange Act or from making any disclosure to, or having any communication with,
their respective stockholders if, in the good faith judgment of the Board of
Directors of Modtech or SPI, as applicable, after consultation with outside
counsel, failure so to disclose or communicate would be inconsistent with its
fiduciary duties under applicable law. The respective meetings of the
stockholders of Modtech
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and SPI shall be held as soon as practicable and in any event (to the extent
permissible under applicable law) within twenty (20) days after the date upon
which the Joint Proxy Statement/Prospectus shall have been approved for release
to the stockholders of Modtech and SPI by the SEC; provided, however, that
notwithstanding anything to the contrary contained in this Agreement, Modtech
and SPI may adjourn or postpone their respective meetings of stockholders to the
extent necessary, in the opinion of their respective counsel, to supplement or
amend the Joint Proxy Statement/Prospectus in advance of a vote on this
Agreement and the Mergers. Modtech and SPI shall coordinate and cooperate with
respect to the timing of such meetings and shall endeavor to hold such meetings
on the same day.
5.3 Further Assurance and Cooperation. Subject to the terms and
conditions herein provided, Modtech and SPI agree to use all reasonable efforts
to take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement and to
cooperate with each other in connection therewith, (a) to obtain all necessary
waivers, consents and approvals from other parties to material loan agreements,
leases and other contracts (provided that neither Modtech nor SPI shall agree to
any substantial modification to any such agreement, lease or contract or to any
payment of funds in order to obtain such waiver, consent or approval without the
prior written consent of the other), (b) to defend any lawsuits or other legal
proceedings challenging this Agreement or the consummation of the transactions
contemplated hereby, (c) to lift or rescind any injunction or restraining order
or other order adversely affecting the ability of the parties to consummate the
transactions contemplated thereby, (d) to effect all necessary registrations and
filings (including any registrations and filings which may be required to be
made by Holdings pursuant to any federal or state securities laws), and (e) to
fulfill all conditions to this Agreement.
5.4 Certain Filings and Consents. Each of Modtech and SPI shall (a)
promptly make the required filings and submissions under the HSR Act, (b)
cooperate with the other in determining whether any other filings are required
to be made or consents, approvals, permits or authorizations are required to be
obtained under any federal, state, local or foreign law or regulation or whether
any consents, approvals or waivers are required to be obtained from other
parties to loan agreements, leases or other contracts in connection with the
consummation of the Mergers and the other transactions contemplated by this
Agreement, and (c) actively assist each other in obtaining any consents,
permits, authorizations, approvals or waivers which are required. Each of
Modtech and SPI shall promptly inform the other of any material communication
between such party and any government or governmental authority regarding the
Mergers or the other transactions contemplated by this Agreement. If Modtech or
SPI receives a request for additional information or documentary material from
any such government or governmental authority, then such party shall endeavor in
good faith to make, or cause to be made, as soon as reasonably practicable and
after consultation with the other party, an appropriate response to such
request. Modtech and SPI shall cooperate in connection with reaching any
understandings, undertaking or agreements (oral or written) involving any
government or any governmental authority in connection with the transactions
contemplated hereby.
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5.5 Publicity. The initial press release relating to this Agreement
and all press releases or public statements thereafter with respect to the
transactions contemplated hereby shall be joint press releases or statements.
Subject to their respective legal obligations (including requirements of stock
exchanges and other similar regulatory bodies), Modtech and SPI shall consult
with each other in making any filings with any governmental or regulatory
authorities or with any national securities exchange.
5.6 Joint Proxy Statement/Prospectus and Form S-4.
(a) Modtech and SPI will cooperate and promptly prepare and file with
the SEC as soon as practicable a joint proxy statement/prospectus and necessary
forms of proxy in connection with the vote of Modtech's and SPI's stockholders
with respect to the Mergers and the offer to such stockholders of the securities
to be issued pursuant to the Mergers (the "Joint Proxy Statement/Prospectus")
and will cause Holdings to prepare and file with the SEC the registration
statement on Form S-4 (the "Form S-4") under the Securities Act, in which the
Joint Proxy Statement/Prospectus shall be included as a prospectus. Modtech and
SPI will cause the Form S-4 to comply in all material respects with the
applicable provisions of the Securities Act and the Exchange Act. Each of
Modtech and SPI will use its best efforts to have the Form S-4 declared
effective by the SEC as promptly as practicable and to keep the Form S-4
effective as long as is necessary to consummate the Mergers. Modtech and SPI
will cause Holdings to take any action required to be taken to obtain, prior to
the effective date of the Form S-4, all necessary state securities law or "Blue
Sky" permits or approvals required to carry out the transactions contemplated by
this Agreement and all expenses incident thereto will be paid 68% by Modtech and
32% by SPI. No amendment or supplement to the Form S-4 or the Joint Proxy
Statement/Prospectus will be made by Modtech or SPI without the approval of the
other party, such approval not to be unreasonably withheld or delayed. Each of
SPI and Modtech shall use reasonable efforts to cause the Joint Proxy
Statement/Prospectus to be mailed to its respective stockholders as soon as
practicable after the date hereof.
5.7 Listing Application. Each of Modtech and SPI will cause Holdings
to promptly prepare and submit to Nasdaq a listing application covering the
shares of Holdings Common Stock issuable in the Mergers, and will use its best
efforts to obtain, prior to the Effective Time, approval for the listing of such
Holdings Common Stock, subject to official notice of issuance.
5.8 Further Action. Each of Modtech and SPI will, subject to the other
terms and conditions set forth herein and to the fulfillment at or before the
Effective Time of each of the conditions of performance set forth herein or the
waiver thereof, perform such further acts and execute such documents as may be
reasonably required to effect the Mergers. Each of Modtech and SPI will permit
the other and its authorized representatives full access to all of its and its
Subsidiaries premises, properties, personnel, books, records, contracts and
documents, and each party will use commercially reasonable efforts to cause its
representatives to furnish to the other party and its authorized representatives
such additional financial and operating data and other information
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concerning its businesses and properties (and those of its Subsidiaries) as the
other or its duly authorized representatives may from time to time reasonably
request.
5.9 Lockup Agreements. Each of Modtech and SPI will use all reasonable
efforts to deliver or cause to be delivered to the other, prior to the Closing
Date, from each of their respective "affiliates" within the meaning of Rule 145
of the rules and regulations promulgated under the Securities Act, a lockup
agreement pursuant to which each such affiliate will agree not to sell any
shares of Holdings for a period of 90 days following the Effective Time (the
"Lockup Agreement"). Holdings will be entitled, to the extent it is so required
by applicable law (as advised by outside counsel experienced in such matters) to
place legends as specified in such Lockup Agreements on the certificates
evidencing any Holdings Common Stock or Holdings Preferred Stock to be received
by such affiliates pursuant to the terms of this Agreement, and to issue
appropriate stop-transfer instructions to the transfer agent for Holdings Common
Stock, consistent with the terms of such Lockup Agreements.
5.10 Expenses. Whether or not the Mergers are consummated, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby will be paid by the party incurring such expenses except as
expressly provided herein, and except that (i) the filing fee in connection with
the HSR Act filings of SPI and Modtech and the affiliates of SPI and Modtech,
(ii) the filing fee in connection with the filing of the Form S-4 or Joint Proxy
Statement/Prospectus with the SEC, and (iii) the expenses incurred in connection
with the preparation, printing and mailing of the Form S-4 and the Joint Proxy
Statement/Prospectus, will be paid 68% by Modtech and 32% by SPI. In addition,
SPI will reimburse Modtech for 32% of the cost of obtaining the Fairness
Opinion. Following consummation of the Mergers, Holdings will reimburse Modtech
and SPI for their reasonable expenses payable to third parties and incurred in
connection with this Agreement and the transactions contemplated hereby,
including amounts paid by SPI to Modtech to reimburse Modtech for 32% of the
cost of the Fairness Opinion. The provisions of this Section 5.10 will survive
the consummation of the Mergers.
5.11 Notice of Change in Representations and Warranties. Modtech and
SPI will each give prompt notice to the other of (i) any change in its condition
or any event causing a breach of any of its representations and warranties, (ii)
the occurrence or non-occurrence of any event which would, or which would be
reasonably likely to, cause any conditions to their obligations to effect the
Mergers and other transactions contemplated hereby not to be satisfied in any
material respect, and (iii) their failure to satisfy in any material respect any
covenant or condition to be complied with by them pursuant to this Agreement.
5.12 Consents. Modtech and SPI will use all reasonable efforts to
obtain each of the consents identified in Section 3.6 and 4.6, respectively, of
the Disclosure Schedule.
5.13 Letter of Modtech's Accountants. Modtech shall use reasonable
efforts to cause to be delivered to SPI and Holdings a letter of KPMG Peat
Marwick LLP, Modtech's independent auditors, dated a date within two business
days before the date on which the Form S-4 shall become
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effective and addressed to Holdings, in form reasonably satisfactory to SPI and
customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the Form S-4.
5.14 Letter of SPI's Accountants. SPI shall use reasonable efforts to
cause to be delivered to Modtech and Holdings a letter of Arthur Andersen LLP,
SPI's independent auditors, dated a date within two business days before the
date on which the Form S-4 shall become effective and addressed to Holdings, in
form reasonably satisfactory to Modtech and customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the Form S-4.
5.15 Registration Statement on Form S-8. On or promptly after the 90th
day following the Effective Time, Modtech and SPI shall cause Holdings to
prepare and file with the SEC a registration statement on Form S-8 (or another
appropriate form) registering a number of shares of Holdings Common Stock at
least equal to the number of shares of Holdings Common Stock subject to options
to be received by the holders of Modtech and SPI options pursuant to Section
2.1(c). Such registration statement shall be kept effective (and the current
status of the prospectus or prospectuses required thereby shall be maintained)
at least for so long as any options with respect to Holdings Common Stock
received by the holders of Modtech or SPI options pursuant to Section 2.1(c)
remain outstanding.
5.16 Tax Matters Certificates. In connection with the opinions to be
rendered by counsel to Modtech and SPI pursuant to Sections 6.2(e) and 6.3(e),
respectively, tax certificates shall be delivered to such counsel which
certificates shall be from such parties and in such form and substance as may
reasonably be required by such counsel. Such counsel shall, in rendering such
opinions, be entitled to rely on the representations contained in such tax
certificates.
5.17 Assumption of Obligations by Holdings, Modtech Sub and SPI Sub.
As soon as practicable after the formation of Holdings, Modtech and SPI (i)
shall cause Holdings to sign and become a party to this Agreement and to assume
the obligations applicable to it hereunder, and (ii) shall cause Modtech Sub and
SPI Sub to sign and become parties to this Agreement and to assume their
respective obligations hereunder and under the agreements of merger contained
herein. Upon their execution of this Agreement, Holdings, Modtech Sub and SPI
Sub will be bound by the provisions hereof and Modtech and SPI hereby agree that
upon such execution such entities shall be parties hereto.
5.18 Representations and Warranties of Holdings. Modtech and SPI shall
cause Holdings to deliver, on the Closing Date, a certificate of an executive
officer containing representations and warranties substantially to the effect of
those representations and warranties set forth in Articles III and IV of this
Agreement.
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5.19 Development of Holdings Business Plan. Promptly following the
execution of this Agreement, representatives of Modtech and SPI shall jointly
develop a business plan for the operation of Holdings following the Closing.
5.20 Payment of Transaction Fees; Transaction Advisory Agreement.
Modtech and SPI shall cause Holdings to pay the fees set forth in Section 3.21
and Section 4.21, respectively, of the Disclosure Schedule. In addition to the
payment of the fees described in the preceding sentence, Modtech and SPI shall,
in connection with the Closing, cause Holdings, following approval thereof by
the Independent Directors, to enter into the Transaction Advisory Agreement with
KRG Capital, in substantially the form set forth in Exhibit F (the "Transaction
Advisory Agreement").
5.21 Retention of Holdings' Financial Advisor. Modtech and SPI shall
cause Holdings to retain DLJ as financial advisor to Holdings in connection with
the Mergers.
5.22 Deregistration of Modtech Shares. Promptly after the Closing,
Holdings shall take all necessary steps to deregister the Modtech Shares with
the Securities and Exchange Commission and Nasdaq.
ARTICLE VI
CONDITIONS
6.1 Conditions to Each of Modtech's and SPI's Obligation to Effect the
Mergers. The respective obligations of Modtech and SPI to effect the Mergers
will be subject to the fulfillment or waiver by both parties at or prior to the
Closing Date of the following conditions:
(a) The Modtech Merger and this Agreement shall have been validly
approved and adopted by the affirmative vote of the holders of at least that
number of outstanding shares of Modtech Shares required to approve the Modtech
Merger under the CGCL and Modtech's articles of incorporation at the
stockholders' meeting referred to in Section 5.2 (the "Modtech Stockholder
Approvals");
(b) The SPI Merger and this Agreement shall have been validly approved
and adopted by the affirmative vote of the holders of at least that number of
outstanding shares of SPI Shares required to approve the SPI Merger under the
CBCA and SPI's articles of incorporation at the stockholders' meeting referred
to in Section 5.2 (the "SPI Stockholder Approvals");
(c) Neither Modtech nor SPI shall be subject to any order, decree,
ruling or injunction of a court of competent jurisdiction or by a governmental,
regulatory or administrative agency or commission, and no law, statute, rule or
regulation shall have been promulgated or enacted by a governmental or
regulatory authority, which prohibits the consummation of the transactions
contemplated by this Agreement or would otherwise impair the ability of Holdings
to operate the business of Modtech and SPI on a consolidated basis following the
Closing and there shall be no
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pending action, proceeding or investigation by or before any governmental entity
challenging or seeking material damages in connection with the Mergers or
otherwise limiting the right of Modtech and SPI to continue their respective
operations (and those of their Subsidiaries) following the Closing;
(d) The waiting period applicable to the consummation of the Mergers
under the HSR Act shall have expired or been terminated;
(e) The Form S-4 shall have become effective and shall be effective at
the Effective Time, and no stop order suspending effectiveness of the Form S-4
shall have been issued which shall be in effect at the Effective Time, no
action, suit, proceeding or investigation by the SEC to suspend the
effectiveness thereof shall have been initiated and be continuing or, to the
knowledge of Modtech or SPI, be threatened in writing, and all necessary
approvals under state securities laws relating to the issuance or trading of
Holdings Common Stock to be issued to Modtech and SPI stockholders in connection
with the Mergers shall have been received;
(f) Holdings shall have successfully negotiated and put into effect a
credit facility on terms acceptable to Holdings, which facility shall provide
approximately $100 million in available credit, (approximately $45 million of
which shall be a term loan, $30 million of which shall be a revolving loan, and
$25 million of which shall be an acquisition line of credit);
(g) All consents, licenses, permits, authorizations, orders and
approvals of (or filings or registrations with) any governmental or regulatory
authorities, and all consents, authorizations and approvals of any other entity
(including, without limitation, any bank or financial institution) required in
connection with the execution, delivery and performance of this Agreement shall
have been obtained or made, except for filings in connection with the Mergers
and any other documents required to be filed after the Effective Time and except
where the failure to have obtained or made any such consent, license, permit,
authorization, order, approval, filing or registration would not have a Material
Adverse Effect on Holdings and its Subsidiaries, taken as a whole, following the
Effective Time;
(h) Holdings Common Stock to be issued to Modtech and SPI stockholders
in connection with the Mergers shall have been approved for listing on Nasdaq,
subject only to official notice of issuance;
(i) After the Effective Time and except as set forth in this Agreement,
no Person will have any right under any stock option plan (or any option granted
thereunder) or other plan, program or arrangement to acquire any securities of
Modtech, SPI or any of their respective Subsidiaries;
(j) Holders of Modtech Shares representing no more than 5% of the
issued and outstanding Modtech Shares shall have exercised, and not withdrawn,
their rights to dissent from the Modtech Merger;
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(k) Holders of SPI Shares representing no more than 5% of the issued
and outstanding SPI Shares shall have exercised, and not withdrawn, their rights
to dissent from the SPI Merger;
(l) All of the parties set forth on the signature page thereof shall
have entered into the Registration Rights Agreement substantially in the form of
Exhibit G;
(m) Holdings and KRG Capital shall each have entered into the
Transaction Advisory Agreement substantially in the form of Exhibit F;
(n) Such key employees as shall be identified by mutual agreement of
Modtech and SPI shall have entered into employment agreements with Holdings on
terms acceptable to Holdings;
(o) Holdings shall have delivered the certificate described in Section
5.16 of this Agreement; and
(p) The affiliates of Modtech and SPI shall have entered into the
Lockup Agreements.
