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FORM 8-K
Securities and Exchange Commission
Washington, D.C. 20549
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: March 1, 1999
MODTECH HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-25161 33-0825386
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
2830 Barrett Avenue
Perris, California 92571
(Address of principal executive offices)
Registrant's telephone number, including area code:
(909) 943-4014
Not Applicable
(Former name or former address, if changed since last report)
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Item 1. Changes in Control of Registrant.
None.
Item 2. Acquisition or Disposition of Assets.
On February 16, 1999, Modtech Holdings, Inc. (the "Company")
acquired 100% of the outstanding stock of Modtech, Inc., a California
corporation ("Modtech") and 100% of the outstanding stock of SPI Holdings, Inc.,
a Colorado corporation ("SPI"). The acquisition was consummated pursuant to the
terms of the Agreement and Plan of Reorganization and Merger between SPI and
Modtech, dated September 28, 1998 (the "Merger Agreement").
Pursuant to the Merger Agreement, subsidiaries of the Company,
Modtech Merger Sub, Inc., and SPI Merger Sub, Inc., merged with and into Modtech
and SPI, respectively, resulting in Modtech and SPI becoming wholly-owned
subsidiaries of the Company. For each share of Modtech Common Stock, Modtech
stockholders received $3.7293 cash and 0.8508 of a share of the Company's Common
Stock. For each share of SPI Common Stock or SPI Preferred Stock, SPI
stockholders received 1.8785 shares of the Company's Common Stock. Modtech
stockholders had the right to exchange up to 3.94% of their Common Stock for the
Company's Series A Preferred Stock in place of the Company's Common Stock, at
the same 0.8508 exchange ratio, and SPI stockholders had the right to elect to
receive, in place of the Company's Common Stock, $49.4097 cash per share of SPI
Common Stock or SPI Preferred Stock for up to 5.9176% of such Common Stock or
Preferred Stock. Modtech option holders received $25.00 cash per share, less the
applicable per share exercise price of their options, for 14.6709% of the shares
covered by the vested portion of their options.
A total of 12,622,158 shares of the Company's Common Stock, 388,939
shares of the Company's Series A Preferred Stock, and $39,923,472 cash was
issued and paid by the Company to the stockholders and option holders of SPI and
Modtech in connection with the mergers.
The mergers were funded from Modtech's cash and the proceeds of a
Credit Agreement with NationsBank, N.A. as the agent for several lenders, dated
February 16, 1999.
The assets acquired in the mergers include manufacturing facilities
located at nine production facilities, inventory, machinery, raw materials, and
cash. The manufacturing facilities were used by Modtech and SPI to produce
modular classrooms and commercial and light industrial buildings. The Company
intends to continue the same line of business through Modtech and SPI as
operating subsidiaries.
The Company's Board of Directors consists of Evan M. Gruber, Charles
C. McGettigan, Myron A. Wick III, Daniel J. Donahoe III and Robert W. Campbell
(each of whom was a director of Modtech at the time of the merger); and Patrick
Van Den Bossche, Charles A. Hamilton and Charles R. Gwirtsman (each of whom was
a director of SPI at the time of the merger). Evan M. Gruber, Chief Executive
Officer of Modtech serves as the Chief Executive Officer of the Company, and
Michael G. Rhodes, Chief Operating Officer of Modtech, serves as the Chief
Operating Officer and Chief Financial Officer of the Company. SPI's President,
Patrick Van Den Bossche, serves as the President of the Company.
Modtech leases its two facilities located in Perris, California, and
the land on which the manufacturing facility is located in Lathrop, California
from general partnerships in which Mr. Gruber, an officer and director of both
Modtech and the Company, is a partner. The leases are standard industrial leases
which expire in 2014 and 2019. The current aggregate monthly rent is $36,000 and
is subject to upward adjustment each year to market rates based on annual market
surveys conducted by the parties.
KRG Capital Partners, LLC ("KRG"), Infrastructure and Environmental
Private Equity Private Management III, LLC ("IEPEM"), The Argentum Group
("Argentum") and NationsCredit Commercial Corporation ("NationsCredit") will
receive a total of $1,250,000 in transaction fees in connection with the
mergers. Mr. Gwirtsman, a director of both SPI and the Company, is a principal
of KRG. At the closing of the merger, $750,000
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of the transaction fees were paid as follows: KRG--$573,170; IEPEM--$126,525;
Argentum--$25,305; and NationsCredit--$25,000. The remaining balance of the fees
will be paid to KRG over two years in equal monthly installments. Upon the
closing of a business acquisition by the Company during each of the first and
second years after the closing of the mergers, all remaining monthly payments of
the transactions fee for that year will become immediately due and payable. KRG
will also be retained by the Company for a period of three years to provide
transaction advisory services in connection with any future acquisitions by the
Company following completion of the mergers. This agreement may be renewed by
the parties on a year-to-year basis for a maximum of two additional years. The
Company 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.
