<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1997
REGISTRATION NO. 333-37473
================================================================================
SECURITIES AND EXCHANGE COMMISSION
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MODTECH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 33-0044888
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
2830 BARRETT AVENUE, PERRIS, CALIFORNIA 92571, (909) 943-4014
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
EVAN M. GRUBER, CHIEF EXECUTIVE OFFICER
2830 BARRETT AVENUE, PERRIS, CALIFORNIA 92571, (909) 943-4014
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE OF PROCESS)
COPIES TO:
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JAMES M. PHILLIPS, JR., ESQ. DHIYA EL-SADEN, ESQ.
PHILLIPS & HADDAN LLP GIBSON DUNN & CRUTCHER LLP
4675 MACARTHUR COURT, SUITE 710 333 SOUTH GRAND AVENUE
NEWPORT BEACH, CALIFORNIA 92660 LOS ANGELES, CALIFORNIA 90071
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(2)
- -------------------------------------------------------------------------------------------------
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Common Stock................. 3,450,000 shares $25.00 $86,250,000 $26,136.34
</TABLE>
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(1) Includes 1,000,000 shares to be issued and sold by the Company, 2,000,000
shares to be sold by certain Selling Shareholders, and 450,000 shares that
may be sold by certain Selling Shareholders upon exercise of the
Underwriters' over-allotment option.
(2) Calculated pursuant to Rule 457(c), based on the average of the high and low
prices for a share of the Common Stock on The Nasdaq National Market on
October 6, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 14, 1997
PROSPECTUS
MODTECH LOGO
Of the 3,000,000 shares of Common Stock offered hereby (the "Offering"),
1,000,000 shares are being sold by Modtech, Inc. ("Modtech" or the "Company")
and 2,000,000 shares are being sold by certain shareholders of the Company (the
"Selling Shareholders"). See "Principal and Selling Shareholders." The Company
will not receive any of the proceeds from the sale of shares by the Selling
Shareholders. See "Use of Proceeds."
The Company's Common Stock is listed on The Nasdaq National Market under
the symbol "MODT." On October 13, 1997, the last reported sales price for a
share of the Company's Common Stock on The Nasdaq National Market was $28.625.
See "Market Information and Related Matters."
------------------------
SEE "RISK FACTORS" BEGINNING AT PAGE 6 FOR CERTAIN INFORMATION WHICH SHOULD
BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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======================================================================================================
UNDERWRITING PROCEEDS PROCEEDS TO
PRICE TO DISCOUNTS AND TO THE THE SELLING
THE PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- ------------------------------------------------------------------------------------------------------
Per Share......................... $ $ $ $
- ------------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $ $
======================================================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company (including expenses of the
Selling Shareholders) estimated at $300,000.
(3) Certain of the Selling Shareholders have granted the Underwriters an option,
exercisable within 30 days of the date hereof, to purchase up to 450,000
additional shares of the Company's Common Stock, at the same price and
subject to the same Underwriting Discounts and Commissions as set forth
above, solely to cover over-allotments, if any. If the Underwriters exercise
such option in full, the total Price to the Public, Underwriting Discounts
and Commissions and Proceeds to the Selling Shareholders will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered subject to prior sale, when, as and
if delivered to and accepted by the Underwriters and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
said offer and to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made on or about October , 1997, at the
offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167.
BEAR, STEARNS & CO. INC.
CRUTTENDEN ROTH
INCORPORATED
L.H. FRIEND, WEINRESS,
FRANKSON & PRESSON, INC.
THE DATE OF THIS PROSPECTUS IS OCTOBER , 1997.
3,000,000 SHARES
MODTECH, INC.
COMMON STOCK
<PAGE> 3
[ PHOTOGRAPHS ]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENTS, STABILIZING AND SHORT-COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. SEE "UNDERWRITING."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ALSO ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET.
SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information contained in this Prospectus assumes that there has
been no exercise of the Underwriters' over-allotment option and options to
purchase shares of Common Stock granted or to be granted under the Company's
stock option plans.
THE COMPANY
Modtech designs, manufactures, markets and installs modular relocatable
classrooms. Based upon 1996 net sales, the Company believes that it is the
largest manufacturer of modular relocatable classrooms in California. The
Company's classrooms are sold primarily to California school districts, and to
third parties and the State of California principally for lease to California's
school districts. Modtech's products include standardized classrooms, as well as
customized structures for use as libraries, gymnasiums, computer rooms and
bathroom facilities. The Company believes that its modular structures can be
substituted for virtually any part of a school. The Company's classrooms are
engineered and constructed in accordance with structural and seismic safety
specifications adopted by the California Department of State Architects which
regulates all school construction on public land, standards which are more
rigorous than the requirements for other portable units.