6.2 Conditions to Obligation of Modtech to Effect the Mergers. The
obligation of Modtech to effect the Mergers will be subject to the fulfillment
or waiver by Modtech at or prior to the Closing Date of the following additional
conditions:
(a) SPI shall have performed and complied in all material respects with
all material obligations and agreements required to be performed and complied
with by it under this Agreement at or prior to the Closing Date;
(b) The representations and warranties of SPI contained in this
Agreement that are qualified as to materiality shall be true and correct, and
such representations and warranties of SPI that are not so qualified shall be
true and correct in all material respects, in each case both as of the date of
this Agreement and on the Closing Date as though made on and as of the Closing
Date, except to the extent such representations and warranties are expressly
made as of an earlier date, in which case, such representations and warranties
shall be true and correct as of such date;
(c) Modtech shall have received a certificate from the President or a
Vice President of SPI, dated as of the Closing Date, to the effect that the
conditions set forth in paragraphs (a) and (b) above have been satisfied;
(d) From the date of this Agreement through the Effective Time, a
Material Adverse Effect with respect to SPI and its Subsidiaries, taken as a
whole, shall not have occurred;
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(e) Modtech shall have received a tax opinion from Gibson Dunn &
Crutcher LLP, in form and substance reasonably satisfactory to Modtech,
substantially to the effect that, on the basis of the facts, representations and
assumptions set forth in such opinion, the Modtech Merger (together with the SPI
Merger) will be treated as an "exchange" under Section 351 of the Code;
(f) Modtech shall have received the opinion of Dorsey & Whitney LLP,
counsel to SPI, dated the Effective Time, in form and substance reasonably
satisfactory to Modtech and its counsel; and
(g) The Fairness Opinion received by Modtech in accordance with the
provisions of Section 3.28 hereof and shall not have been amended, withdrawn or
modified in any adverse manner.
6.3 Conditions to Obligation of SPI to Effect the Mergers. The
obligation of SPI to effect the Mergers will be subject to the fulfillment or
waiver by SPI at or prior to the Closing Date of the following additional
conditions:
(a) Modtech shall have performed and complied in all material respects
with all material obligations and agreements required to be performed and
complied with by it under this Agreement at or prior to the Closing Date;
(b) The representations and warranties of Modtech contained in this
Agreement that are qualified as to materiality shall be true and correct, and
such representations and warranties of Modtech that are not so qualified shall
be true and correct in all material respects, in each case both as of the date
of this Agreement and on the Closing Date as though made on and as of the
Closing Date, except to the extent such representations and warranties are
expressly made as of an earlier date, in which case, such representations and
warranties shall be true and correct as of such date;
(c) SPI shall have received from Modtech a certificate from the
President or a Vice President of Modtech, dated as of the Closing Date, to the
effect that the conditions set forth in paragraphs (a) and (b) above have been
satisfied;
(d) From the date of this Agreement through the Effective Time, a
Material Adverse Effect on Modtech and its Subsidiaries, taken as a whole, shall
not have occurred;
(e) SPI shall have received a tax opinion from Dorsey & Whitney LLP, in
form and substance reasonably satisfactory to SPI, substantially to the effect
that, on the basis of the facts, representations and assumptions set forth in
such opinion, the SPI Merger will be treated as a "reorganization" within the
meaning of Section 368 of the Code; and
(f) SPI shall have received the opinion of Gibson, Dunn & Crutcher LLP
and Haddan & Zepfel LLP, counsel to Modtech, in form and substance reasonably
satisfactory to SPI and its counsel.
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ARTICLE VII
TERMINATION, WAIVER AND AMENDMENT
7.1 Termination or Abandonment. Notwithstanding anything contained in
this Agreement to the contrary, this Agreement may be terminated and abandoned
at any time prior to the Effective Time, whether before or after the Modtech
Stockholder Approvals and the SPI Stockholder Approvals:
(a) by the mutual written consent of Modtech and SPI;
(b) by Modtech or SPI, if the Effective Time shall not have occurred on
or before six (6) months from the date of this Agreement; provided, however,
that the right to terminate this Agreement under this Section 7.1(b) shall not
be available to any party whose breach of this Agreement has been the cause of,
or resulted in, the failure of the Effective Time to occur on or before such
date;
(c) by Modtech or SPI if any court of competent jurisdiction in the
United States or other United States governmental body shall have issued an
order, decree or ruling or taken any other action restraining, enjoining or
otherwise prohibiting the Modtech Merger or the SPI Merger;
(d) by Modtech, (i) if SPI shall materially breach any of its
representations, warranties or covenants hereunder and such breach shall not
have been cured within ten (10) business days after receipt by SPI of written
notice of such breach, (ii) if any required approval of the shareholders of SPI
has not been obtained, or (iii) if the Board of Directors of SPI shall have
withdrawn or modified its recommendation of the approval of this Agreement or
the SPI Merger in a manner adverse to Modtech or shall have resolved to do any
of the foregoing;
(e) by SPI, (i) if Modtech shall materially breach any of its
representations, warranties or covenants hereunder and such breach shall not
have been cured within ten (10) business days after receipt by Modtech of
written notice of such breach, (ii) if any required approval of the shareholders
of Modtech has not been obtained, or (iii) if the Board of Directors of Modtech
shall have withdrawn or modified its recommendation of the approval of this
Agreement or the Modtech Merger in a manner adverse to SPI or shall have
resolved to do any of the foregoing;
(f) by Modtech, at any time prior to the Effective Time, by action of
the Board of Directors of Modtech, if Modtech receives an Acquisition Proposal
on terms Modtech's Board of Directors (after consultation with its independent
financial advisors) determines in good faith to be more favorable to the
Modtech's stockholders than the terms of the Modtech Merger, and Modtech's Board
of Directors determines, upon the advice of its legal counsel, that, to continue
to recommend that holders of Modtech Shares vote in favor of the Modtech Merger,
notwithstanding the receipt of such offer with respect to an Acquisition
Proposal, or to fail to recommend or accept the Acquisition Proposal, would not
be consistent with the fiduciary duties of Modtech's Board of Directors;
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provided, however, that Modtech shall not be permitted to terminate this
Agreement pursuant to this Section 7.1(f) unless it has provided SPI with three
(3) business days' prior written notice of its intent to so terminate this
Agreement, together with a detailed summary of the terms and conditions
(including proposed financing, if any) of such Acquisition Proposal; or
(g) by SPI, at any time prior to the Effective Time, by action of the
Board of Directors of SPI, if SPI receives an Acquisition Proposal on terms
SPI's Board of Directors (after consultation with its independent financial
advisors) determines in good faith to be more favorable to the SPI's
stockholders than the terms of the SPI Merger, and SPI's Board of Directors
determines, upon the advice of its legal counsel, that, to continue to recommend
that holders of SPI Shares vote in favor of the SPI Merger, notwithstanding the
receipt of such offer with respect to an Acquisition Proposal, or to fail to
recommend or accept the Acquisition Proposal, would not be consistent with the
fiduciary duties of SPI's Board of Directors; provided, however, that SPI shall
not be permitted to terminate this Agreement pursuant to this Section 7.1(g)
unless it has provided Modtech with three (3) business days' prior written
notice of its intent to so terminate this Agreement, together with a detailed
summary of the terms and conditions (including proposed financing, if any) of
such Acquisition Proposal.
7.2 Effect of Termination.
(a) Modtech shall pay to SPI, concurrently with any termination
pursuant to Sections 7.1(e) or 7.1(f) by wire transfer in same day funds, all
documented fees and expenses of SPI related to this Agreement and the
transactions contemplated hereby, if SPI shall have satisfied all conditions to
the Closing that are or were at the time reasonably within its control and if
SPI shall not have taken any action reasonably calculated to prevent or
unreasonably delay the Closing, plus an additional fee of $2,000,000.
(b) SPI shall pay to Modtech, concurrently with any termination
pursuant to Sections 7.1(d) or 7.1(g) by wire transfer in same day funds, all
documented fees and expenses of Modtech related to this Agreement and the
transactions contemplated hereby, if Modtech shall have satisfied all conditions
to the Closing that are or were at the time reasonably within its control and if
Modtech shall not have taken any action reasonably calculated to prevent or
unreasonably delay the Closing, plus an additional fee of $2,000,000.
(c) The parties agree that the payments contemplated by Sections 7.2(a)
and 7.2 (b) are intended as liquidated damages to reimburse the other party for
all damages it may suffer as a result of termination of this Agreement. The
parties acknowledge and agree that such amounts are not a penalty, and that such
amounts are reasonable considering all the circumstances existing on the date of
this Agreement, including the relationship of the remedy to the range of harm
that could reasonably be anticipated and the anticipation that proof of actual
damages would be costly or inconvenient. The foregoing payments are each
parties' sole and exclusive remedy in the event of a termination of this
Agreement pursuant to Section 7.1 and neither party shall have any other remedy
at law or in equity as a result of such termination.
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(d) The parties acknowledge that the agreements contained in this
Section 7.2 are an integral part of the transactions contemplated in this
Agreement, and that, without these agreements, neither party would enter into
this Agreement. Accordingly, if either party fails to pay promptly the amounts
due pursuant to this Section 7.2, and, in order to obtain such payments, the
other party commences a suit for the fees set forth in this paragraph, the
prevailing party shall be reimbursed by the other party its costs and expenses
(including attorneys' fees and expenses) in connection with such suit, together
with interest on the amount thereof at the prime rate of as quoted in The Wall
Street Journal on the date such payment was required to be made.
(e) In the event of termination of this Agreement pursuant to Section
7.2, this Agreement shall terminate, and there shall be no other liability on
the part of Modtech or SPI to the other, except that the liability on the
agreements contained in Section 7.2 shall survive the termination hereof, and
except liability arising out of a breach of this Agreement.
7.3 Amendment or Supplement. At any time before or after the Modtech
Stockholder Approvals and the SPI Stockholder Approvals and prior to the
Effective Time, this Agreement may be amended or supplemented in writing by
Modtech and SPI with respect to any of the terms contained in this Agreement,
except that following the Modtech Stockholder Approvals and the SPI Stockholder
Approvals there shall be no amendment or change to the provisions hereof with
respect to the Modtech Exchange Ratio or SPI Exchange Ratio as provided herein,
without further approval by the respective stockholders of Modtech and SPI.
7.4 Extension of Time; Waiver, Etc. At any time prior to the Effective
Time, Modtech and SPI may:
(a) extend the time for the performance of any of the obligations or
acts of the other party;
(b) waive any inaccuracies in the representations and warranties of the
other party contained herein or in any document delivered pursuant hereto; and
(c) waive compliance with any of the agreements or conditions of the
other party contained herein;
provided, however, that no failure or delay by Modtech or SPI in exercising any
right hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right hereunder. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
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ARTICLE VIII
INDEMNIFICATION
8.1 Indemnification.
(a) From and after the Effective Time, Holdings shall indemnify, defend
and hold harmless the present and former directors, officers and employees of
Modtech and SPI and their respective Subsidiaries (each, an "Indemnified Party")
against all costs or expenses (including reasonable attorneys' fees), judgments,
fines, losses, claims, damages or liabilities (collectively, "Costs") incurred
in connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of actions or
omissions as directors or officers of Modtech or SPI and their respective
Subsidiaries occurring at or prior to the Effective Time, including, without
limitation, the transactions contemplated by this Agreement, to the fullest
extent that such persons are indemnified under the laws of the States of
California or Colorado and the organizational documents, as in effect on the
date hereof, of Modtech and SPI and their respective Subsidiaries or any
existing indemnification agreement with any of Modtech or SPI (and during such
period Holdings shall also advance expenses (including expenses constituting
Costs described in Section 8.1(e)) as incurred to the fullest extent permitted
under applicable law, provided that the Person to whom expenses are advanced
provides a written affirmation of his or her good faith that the standard of
conduct necessary for indemnification has been met and an undertaking to repay
such advances if it is ultimately determined that such Person is not entitled to
indemnification with no bond or security to be required); provided that 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 organizational documents shall be made by independent counsel
(which shall not be counsel that provides material services to Holdings or its
Subsidiaries) selected by Holdings and reasonably acceptable to such officer or
director; and provided, further, that in the absence of applicable judicial
precedent to the contrary, such counsel, in making such determination, shall
presume such officer's or director's conduct complied with such standard and
Holdings shall have the burden to demonstrate that such officer's or director's
conduct failed to comply with such standard.
(b) For a period of not less than six (6) years after the Effective
Time, Holdings will maintain officers' and directors' liability insurance
covering the Indemnified Parties who are currently covered, in their capacities
as current or former officers and directors of Modtech and covering similarly
situated Indemnified Parties of SPI, by existing officers' and directors'
liability insurance policy on terms substantially no less advantageous to the
Indemnified Parties than such existing insurance.
(c) Any Indemnified Party wishing to claim indemnification under
Section 8.1(a), upon learning of any claim, action, suit, proceeding or
investigation described above, shall promptly notify Holdings thereof; provided
that the failure so to notify shall not affect the obligations of Holdings
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under Section 8.1(a) unless and to the extent such failure materially increases
Holdings' liability under such subsection (a).
(d) If Holdings or any of its successors or assigns shall consolidate
with or merge with any other entity and shall not be the continuing or surviving
entity of such consolidation or merger or shall transfer all or substantially
all of its assets to any Person, then and in each case, proper provision shall
be made so that the successors and assigns of Holdings or any of its
Subsidiaries shall assume the obligations set forth in this Section 8.1.
(e) Holdings shall pay all reasonable Costs, including attorneys' fees,
that may be incurred by any Indemnified Party in enforcing the indemnity and
other obligations provided for in this Section 8.1. The rights of each
Indemnified Party hereunder shall be in addition to any other rights such
Indemnified Party may have under applicable law.
(f) Modtech and SPI will cause Holdings to keep in effect provisions in
Holdings', New Modtech's and New 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 General
Corporation Law (the "DGCL"), the CGCL or the CBCA, 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.
(g) The provisions of this Section 8.1 will survive the consummation of
the Mergers and expressly are intended to benefit each Indemnified Party.
ARTICLE IX
GENERAL PROVISIONS
9.1 Non-survival of Representations and Warranties. All
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement will be deemed to the extent expressly provided
herein to be conditions to the Mergers and will not survive the Mergers. This
Section 9.1 shall not limit any covenant or agreement of the parties which by
its terms contemplates performance after the Effective Time.
9.2 Notices. Any notice required to be given hereunder will be
sufficient if in writing, and sent by facsimile transmission and by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
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If to Modtech: If to SPI:
Modtech, Inc. SPI Manufacturing, Inc.
2830 Barrett Avenue 9550 Hermosa Avenue
P.O. Box 1240 Rancho Cucamonga, California 91730
Perris, California 92572 Attention: Patrick Van Den Bossche
Attention: Evan M. Gruber Fax No.: (909) 484-4296
Fax No.: (949) 476-0740
With copies to: With copies to:
Proactive Partners, L.P. KRG Capital Partners, LLC
50 Osgood Place 370 17th Street, Suite 2300
San Francisco, California 94133 Denver, CO 80202
Attention: Charles C. McGettigan Attention: Charles R. Gwirtsman
Fax No.: (415) 986-3617 Fax No.: (303) 572-5015
With copies to counsel for Modtech: With copies to counsel for SPI:
Haddan & Zepfel LLP Dorsey & Whitney LLP
4675 McCarthy Court 370 17th Street, Suite 4400
Suite 710 Denver, Colorado 80202-5644
Newport Beach, California 98660 Attention: Kevin A. Cudney
Attention: Jon R. Haddan, Esq. Fax No.: (303) 629-3450
Fax No.: (949) 752-6100
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
9.3 Assignment; Binding Effect. Neither this Agreement nor any of the
rights, interests or obligations hereunder will be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon and will inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except for the provisions of
Section 8.1, nothing in this Agreement, expressed or implied, is intended to
confer on any Person other than the parties hereto or their respective heirs,
successors, executors, administrators and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
9.4 Entire Agreement. This Agreement, the Exhibits, the Disclosure
Schedule and any documents delivered by the parties in connection herewith which
will survive the execution and delivery of this Agreement, constitute the entire
agreement among the parties with respect to the
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subject matter hereof and supersede all prior agreements and understandings
among the parties with respect thereto. No addition to or modification of any
provision of this Agreement will be binding upon any party hereto unless made in
writing and signed by all parties hereto.
9.5 Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules of
conflict of laws; provided, however, that all matters covered by the CGCL will
be governed by and construed in accordance with the laws of the State of
California without regard to its rules of conflict of laws and all matters
covered by the CBCA will be governed by and construed in accordance with the
laws of the State of Colorado without regard to its rules of conflict of laws.
9.6 Counterparts. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered will be
an original, but all such counterparts will together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
9.7 Headings. Headings of the Articles and Sections of this Agreement
are for the convenience of the parties only, and will be given no substantive or
interpretive effect whatsoever.
9.8 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number will include the plural and vice
versa, and words denoting any gender will include all genders and words denoting
natural Persons will include corporations and partnerships and vice versa.
9.9 Incorporation of Schedules. The Disclosure Schedule attached
hereto and referred to herein is hereby incorporated herein and made a part
hereof for all purposes as if fully set forth herein.