Pursuant to the terms of a financial advisory 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 financial advisory services rendered
in connection with the mergers. The fee is 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 controlled about 23.6% of the voting power of Modtech
prior to the merger and beneficially controls about 13% of the voting power of
the Company. Mr. McGettigan and Mr. Wick were directors of Modtech prior to the
merger and are currently directors of the Company.
The officers and directors of Modtech and SPI at the time of the
merger, and the holders of 5% or more of the equity securities of each company
at that time, are entitled to have their shares of the Company's Common Stock
registered for resale to the public under certain circumstances pursuant to a
Registration Rights Agreement.
The Company entered into employment agreements, effective on the
closing date of the mergers, with Evan M. Gruber, an officer and director of
Modtech, Patrick Van Den Bossche, an officer and director of SPI, and Michael G.
Rhodes, an officer of Modtech. 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 merger, Mr. Gruber received an option to
purchase 50,000 shares of the Company's Common Stock at the closing price of
Modtech Common Stock on the day prior to the closing of the mergers. The option
is 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 prior employment agreement with Modtech. Messrs. Gruber, Van Den
Bossche and Rhodes are officers of the Company. Messrs. Gruber and Van Den
Bossche are also directors of the Company.
Item 3. Bankruptcy or Receivership.
None.
Item 4. Changes in Registrant's Certifying Accountant.
None.
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Item 5. Other Events.
None.
Item 6. Resignations of Registrant's Directors.
None.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements. The financial statements of Modtech, Inc.,
SPI Holdings, Inc. and the indirect subsidiaries of SPI Holdings, Inc., Office
Master of Texas, Inc. and Rosewood Enterprises, Inc. Modular Manufacturing,
included in Amendment No. 2 to the Company's Registration Statement on Form S-4,
dated January 11, 1999 (Commission File No. 333-69033), are incorporated herein
by reference.
(b) Unaudited Pro Forma Combined Condensed Financial Statements. The
unaudited pro forma combined condensed financial statements of Modtech, Inc. and
SPI Holdings, Inc., included in Amendment No. 2 to the Company's Registration
Statement on Form S-4, dated January 11, 1999 (Commission File No. 333-69033),
are incorporated herein by reference.
(c) Exhibits.
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Number Name of Exhibit
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<C> <S>
2 Agreement and Plan of Reorganization and Merger, dated as of September 28, 1998, by and
between Modtech, Inc. and SPI Holdings, Inc.
99.1 Financial Statements of Modtech, Inc., SPI Holdings, Inc., Office Master of Texas, Inc. and
Rosewood Enterprises, Inc. Modular Manufacturing.
99.2 Unaudited Pro Forma Combined Condensed Financial Statements of Modtech, Inc. and SPI
Holdings, Inc.
99.3 Press Release dated February 17, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MODTECH HOLDINGS, INC.
By: /s/ Evan M. Gruber
-----------------------------
Evan M. Gruber,
Chief Executive Officer
Date: March 1, 1999.
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EXHIBIT INDEX
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Number Name of Exhibit
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2 Agreement and Plan of Reorganization and Merger, dated as of September 28, 1998, by and
between Modtech, Inc. and SPI Holdings, Inc.
99.1 Financial Statements of Modtech, Inc., SPI Holdings, Inc., Office Master of Texas, Inc. and
Rosewood Enterprises, Inc. Modular Manufacturing.
99.2 Unaudited Pro Forma Combined Condensed Financial Statements of Modtech, Inc. and SPI
Holdings, Inc.
99.3 Press Release dated February 17, 1999.
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EXHIBIT 2
ANNEX I
================================================================================
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
by and between
MODTECH, INC.
and
SPI HOLDINGS, INC.
-------------------------------
Dated as of September 28, 1998
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================================================================================
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TABLE OF CONTENTS
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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
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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
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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
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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
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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.
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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 at
which directors are elected, the Board of Directors shall, 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 shall be Independent
Directors.