In recent years, population growth and demographic and geographic shifts in
California student enrollments have necessitated the addition of more classrooms
at existing schools and the construction of new schools to serve new residential
developments. However, as a consequence of budget shortfalls experienced by the
State of California and many California school districts from 1991 through the
middle of 1996, the level of funding for the construction of schools declined,
even though school enrollments increased annually during this period. As a
result, classrooms in many California school districts currently are reported to
be among the most crowded in the nation, with an average of 29 students per
class, compared to a national average class size of 17. Without the addition of
new classrooms, the average class size will continue to grow since the
California Department of Finance has estimated that student enrollment in grades
kindergarten through 12 will increase by approximately 18% from 1995 through
2005.
Funding for new school construction is provided primarily at the State
level, (i) through annual budget allocations of funds derived from general
revenue sources and (ii) from the sale of statewide bond issues. As the State of
California budget deficit has ameliorated, the legislature has increased funding
for the addition of classrooms in an effort to reduce the average number of
students per classroom. For the 1996 - 1997 school year, the State spent $822
million in funding under the California Class Size Reduction Program adopted in
1996, including $200 million specifically for facilities which may be
relocatable classrooms. The Company believes that State funding for the
reduction of class sizes during the 1997 - 1998 school year will be as high as
$1.5 billion for both general operations and school facilities. In addition to
funding out of its annual budget, the State is empowered to issue general
obligation bonds to finance, among other things, the construction of school
facilities. The California State School Facilities Conference Committee recently
adopted a package of bills which, if approved by the Legislature, would, among
other things, place an $8.2 billion school construction bond on the June 1998
California ballot. If these proposals are on the ballot and are approved by the
voters, $4 billion of the bonds would be sold in 1998, followed by $4.2 billion
in 2000, the proceeds of which would be used to construct and modernize existing
school facilities, acquire land to build new schools, and construct or add
classrooms. See "Business -- Legislation and Funding."
These factors have combined to increase the demand for modular relocatable
classrooms, which cost significantly less and take much less time to construct
and install than conventional school facilities, and which permit a school
district to relocate the units as student enrollments shift. In addition, the
Company's products provide added flexibility to school districts in financing
the costs of adding classroom space, since modular relocatable classrooms are
considered personal property which can be financed out of a district's operating
budget in addition to its capital budget. In recognition of these advantages,
California legislation currently requires, with certain exceptions, that at
least 30% of all new classroom space added using State funds must be relocatable
structures. See "Business -- Legislation and Funding."
3
<PAGE> 5
The Company currently operates a total of six production lines at four
plants, which serve both the Northern and Southern California markets. The
Company's manufacturing process is vertically integrated in that the Company
fabricates many of the components used in the construction of its classrooms.
The Company believes that this capability enables it to be one of the low-cost
producers in California of standardized modular relocatable classrooms, and
provides it with a competitive advantage over other manufacturers who must use
third parties to supply these parts.
During recent periods, the Company's net sales and profitability have
increased. Net sales increased from $19.4 million for the year ended December
31, 1995, to $49.9 million for the year ended December 31, 1996. During the
first six months of 1997, net sales were $58.9 million, as compared to $12.7
million during the same period of 1996. Net income for the year ended December
31, 1996 and the six months ended June 30, 1997 was $4.3 million and $5.2
million, respectively. The Company attributes these recent improved results to
the heightened demand for modular relocatable classrooms in California, the
Company's ability to increase production capacity to accommodate this demand,
its efficient and cost effective manufacturing processes, and the quality and
attractive pricing of its classrooms.
The Company's strategy is to expand its production capacity to meet the
increased demand for modular relocatable classrooms, to increase its share of
the California market for such classrooms, and to continue to develop new
product designs and manufacturing alternatives. In addition, the Company intends
to increase its efforts to expand the market for its classrooms to include
neighboring states and to develop and more extensively market additional
non-classroom products. Recent diversification initiatives have included the
acquisition of a manufacturing operation that enhanced the Company's ability to
produce relocatable buildings for sale to commercial customers and modular
shelters for electronics used in the telecommunications industry. The Company
also recently hired a salesperson to market the Company's relocatable classrooms
to customers in the States of Arizona and Nevada and to private schools and
child care providers within California.
Organized in 1982, the Company is a California corporation whose executive
offices are located at 2830 Barrett Avenue, Perris, California 92571, and its
telephone number is (909) 943-4014. The Company maintains a website that
contains information concerning its products and personnel and copies of its
most recent press releases, the address of which is http://www.modt.com.