9.10 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction will, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision will be interpreted
to be only so broad as is enforceable.
9.11 Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties will be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any Delaware court, this
being in addition to any other remedy to which they are entitled at law or in
equity.
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ARTICLE X
DEFINITIONS
10.1 Defined Terms. As used herein, the terms below shall have the
following meanings:
"Acquisition Proposal" shall mean any proposal or offer (including,
without limitation, any proposal or offer to stockholders) with respect to a
merger, consolidation or similar transaction involving, or any purchase of all
or any significant portion of the assets or any equity securities of, Modtech or
SPI or any of the Subsidiaries of Modtech or SPI.
"Action" shall mean any action, order, writ, injunction, judgment or
decree outstanding or claim, suit, litigation, proceeding, arbitration or
investigation by or before any court, governmental or other regulatory or
administrative agency or commission or any other Person.
"Affiliate" shall mean, with respect to any Person, any other Person
that directly, or through one or more intermediaries, controls or is controlled
by or is under common control with such Person.
"Assets" shall mean, with respect to any Person, all land, buildings,
improvements, leasehold improvements, Fixtures and Equipment and other assets,
real or personal, tangible or intangible, owned, leased or licensed by such
Person or any of its Subsidiaries.
"Disclosure Schedule" means the schedules dated as of the date hereof
and delivered by or on behalf of each party hereto to the other party hereto in
connection with this Agreement and which set forth exceptions to the
representations and warranties contained herein and certain other information
called for by other provisions of this Agreement.
"Election" shall mean the election contemplated by Section 2.3 hereof
with respect to the Record Holders of Modtech Shares, and the election
contemplated by Section 2.8 hereof with respect to the Record Holders of SPI
Shares.
"Election Deadline" shall mean a time not later than the time specified
in the Letter of Transmittal, at which time the shareholders of Modtech and SPI
must submit their Election Forms to the Exchange Agent.
"Election Form" shall mean a form for the purpose of making the
Elections, which form shall be delivered to Record Holders in connection with
the delivery of the definitive proxy statement for the transaction contemplated
by this Agreement.
"Encumbrances" shall mean any claim, lien, pledge, option, charge,
easement, security interest, deed of trust, mortgage, right-of-way, covenant,
condition, restriction, encumbrance or other rights of third parties.
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"Environmental Laws" shall mean any federal, state or local law,
statute, ordinance, order, decree, rule or regulation relating to releases,
discharges, emissions or disposals to air, water, land or groundwater of
Hazardous Materials; to the withdrawal or use of groundwater; to the use,
handling or disposal of polychlorinated biphenyls, asbestos or urea formaldehyde
or any other Hazardous Material; to the treatment, storage, disposal or
management of Hazardous Materials; to exposure to toxic, hazardous or other
controlled, prohibited or regulated substances; and to the transportation,
release or any other use of Hazardous Materials, including the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601, et seq.
("CERCLA"), the Resource Conservation and Recovery Act, 42 U.S.C. 6901, et seq.
("RCRA"), the Toxic Substances Control Act, 15 U.S.C. 2601, et seq. ("TSCA"),
the Occupational, Safety and Health Act, 29 U.S.C. 651, et seq., the Clean Air
Act, 42 U.S.C. 7401, et seq., the Federal Water Pollution Control Act, 33 U.S.C.
1251, et seq., the Safe Drinking Water Act, 42 U.S.C. 300f, et seq., the
Hazardous Materials Transportation Act, 49 U.S.C. 1802 et seq. ("HMTA") and the
Emergency Planning and Community Right to Know Act, 42 U.S.C. 11001 et seq.
("EPCRA"), and other comparable state laws and all rules, regulations and
guidance documents promulgated pursuant thereto or published thereunder.
"Equity Interests" means capital stock, partnership interests or
warrants, options or other rights to acquire capital stock or partnership
interests (including any debt security which is convertible into, or
exchangeable for, capital stock or partnership interests).
"Exchange Agent" shall mean the Person selected by Modtech and SPI to
perform the duties of the exchange agent under this Agreement and shall be a
commercial bank having trust powers or a trust company, either of which shall
have a reported capital and surplus of not less than $100,000,000.
"Facilities" shall mean, with respect to any Person, all of the
offices, plants, factories, storage facilities and similar structures owned or
leased by such Person.
"Fixtures and Equipment" shall mean, with respect to any Person, all of
the furniture, fixtures, furnishings, machinery and equipment owned, leased or
licensed by such Person and located in, at or upon the Facilities of such
Person.
"GAAP" shall mean generally accepted accounting principles in the
United States of America, as in effect from time to time, consistently applied.
"Hazardous Materials" shall mean each and every element, compound,
chemical mixture, contaminant, pollutant, material, waste or other substance
which is defined, determined or identified as hazardous or toxic under
Environmental Laws or the release of which is regulated under Environmental
Laws. Without limiting the generality of the foregoing, the term includes:
"hazardous substances" as defined in CERCLA; "extremely hazardous substances" as
defined in EPCRA; "hazardous waste" as defined in RCRA; "hazardous materials" as
defined in HMTA; "chemical substance or mixture" as defined in TSCA; crude oil,
petroleum products or any fraction thereof;
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radioactive materials including source, byproduct or special nuclear materials;
asbestos or asbestos-containing materials; and radon.
"Independent Director" shall mean a person other than an officer,
employee or affiliate of Holdings or its subsidiaries or any other individual
having a relationship which, in the opinion of the board of directors of
Holdings, would interfere with the exercise of independent judgment in carrying
out the responsibilities of a director.
"Leased Real Estate" shall mean all Properties (including all
Facilities) which are leased by any Person as lessee or sublessee.
"Leases" shall mean, with respect to any Person, all leases (including
subleases, licenses, any occupancy agreement and any other agreement) of real or
personal property, in each case to which such Person or any of its Subsidiaries
is a party, whether as lessor, lessee, guarantor or otherwise, or by which any
of them or their respective Properties or assets are bound, or which otherwise
relate to the operation of their respective businesses.
"Mailing Date" shall mean the date agreed to by Holdings, Modtech and
SPI as the date on which a Letter of Transmittal and Election Form shall be
mailed to each Record Holder of Modtech Shares and SPI Shares.
"Material Adverse Effect" shall mean, with respect to any of Holdings
(following the Mergers), Modtech or SPI, as the context requires, a material
adverse change in or effect on the business, results of operations, assets,
liabilities or conditions (financial or otherwise) or prospects of such Person
and its Subsidiaries taken as a whole or any change which impairs or materially
delays the ability of such Person to consummate the transactions contemplated by
this Agreement.
"Permitted Encumbrances" shall mean any Encumbrances resulting from (i)
all statutory or other liens for Taxes or assessments which are not yet due or
delinquent or the validity of which are being contested in good faith by
appropriate proceedings for which adequate reserves are being maintained in
accordance with GAAP; (ii) all workers' and repairers' liens, and other similar
liens imposed by law, incurred in the ordinary course of business; (iii) all
laws and governmental rules, regulations, ordinances and restrictions; (iv) all
leases, subleases or licenses to which any Person or any of its Subsidiaries is
a party; (v) Encumbrances identified on title policies or preliminary title
reports delivered or made available for inspection to any Person prior to the
date hereof; and (vi) all other liens and mortgages (but solely to the extent
such liens or mortgages secure indebtedness described in the Disclosure
Schedule), covenants, imperfections in title, charges, easements, restrictions
and other Encumbrances which, in the case of any such Encumbrances pursuant to
clause (i) through (vi), do not materially detract from or materially interfere
with the value or present use of the asset subject thereto or affected thereby.
"Person" shall mean any individual, corporation, partnership, limited
liability company, joint venture, governmental agency or instrumentality, or any
other entity.
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"Properties" shall mean, with respect to any Person, all of the
improved and unimproved real property owned or leased by such Person.
"Record Date" shall mean the record date established in accordance with
applicable charter documents and applicable state law, by Modtech or SPI, as the
case may be, for the respective stockholders' meeting to approve the Mergers.
"Record Holder" shall mean a holder of record as of the Record Date, of
Modtech Shares or SPI Shares, as the case may be.
"Returns" shall mean all returns, declarations, reports, statements,
and other documents required to be filed with respect to federal, state, local
and foreign Taxes or for information purposes.
"Subsidiary" shall mean, with respect to any Person, any corporation or
other organization, whether incorporated or unincorporated, of which at least a
majority of the Equity Interests having ordinary voting power for the election
of directors or other governing body of such organization is owned or controlled
by such Person directly or indirectly.
"Tax" or "Taxes" shall mean all federal, state, local, foreign and
other taxes, levies, imposts, assessments, impositions or other similar
government charges, including, without limitation, income, estimated income,
business, occupation, franchise, real property, payroll, personal property,
sales, transfer, stamp, use, employment, commercial rent or withholding,
occupancy, premium, gross receipts, profits, windfall profits, deemed profits,
license, lease, severance, capital, production, corporation, ad valorem, excise,
duty or other taxes, including interest, penalties and additions (to the extent
applicable) thereto.
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IN WITNESS WHEREOF, the parties have executed this Agreement and caused
the same to be duly delivered on their behalf on the day and year first written
above.
MODTECH, INC.
By: /s/ EVAN M. GRUBER
-------------------------------------
Name: Evan M. Gruber
Title: Chief Executive Officer
SPI HOLDINGS, INC.
By:
-------------------------------------
Name: Patrick Van Den Bossche
Title: President and Chief Executive Officer
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MODTECH, INC.
By:
-------------------------------------
Name: Evan M. Gruber
Title: Chief Executive Officer
SPI HOLDINGS, INC.
By: /s/ PATRICK VAN DEN BOSSCHE
-------------------------------------
Name: Patrick Van Den Bossche
Title: President and Chief Executive Officer
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MODTECH HOLDINGS, INC.
By: __________________________________
Name: ________________________________
Title: _______________________________
MODTECH MERGER SUB, INC.
By: __________________________________
Name: ________________________________
Title: _______________________________
SPI MERGER SUB, INC.
By: __________________________________
Name: ________________________________
Title: _______________________________
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Annex II
DONALDSON, LUFKIN & JENRETTE
Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue, New York, New York 10172 (212) 892-3000
September 28, 1998
The Board of Directors
Modtech, Inc.
2830 Barrett Avenue
Perris, CA 92570
Dear Board Members:
You have requested our opinion as to the fairness from a financial
point of view to the stockholders of Modtech, Inc. (the "Company") of the
consideration to be received by such stockholders pursuant to the terms of the
Agreement and Plan of Reorganization and Merger (the "Agreement"), dated as of
September 28, 1998 (the "Agreement"), by and between Modtech, Inc., and SPI
Holdings, Inc. ("SPI"), pursuant to which the Company and SPI will form a new
corporation ("Holdings") which will in turn form two wholly owned acquisition
subsidiaries, one of which will merge with and into the Company (the "Modtech
Merger") and the other of which will merge with and into SPI (the "SPI Merger"
and, together with the Modtech Merger, the "Mergers").
Pursuant to the Agreement, (i) all issued and outstanding shares of
common stock of Modtech (together with certain options to purchase such shares
of common stock which have or will become exercisable, as set forth in the
Agreement) will be converted, subject to certain exceptions, into the right to
receive, in the aggregate, $39,923,472 in cash, 9,027,566 shares of common
stock, $.01 par value per share of Holdings ("Holdings Common Stock") and
260,734 shares of non-voting convertible series A preferred stock, par value
$.01 per share of Holdings ("Holdings Preferred Stock"); and (ii) all issued and
outstanding shares of common stock and preferred stock of SPI (together with
certain options to purchase such shares of common stock which have or will
become exercisable, as set forth in the Agreement) and exercisable warrants to
purchase common stock or preferred stock of SPI will be converted, subject to
certain exceptions, into the right to receive, in the aggregate, 4,873,306
shares of Holdings Common Stock and $8,076,133 in cash.
In arriving at our opinion, we have reviewed the Agreement dated
September 28, 1998 and the draft dated September 27, 1998 of the Certificate of
Determination of Rights, Preferences, Privileges and Restrictions of Series A
Non-Voting Convertible Preferred Stock of Modtech Holdings, Inc. We also have
reviewed financial and other information that was publicly available or
furnished to us by the Company and SPI including information provided during
discussions with your and their respective managements. Included in the
information provided during discussions with the respective managements were
certain financial projections of SPI for the period beginning January 1998 and
ending December 2003 prepared by the management of SPI and certain financial
projections of the Company for the period beginning January 1998 and ending
December 2003 prepared by the management of the Company. In addition, we have
compared certain financial and securities data of the Company and SPI with
various other companies whose securities are traded in public markets, reviewed
the historical stock prices and trading volumes of the common stock of the
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The Board of Directors
Modtech, Inc.
Page 2
Company, reviewed prices and premiums paid in certain other business
combinations and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion.
In rendering our opinion and with your approval, we have relied upon
and assumed the accuracy and completeness of all of the financial and other
information that was available to us from public sources, that was provided to
us by the Company and SPI or their respective representatives, or that was
otherwise reviewed by us. With respect to the financial projections relied on by
us, we have assumed that they have been reasonably prepared on the basis
reflecting the best currently available estimates and judgments of the
management of the Company and SPI as to the future operating and financial
performance of the Company and SPI respectively. We have assumed that the cash
portion of the consideration to be received by holders of Company common stock
would not otherwise be received by such holders in the ordinary course of
business. We have not assumed any responsibility for making any independent
evaluation of any assets or liabilities or for making any independent
verification of any of the information reviewed by us. We have relied as to
certain legal matters on advice of counsel to the Company.
Our opinion is necessarily based on economic, market, financial and
other conditions as they exist on, and on the information made available to us
as of, the date of this letter. It should be understood that, although
subsequent developments may affect this opinion, we do not have any obligation
to update, revise or reaffirm this opinion. We are expressing no opinion herein
as to the prices at which Holdings Common Stock or Holdings Preferred Stock will
actually trade at any time. Our opinion does not address the relative merits of
the Mergers and the other business strategies being considered by the Company's
Board of Directors, nor does it address the Board's decision to proceed with the
Mergers. Our opinion does not constitute a recommendation to any stockholder as
to how such stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of
its investment banking services, 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, and has
previously advised SPI and certain of its stockholders with respect to the
Transaction and possible financing alternatives.
Based upon the foregoing and such other factors as we deem relevant, we
are of the opinion that the consideration to be received by holders of Company
common stock pursuant to the Agreement is fair to such holders from a financial
point of view.
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The Board of Directors
Modtech, Inc.
Page 3
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: s/Marc G. Cummins
---------------------------------
Marc G. Cummins
Managing Director
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ANNEX III
CALIFORNIA CORPORATIONS CODE
SECTIONS 1300-1312
1300. (a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by the
Commissioner of Corporations under subdivision (o) of Section 25100 or (B)
listed on the list of OTC margin stocks issued by the Board of Governors of the
Federal Reserve System, and the notice of meeting of shareholders to act upon
the reorganization summarizes this section and Sections 1301, 1302, 1303 and
1304; provided, however, that this provision does not apply to any shares with
respect to which there exists any restriction on transfer imposed by the
corporation or by any law or regulation; and provided, further, that this
provision does not apply to any class of shares described in subparagraph (A) or
(B) if demands for payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the determination of shareholders
entitled to vote on the reorganization and (A) were not voted in favor of the
reorganization or, (B) if described in subparagraph (A) or (B) of paragraph (1)
(without regard to the provisos in that paragraph), were voted against the
reorganization, or which were held of record on the effective date of a
short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with
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Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
1301. (a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an
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offer by the shareholder to sell the shares at such price.
1302. Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
1303. (a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
1304. (a) If the corporation denies that the shares are dissenting shares, or
the corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested
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corporation, within six months after the date on which notice of the approval by
the outstanding shares (Section 152) or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder, but not thereafter, may file a
complaint in the superior court of the proper county praying the court to
determine whether the shares are dissenting shares or the fair market value of
the dissenting shares or both or may intervene in any action pending on such a
complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305. (a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share.
Within the time fixed by the court, the appraisers, or a majority of them,
shall make and file a report in the office of the clerk of the court. Thereupon,
on the motion of any party, the report shall be submitted to the court and
considered on such evidence as the court considers relevant. If the court finds
the report reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time as
may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal
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exceeds the price offered by the corporation, the corporation shall pay the
costs (including in the discretion of the court attorneys' fees, fees of expert
witnesses and interest at the legal rate on judgments from the date of
compliance with Sections 1300, 1301 and 1302 if the value awarded by the court
for the shares is more than 125 percent of the price offered by the corporation
under subdivision (a) of Section 1301).