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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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<PAGE> 12
(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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<PAGE> 14
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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<PAGE> 15
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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<PAGE> 16
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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<PAGE> 17
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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<PAGE> 18
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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<PAGE> 19
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
at or prior to the Closing Date of the following additional conditions, all of
which, except paragraph (e), may be waived by Modtech:
(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 at or
prior to the Closing Date of the following additional conditions, all of which,
except paragraph (e), may be waived by SPI:
(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, except the receipt of the tax opinions set forth
in Sections 6.2 and 6.3 above;
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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<PAGE> 1
EXHIBIT 99.1
INDEX TO FINANCIAL STATEMENTS
MODTECH, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-3
Balance Sheets as of December 31, 1996 and 1997............. F-4
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-8
Schedule II -- Valuation and Qualifying Accounts............ F-22
Condensed Consolidated Balance Sheets as of December 31,
1997 (audited) and September 30, 1998 (unaudited)......... F-23
Condensed Consolidated Statements of Income for the three
months ended and nine months ended September 30, 1997 and
1998 (unaudited).......................................... F-24
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1998 (unaudited)...... F-25
Notes to Condensed Financial Statements..................... F-26
</TABLE>
SPI HOLDINGS, INC
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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-37
Condensed Consolidated Balance Sheet as of September 30,
1998 (unaudited).......................................... F-51
Condensed Consolidated Statements of Income for the
six-months ended September 30, 1997 and 1998
(unaudited)............................................... F-52
Condensed Consolidated Cash Flows for the six-months ended
September 30, 1997 and 1998 (unaudited)................... F-53
Notes to Condensed Consolidated Financial Statements........ F-54
</TABLE>
OFFICE MASTER OF TEXAS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
F-1
<PAGE> 2
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-65
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 and 1997 (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-70
</TABLE>
F-2
<PAGE> 3
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 LLP
Orange County, California
March 18, 1998
F-3
<PAGE> 4
MODTECH, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS(Note 5)
<TABLE>
<CAPTION>
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 (note 2).................................... 10,309,861 21,510,146
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
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
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> 5
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> 6
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> 7
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) --
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)
----------- ----------- ------------
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 stock... (74,258) -- --
Net proceeds from issuance of common
stock.................................... -- 2,348,327 19,721,614
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-7
<PAGE> 8
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.
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
F-8
<PAGE> 9
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
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>
<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
F-9
<PAGE> 10
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
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 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-10
<PAGE> 11
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(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-11
<PAGE> 12
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(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-12
<PAGE> 13
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(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>
F-13
<PAGE> 14
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
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:
<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.
(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.
F-14
<PAGE> 15
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
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-15
<PAGE> 16
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
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-16
<PAGE> 17
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
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).
F-17
<PAGE> 18
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
Stock options outstanding under the May 1994 Plan, are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE 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
======= =======
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.
F-18
<PAGE> 19
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
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 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.
F-19
<PAGE> 20
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(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>
(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>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1998................................................... $ 569,000
1999................................................... 515,000
2000................................................... 513,000
2001................................................... 444,000
2002................................................... 444,000
Thereafter............................................. 6,002,000
----------
$8,487,000
==========
</TABLE>
F-20
<PAGE> 21
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
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.
(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-21
<PAGE> 22
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
----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for contract adjustments:
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-22
<PAGE> 23
MODTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
AUDITED UNAUDITED
<S> <C> <C>
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 1998, respectively..... 37,531,000 33,565,000
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-23
<PAGE> 24
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-24
<PAGE> 25
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-25
<PAGE> 26
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-26
<PAGE> 27
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 PERCENT OF
NET SALES NET SALES
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1997 1998 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 100.0%
Gross profit.................................. 21.5 23.7 20.0 23.0
Selling, general and administrative........... 3.4 3.0 3.6 3.4
Income from operations........................ 18.1 20.8 16.5 19.6
Interest income (expense), net................ (0.7) 0.8 (0.8) 0.6
Income before taxes on income................. 17.4 21.6 15.7 20.2
</TABLE>
Net sales decreased by $2,562,000 or 6.4% for the three months and
increased by $14,408,000 or 14.6% for the nine months ended September 30, 1998.
The overall increase in revenue is attributable to the growth in the school
population, the Class Size Reduction program and a diversification of our
product line. The three month decrease was primarily due to the delay by the
California Legislature in the adoption of the California state fiscal budget for
1998/1999.
Gross profit as a percentage of net sales for the three and nine months
ended September 30, 1998 increased to 23.7% and 23.0% from 21.5% and 20.0% for
the same period in 1997. The increase was due principally to the utilization of
the manufacturing facilities and the realization of manufacturing efficiencies
and product mix.