4
<PAGE> 6
RECENT DEVELOPMENTS
The Company issued a press release on October 21, 1997, announcing
operating results, for the third quarter ended September 30, 1997. Net sales for
the third quarter ended September 30, 1997 were $39.8 million, compared to $14.3
million for the quarter ended September 30, 1996, an increase of 178%. Net sales
for the nine months ended September 30, 1997 were $98.7 million, compared to
$27.0 million for the nine months ended September 30, 1996, an increase of 266%.
Operating income for the third quarter of 1997 was $7.2 million, compared to
operating income of $1.5 million for the third quarter of 1996. Net income for
the third quarter of 1997 was $4.4 million, or $0.45 per share, compared to $1.3
million, or $0.14 per share, for the third quarter of 1996, and net income for
the nine months ended September 30, 1997 was $9.7 million, or $1.00 per share,
compared to $2.2 million, or $0.24 per share, for the nine months ended
September 30, 1996. Net income per share is computed on a fully diluted basis.
At September 30, 1997, the Company's backlog was $85.0 million, compared to
$80.4 million at June 30, 1997 and $40.0 million at September 30, 1996.
THE OFFERING
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Common Stock offered by the Company........... 1,000,000 shares
Common Stock offered by the Selling
Shareholders................................ 2,000,000 shares
Common Stock to be outstanding after the
Offering(1)................................. 9,705,836 shares
Use of proceeds by the Company................ Debt repayment, additions to working capital
and other general corporate purposes. See
"Use of Proceeds."
Nasdaq National Market symbol................. MODT
</TABLE>
- ---------------
(1) Excludes 1,206,933 shares issuable upon exercise of outstanding options, and
196,667 shares available for the grant of additional options under the
Company's stock option plans. See "Management -- Stock Options."
5
<PAGE> 7
SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The historical income statement data, certain of the selected operating
data, and the balance sheet data set forth below have been derived from the
Company's audited and unaudited financial statements included elsewhere herein
and should be read in conjunction with such financial statements and the notes
thereto.
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<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
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INCOME STATEMENT DATA:
Net sales................................ $20,355 $19,386 $49,886 $12,704 $58,906
Gross profit............................. 2,589 2,985 7,257 1,842 11,218
Income from operations................... 1,035 1,372 4,912 994 9,036
Interest expense, net.................... (471) (387) (422) (107) (549)
Net income............................... 602 965 4,269 889 5,195
Net income available for Common
Stock(1)............................... 602 799 4,221 841 5,195
Earnings per common share(2)............. $ 0.11 $ 0.12 $ 0.47 $ 0.10 $ 0.55
Weighted average shares outstanding
(in thousands)(2)...................... 5,294 6,712 9,041 8,750 9,370
SELECTED OPERATING DATA:
Gross margin............................. 12.7% 15.4% 14.5% 14.5% 19.0%
Operating margin......................... 5.1% 7.1% 9.8% 7.8% 15.3%
Standard classrooms sold(3).............. 680 605 1,610 413 2,066
Backlog at period end(4)................. $ 7,000 $ 4,100 $58,000 $20,400 $80,400
</TABLE>
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<CAPTION>
AS OF JUNE 30, 1997
------------------------
ACTUAL AS ADJUSTED(6)
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BALANCE SHEET DATA
Working capital....................................................... $26,647 $ 40,066
Total assets.......................................................... 58,387 71,806
Total liabilities..................................................... 37,800 24,468
Long-term debt, excluding current portion(5).......................... 15,132 1,800
Shareholders' equity.................................................. 20,587 47,338
</TABLE>
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(1) After deduction of preferred stock dividends of $166,000 and $48,000 for the
years ended December 31, 1995 and 1996, respectively, and $48,000 for the
six months ended June 30, 1996. No preferred stock was outstanding during
the six months ended June 30, 1997, and none currently is outstanding. See
Note 11 of Notes to Financial Statements.
(2) Computed on a fully diluted basis.
(3) Determined by dividing the total square footage of floors sold during the
year by 960 square feet, the floor area of a standard classroom. See
"Business -- Modular Classrooms."
(4) The Company manufactures classrooms to fill existing orders only, and not
for inventory. Backlog consists of sales orders scheduled for completion
during the next 12 months.
(5) For a description of the Company's long-term debt, see Notes 5 and 6 of
Notes to Financial Statements.