1306. To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
1307. Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
1308. Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
1309. Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for
<PAGE> 277
endorsement in accordance with Section 1302 or are surrendered for conversion
into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
1310. If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
1311. This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
1312. (a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control
<PAGE> 278
with, another party to the reorganization or short-form merger, subdivision (a)
shall not apply to any shareholder of such party who has not demanded payment of
cash for such shareholder's shares pursuant to this chapter; but if the
shareholder institutes any action to attack the validity of the reorganization
or short-form merger or to have the reorganization or short-form merger set
aside or rescinded, the shareholder shall not thereafter have any right to
demand payment of cash for the shareholder's shares pursuant to this chapter.
The court in any action attacking the validity of the reorganization or
short-form merger or to have the reorganization or short-form merger set aside
or rescinded shall not restrain or enjoin the consummation of the transaction
except upon 10 days' prior notice to the corporation and upon a determination by
the court that clearly no other remedy will adequately protect the complaining
shareholder or the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
<PAGE> 279
ANNEX IV
ARTICLE 113
DISSENTERS' RIGHTS
PART 1. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
SECTION 7-113-101. Definitions. For purposes of this article:
(1) "Beneficial shareholder" means the beneficial owner of shares held
in a voting trust or by a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring domestic or foreign
corporation, by merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 7-113-102 and who exercises that right at the
time and in the manner required by part 2 of this article.
(4) "Fair value", with respect to a dissenter's shares, means the value
of the shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action except to the extent that exclusion would
be inequitable.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at the legal rate as
specified in section 5-12-101, C.R.S.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares
that are registered in the name of a nominee to the extent such owner is
recognized by the corporation as the shareholder as provided in section
7-107-204.
(7) "Shareholder" means either a record shareholder or a beneficial
shareholder.
SECTION 7-113-102. Right to dissent.
(1) A shareholder, whether or not entitled to vote, is entitled to
dissent and obtain payment of the fair value of the shareholder's shares in the
event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation
is a party if:
<PAGE> 280
(I) Approval by the shareholders of that corporation
is required for the merger by section 7-111-103 or 7-111-104
or by the articles of incorporation, or
(II) The corporation is a subsidiary that is merged
with its parent corporation under section 7-111-104;
(b) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be
acquired;
(c) Consummation of a sale, lease, exchange, or other
disposition of all, or substantially all, of the property of the
corporation for which a shareholders' vote is required under section
7-112-102(1); and
(d) Consummation of a sale, lease, exchange, or other
disposition of all, or substantially all, of the property of an entity
controlled by the corporation if the shareholders of the corporation
were entitled to vote upon the consent of the corporation to the
disposition pursuant to section 7-112-102(2).
(1.3) A shareholder is not entitled to dissent and obtain payment,
under subsection (I) of this section, of the fair value of the shares of any
class or series of shares which either were listed on a national securities
exchange registered under the federal "Securities Exchange Act of 1934", as
amended, or on the national market system of the National Association of
Securities Dealers Automated Quotation System, or were held of record by more
than two thousand shareholders, at the time of:
(a) The record date fixed under section 7-107-107 to determine
the shareholders entitled to receive notice of the shareholders'
meeting at which the corporate action is submitted to a vote;
(b) The record date fixed under section 7-107-104 to determine
shareholders entitled to sign writings consenting to the corporate
action; or
(c) The effective date of the corporate action if the
corporate action is authorized other than by a vote of shareholders.
(1.8) The limitation set forth in subsection (1.3) of this action shall
not apply if the shareholder will receive for the shareholder's shares, pursuant
to the corporate action, anything except:
(a) Shares of the corporation surviving the consummation of
the plan of merger or share exchange;
(b) Shares of any other corporation which at the effective
date of the plan of merger or share exchange either will be listed on a
national securities exchange registered under the federal "Securities
Exchange Act of 1934", as amended, or on the national
<PAGE> 281
market system of the National Association of Securities Dealers
Automated Quotation System, or will be held of record by more than two
thousand shareholders;
(c) Cash in lieu of fractional shares; or
(d) Any combination of the foregoing described shares or cash
in lieu of fractional shares.
(2.5) A shareholder, whether or not entitled to vote, is entitled to
dissent and obtain payment of the fair value of the shareholder's shares in the
event of a reverse split that reduces the number of shares owned by the
shareholder to a fraction of a share or to scrip if the fractional share or
scrip so created is to be acquired for cash or the scrip is to be voided under
section 7-106-104.
(3) A shareholder is entitled to dissent and obtain payment of the fair
value of the shareholder's shares in the event of any corporate action to the
extent provided by the bylaws or a resolution of the board of directors.
(4) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this article may not challenge the corporate action
creating such entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
SECTION 7-113-103. Dissent by nominees and beneficial owners.
(1) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any one
person and causes the corporation to receive written notice which states such
dissent and the name, address, and federal taxpayer identification number, if
any, of each person on whose behalf the record shareholder asserts dissenters'
rights. The rights of a record shareholder under this subsection (1) are
determined as if the shares as to which the record shareholder dissents and the
other shares of the record shareholder were registered in the names of different
shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to the
shares held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder causes the corporation to
receive the record shareholder's written consent to the dissent not
later than the time the beneficial shareholder asserts dissenters'
rights; and
(b) The beneficial shareholder dissents with respect to all
shares beneficially owned by the beneficial shareholder.
(3) The corporation may require that, when a record shareholder
dissents with respect to the shares held by any one or more beneficial
shareholders, each such beneficial shareholder must certify to the corporation
that the beneficial shareholder and the record shareholder or
<PAGE> 282
record shareholders of all shares owned beneficially by the beneficial
shareholder have asserted, or will timely assert, dissenters' rights as to all
such shares as to which there is no limitation on the ability to exercise
dissenters' rights. Any such requirement shall be stated in the dissenters'
notice given pursuant to section 7-113-203.
PART 2. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
SECTION 7-113-201. Notice of dissenters' rights.
(1) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is submitted to a vote at a shareholders' meeting, the notice
of the meeting shall be given to all shareholders, whether or not entitled to
vote. The notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this article and shall be accompanied by a copy of this
article and the materials, if any, that, under articles 101 to 117 of this
title, are required to be given to shareholders entitled to vote on the proposed
action at the meeting. Failure to give notice as provided by this subsection (1)
shall not affect any action taken at the shareholders' meeting for which the
notice was to have been given, but any shareholder who was entitled to dissent
but who was not given such notice shall not be precluded from demanding payment
for the shareholder's shares under this articles by reason of the shareholder's
failure to comply with the provisions of section 7-113-202(1).
(2) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized without a meeting of shareholders pursuant to
section 7-107-104, any written or oral solicitation of a shareholder to execute
a writing consenting to such action contemplated in section 7-107-104 shall be
accompanied or preceded by a written notice stating that shareholders are or may
be entitled to assert dissenters' rights under this article, by a copy of this
article, and by the materials, if any, that, under articles 101 to 117 of this
title, would have been required to be given to shareholders entitled to vote on
the proposed action if the proposed action were submitted to a vote at a
shareholders' meeting. Failure to give notice as provided by this subsection (2)
shall not affect any action taken pursuant to section 7-107-104 for which the
notice was to have been given, but any shareholder who was entitled to dissent
but who was not given such notice shall not be precluded from demanding payment
for the shareholder's shares under this articles by reason of the shareholder's
failure to comply with the provisions of section 7-113-202(2).
SECTION 7-113-202. Notice of intent to demand payment.
(1) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is submitted to a vote at a shareholders' meeting and if
notice of dissenters' rights has been given to such shareholder in connection
with the action pursuant to section 7-113-201(1), a shareholder who wishes to
assert dissenters' rights shall:
(a) Cause the corporation to receive, before the vote is
taken, written notice of the shareholder's intention to demand payment
for the shareholder's shares if the proposed corporate action is
effectuated; and
<PAGE> 283
(b) Not vote the shares in favor of the proposed corporate
action.
(2) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized without a meeting of shareholders pursuant to
section 7-107-104 and if notice of dissenters' rights has been given to such
shareholder in connection with the action pursuant to section 7-113-201(2) a
shareholder who wishes to assert dissenters' rights shall not execute a writing
consenting to the proposed corporate action.
(3) A shareholder who does not satisfy the requirements of subsection
(1) or (2) of this section is not entitled to demand payment for the
shareholder's shares under this article.
SECTION 7-113-203. Dissenters' notice.
(1) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized, the corporation shall give a written
dissenters' notice to all shareholders who are entitled to demand payment for
their shares under this article.
(2) The dissenters' notice required by subsection (1) of this section
shall be given no later than ten days after the effective date of the corporate
action creating dissenters' rights under section 7-113-102 and shall:
(a) State that the corporate action was authorized and state
the effective date or proposed effective date of the corporate action;
(b) State an address at which the corporation will receive
payment demands and the address of a place where certificates for
certificated shares must be deposited;
(c) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is
received;
(d) Supply a form for demanding payment, which form shall
request a dissenter to state an address to which payment is to be made;
(e) Set the date by which the corporation must receive the
payment demand and certificates for certificated shares, which date
shall not be less than thirty days after the date the notice required
by subsection (1) of this section is given;
(f) State the requirement contemplated in section
7-113-103(3), if such requirement is imposed; and
(g) Be accompanied by a copy of this article.
SECTION 7-113-204. Procedure to demand payment.
<PAGE> 284
(1) A shareholder who is given a dissenters' notice pursuant to section
7-113-203 and who wishes to assert dissenters' rights shall, in accordance with
the terms of the dissenters' notice:
(a) Cause the corporation to receive a payment demand, which
may be the payment demand form contemplated in section 7-113-203(2)(d),
duly completed, or may be stated in another writing; and
(b) Deposit the shareholder's certificates for certificated
shares.
(2) A shareholder who demands payment in accordance with subsection (1)
of this section retains all rights of a shareholder, except the right to
transfer the shares, until the effective date of the proposed corporate action
giving rise to the shareholder's exercise of dissenters' rights and has only the
right to receive payment for the shares after the effective date of such
corporate action.
(3) Except as provided in section 7-113-207 or 7-113-209(1)(b), the
demand for payment and deposit of certificates are irrevocable.
(4) A shareholder who does not demand payment and deposit the
shareholder's share certificates as required by the date or dates set in the
dissenters' notice is not entitled to payment for the shares under this article.
SECTION 7-113-205. Uncertificated shares.
(1) Upon receipt of a demand for payment under section 7-113-204 from a
shareholder holding uncertificated shares, and in lieu of the deposit of
certificates representing the shares, the corporation may restrict the transfer
thereof.
(2) In all other respects, the provisions of section 7-113-204 shall be
applicable to shareholders who own uncertificated shares.
SECTION 7-113-206. Payment.
(1) Except as provided in section 7-113-208, upon the effective date of
the corporate action creating dissenters' rights under section 7-113-102 or upon
receipt of a payment demand pursuant to section 7-113-204, whichever is later,
the corporation shall pay each dissenter who complied with section 7-113-204, at
the address stated in the payment demand, or if no such address is stated in the
payment demand, at the address shown on the corporation's current record of
shareholders for the record shareholder holding the dissenter's shares, the
amount the corporation estimates to be the fair value of the dissenter's shares,
plus accrued interest.
(2) The payment made pursuant to subsection (1) of this section shall
be accompanied by:
<PAGE> 285
(a) The corporation's balance sheet as of the end of its most
recent fiscal year or, if that is not available, the corporation's
balance sheet as of the end of a fiscal year ending not more than
sixteen months before the date of payment, an income statement for that
year, and, if the corporation customarily provides such statements to
shareholders, a statement of changes in shareholders' equity for that
year and a statement of cash flow for that year, which balance sheet
and statements shall have been audited if the corporation customarily
provides audited financial statements to shareholders, as well as the
latest available financial statements, if any, for the interim or
full-year period, which financial statements need not be audited;
(b) A statement of the corporation's estimate of the fair
value of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment
under section 7-113-209; and
(e) A copy of this article.
SECTION 7-113-207. Failure to take action.
(1) If the effective date of the corporate action creating dissenters'
rights under section 7-113-102 does not occur within sixty days after the date
set by the corporation by which the corporation must receive the payment demand
as provided in section 7-113-203, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
(2) If the effective date of the corporate action creating dissenters'
rights under section 7-113-102 occurs more than sixty days after the date set by
the corporation by which the corporation must receive the payment demand as
provided in section 7-113-203, then the corporation shall send a new dissenters'
notice, as provided in section 7-113-203, and the provisions of sections
7-113-204 to 7-113-209 shall again be applicable.
SECTION 7-113-208. Special provisions relating to shares acquired after
announcement of proposed corporate action
(1) The corporation may, in or with the dissenters' notice given
pursuant to section 7-113-203, state the date of the first announcement to news
media or to shareholders of the terms of the proposed corporate action creating
dissenters' rights under section 7-113-102 and state that the dissenter shall
certify in writing, in or with the dissenter's payment demand under section
7-113-204, whether or not the dissenter (or the person on whose behalf
dissenters' rights are asserted) acquired beneficial ownership of the shares
before that date. With respect to any dissenter who does not so certify in
writing, in or with the payment demand, that the dissenter or the person on
whose behalf the dissenter asserts dissenters' rights acquired beneficial
ownership of the shares before such date, the corporation may, in lieu of making
the payment provided in
<PAGE> 286
section 7-113-206, offer to make such payment if the dissenter agrees to accept
it in full satisfaction of the demand.
(2) An offer to make payment under subsection (1) of this section shall
include or be accompanied by the information required by section 7-113-206(2).
SECTION 7-113-209. Procedure if dissenter is dissatisfied with payment or offer
(1) A dissenter may give notice to the corporation in writing of the
dissenter's estimate of the fair value of the dissenter's shares and of the
amount of interest due and may demand payment of such estimate, less any payment
made under section 7-113-206, or reject the corporation's offer under section
7-113-208 and demand payment of the fair value of the shares and interest due,
if:
(a) The dissenter believes that the amount paid under section
7-113-206 or offered under section 7-113-208 is less than the fair
value of the shares or that the interest due was incorrectly
calculated;
(b) The corporation fails to make payment under section
7-113-206 within sixty days after the date set by the corporation by
which the corporation must receive the payment demand; or
(c) The corporation does not return the deposited certificates
or release the transfer restrictions imposed on uncertificated shares
as required by section 7-113-207(1).
(2) A dissenter waives the right to demand payment under this section
unless the dissenter causes the corporation to receive the notice required by
subsection (1) of this section within thirty days after the corporation made or
offered payment for the dissenter's shares.
PART 3. JUDICIAL APPRAISAL OF SHARES
SECTION 7-113-301. Court action.
(1) If a demand for payment under section 7-113-209 remains unresolved,
the corporation may, within sixty days after receiving the payment demand,
commence a proceeding and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the proceeding
within the sixty-day period, it shall pay to each dissenter whose demand remains
unresolved the amount demanded.
(2) The corporation shall commence the proceeding described in
subsection (1) of this section in the district court of the county in this state
where the corporation's principal office is located or, if the corporation has
no principal office in this state, in the district court of the county in which
its registered office is located. If the corporation is a foreign corporation
without a registered office, it shall commence the proceeding in the county in
this state where the registered office of the domestic corporation merged into,
or whose shares were acquired by, the foreign corporation was located.
<PAGE> 287
(3) The corporation shall make all dissenters, whether or not residents
of this state, whose demands remain unresolved parties to the proceeding
commenced under subsection (2) of this section as in an action against their
shares, and all parties shall be served with a copy of the petition. Service on
each dissenter shall be by registered or certified mail, to the address stated
in such dissenter's payment demand, or if no such address is stated in the
payment demand, at the address shown on the corporation's current record of
shareholders for the record shareholder holding the dissenter's shares, or as
provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to such order. The parties to
the proceeding are entitled to the same discovery rights as parties in other
civil proceedings.
(5) Each dissenter made a party to the proceeding commenced under
subsection (2) of this section is entitled to judgment for the amount, if any,
by which the court finds the fair value of the dissenter's shares, plus
interest, exceeds the amount paid by the corporation, or for the fair value,
plus interest, of the dissenter's shares for which the corporation elected to
withhold payment under section 7-113-208.
SECTION 7-113-302. Court costs and counsel fees.
(1) The court in an appraisal proceeding commenced under section
7-113-301 shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation; except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under section 7-113-209.
(2) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any dissenters if
the court finds the corporation did not substantially comply with the
requirements of part 2 of this article; or
(b) Against either the corporation or one or more dissenters,
in favor of any other party, if the court finds that the party against
whom the fees and expenses are assessed acted arbitrarily, vexatiously,
or not in good faith with respect to the rights provided by this
article.
(3) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to said counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefitted.
<PAGE> 288
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> 289
<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 Bertrand
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)
</TABLE>
II-2
<PAGE> 290
<TABLE>
<CAPTION>
<S> <C>
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>
- ----------
+ Previously filed.
* Incorporated by reference from Modtech's Registration Statement on Form
S-1 filed June 6, 1990 (Commission File No. 033-35239).