Selling, general and administrative expenses decreased for the three months
ended September 30, 1998 by $260,000 and increased for the nine months ended
September 30, 1998 by $299,000, a change of 19.1% and 8.4% respectively. The
increase is primarily due to the increase in sales expense as well as the
increase in the number of employees. As a percentage of sales, selling, general,
and administrative expenses for the three and nine months ended September 30,
are 3.0% and 3.4% for 1998. The percentages were 3.4% and 3.6% for the same
period in 1997.
Due to a higher cash balance and reduced line of credit borrowing, the nine
months ended September 30, 1998 reflects net interest income of $712,000
compared to net interest expense of $751,000 for the same period in 1997, a
favorable increase of $1,463,000 or 194.8%.
On March 20, 1998, the Company purchased an 80% interest in Trac Modular
Manufacturing, Inc (Trac). The purchase price approximated the fair value of net
assets on the purchase date. Trac is based in Glendale, Arizona. The financial
activity for this subsidiary has been included in the Company's financial
statements for the second and third quarter of 1998.
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
F-27
<PAGE> 28
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
F-28
<PAGE> 29
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 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.
F-29
<PAGE> 30
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' computer systems.
F-30
<PAGE> 31
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> 32
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 $25,768
====== ====== =======
</TABLE>
- - -------------------------
(1) Effective March 28, 1997, SPI Holdings, Inc. acquired Standard Pacific
Industries, Inc. ("the Predecessor"). Because the acquisition was accounted
for as a purchase, the post-acquisition period is not comparable to the
pre-acquisition periods.
The accompanying notes are an integral part of these consolidated balance
sheets.
F-32
<PAGE> 33
SPI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
($ IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PRO FORMA
PREDECESSOR(1) COMPANY SHAREHOLDERS'
----------------------- --------- EQUITY AT
JANUARY 31, MARCH 27, MARCH 31, AT MARCH 31,
1997 1997 1998 1998
----------- --------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
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 $25,768
====== ====== =======
</TABLE>
- - -------------------------
(1) Effective March 28, 1997, SPI Holdings, Inc. acquired Standard Pacific
Industries, Inc. ("the Predecessor"). Because the acquisition was accounted
for as a purchase, the post-acquisition period is not comparable to the
pre-acquisition periods.
The accompanying notes are an integral part of these consolidated balance
sheets.
F-33
<PAGE> 34
SPI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
($ 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> 35
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 $6,702
=== === ===== ====== ====== ======
</TABLE>
- - -------------------------
(1) Effective March 28, 1997, SPI Holdings, Inc. acquired the Predecessor
entity. Because the acquisition was accounted for as a purchase, the
post-acquisition period is not comparable to the pre-acquisition periods.
The accompanying notes are an integral part of these consolidated statements.
F-35
<PAGE> 36
SPI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ 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)
------ ------- ------- -------
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-36
<PAGE> 37
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-37
<PAGE> 38
SPI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-38
<PAGE> 39
SPI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<S> <C>
Furniture and fixtures................ Seven years
Vehicles and equipment................ One to seven years
Leasehold improvements................ Useful life or life of the lease,
whichever is
shorter
</TABLE>
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-39
<PAGE> 40
SPI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-40
<PAGE> 41
SPI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-41
<PAGE> 42
SPI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-42
<PAGE> 43
SPI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-43
<PAGE> 44
SPI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-44
<PAGE> 45
SPI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-45
<PAGE> 46
SPI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
<S> <C>
YEAR ENDING MARCH 31:
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-46
<PAGE> 47
SPI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-47
<PAGE> 48
SPI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<S> <C>
OPTIONS OUTSTANDING
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.
F-48
<PAGE> 49
SPI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
YEARS ENDED FEBRUARY 1, PERIOD FROM
JANUARY 31, 1997 TO YEAR 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%
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 $2.0 million plus additional
consideration based on future earnings.
F-49
<PAGE> 50
SPI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
c. Proposed merger (unaudited)
The Company has entered into a Plan of Reorganization and Merger dated
September 28, 1998 with Modtech, Inc. Under terms of the agreement, all equity
instruments will be converted into equity instruments of Modtech Holdings, Inc.
or redeemed for cash.