(6) Adjusted to reflect the sale of 1,000,000 shares of Common Stock by the
Company in the Offering at an assumed offering price of $28.625 per share,
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
5
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, the following
risks and other factors should be considered carefully in evaluating the Company
and its business before purchasing any of the Common Stock offered hereby. The
statements contained in this Prospectus that are not purely historical are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including but not limited to statements regarding
the Company's assumptions, expectations, anticipations, hopes, beliefs, plans,
proposals, intentions or strategies regarding the future. Actual results could
differ materially from those projected in any forward-looking statements as a
result of a number of factors, including those detailed in this "Risk Factors"
portion of this Prospectus as well as those set forth elsewhere in this
Prospectus. The forward-looking statements are made as of the date of this
Prospectus and the Company assumes no obligation to update the forward-looking
statements, or to update the reasons why actual results could differ materially
from those projected in the forward-looking statements.
LEGISLATION AND SCHOOL FUNDING
The demand for modular relocatable classrooms in California is affected by
various statutes which, among other things, prescribe the way in which all
school classrooms to be constructed on public lands must be designed and
engineered, the methods by which the Company's customers, primarily individual
school districts, obtain funding for the construction of new facilities, and the
manner in which available funding is to be spent. The Company's business
therefore is, to a material degree, dependent upon the legislative and
educational policies and financial condition of the State of California. Funding
for new school construction and rehabilitation of existing schools by California
school districts currently is provided primarily at the State level, through
annual allocations of funds derived from general revenue sources and statewide
bond issues. In addition, school districts obtain funding for the purchase or
lease of school facilities through the imposition of Developers' Fees and local
bond issuances. The availability of this funding is subject to financial and
political considerations which vary from district to district. The use of
funding provided by the State is also affected by the legislative policies of
the State of California. For example, California legislation currently requires,
with certain exceptions, that 30% of new classroom space added using State funds
must be relocatable structures. The Company's classroom units qualify as
relocatable structures. There are, however, alternative structures that are less
modular in nature than the Company's classrooms that may also satisfy this
legislative requirement. Shortages of financial resources at either State or
local levels, or changes in the legislative or educational policies of the State
of California, could have a material adverse effect upon the Company.
The California State School Facilities Conference Committee recently
adopted a package of proposals that, if approved by the Legislature, would
provide, among other things, for the inclusion on the June 1998 ballot of an
$8.2 billion bond issue for school construction and a proposed amendment to the
California Constitution that would reduce the percentage of voter approval
required for local bond issues from that currently specified in Proposition 13.
In addition, the provision of California legislation which requires that 30% of
all new classrooms added using State funds be relocatable structures would be
eliminated. As currently drafted, approval of each of these proposals is linked,
and in order for any of them to become effective the $8.2 billion bond issue
must be approved by a majority of the California voters and the proposed
Constitutional Amendment must be approved by two-thirds of the California
voters. See "Business -- Legislation and Funding."
CYCLICAL INDUSTRY
The Company's modular classrooms are purchased predominately by school
districts in California. The ability of California school districts to finance
the acquisition of the Company's products is largely dependent upon the level of
funding available from the State. Although the need for additional classrooms
remained unabated in the early to mid 1990's as California school districts
continued to encounter student population growth, the increasing budget
shortfalls that the State and many California school districts were experiencing
imposed severe limitations on the levels of funding for the construction of
schools. As a result, the Company experienced declines in net sales, and
reported losses from 1991 through 1993, forcing it to reduce the number of
production lines in operation from six at the end of 1991 to two at the end of
1993 and to reduce its workforce by approximately 53%.
6
<PAGE> 9
The State of California recently has increased the amount of funds
available for expenditures on school facilities, and the market for the
Company's modular relocatable classrooms has grown rapidly, particularly since
the implementation of the State's Class Size Reduction Program in November 1996.
Since the beginning of 1995, the Company has re-opened three production lines
and acquired a fourth line, resulting in six production lines in operation at
the end of 1996. The Company currently is completing a seventh line and plans to
open another line in 1998. However, there can be no assurance that the funding
for school construction provided by the State of California will continue to
increase, or even remain at current levels, in future periods particularly since
the Class Size Reduction Program has already produced the desired result for
over half of the student population in the target grade levels of kindergarten
through the third grade. If demand for modular classrooms declines, or the
Company's share of the market is reduced, the Company may again be faced with
excess production capacity. On the other hand, if demand for the Company's
classrooms were to increase to levels beyond current expectations, the Company's
growth would be restricted by its production capacity unless and until the
Company were able to construct or acquire additional production lines, at costs
and over a period of time which might prove substantial.