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
II-3
<PAGE> 291
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 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> 292
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 December
__, 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 December 15, 1998
- ------------------------------ and Director
Evan M. Gruber
/s/ * Chief Operating and Chief December 15, 1998
- ------------------------------ Financial Officer (principal financial
Michael G. Rhodes and accounting officer)
/s/ * President, Director December 15, 1998
- ------------------------------
Patrick Van Den Bossche
/s/ * Director December 15, 1998
- ------------------------------
Charles A. Hamilton
/s/ * Director December 15, 1998
- ------------------------------
Charles R. Gwirtsman
/s/ * Director December 15, 1998
- ------------------------------
Charles C. McGettigan
/s/ * Director December 15, 1998
- ------------------------------
Myron A. Wick III
/s/ * Director December 15, 1998
- ------------------------------
Daniel J. Donahoe III
*By Evan M. Gruber
-------------------------
Evan M. Gruber as
attorney-in-fact
</TABLE>
<PAGE> 293
EXHIBIT INDEX
<TABLE>
NUMBER NAME OF 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
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 Bertrand
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.
</TABLE>
<PAGE> 294
<TABLE>
<S> <C>
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
99.2+ Form of SPI Holdings, Inc. proxy
</TABLE>
- ----------
+ Previously filed.
* Incorporated by reference from Modtech's Registration Statement on Form
S-1 filed June 6, 1990 (Commission File No. 033-35239).
<PAGE> 1
EXHIBIT 5
[HADDAN & ZEPFEL LLP LETTERHEAD]
December 14, 1998
Modtech Holdings, Inc.
2830 Barrett Avenue
Perris, CA 92571
Dear Sirs:
We are acting as counsel for Modtech Holdings, Inc., a Delaware
corporation (the "Company") , in connection with the registration by the Company
of 12,622,158 shares of the Company's Common Stock, par value $.01 per share
(the "Common Stock") and 388,939 shares of the Company's Series A Preferred
Stock, par value $.01 per share (the "Preferred Stock") pursuant to the
Company's Registration Statement on Form S-4, filed with the Securities and
Exchange Commission (the "Registration Statement"). The Shares are to be issued
in connection with the acquisition of SPI Holdings, Inc. by the Company,
pursuant to the Agreement and Plan of Reorganization and Merger dated as of
September 28, 1998 by and among Modtech, Inc. and SPI Holdings, Inc. (the
"Merger Agreement").
In connection with rendering this opinion, we have examined and relied
upon originals or copies, certified or otherwise identified to our satisfaction,
of such corporate records, agreements and other instruments, certificates of
officers, certificates of public officials and other documents as we have deemed
necessary or appropriate as a basis for the opinions expressed herein.
Based on, and subject to, the foregoing, it is our opinion that:
1. The Company has the corporate authority to issue the Common Stock
and the Preferred Stock in the manner and under the terms set forth in the
Registration Statement.
2. The Common Stock and the Preferred Stock have been duly authorized
and, when issued and delivered to in accordance with the Merger Agreement, will
be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement, to its use as a part of the Registration Statement and
to the use of our name under the caption "Legal Matters" in the Proxy
Statement/Prospectus constituting a part of the Registration Statement.
Very truly yours,
Haddan & Zepfel LLP
<PAGE> 1
EXHIBIT 8.1
January __, 1999
(714) 451-3800 C 63630-00002
Modtech, Inc.
2830 Barrett Avenue
Perris, California 92571
Re: Tax Opinion for Registration Statement on Form S-4
(File No. 333-66209)
Gentlemen:
We are acting as special tax counsel to Modtech, Inc., a California
corporation ("MODTECH"), in connection with the Agreement and Plan of
Reorganization and Merger (the "AGREEMENT") dated as of September 28, 1998, by
and between Modtech and SPI Holdings, Inc., a Colorado corporation ("SPI").
Pursuant to the terms of the Agreement, Modtech and SPI shall form Modtech
Holdings, Inc., a Delaware corporation ("MODTECH HOLDINGS"), which in turn will
form Modtech Merger Sub, Inc., a Delaware corporation and wholly owned
subsidiary of Modtech Holdings ("MODTECH SUB"), and SPI Merger Sub, Inc., a
Delaware corporation and wholly owned subsidiary of Modtech Holdings ("SPI
SUB"). At the effective time, Modtech Sub will merge with and into Modtech
(the "MODTECH MERGER") and SPI Sub will merge with and into SPI (the "SPI
MERGER"). The Agreement is attached as Annex I to Registration Statement on
Form S-4, File No. 333-66209 (the "REGISTRATION STATEMENT"), filed with the
Securities and Exchange Commission in connection with the Modtech Merger and
SPI Merger. You have requested our opinion as to the material federal income
tax consequences of the Modtech Merger to the shareholders of Modtech. This
opinion is being rendered pursuant to Section 6.2(e) of the Agreement.
In rendering our opinion, we have examined the Agreement and have, with
your permission, relied upon, and assumed as correct as of the effective date
of the Modtech Merger, (i) the factual information contained in the
Registration Statement, (ii) the representations and covenants contained in the
Agreement, (iii) certain factual representations made by Modtech and SPI, and
(iv) such other materials as we have deemed necessary or appropriate as a
basis for our opinion.
On the basis of the information, representations and covenants contained
in the foregoing materials and assuming the Modtech Merger is consummated in
the manner
<PAGE> 2
Modtech, Inc.
January ___, 1999
Page 2
described in the Agreement and the Proxy Statement/Prospectus included in the
Registration Statement, we are of the opinion that:
(i) The formation of Modtech Sub and its merger with and into Modtech
will be disregarded for federal income tax purposes and the Modtech Merger will
be viewed as transfers by the Modtech stockholders of their shares of Modtech
common stock, par value $.01 per share ("MODTECH COMMON STOCK"), in exchange
for (i) cash, (ii) shares of common stock, par value $.01 per share, of
Modtech Holdings ("HOLDINGS COMMON STOCK"), and, if elected, (iii) shares of
non-voting convertible preferred stock, Series A, of Holdings ("HOLDINGS
SERIES A PREFERRED STOCK"). The exchange will constitute an exchange within the
meaning of Section 351 of the Internal Revenue Code of 1986, as amended (the
"CODE").
(ii) No gain or loss will be recognized by a Modtech stockholder upon
the exchange of Modtech Common Stock for Holdings Common Stock and Holdings
Series A Preferred Stock.
(iii) A Modtech stockholder will recognize gain (but not loss) upon the
exchange of Modtech Common Stock for cash equal to the lesser of (i) the amount
of cash received, and (ii) the amount of gain realized by such stockholder in
the exchange.
(iv) The discussion in the Proxy Statement/Prospectus under the caption
"The Mergers -- Material Federal Income Tax Consequences," to the extent it
constitutes summaries of legal matters or legal conclusions, is accurate in
all material respects.
This opinion expresses our views only as to federal income tax laws in
effect as of the date hereof, including the Code, applicable Treasury
Regulations, published rulings and administrative practices of the Internal
Revenue Service (the "SERVICE") and court decisions. This opinion represents
our best legal judgment as to the matters addressed herein, but is not binding
on the Service or the courts. Furthermore, the legal authorities upon which
we rely are subject to change either prospectively or retroactively. Any change
in such authorities or any change in the facts or representations, or any past
or future actions by Modtech, SPI, or Modtech Holdings contrary to such
representations might adversely affect the conclusions stated herein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and further consent to the use of our name under the
caption "The Mergers -- Material Federal Income Tax Consequences" in the Proxy
Statement/Prospectus included in the Registration Statement.
Very truly yours,
GIBSON, DUNN & CRUTCHER LLP
<PAGE> 1
EXHIBIT 8.2
SPI Holdings, Inc.
9550 Hermosa Avenue
Rancho Cucamonga, California 91730
Ladies and Gentlemen:
We have acted as your counsel in connection with the Modtech Holdings,
Inc. ("Holdings") Registration Statement on Form S-4 filed on October 27, 1998,
as amended by Amendment No. 1 filed on December 15, 1998 (the "Registration
Statement") with the Securities and Exchange Commission under the Securities
Act of 1933, as amended (the "Securities Act"). The Registration Statement
relates to the proposed merger of a wholly-owned subsidiary of Holdings with
and into SPI Holdings, Inc. ("SPI").
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
the Registration Statement, the Joint Proxy Statement/Prospectus included
therein (the "Joint Proxy Statement/Prospectus"), the Agreement and Plan of
Reorganization and Merger, dated as of September 28, 1998, by and between
Modtech, Inc. and SPI, and such other documents as we have deemed necessary or
appropriate.
We hereby confirm that the discussion of the tax treatment of SPI
stockholders in the Joint Proxy Statement/Prospectus under the caption
"Material Federal Income Tax Consequences" is a fair and accurate summary of
the matters addressed therein, based upon current law and the facts and
assumptions stated or referred to therein. There can be no assurance that
contrary positions may not be taken by the Internal Revenue Service.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the use of our name under the caption "Material
Federal Income Tax Consequences" in the Joint Proxy Statement/Prospectus. In
giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act.
Dated: December 15, 1998
Very truly yours,
/s/ Dorsey & Whitney LLP
<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as
of ___________ ___,1998, by and between MODTECH HOLDINGS, INC., a Delaware
corporation (the "Holding Company"), EVAN M. GRUBER, an individual residing in
the State of California ("Executive"), and MODTECH, INC., a California
corporation ("Modtech").
WHEREAS, the Holding Company desires to retain the services of Executive
on the terms and conditions herein provided, and Executive is willing to provide
such services on such terms and conditions;
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants of the parties contained herein, the parties agree as follows:
1. Termination of Prior Agreement: Effective Date. This Agreement
terminates and takes the place of the existing Employment Agreement between
Modtech and Executive, dated as of April 1994 and amended in September 1996 (the
"Existing Employment Agreement"). This termination shall be effective as of the
closings of the mergers contemplated in that Agreement and Plan of
Reorganization and Merger between Modtech and SPI Holdings, Inc., a Colorado
corporation, dated September 28, 1998 (the "Merger Closings"). In consideration
of the termination of the Existing Employment Agreement, Modtech agrees to pay
to Executive on the date of the Merger Closings (i) $500,000, plus (ii)
Executive's 1998 bonus under the Modtech Bonus Plan pro rated on a daily basis
through the date of the Merger Closings. Such payment is guaranteed by the
Holding Company.
2. Term. This Agreement shall continue in full force and effect for a
period which shall commence on the date of the Merger Closings and shall
continue until December 31, 2003 (the"Term"), unless sooner terminated as
hereinafter provided or extended by the mutual agreement of the parties. On that
date, and each anniversary thereafter, this Agreement shall automatically be
renewed for a period of one year, unless either party shall have given the other
prior written notice of their intent not to renew this Agreement.
3. Employment. Executive shall serve as the Chief Executive Officer of
the Holding Company and shall have such responsibilities, duties and authority
customarily associated with such position, including day-to-day responsibility
for the management of all of the Holding Company's affairs and operations, and
oversight of the operations and management of its direct and indirect
subsidiaries (the "Subsidiaries"). Executive shall report directly to the
Holding Company's Board of Directors and shall be subject to its reasonable
directions in the performance of his duties. In addition, Executive shall serve
as a member of the Holding Company's Board of Directors, and on one or more
committees thereof, but without compensation other than as provided for in
Section 3 below. Executive shall devote such of his working time and effort to
the business and affairs of the Holding Company and its Subsidiaries as may
reasonably be required of him in the discharge of the duties and
responsibilities of such office. Executive shall at all times perform his duties
and obligations faithfully and diligently and to the best of Executive's
ability.
-1-
<PAGE> 2
4. Compensation.
(a) Base Salary. As compensation for the services provided by
Executive hereunder, during the Term of this Agreement, the Holding Company
shall pay Executive an annual salary of not less than $300,000 per year ("Base
Salary"). Executive's salary shall be reviewed by the Holding Company's Board of
Directors from time to time at its discretion but not less often than annually,
and Executive shall receive such salary increases as the Holding Company's Board
of Directors shall determine; provided that Executive's annual salary payable
for each ensuing twelve (12) month period shall in all events be increased at
the end of each succeeding twelve (12) month period at a rate equal to the
increase, if any, in the Consumer Price Index for Urban Wage Earners and
Clerical Workers (Los Angeles-Long Beach-Anaheim), as published by the Bureau of
Labor Statistics of the U.S. Department of Labor, during the preceding twelve
(12) months, plus three percent (3%). All such salary shall be payable in equal
installments in conformity with the Holding Company's normal payroll period, but
not less frequently than monthly.
(b) Bonus. In addition to the minimum salary payable to Executive
as provided in Section 3(a) above, Executive shall be entitled to receive, for
each full or partial calendar year during the Term hereof, a bonus which shall
be calculated and paid as provided in Exhibit A attached hereto.
(c) Stock Options. Upon execution hereof, the Holding Company
shall grant Executive options under the Holding Company's 1998 Stock Option Plan
to purchase an aggregate of 50,000 shares of the Holding Company's Common Stock
at the closing price per share of Modtech Common Stock on the Nasdaq National
Market System on September 28, 1998. These options will become exercisable to
purchase 10,000 of such shares upon the expiration of one full year of
continuous employment of Executive by the Holding Company from the date hereof,
and to purchase an additional 10,000 of such shares for each further year of
continuous employment, and, subject to the foregoing, will be exercisable at any
time after November 30, 2003. In addition to the foregoing, during the term of
this Agreement, Executive shall be a full participant in any and all of the
short and long-term incentive plans and equity compensation plans in which
senior officers of the Holding Company or its Subsidiaries participate that are
in effect on the date hereof or that may hereafter be adopted, with at least the
same reward opportunities, if any, that are provided to other senior officers of
the Holding Company and its Subsidiaries from time to time during the term of
this Agreement.
5. Benefits and Vacations.
(a) Benefits. Executive shall be entitled to participate in any
employee benefit plans, arrangements and perquisites substantially equivalent to
those in which Executive was participating or otherwise deriving benefit from
immediately prior to the beginning of the term of this Agreement, and the
Holding Company and its Subsidiaries will not, without Executive's prior written
consent, make any changes in such plans, arrangements or perquisites which would
materially adversely affect Executive's rights or benefits thereunder, except to
the extent that such changes are made applicable to all senior executive
employees of the Holding Company or its
-2-
<PAGE> 3
Subsidiaries eligible to participate in such plans, arrangements and perquisites
on a non-discriminatory basis. Without limiting the generality of the foregoing,
Executive shall be entitled to participate in or receive benefits under all
plans relating to, any pension plans, profit sharing plans, any non-qualified
deferred compensation plans and related "rabbi" trusts, life insurance plans,
disability benefit plans, vacation and holiday pay plans, medical, dental and
welfare plans, and other present or successor plans and practices of the Holding
Company and its Subsidiaries for which senior executive officers are eligible,
and to all payments and other benefits under any such plan or practice
subsequent to the term of this Agreement as a result of participation in such
plan or practice during the term of this Agreement.
(b) Vacations and Holidays. Executive shall be entitled to the
number of paid vacation days in each calendar year, and to compensation for
earned but unused vacation days, determined by the Holding Company from time to
time for its senior executive officers, but not less than four (4) weeks in each
year of the Term hereof. Executive shall also be entitled to all paid holidays
given by the Holding Company to its executives and key management employees.
6. Expenses. During the Term hereof, Executive shall be entitled to
receive prompt reimbursement of all reasonable expenses incurred by Executive
(in accordance with the policies and procedures from time to time adopted by the
Board of Directors of the Holding Company for its senior executive officers) in
performing the services contemplated hereunder, provided that Executive properly
accounts therefor in accordance with the Holding Company's policy.
7. Termination.
(a) Executive's employment hereunder shall terminate immediately
upon death.
(b) In the event that Executive shall be unable to perform the
services contemplated hereunder by reason of disability, illness or other
incapacity, such failure to so perform such duties shall not be grounds for
terminating the employment of Executive by the Holding Company; provided,
however, that the Holding Company may terminate Executive's employment hereunder
should the period of such incapacity exceed six (6) consecutive months
("Disability"). Any such termination shall not be considered to be for "Cause"
as defined in subparagraph (c) immediately below.
(c) Executive's employment hereunder may be terminated by the
Holding Company prior to the expiration of the Term, with or without Cause,
immediately upon delivery by the Holding Company of a written notice of
termination.
(d) For the purposes of this Agreement, "Cause" means (i) the
willful and continued failure by Executive to substantially perform Executive's
duties hereunder, other than any such failure resulting from Executive's
incapacity due to physical or mental illness, after a demand for substantial
performance is delivered to Executive by the Board of Directors of the Holding
Company (the "Board") which specifically identifies the manner in which the
Board believes that Executive has not substantially performed such duties and
Executive has not diligently and in good faith taken reasonable steps to comply
with such demand within 30 days of his receipt of the same,
-3-
<PAGE> 4
or (ii) the willful engaging by Executive in gross misconduct materially and
demonstrably injurious to the Holding Company. For purposes of this
subparagraph, no act, or failure to act, on Executive's part shall be considered
"willful" merely because it was the result of bad judgment or negligence;
rather, such act or failure to act must have been done, or omitted to have been
done, by Executive other than in good faith and without reasonable belief that
Executive's action or omission was in the best interests of the Holding Company.