F-50
<PAGE> 51
SPI HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
ASSETS
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
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
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-51
<PAGE> 52
SPI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1998
------- -------
<S> <C> <C>
Net sales................................................ $22,712 $41,540
Cost of sales............................................ 17,078 33,322
------- -------
Gross profit...................................... 5,634 8,218
------- -------
Operating expenses:
Selling and administrative............................. 1,109 2,325
Management and monitoring fees......................... 112 173
Depreciation and amortization.......................... 728 1,319
------- -------
1,949 3,817
------- -------
Income from operations............................ 3,685 4,401
------- -------
Other income/(expense):
Interest expense, net.................................. (725) (1,766)
Miscellaneous income................................... 4 3
------- -------
(721) (1,763)
------- -------
Income before provision for income taxes.......... 2,964 2,638
Provision for income
taxes.................................................. 1,269 1,140
------- -------
Net income..................................... $ 1,695 $ 1,498
======= =======
Pro forma per share data-
Net income per share:
Basic............................................... $ 1.06 $ 0.67
Diluted............................................. $ 0.91 $ 0.56
Weighted average number
of shares:
Basic............................................... 1,600 2,245
Diluted............................................. 1,861 2,665
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-52
<PAGE> 53
SPI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1998
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by (used in) operating
activities.................................. $ 422 $ 916
------- --------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements... (969) (257)
Payments under non-compete agreement................ (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.................................. 31 (24,709)
------- --------
Cash flows from financing activities:
Principal payments on notes payable................. (5,120) (3,183)
Additions to notes payable.......................... 4,431 21,197
Proceeds from issuance of common stock.............. -- 5,000
------- --------
Net cash provided by (used in) financing
activities.................................. (689) 23,014
------- --------
Net increase (decrease) in cash....................... (236) (779)
Cash, beginning of period............................. 991 1,120
------- --------
Cash, end of period................................... $ 755 $ 341
======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest............ $ 740 $ 1,870
======= ========
Cash paid during the period for income taxes........ $ 2,255 $ 1,137
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F-53
<PAGE> 54
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 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 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-54
<PAGE> 55
SPI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
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>
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-55
<PAGE> 56
SPI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
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
F-56
<PAGE> 57
SPI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
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> 58
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> 59
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> 60
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> 61
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> 62
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:
<TABLE>
<S> <C>
Buildings................................ 31.5 years
Vehicles and equipment................... Five to ten years
Leasehold improvements................... Useful life or life of
the lease, whichever is
shorter
</TABLE>
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.
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.
F-62
<PAGE> 63
OFFICE MASTER OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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> 64
OFFICE MASTER OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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> 65
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> 66
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------- -------------------------
1997 1996 1998 1997
---------- ---------- ----------- -----------
(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> 67
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> 68
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> 69
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
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-69
<PAGE> 70
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>
F-70
<PAGE> 71
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation is
computed using the straight-line method over the assets' useful lives or life of
the lease, whichever is shorter.
Equipment and leasehold improvements at December 31 is comprised of the
following:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1996
------ --------- ---------
<S> <C> <C> <C>
Automotive equipment.................. 3-5 $ 199,855 $ 164,162
Furniture and fixtures................ 5-10 208,691 208,691
Leasehold improvements................ 5-10 33,545 33,545
Warehouse equipment................... 5-7 202,911 187,205
---- --------- ---------
645,002 593,603
Less -- accumulated depreciation...... (481,280) (382,872)
--------- ---------
$ 163,722 $ 210,731
========= =========
</TABLE>
Major renewals or betterments are capitalized while maintenance costs and
repairs are expensed in the period incurred. Upon retirement or disposal of
depreciable assets, the cost and related accumulated depreciation are removed
from the accounts and the resulting gain or loss is reflected in operations.
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of,
requires that long-lived assets to be held and used be 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.
F-71
<PAGE> 72
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
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>
Amounts due on the note payable in future years are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998...................................................... $ 200,000
1999...................................................... 251,000
2000...................................................... 240,080
2001...................................................... 183,700
2002...................................................... 204,963
Thereafter................................................ 395,694
----------
$1,475,437
==========
</TABLE>
F-72
<PAGE> 73
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
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>
F-73
<PAGE> 74
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
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>
(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.
F-74
<PAGE> 75
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
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.
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
F-75
<PAGE> 76
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
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.
F-76
<PAGE> 77
ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(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-77
<PAGE> 1
EXHIBIT 99.2
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.
Goodwill arises when an acquirer pays more for a business than the fair
value of the tangible and separately measurable intangible net assets. General
accepted accounting principles ("GAAP") requires that this and all other
intangible assets be amortized over the period benefitted. Management has
determined that period to be no less than 40 years, based on its determination
that the anticipated future cash flows associated with the intangible assets
recognized in the SPI Merger will be sufficient to recover those assets over a
40-year period.