Notwithstanding the foregoing, Executive's employment shall not be deemed to
have been terminated for "Cause" unless and until there shall have been
delivered to Executive a copy of a resolution duly adopted by the affirmative
vote of not less than three-quarters of the entire membership of the Board at a
meeting of the Board called and held for such purpose (after reasonable notice
to Executive and an opportunity for Executive, together with Executive's
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board Executive was guilty of conduct described above in clauses (i) or
(ii) of this subparagraph and specifying the particulars thereof in detail. In
the event that Executive is terminated for Cause, the Holding Company shall pay
Executive's salary through the date of termination, any bonuses which have been
earned by Executive through the date of termination after deducting any amounts
lawfully owing from Executive to the Holding Company, and shall thereafter have
no further obligation to Executive, except to the extent that Executive may be
entitled to exercise any of the options granted to Executive as contemplated in
Section 4(c) above or otherwise.
(e) Executive shall be entitled to terminate his employment with
the Holding Company hereunder for "Good Reason". For purposes of this Agreement,
any termination of employment under any one or more of the following
circumstances shall be for "Good Reason":
(i) Without Executive's express written consent, the
assignment to Executive of any duties inconsistent with Executive's
positions, duties, responsibilities and status with the Holding
Company, or a change in Executive's reporting responsibilities,
titles or offices as in effect upon the execution hereof, or any
removal of Executive from or any failure to re-elect Executive to
the Holding Company's Board of Directors or any other of
Executives's positions, except in connection with the termination of
Executive's employment for Cause, Disability or as a result of
death;
(ii) The reduction by the Holding Company in Executive's Base
Salary, as the same may thereafter be increased from time to time,
or the failure by the Holding Company to increase such Base Salary
each successive year, as specified in Section 4(a) hereof;
(iii) The failure by the Holding Company to continue
Executive's participation in the bonus and other compensation plans
and incentive plans specified in Section 4(b) hereof;
(iv) The failure by the Holding Company to continue
Executive's participation in any benefit plan, pension plan,
qualified retirement plan, life insurance plan, vacation plan,
holiday plan, car lease plan, medical expense, health and accident
plan or disability plan, or expense reimbursement arrangement
specified
-4-
<PAGE> 5
in Sections 5 and 6 hereof, or the taking of any action by the
Holding Company (prompt notice of which shall be provided to
Executive) which would adversely affect Executive's participation in
(including increasing Executive's costs of such participation), or
materially reduce Executive's benefits under, any of such plans, or
which would deprive Executive of any other fringe or personal
benefits under any of such plans; provided, however, that
notwithstanding the provisions of this Section 7(e)(iv), the Holding
Company's providing benefits of a type or amount different than as
provided for hereinabove shall not be deemed a violation of this
subparagraph if required by law;
(v) The relocation of the Holding Company's principal
executive offices to a location outside of Riverside County or
Orange County, California, or the requirement by the Holding Company
that Executive be based anywhere other than at the Holding Company's
principal executive offices or the location where Executive is based
at the time of execution hereof, except for required travel on the
Holding Company's business to an extent substantially consistent
with Executive's business travel obligations in effect immediately
prior to the execution hereof; or, in the event Executive consents
to any such relocation of the Holding Company's principal executive
offices or change in the location where Executive is based, the
failure by the Holding Company (A) to pay (or promptly reimburse
Executive for) all reasonable moving expenses incurred by Executive
relating to a change of Executive's principal residence in
connection with such relocation, and (B) to indemnify Executive
against any loss (defined as Executive's cost of terminating any
lease for such residence, if it is leased, or if Executive owns such
residence the difference between the actual sale price of such
residence and the higher of Executive's aggregate investment in such
residence or the fair market value of such residence as determined
by any real estate appraiser designated by Executive and reasonably
satisfactory to the Holding Company) realized in the lease
termination or sale of Executive's principal residence in connection
with any such change of residence, and (C) to reimburse Executive
for the amount of any federal, state and local income taxes for
which Executive becomes liable by a reason of Executive's receipt of
any amounts under this subparagraph;
(vi) Any purported termination of Executive's employment by
the Holding Company which is not effected pursuant to a Notice of
Termination satisfying the requirements of subparagraph 7(f) below;
or
(vii) a determination by Executive made in good faith that, as
a result of a detrimental change in circumstances significantly
affecting Executive's position, Executive is unable properly to
carry out all of the authorities, powers, functions, duties and
responsibilities attached to Executive's position and contemplated
by Section 3, and the situation is not remedied within 30 days after
receipt by the Holding Company of written notice from Executive of
such determination.
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(f) Any termination of Executive's employment by the Holding
Company for Disability or Cause, or by Executive for Good Reason, shall be
communicated by written Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon,
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated, and shall set forth the date upon which such termination is to become
effective ("Date of Termination").
8. Compensation on Certain Terminations. If Executive terminates
Executive's employment during the term of this Agreement for Good Reason or if
Executive is otherwise terminated except for Cause then:
(a) Severance Payment. Holding Company or its successor, shall pay
to Executive the two (2) times the average of his Base Salary and bonuses for
the two (2) preceding taxable years that Executive has been employed by the
Holding Company (predecessor or its successor) or such lesser number of years in
the event Executive shall have been employed with the Holding Company
(predecessor or its successor) less than two (2) years ("Severance Payment"). In
the event of Executive's death, the Severance Payment shall be made to his
estate or beneficiaries, as the case may be. The Severance Payment shall be made
in full in cash within 30 days following the Date of Termination. Executive is
not required to mitigate the amount of the Severance Payment by seeking other
employment or otherwise, nor shall any compensation earned by Executive in other
employment or otherwise reduce the amount of the Severance Payment. The
Severance Payment will NOT be reduced if the remaining term of this Agreement is
less than two years.
(b) Stock Options. All stock options, warrants and similar rights
relating to capital stock of the Holding Company held by Executive shall
immediately become fully vested and exercisable. The terms of such warrants,
options and rights shall be extended to the third anniversary of Executive's
termination of employment.
(c) Benefits. The Holding Company will cause to be continued life,
medical, dental and disability coverage substantially equivalent to the coverage
maintained by the Holding Company or its Subsidiaries for Executive prior to his
termination at no premium cost to the Executive. Such coverage shall cease upon
the expiration two years from the Date of Termination. Nothing in Section 8(a)
or 8(b) shall deprive Executive of any rights, payments, benefits or service
credit for benefits after termination of employment which were earned pursuant
to any provision of this Agreement or any plan or practice of the Holding
Company on or prior to such termination including, without limitation, any
pension or welfare benefits and any rights under the Holding Company's pension,
deferred compensation or stock option or other benefit plans.
If the Holding Company elects not to renew this Agreement following the
expiration of its then current term, it shall pay Executive on expiration of the
then current term a severance payment equal to one-half of the then current
annual Base Salary, plus one half of the most recently completed year's bonus.
In addition, the Holding Company will cause to be continued life, medical,
dental and disability coverage substantially equivalent to the coverage
maintained by the Holding
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Company or its Subsidiaries for Executive prior to his termination at no premium
cost to the Executive for a period of six months.
9. Indemnification. The Holding Company shall indemnify Executive to
the fullest extent permitted by the General Corporation Law of the State of
Delaware, as amended from time to time, for all amounts (including, without
limitation, judgments, fines, settlement payments, expenses and attorneys' fees)
incurred or paid by Executive in connection with any action, suit, investigation
or proceeding arising out of or relating to the performance by Executive of
services for, or the acting by Executive as a director, officer or employee of,
the Holding Company, or any subsidiary of the Holding Company or any other
Person at the Holding Company's request. Nothing in this Section 9 or elsewhere
in this Agreement is intended to prevent the Holding Company from indemnifying
Executive to any greater extent than is required by this Section 9.
10. Proprietary Information. Executive acknowledges that certain
technological and other information may from time to time be disclosed to
Executive by the Holding Company during the continuance hereof. Executive hereby
acknowledges that all such information and technology, whether currently
existing or hereafter developed by the Holding Company through or involving the
services and efforts of Executive hereunder, shall at all times consist of and
be preserved by Executive as valuable trade secrets and confidential information
which is proprietary to and owned exclusively by the Holding Company, and that
Executive does not have, and shall not have or hereafter acquire, any rights in
or to any of such information and technology, including without limitation any
patents, inventions, discoveries, know-how, trademarks or tradenames used or
adopted by the Holding Company in connection with the design, development,
manufacture, marketing, sale or installation of any products which at any time
during the continuation hereof may be offered and sold or licensed by the
Holding Company. Executive further warrants and agrees that he shall not at any
time, whether during the continuance of this Agreement or after its expiration
or earlier termination, whether by Executive or by the Holding Company, in any
manner or form, directly or indirectly, use, disclose, duplicate, license, sell,
reveal, divulge, publish or communicate any portion of any such information or
technology, nor use, disclose, duplicate, license, sell, reveal, divulge,
publish or communicate any other confidential information concerning the Holding
Company, or any customers or other products of the Holding Company, to any
person, firm or entity.
11. Competition. During the Term hereof, Executive shall not, without
the Holding Company's prior written consent, directly or indirectly engage in
any business activity, or have any interest in any person, firm or other entity
engaged in any business activity, in which the Holding Company at the time is
engaged or is planning to engage. During the Term hereof and for a period of
twenty-four (24) months thereafter, Executive shall not directly or indirectly:
(a) divert or take away or solicit or attempt to divert or take away any of the
Holding Company's customers, including without limitation those customers with
whom Executive became acquainted while retained by the Holding Company; (b)
employ, or knowingly permit any business entity controlled by Executive to
employ, any person who during the period of twelve (12) months immediately
preceding such time has been employed by the Holding Company; (c) solicit or
otherwise seek to induce any employee of the Holding Company to leave his or her
employment with the Holding Company; or (d) undertake planning for or
organization of any business activity that will injure the Holding
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Company's business, or conspire with employees of the Holding Company for the
purpose of organizing any such injurious business activity.
12. General Provisions.
(a) Any notice, request, demand or other communication required or
permitted hereunder shall be deemed to be properly given when personally served
in writing, when deposited in the United States mail, postage prepaid, or when
communicated to a public telegraph Holding Company for transmittal, addressed to
the Holding Company or Executive at their respective last known address. Either
party may change its address by written notice given in accordance with this
subparagraph.
(b) This Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective executors, administrators,
successors and assigns; provided, however, that Executive may not assign any or
all of Executive's rights or duties hereunder without the prior written consent
of the Holding Company.
(c) This Agreement is made and entered into, is to be performed
primarily within, and shall be governed by and construed in all respects in
accordance with the laws of the State of California.
(d) Captions and Paragraph headings used herein are for
convenience only and are not a part of this Agreement and shall not be used in
construing it.
(e) Should any provision of this Agreement for any reason be
declared invalid, void, or unenforceable by a court of competent jurisdiction,
the validity and binding effect of any remaining portions shall not be affected,
and the remaining portions of this Agreement shall remain in full force and
effect as if this Agreement had been executed with said provision eliminated.
(f) The Holding Company shall indemnify Executive to the fullest
extent permitted by applicable law with respect to any claims arising from the
performance by Executive of his duties hereunder during the Term of this
Agreement.
(g) This Agreement contains the entire agreement of the parties,
and supersedes any and all other agreements, either oral or in writing, between
the parties hereto with respect to the employment of Executive by the Holding
Company. Each party to this Agreement acknowledges that no representations,
inducements, promises or agreements, oral or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not embodied herein or
therein, and that no other agreement, statement or promise not contained herein
or therein shall be relied upon or be valid or binding. This Agreement may not
be modified or amended by oral agreements, but only by an agreement in writing
signed by the Holding Company on the one hand, and by Executive on the other
hand.
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(h) In the event of any litigation between Executive and the
Holding Company concerning the rights or obligations of any party under this
Agreement, the non-prevailing party shall pay the reasonable costs and expenses,
including attorneys' fees, of the prevailing party in connection therewith.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
"Executive"
_________________________________________
Evan M. Gruber
Modtech Holdings, Inc.
By: _____________________________________
Patrick Van Den Bossche, President
By: _____________________________________
, Secretary
Modtech, Inc.
By: _____________________________________
Evan Gruber, CEO
By: _____________________________________
James D. Goldenetz, Secretary
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EXHIBIT A
BONUS PLAN
The annual incentive bonus plan shall be the same as the annual bonus plan
currently utilized by Modtech, which is described in the Memorandum to
Compensation Committee attached hereto as Schedule 1. For the first year under
this Agreement, from the stock option component of the bonus plan 50,000 shares
have already been granted pursuant to Section 4(c) of the Employment Agreement.
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as
of ______________ ___, 1998, by and between MODTECH HOLDINGS, INC., a Delaware
corporation (the "Holding Company"), and Patrick Van Den Bossche, an individual
residing in the State of California ("Executive").
WHEREAS, the Holding Company desires to retain the services of Executive
on the terms and conditions herein provided, and Executive is willing to provide
such services on such terms and conditions;
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants of the parties contained herein, the parties agree as follows:
1. Effective Date. This Agreement shall be effective as of the closings
of the mergers contemplated in that Agreement and Plan of Reorganization and
Merger between Modtech, Inc. and SPI Holdings, Inc., a Colorado corporation,
dated September 28, 1998 (the "Merger Closings"). payment is guaranteed by the
Holding Company.
2. Term. This Agreement shall continue in full force and effect for a
period which shall commence on the date of the Merger Closings and shall
continue until December 31, 2003 (the "Term"), unless sooner terminated as
hereinafter provided or extended by the mutual agreement of the parties. On that
date, and each anniversary thereafter, this Agreement shall automatically be
renewed for a period of one year, unless either party shall have given the other
prior written notice of their intent not to renew this Agreement.
3. Employment. Executive shall serve as the President of the Holding
Company and shall have such responsibilities, duties and authority customarily
associated with such position, including day-to-day responsibility for the
management of the Holding Company's affairs and operations, and oversight of the
affairs and operations of its direct and indirect subsidiaries (the
"Subsidiaries"), subject to the supervision of the Chief Executive Officer.
Executive shall devote such of his working time and effort to the business and
affairs of the Holding Company and its Subsidiaries as may reasonably be
required of him in the discharge of the duties and responsibilities of such
office. Executive shall at all times perform his duties and obligations
faithfully and diligently and to the best of Executive's ability.
4. Compensation.
(a) Base Salary. As compensation for the services provided by
Executive hereunder, during the Term of this Agreement, the Holding Company
shall pay Executive an annual salary of not less than $250,000 per year ("Base
Salary"). Executive's salary shall be reviewed by the Holding Company's Board of
Directors from time to time at its discretion but not less often than annually,
and Executive shall receive such salary increases as the Holding Company's Board
of Directors shall determine; provided that Executive's annual salary payable
for each ensuing twelve
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(12) month period shall in all events be increased at the end of each succeeding
twelve (12) month period at a rate equal to the increase, if any, in the
Consumer Price Index for Urban Wage Earners and Clerical Workers (Los
Angeles-Long Beach-Anaheim), as published by the Bureau of Labor Statistics of
the U.S. Department of Labor, during the preceding twelve (12) months, plus
three percent (3%). All such salary shall be payable in equal installments in
conformity with the Holding Company's normal payroll period, but not less
frequently than monthly.
(b) Bonus. In addition to the minimum salary payable to Executive
as provided in Section 3(a) above, Executive shall be entitled to receive, for
each full or partial calendar year during the Term hereof, a bonus which shall
be calculated and paid as provided in Exhibit A attached hereto.
5. Benefits and Vacations.
(a) Benefits. Executive shall be entitled to participate in any
employee benefit plans, arrangements and perquisites substantially equivalent to
those in which Executive was participating or otherwise deriving benefit from
immediately prior to the beginning of the term of this Agreement, and the
Holding Company and its Subsidiaries will not, without Executive's prior written
consent, make any changes in such plans, arrangements or perquisites which would
materially adversely affect Executive's rights or benefits thereunder, except to
the extent that such changes are made applicable to all senior executive
employees of the Holding Company or its Subsidiaries eligible to participate in
such plans, arrangements and perquisites on a non-discriminatory basis. Without
limiting the generality of the foregoing, Executive shall be entitled to
participate in or receive benefits under all plans relating to, any pension
plans, profit sharing plans, any non-qualified deferred compensation plans and
related "rabbi" trusts, life insurance plans, disability benefit plans, vacation
and holiday pay plans, medical, dental and welfare plans, and other present or
successor plans and practices of the Holding Company and its Subsidiaries for
which senior executive officers are eligible, and to all payments and other
benefits under any such plan or practice subsequent to the term of this
Agreement as a result of participation in such plan or practice during the term
of this Agreement.
(b) Vacations and Holidays. Executive shall be entitled to the
number of paid vacation days in each calendar year, and to compensation for
earned but unused vacation days, determined by the Holding Company from time to
time for its senior executive officers, but not less than four (4) weeks in each
year of the Term hereof. Executive shall also be entitled to all paid holidays
given by the Holding Company to its executives and key management employees.
6. Expenses. During the Term hereof, Executive shall be entitled to
receive prompt reimbursement of all reasonable expenses incurred by Executive
(in accordance with the policies and procedures from time to time adopted by the
Board of Directors of the Holding Company for its senior executive officers) in
performing the services contemplated hereunder, provided that Executive properly
accounts therefor in accordance with the Holding Company's policy.
7. Termination.
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(a) Executive's employment hereunder shall terminate immediately
upon death.
(b) In the event that Executive shall be unable to perform the
services contemplated hereunder by reason of disability, illness or other
incapacity, such failure to so perform such duties shall not be grounds for
terminating the employment of Executive by the Holding Company; provided,
however, that the Holding Company may terminate Executive's employment hereunder
should the period of such incapacity exceed six (6) consecutive months
("Disability"). Any such termination shall not be considered to be for "Cause"
as defined in subparagraph (c) immediately below.
(c) Executive's employment hereunder may be terminated by the
Holding Company prior to the expiration of the Term, with or without Cause,
immediately upon delivery by the Holding Company of a written notice of
termination.
(d) For the purposes of this Agreement, "Cause" means (i) the
willful and continued failure by Executive to substantially perform Executive's
duties hereunder, other than any such failure resulting from Executive's
incapacity due to physical or mental illness, after a demand for substantial
performance is delivered to Executive by the Board of Directors of the Holding
Company (the "Board") which specifically identifies the manner in which the
Board believes that Executive has not substantially performed such duties and
Executive has not diligently and in good faith taken reasonable steps to comply
with such demand within 30 days of his receipt of the same, or (ii) the willful
engaging by Executive in gross misconduct materially and demonstrably injurious
to the Holding Company. For purposes of this subparagraph, no act, or failure to
act, on Executive's part shall be considered "willful" merely because it was the
result of bad judgment or negligence; rather, such act or failure to act must
have been done, or omitted to have been done, by Executive other than in good
faith and without reasonable belief that Executive's action or omission was in
the best interests of the Holding Company. Notwithstanding the foregoing,
Executive's employment shall not be deemed to have been terminated for "Cause"
unless and until there shall have been delivered to Executive a copy of a
resolution duly adopted by the affirmative vote of not less than three-quarters
of the entire membership of the Board at a meeting of the Board called and held
for such purpose (after reasonable notice to Executive and an opportunity for
Executive, together with Executive's counsel, to be heard before the Board),
finding that in the good faith opinion of the Board Executive was guilty of
conduct described above in clauses (i) or (ii) of this subparagraph and
specifying the particulars thereof in detail. In the event that Executive is
terminated for Cause, the Holding Company shall pay Executive's salary through
the date of termination, any bonuses which have been earned by Executive through
the date of termination after deducting any amounts lawfully owing from
Executive to the Holding Company, and shall thereafter have no further
obligation to Executive, except to the extent that Executive may be entitled to
exercise any of the options granted to Executive as contemplated in Section 4(c)
above or otherwise.
(e) Executive shall be entitled to terminate his employment with
the Holding Company hereunder for "Good Reason". For purposes of this Agreement,
any termination of employment under any one or more of the following
circumstances shall be for "Good Reason":
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(i) Without Executive's express written consent, the
assignment to Executive of any duties inconsistent with Executive's
positions, duties, responsibilities and status with the Holding
Company, or a change in Executive's reporting responsibilities,
titles or offices as in effect upon the execution hereof, or any
removal of Executive from or any failure to re-elect Executive to
the Holding Company's Board of Directors or any other of
Executives's positions, except in connection with the termination of
Executive's employment for Cause, Disability or as a result of
death;
(ii) The reduction by the Holding Company in Executive's Base
Salary, as the same may thereafter be increased from time to time,
or the failure by the Holding Company to increase such Base Salary
each successive year, as specified in Section 4(a) hereof;
(iii) The failure by the Holding Company to continue
Executive's participation in the bonus and other compensation plans
and incentive plans specified in Section 4(b) hereof;
(iv) The failure by the Holding Company to continue
Executive's participation in any benefit plan, pension plan,
qualified retirement plan, life insurance plan, vacation plan,
holiday plan, car lease plan, medical expense, health and accident
plan or disability plan, or expense reimbursement arrangement
specified in Sections 5 and 6 hereof, or the taking of any action by
the Holding Company (prompt notice of which shall be provided to
Executive) which would adversely affect Executive's participation in
(including increasing Executive's costs of such participation), or
materially reduce Executive's benefits under, any of such plans, or
which would deprive Executive of any other fringe or personal
benefits under any of such plans; provided, however, that
notwithstanding the provisions of this Section 7(e)(iv), the Holding
Company's providing benefits of a type or amount different than as
provided for hereinabove shall not be deemed a violation of this
subparagraph if required by law;
(v) The relocation of the Holding Company's principal
executive offices to a location outside of Riverside County or
Orange County, California, or the requirement by the Holding Company
that Executive be based anywhere other than at the Holding Company's
principal executive offices or the location where Executive is based
at the time of execution hereof, except for required travel on the
Holding Company's business to an extent substantially consistent
with Executive's business travel obligations in effect immediately
prior to the execution hereof; or, in the event Executive consents
to any such relocation of the Holding Company's principal executive
offices or change in the location where Executive is based, the
failure by the Holding Company (A) to pay (or promptly reimburse
Executive for) all reasonable moving expenses incurred by Executive
relating to a change of Executive's principal residence in
connection with such relocation, and (B) to
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indemnify Executive against any loss (defined as Executive's cost of
terminating any lease for such residence, if it is leased, or if
Executive owns such residence the difference between the actual sale
price of such residence and the higher of Executive's aggregate
investment in such residence or the fair market value of such
residence as determined by any real estate appraiser designated by
Executive and reasonably satisfactory to the Holding Company)
realized in the lease termination or sale of Executive's principal
residence in connection with any such change of residence, and (C)
to reimburse Executive for the amount of any federal, state and
local income taxes for which Executive becomes liable by a reason of
Executive's receipt of any amounts under this subparagraph;
(vi) Any purported termination of Executive's employment by
the Holding Company which is not effected pursuant to a Notice of
Termination satisfying the requirements of subparagraph 7(f) below;
or
(vii) a determination by Executive made in good faith that, as
a result of a detrimental change in circumstances significantly
affecting Executive's position, Executive is unable properly to
carry out all of the authorities, powers, functions, duties and
responsibilities attached to Executive's position and contemplated
by Section 3, and the situation is not remedied within 30 days after
receipt by the Holding Company of written notice from Executive of
such determination.
(f) Any termination of Executive's employment by the Holding
Company for Disability or Cause, or by Executive for Good Reason, shall be
communicated by written Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon,
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated, and shall set forth the date upon which such termination is to become
effective ("Date of Termination").
8. Compensation on Certain Terminations. If Executive terminates
Executive's employment during the term of this Agreement for Good Reason or if
Executive is otherwise terminated except for Cause then:
(a) Severance Payment. Holding Company or its successor, shall pay
to Executive the two (2) times the average of his Base Salary and bonuses for
the two (2) preceding taxable years that Executive has been employed by the
Holding Company (predecessor or its successor) or such lesser number of years in
the event Executive shall have been employed with the Holding Company
(predecessor or its successor) less than two (2) years ("Severance Payment"). In
the event of Executive's death, the Severance Payment shall be made to his
estate or beneficiaries, as the case may be. The Severance Payment shall be made
in full in cash within 30 days following the Date of Termination. Executive is
not required to mitigate the amount of the Severance Payment by seeking other
employment or otherwise, nor shall any compensation earned by Executive in other
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<PAGE> 6
employment or otherwise reduce the amount of the Severance Payment. The
Severance Payment will NOT be reduced if the remaining term of this Agreement is
less than two years.
(b) Stock Options. All stock options, warrants and similar rights
relating to capital stock of the Holding Company held by Executive shall
immediately become fully vested and exercisable. The terms of such warrants,
options and rights shall be extended to the third anniversary of Executive's
termination of employment.
(c) Benefits. The Holding Company will cause to be continued life,
medical, dental and disability coverage substantially equivalent to the coverage
maintained by the Holding Company or its Subsidiaries for Executive prior to his
termination at no premium cost to the Executive. Such coverage shall cease upon
the expiration two years from the Date of Termination. Nothing in Section 8(a)
or 8(b) shall deprive Executive of any rights, payments, benefits or service
credit for benefits after termination of employment which were earned pursuant
to any provision of this Agreement or any plan or practice of the Holding
Company on or prior to such termination including, without limitation, any
pension or welfare benefits and any rights under the Holding Company's pension,
deferred compensation or stock option or other benefit plans.
If the Holding Company elects not to renew this Agreement following the
expiration of its then current term, it shall pay Executive on expiration of the
then current term a severance payment equal to one-half of the then current
annual Base Salary, plus one half of the most recently completed year's bonus.
In addition, the Holding Company will cause to be continued life, medical,
dental and disability coverage substantially equivalent to the coverage
maintained by the Holding Company or its Subsidiaries for Executive prior to his
termination at no premium cost to the Executive for a period of six months.
9. Indemnification. The Holding Company shall indemnify Executive to
the fullest extent permitted by the General Corporation Law of the State of
Delaware, as amended from time to time, for all amounts (including, without
limitation, judgments, fines, settlement payments, expenses and attorneys' fees)
incurred or paid by Executive in connection with any action, suit, investigation
or proceeding arising out of or relating to the performance by Executive of
services for, or the acting by Executive as a director, officer or employee of,
the Holding Company, or any subsidiary of the Holding Company or any other
Person at the Holding Company's request. Nothing in this Section 9 or elsewhere
in this Agreement is intended to prevent the Holding Company from indemnifying
Executive to any greater extent than is required by this Section 9.
10. Proprietary Information. Executive acknowledges that certain
technological and other information may from time to time be disclosed to
Executive by the Holding Company during the continuance hereof. Executive hereby
acknowledges that all such information and technology, whether currently
existing or hereafter developed by the Holding Company through or involving the
services and efforts of Executive hereunder, shall at all times consist of and
be preserved by Executive as valuable trade secrets and confidential information
which is proprietary to and owned exclusively by the Holding Company, and that
Executive does not have, and shall not have or hereafter acquire, any rights in
or to any of such information and technology, including without
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limitation any patents, inventions, discoveries, know-how, trademarks or
tradenames used or adopted by the Holding Company in connection with the design,
development, manufacture, marketing, sale or installation of any products which
at any time during the continuation hereof may be offered and sold or licensed
by the Holding Company. Executive further warrants and agrees that he shall not
at any time, whether during the continuance of this Agreement or after its
expiration or earlier termination, whether by Executive or by the Holding
Company, in any manner or form, directly or indirectly, use, disclose,
duplicate, license, sell, reveal, divulge, publish or communicate any portion of
any such information or technology, nor use, disclose, duplicate, license, sell,
reveal, divulge, publish or communicate any other confidential information
concerning the Holding Company, or any customers or other products of the
Holding Company, to any person, firm or entity.
11. Competition. During the Term hereof, Executive shall not, without
the Holding Company's prior written consent, directly or indirectly engage in
any business activity, or have any interest in any person, firm or other entity
engaged in any business activity, in which the Holding Company at the time is
engaged or is planning to engage. During the Term hereof and for a period of
twenty-four (24) months thereafter, Executive shall not directly or indirectly:
(a) divert or take away or solicit or attempt to divert or take away any of the
Holding Company's customers, including without limitation those customers with
whom Executive became acquainted while retained by the Holding Company; (b)
employ, or knowingly permit any business entity controlled by Executive to
employ, any person who during the period of twelve (12) months immediately
preceding such time has been employed by the Holding Company; (c) solicit or
otherwise seek to induce any employee of the Holding Company to leave his or her
employment with the Holding Company; or (d) undertake planning for or
organization of any business activity that will injure the Holding Company's
business, or conspire with employees of the Holding Company for the purpose of
organizing any such injurious business activity.
12. General Provisions.
(a) Any notice, request, demand or other communication required or
permitted hereunder shall be deemed to be properly given when personally served
in writing, when deposited in the United States mail, postage prepaid, or when
communicated to a public telegraph Holding Company for transmittal, addressed to
the Holding Company or Executive at their respective last known address. Either
party may change its address by written notice given in accordance with this
subparagraph.
(b) This Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective executors, administrators,
successors and assigns; provided, however, that Executive may not assign any or
all of Executive's rights or duties hereunder without the prior written consent
of the Holding Company.
(c) This Agreement is made and entered into, is to be performed
primarily within, and shall be governed by and construed in all respects in
accordance with the laws of the State of California.
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(d) Captions and Paragraph headings used herein are for
convenience only and are not a part of this Agreement and shall not be used in
construing it.
(e) Should any provision of this Agreement for any reason be
declared invalid, void, or unenforceable by a court of competent jurisdiction,
the validity and binding effect of any remaining portions shall not be affected,
and the remaining portions of this Agreement shall remain in full force and
effect as if this Agreement had been executed with said provision eliminated.
(f) The Holding Company shall indemnify Executive to the fullest
extent permitted by applicable law with respect to any claims arising from the
performance by Executive of his duties hereunder during the Term of this
Agreement.
(g) This Agreement contains the entire agreement of the parties,
and supersedes any and all other agreements, either oral or in writing, between
the parties hereto with respect to the employment of Executive by the Holding
Company. Each party to this Agreement acknowledges that no representations,
inducements, promises or agreements, oral or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not embodied herein or
therein, and that no other agreement, statement or promise not contained herein
or therein shall be relied upon or be valid or binding. This Agreement may not
be modified or amended by oral agreements, but only by an agreement in writing
signed by the Holding Company on the one hand, and by Executive on the other
hand.
(h) In the event of any litigation between Executive and the
Holding Company concerning the rights or obligations of any party under this
Agreement, the non-prevailing party shall pay the reasonable costs and expenses,
including attorneys' fees, of the prevailing party in connection therewith.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
"Executive"
______________________________________________
Patrick Van Den Bossche
Modtech Holdings, Inc.
By: __________________________________________
Evan M. Gruber, Chief Executive Officer
By: __________________________________________
Michael G. Rhodes, Chief Financial Officer
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<PAGE> 9
EXHIBIT A
BONUS PLAN
The annual incentive bonus plan shall be the same as the annual bonus plan
currently utilized by Modtech, which is described in the Memorandum to
Compensation Committee attached hereto as Schedule 1.
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as
of ______________ ___, 1998, by and between MODTECH HOLDINGS, INC., a Delaware
corporation (the "Holding Company"), and Michael G. Rhodes, an individual
residing in the State of California ("Executive").
WHEREAS, the Holding Company desires to retain the services of Executive
on the terms and conditions herein provided, and Executive is willing to provide
such services on such terms and conditions;
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants of the parties contained herein, the parties agree as follows:
1. Effective Date. This Agreement shall be effective as of the closings
of the mergers contemplated in that Agreement and Plan of Reorganization and
Merger between Modtech, Inc. and SPI Holdings, Inc., a Colorado corporation,
dated September 28, 1998 (the "Merger Closings"). payment is guaranteed by the
Holding Company.
2. Term. This Agreement shall continue in full force and effect for a
period which shall commence on the date of the Merger Closings and shall
continue until December 31, 2003 (the "Term"), unless sooner terminated as
hereinafter provided or extended by the mutual agreement of the parties. On that
date, and each anniversary thereafter, this Agreement shall automatically be
renewed for a period of one year, unless either party shall have given the other
prior written notice of their intent not to renew this Agreement.
3. Employment. Executive shall serve as the Chief Operating Officer and
Chief Financial Officer of the Holding Company and shall have such
responsibilities, duties and authority customarily associated with such
position, including day-to-day responsibility for the management of the Holding
Company's financial affairs and operations, and oversight of the financial
affairs and operations of its direct and indirect subsidiaries (the
"Subsidiaries"), subject to the supervision of the Chief Executive Officer and
the President. Executive shall devote such of his working time and effort to the
business and affairs of the Holding Company and its Subsidiaries as may
reasonably be required of him in the discharge of the duties and
responsibilities of such office. Executive shall at all times perform his duties
and obligations faithfully and diligently and to the best of Executive's
ability.