If management were not to separately recognize a material intangible asset
having a benefit period less than 40 years, or were not to give effect to
shorter benefit period of factors giving rise to a material portion of the
goodwill, earnings reported in periods immediately following the acquisition
would be overstated. In later years, the Company would be burdened by a
continuing charge against earnings without the associated benefit to income
value by management in arriving at the consideration paid for the business.
Earnings in later years also could be significantly affected if management
determined then that the remaining balance of goodwill was impaired.
1
<PAGE> 2
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.
2
<PAGE> 3
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
------------------ PRO FORMA PRO FORMA
MODTECH SPI NOTES ADJUSTMENTS COMBINED
------- ------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
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.
3
<PAGE> 4
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
administrative 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.
4
<PAGE> 5
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
administrative 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......................... 9,871 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.
5
<PAGE> 6
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.
6
<PAGE> 7
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>
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
7
<PAGE> 8
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.
8
<PAGE> 9
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) $16,000,000; (J) $(2,724,000) = $13,276,000
(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)
9
<PAGE> 10
SPI HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------------
SPI ACQUISITION
PREDECESSOR SPI AND NOTES PRO FORMA
1/1-3/27/97 3/28-12/31/97 OFFICE MASTER ROSEWOOD CONSOLIDATION (A,I) CONSOLIDATED
----------- ------------- ------------- -------- ------------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............. $9,039 $31,255 $8,328 $31,875 $ -- $80,497
Cost of goods sold.... 6,490 23,792 7,466 26,482 1,091 (G) 65,321
------ ------- ------ ------- ------- -------
Gross profit........ 2,549 7,463 862 5,393 (1,091) 15,176
Selling, general and
administrative
expenses............ 611 1,837 819 2,704 (901) (G,H) 5,070
Management and
monitoring fees..... -- 168 -- -- -- 168
Depreciation and
amortization........ 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
provision 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.
10
<PAGE> 11
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.
11
<PAGE> 12
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
administrative expenses........ 3,154 155 1,098 (1,205) (G,H) 3,202
Management and monitoring fees... 229 -- -- -- 229
Depreciation and amortization.... 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.
12
<PAGE> 13
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.
13
<PAGE> 1
EXHIBIT 99.3
Modtech Announces Closing of Merger Transaction
PERRIS, Calif., Feb. 17/PRNewswire/ -- Modtech, Inc. (Nasdaq: MODJ) today
announced the closing of its previously announced merger transaction pursuant
to which Modtech has acquired SPI Manufacturing, Inc and formed a new holding
company, Modtech Holdings, Inc.
Evan M. Gruber, CEO of Modtech, announced that the transaction closed at
the end of business on Tuesday, February 16th. Modtech Holdings has entered
into a new $100 million credit facility to finance the merger, to provide
working capital needs and to provide up to $25 million to fund future
acquisitions.
Shareholders at the close of business on February 16th, will be entitled to
receive shares of Modtech Holdings, Inc. and cash, as detailed in Modtech's
Proxy Statement for the merger transaction. New share certificates and cash
will be distributed by the Exchange Agent, ChaseMellon Shareholder Services.
Shareholders with questions concerning the distribution of cash and share
certificates can call the Exchange agent at 800-414-2879. Shares of Modtech
Holdings, Inc. will begin trading on Nasdaq on Wednesday, February 17th. For a
limited period of time, they will trade under the symbol MODTD, and thereafter
under Modtech's old symbol, MODT.
Mr. Gruber said, "We are pleased to announce the merger closing and look
forward to continuing to provide the highest level of service to Modtech and
SPI's customer base through our new combined company. We believe our company
is now well positioned as a leading provider of relocatable classrooms and
commercial modular structures throughout the Western and Southwestern United
States."
This release may include "forward-looking statements" with the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable,
it can give no assurance that such expectations reflected in such
forward-looking statements will prove to have been correct. The Company's actual
results could differ materially from those anticipated in the forward-looking
statements as a result of certain factors including sales levels, distribution
and competition trends and other market factors.
Modtech Holdings, Inc. designs, manufactures and installs modular
relocatable classrooms and other modular buildings for commercial use.
SOURCE Modtech, Inc.
-0- 2/17/99
/CONTACT: Evan M. Gruber, CEO of Modtech Holdings, Inc., 909-943-4014/
(MODT MODTD)