4. Compensation.
(a) Base Salary. As compensation for the services provided by
Executive hereunder, during the Term of this Agreement, the Holding Company
shall pay Executive an annual salary of not less than $200,000 per year ("Base
Salary"). Executive's salary shall be reviewed by the Holding Company's Board of
Directors from time to time at its discretion but not less often than annually,
and Executive shall receive such salary increases as the Holding Company's Board
of Directors shall determine; provided that Executive's annual salary payable
for each ensuing twelve
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<PAGE> 2
(12) month period shall in all events be increased at the end of each succeeding
twelve (12) month period at a rate equal to the increase, if any, in the
Consumer Price Index for Urban Wage Earners and Clerical Workers (Los
Angeles-Long Beach-Anaheim), as published by the Bureau of Labor Statistics of
the U.S. Department of Labor, during the preceding twelve (12) months, plus
three percent (3%). All such salary shall be payable in equal installments in
conformity with the Holding Company's normal payroll period, but not less
frequently than monthly.
(b) Bonus. In addition to the minimum salary payable to Executive
as provided in Section 3(a) above, Executive shall be entitled to receive, for
each full or partial calendar year during the Term hereof, a bonus which shall
be calculated and paid as provided in Exhibit A attached hereto.
5. Benefits and Vacations.
(a) Benefits. Executive shall be entitled to participate in any
employee benefit plans, arrangements and perquisites substantially equivalent to
those in which Executive was participating or otherwise deriving benefit from
immediately prior to the beginning of the term of this Agreement, and the
Holding Company and its Subsidiaries will not, without Executive's prior written
consent, make any changes in such plans, arrangements or perquisites which would
materially adversely affect Executive's rights or benefits thereunder, except to
the extent that such changes are made applicable to all senior executive
employees of the Holding Company or its Subsidiaries eligible to participate in
such plans, arrangements and perquisites on a non-discriminatory basis. Without
limiting the generality of the foregoing, Executive shall be entitled to
participate in or receive benefits under all plans relating to, any pension
plans, profit sharing plans, any non-qualified deferred compensation plans and
related "rabbi" trusts, life insurance plans, disability benefit plans, vacation
and holiday pay plans, medical, dental and welfare plans, and other present or
successor plans and practices of the Holding Company and its Subsidiaries for
which senior executive officers are eligible, and to all payments and other
benefits under any such plan or practice subsequent to the term of this
Agreement as a result of participation in such plan or practice during the term
of this Agreement.
(b) Vacations and Holidays. Executive shall be entitled to the
number of paid vacation days in each calendar year, and to compensation for
earned but unused vacation days, determined by the Holding Company from time to
time for its senior executive officers, but not less than four (4) weeks in each
year of the Term hereof. Executive shall also be entitled to all paid holidays
given by the Holding Company to its executives and key management employees.
6. Expenses. During the Term hereof, Executive shall be entitled to
receive prompt reimbursement of all reasonable expenses incurred by Executive
(in accordance with the policies and procedures from time to time adopted by the
Board of Directors of the Holding Company for its senior executive officers) in
performing the services contemplated hereunder, provided that Executive properly
accounts therefor in accordance with the Holding Company's policy.
7. Termination.
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<PAGE> 3
(a) Executive's employment hereunder shall terminate immediately
upon death.
(b) In the event that Executive shall be unable to perform the
services contemplated hereunder by reason of disability, illness or other
incapacity, such failure to so perform such duties shall not be grounds for
terminating the employment of Executive by the Holding Company; provided,
however, that the Holding Company may terminate Executive's employment hereunder
should the period of such incapacity exceed six (6) consecutive months
("Disability"). Any such termination shall not be considered to be for "Cause"
as defined in subparagraph (c) immediately below.
(c) Executive's employment hereunder may be terminated by the
Holding Company prior to the expiration of the Term, with or without Cause,
immediately upon delivery by the Holding Company of a written notice of
termination.
(d) For the purposes of this Agreement, "Cause" means (i) the
willful and continued failure by Executive to substantially perform Executive's
duties hereunder, other than any such failure resulting from Executive's
incapacity due to physical or mental illness, after a demand for substantial
performance is delivered to Executive by the Board of Directors of the Holding
Company (the "Board") which specifically identifies the manner in which the
Board believes that Executive has not substantially performed such duties and
Executive has not diligently and in good faith taken reasonable steps to comply
with such demand within 30 days of his receipt of the same, or (ii) the willful
engaging by Executive in gross misconduct materially and demonstrably injurious
to the Holding Company. For purposes of this subparagraph, no act, or failure to
act, on Executive's part shall be considered "willful" merely because it was the
result of bad judgment or negligence; rather, such act or failure to act must
have been done, or omitted to have been done, by Executive other than in good
faith and without reasonable belief that Executive's action or omission was in
the best interests of the Holding Company. Notwithstanding the foregoing,
Executive's employment shall not be deemed to have been terminated for "Cause"
unless and until there shall have been delivered to Executive a copy of a
resolution duly adopted by the affirmative vote of not less than three-quarters
of the entire membership of the Board at a meeting of the Board called and held
for such purpose (after reasonable notice to Executive and an opportunity for
Executive, together with Executive's counsel, to be heard before the Board),
finding that in the good faith opinion of the Board Executive was guilty of
conduct described above in clauses (i) or (ii) of this subparagraph and
specifying the particulars thereof in detail. In the event that Executive is
terminated for Cause, the Holding Company shall pay Executive's salary through
the date of termination, any bonuses which have been earned by Executive through
the date of termination after deducting any amounts lawfully owing from
Executive to the Holding Company, and shall thereafter have no further
obligation to Executive, except to the extent that Executive may be entitled to
exercise any of the options granted to Executive as contemplated in Section 4(c)
above or otherwise.
(e) Executive shall be entitled to terminate his employment with
the Holding Company hereunder for "Good Reason". For purposes of this Agreement,
any termination of employment under any one or more of the following
circumstances shall be for "Good Reason":
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<PAGE> 4
(i) Without Executive's express written consent, the
assignment to Executive of any duties inconsistent with Executive's
positions, duties, responsibilities and status with the Holding
Company, or a change in Executive's reporting responsibilities,
titles or offices as in effect upon the execution hereof, or any
removal of Executive from or any failure to re-elect Executive to
the Holding Company's Board of Directors or any other of
Executives's positions, except in connection with the termination of
Executive's employment for Cause, Disability or as a result of
death;
(ii) The reduction by the Holding Company in Executive's Base
Salary, as the same may thereafter be increased from time to time,
or the failure by the Holding Company to increase such Base Salary
each successive year, as specified in Section 4(a) hereof;
(iii) The failure by the Holding Company to continue
Executive's participation in the bonus and other compensation plans
and incentive plans specified in Section 4(b) hereof;
(iv) The failure by the Holding Company to continue
Executive's participation in any benefit plan, pension plan,
qualified retirement plan, life insurance plan, vacation plan,
holiday plan, car lease plan, medical expense, health and accident
plan or disability plan, or expense reimbursement arrangement
specified in Sections 5 and 6 hereof, or the taking of any action by
the Holding Company (prompt notice of which shall be provided to
Executive) which would adversely affect Executive's participation in
(including increasing Executive's costs of such participation), or
materially reduce Executive's benefits under, any of such plans, or
which would deprive Executive of any other fringe or personal
benefits under any of such plans; provided, however, that
notwithstanding the provisions of this Section 7(e)(iv), the Holding
Company's providing benefits of a type or amount different than as
provided for hereinabove shall not be deemed a violation of this
subparagraph if required by law;
(v) The relocation of the Holding Company's principal
executive offices to a location outside of Riverside County or
Orange County, California, or the requirement by the Holding Company
that Executive be based anywhere other than at the Holding Company's
principal executive offices or the location where Executive is based
at the time of execution hereof, except for required travel on the
Holding Company's business to an extent substantially consistent
with Executive's business travel obligations in effect immediately
prior to the execution hereof; or, in the event Executive consents
to any such relocation of the Holding Company's principal executive
offices or change in the location where Executive is based, the
failure by the Holding Company (A) to pay (or promptly reimburse
Executive for) all reasonable moving expenses incurred by Executive
relating to a change of Executive's principal residence in
connection with such relocation, and (B) to
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<PAGE> 5
indemnify Executive against any loss (defined as Executive's cost of
terminating any lease for such residence, if it is leased, or if
Executive owns such residence the difference between the actual sale
price of such residence and the higher of Executive's aggregate
investment in such residence or the fair market value of such
residence as determined by any real estate appraiser designated by
Executive and reasonably satisfactory to the Holding Company)
realized in the lease termination or sale of Executive's principal
residence in connection with any such change of residence, and (C)
to reimburse Executive for the amount of any federal, state and
local income taxes for which Executive becomes liable by a reason of
Executive's receipt of any amounts under this subparagraph;
(vi) Any purported termination of Executive's employment by
the Holding Company which is not effected pursuant to a Notice of
Termination satisfying the requirements of subparagraph 7(f) below;
or
(vii) a determination by Executive made in good faith that, as
a result of a detrimental change in circumstances significantly
affecting Executive's position, Executive is unable properly to
carry out all of the authorities, powers, functions, duties and
responsibilities attached to Executive's position and contemplated
by Section 3, and the situation is not remedied within 30 days after
receipt by the Holding Company of written notice from Executive of
such determination.
(f) Any termination of Executive's employment by the Holding
Company for Disability or Cause, or by Executive for Good Reason, shall be
communicated by written Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon,
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated, and shall set forth the date upon which such termination is to become
effective ("Date of Termination").
8. Compensation on Certain Terminations. If Executive terminates
Executive's employment during the term of this Agreement for Good Reason or if
Executive is otherwise terminated except for Cause then:
(a) Severance Payment. Holding Company or its successor, shall pay
to Executive the two (2) times the average of his Base Salary and bonuses for
the two (2) preceding taxable years that Executive has been employed by the
Holding Company (predecessor or its successor) or such lesser number of years in
the event Executive shall have been employed with the Holding Company
(predecessor or its successor) less than two (2) years ("Severance Payment"). In
the event of Executive's death, the Severance Payment shall be made to his
estate or beneficiaries, as the case may be. The Severance Payment shall be made
in full in cash within 30 days following the Date of Termination. Executive is
not required to mitigate the amount of the Severance Payment by seeking other
employment or otherwise, nor shall any compensation earned by Executive in other
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<PAGE> 6
employment or otherwise reduce the amount of the Severance Payment. The
Severance Payment will NOT be reduced if the remaining term of this Agreement is
less than two years.
(b) Stock Options. All stock options, warrants and similar rights
relating to capital stock of the Holding Company held by Executive shall
immediately become fully vested and exercisable. The terms of such warrants,
options and rights shall be extended to the third anniversary of Executive's
termination of employment.
(c) Benefits. The Holding Company will cause to be continued life,
medical, dental and disability coverage substantially equivalent to the coverage
maintained by the Holding Company or its Subsidiaries for Executive prior to his
termination at no premium cost to the Executive. Such coverage shall cease upon
the expiration two years from the Date of Termination. Nothing in Section 8(a)
or 8(b) shall deprive Executive of any rights, payments, benefits or service
credit for benefits after termination of employment which were earned pursuant
to any provision of this Agreement or any plan or practice of the Holding
Company on or prior to such termination including, without limitation, any
pension or welfare benefits and any rights under the Holding Company's pension,
deferred compensation or stock option or other benefit plans.
If the Holding Company elects not to renew this Agreement following the
expiration of its then current term, it shall pay Executive on expiration of the
then current term a severance payment equal to one-half of the then current
annual Base Salary, plus one half of the most recently completed year's bonus.
In addition, the Holding Company will cause to be continued life, medical,
dental and disability coverage substantially equivalent to the coverage
maintained by the Holding Company or its Subsidiaries for Executive prior to his
termination at no premium cost to the Executive for a period of six months.
9. Indemnification. The Holding Company shall indemnify Executive to
the fullest extent permitted by the General Corporation Law of the State of
Delaware, as amended from time to time, for all amounts (including, without
limitation, judgments, fines, settlement payments, expenses and attorneys' fees)
incurred or paid by Executive in connection with any action, suit, investigation
or proceeding arising out of or relating to the performance by Executive of
services for, or the acting by Executive as a director, officer or employee of,
the Holding Company, or any subsidiary of the Holding Company or any other
Person at the Holding Company's request. Nothing in this Section 9 or elsewhere
in this Agreement is intended to prevent the Holding Company from indemnifying
Executive to any greater extent than is required by this Section 9.
10. Proprietary Information. Executive acknowledges that certain
technological and other information may from time to time be disclosed to
Executive by the Holding Company during the continuance hereof. Executive hereby
acknowledges that all such information and technology, whether currently
existing or hereafter developed by the Holding Company through or involving the
services and efforts of Executive hereunder, shall at all times consist of and
be preserved by Executive as valuable trade secrets and confidential information
which is proprietary to and owned exclusively by the Holding Company, and that
Executive does not have, and shall not have or hereafter acquire, any rights in
or to any of such information and technology, including without
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<PAGE> 7
limitation any patents, inventions, discoveries, know-how, trademarks or
tradenames used or adopted by the Holding Company in connection with the design,
development, manufacture, marketing, sale or installation of any products which
at any time during the continuation hereof may be offered and sold or licensed
by the Holding Company. Executive further warrants and agrees that he shall not
at any time, whether during the continuance of this Agreement or after its
expiration or earlier termination, whether by Executive or by the Holding
Company, in any manner or form, directly or indirectly, use, disclose,
duplicate, license, sell, reveal, divulge, publish or communicate any portion of
any such information or technology, nor use, disclose, duplicate, license, sell,
reveal, divulge, publish or communicate any other confidential information
concerning the Holding Company, or any customers or other products of the
Holding Company, to any person, firm or entity.
11. Competition. During the Term hereof, Executive shall not, without
the Holding Company's prior written consent, directly or indirectly engage in
any business activity, or have any interest in any person, firm or other entity
engaged in any business activity, in which the Holding Company at the time is
engaged or is planning to engage. During the Term hereof and for a period of
twenty-four (24) months thereafter, Executive shall not directly or indirectly:
(a) divert or take away or solicit or attempt to divert or take away any of the
Holding Company's customers, including without limitation those customers with
whom Executive became acquainted while retained by the Holding Company; (b)
employ, or knowingly permit any business entity controlled by Executive to
employ, any person who during the period of twelve (12) months immediately
preceding such time has been employed by the Holding Company; (c) solicit or
otherwise seek to induce any employee of the Holding Company to leave his or her
employment with the Holding Company; or (d) undertake planning for or
organization of any business activity that will injure the Holding Company's
business, or conspire with employees of the Holding Company for the purpose of
organizing any such injurious business activity.
12. General Provisions.
(a) Any notice, request, demand or other communication required or
permitted hereunder shall be deemed to be properly given when personally served
in writing, when deposited in the United States mail, postage prepaid, or when
communicated to a public telegraph Holding Company for transmittal, addressed to
the Holding Company or Executive at their respective last known address. Either
party may change its address by written notice given in accordance with this
subparagraph.
(b) This Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective executors, administrators,
successors and assigns; provided, however, that Executive may not assign any or
all of Executive's rights or duties hereunder without the prior written consent
of the Holding Company.
(c) This Agreement is made and entered into, is to be performed
primarily within, and shall be governed by and construed in all respects in
accordance with the laws of the State of California.
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<PAGE> 8
(d) Captions and Paragraph headings used herein are for
convenience only and are not a part of this Agreement and shall not be used in
construing it.
(e) Should any provision of this Agreement for any reason be
declared invalid, void, or unenforceable by a court of competent jurisdiction,
the validity and binding effect of any remaining portions shall not be affected,
and the remaining portions of this Agreement shall remain in full force and
effect as if this Agreement had been executed with said provision eliminated.
(f) The Holding Company shall indemnify Executive to the fullest
extent permitted by applicable law with respect to any claims arising from the
performance by Executive of his duties hereunder during the Term of this
Agreement.
(g) This Agreement contains the entire agreement of the parties,
and supersedes any and all other agreements, either oral or in writing, between
the parties hereto with respect to the employment of Executive by the Holding
Company. Each party to this Agreement acknowledges that no representations,
inducements, promises or agreements, oral or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not embodied herein or
therein, and that no other agreement, statement or promise not contained herein
or therein shall be relied upon or be valid or binding. This Agreement may not
be modified or amended by oral agreements, but only by an agreement in writing
signed by the Holding Company on the one hand, and by Executive on the other
hand.
(h) In the event of any litigation between Executive and the
Holding Company concerning the rights or obligations of any party under this
Agreement, the non-prevailing party shall pay the reasonable costs and expenses,
including attorneys' fees, of the prevailing party in connection therewith.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
"Executive"
______________________________________________
Michael G. Rhodes
Modtech Holdings, Inc.
By: __________________________________________
Evan M. Gruber, Chief Executive Officer
By: __________________________________________
Patrick Van Den Bossche, President
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<PAGE> 9
EXHIBIT A
BONUS PLAN
The annual incentive bonus plan shall be the same as the annual bonus plan
currently utilized by Modtech, which is described in the Memorandum to
Compensation Committee attached hereto as Schedule 1.
<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
December 15, 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
December 15, 1998