Primarily as a result of the adoption of the Class Size Reduction Program,
the Company's net sales and profitability increased significantly in 1996, and
have continued to increase during the first six months of 1997. Future operating
results could be affected by a number of factors, including changes in the
legislative and educational policies and financial condition of the State of
California, reductions in sales and/or margins caused by competitive pressures
and other factors, increases in operating costs including costs of raw
materials, production, supplies, personnel, equipment and transportation, and
increases in governmental regulation imposed under federal, state or local laws,
including regulations applicable to environmental, labor and trade matters. For
these reasons, among others, there can be no assurance that the Company will be
able to sustain rates of revenue growth and profitability in future periods that
are comparable to those experienced in the past one and one-half years.
CONCENTRATION OF CUSTOMERS
The Company's sales to date have been almost exclusively limited to sales
of classrooms to customers in California, and the Company has sold only a
limited number of classrooms to private schools and child care facilities. The
Company markets and sells its modular classrooms primarily to California school
districts, as well as to the State of California and leasing companies who lease
the classrooms principally to school districts. Given the costs of
transportation, the Company believes that it can compete cost-effectively
primarily within a radius of approximately 300 miles from any one of its
production facilities. Although parts of Nevada and Arizona are within such
distance, neither Nevada nor Arizona has a legislative and regulatory
environment regarding the construction and financing of schools that is
comparable to that which has given rise to the modular relocatable classroom
industry in California. During the year ended December 31, 1996, approximately
94% of the Company's net sales was attributable to the sale of classrooms, with
sales of classrooms to individual school districts and third party lessors to
school districts representing approximately 81% of the Company's net sales, and
sales of classrooms directly to the State of California accounting for
approximately 13% of net sales for the year. Unless and until the Company is
successful in implementing its strategy for increasing sales out of state and of
non-classroom products, the Company's operating results will continue to be
largely dependent on sales of modular relocatable classrooms to California
school districts.
MANAGEMENT OF GROWTH
The Company's business has grown rapidly during the past one and one-half
years and such growth has placed and, if sustained, will continue to place
significant demands on the Company's management and resources. The Company's
work force increased to 832 employees at June 30, 1997, from 93 employees at
December 31, 1995. The Company's future operating results will depend on
management's ability to manage future growth and there can be no assurance that
efforts to manage future growth will be successful. Should such growth continue,
it is likely that the Company would be required to hire and train additional
technical, marketing and administrative personnel, implement additional
operating and financial controls, install additional reporting and management
information systems for order processing, system monitoring, customer service
and financial reporting, and otherwise improve coordination between the design
and engineering, marketing, sales, manufacturing and finance functions.
7
<PAGE> 10
From time to time the Company has reviewed possible acquisitions of other
companies, with a view to expanding its operations to other geographic areas or
acquiring the capability of manufacturing other, non-classroom products.
Although it is not currently a party to any agreement or understanding with
respect to any prospective acquisition, the Company expects that it will
continue to explore possible acquisitions for the purpose of, among other
things, implementing its strategies for reducing its dependence on sales of
classrooms within California. Should the Company determine to make an
acquisition to extend its operations outside of California, expand its
non-classroom product line, increase its production capacity and/or market share
within California, or add the capability of manufacturing more of the components
used in the construction of its classrooms through one or more acquisitions, the
completion of any such acquisition could require sizeable amounts of capital and
is likely to involve the diversion of management's attention for other business
concerns. There can be no assurance that any acquired operations will be
integrated efficiently or prove profitable, and unexpected problems encountered
in connection with any such acquisition could have a material adverse effect on
the Company.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon its executive officers, Evan M. Gruber and
Michael G. Rhodes, and the loss of either of these key executive officers could
have a material adverse effect on the Company. Although the Company has entered
into an employment agreement with Mr. Gruber which continues through December
31, 1999, each of the these key executive officers may voluntarily terminate his
employment with the Company at any time. The continued success of the Company
also will depend upon its ability to attract and retain skilled employees. See
"Management."
PRODUCT SPECIFICATIONS AND REGULATION
Most of the Company's contracts require the Company to build classrooms
which meet certain established state mandated function and manufacturing
specifications. Under such contracts, which are typically fixed-price contracts,
the Company assumes the liability for correcting, without additional
compensation, any deficiencies which cause its classrooms to fail inspection and
certification tests. The Company relies upon its experience and expertise to
evaluate the potential for such liability inherent in prospective projects and
to price its bids accordingly. In addition, the Company attempts to minimize the
risk of additional exposure by adopting strict quality control standards, and
subjecting its units under construction to extensive testing under the
supervision of inspectors hired by the Company's customers. To date, the
Company's operating performance has not been materially impacted adversely by
such liability. However, should the Company incur such liability significantly
in excess of that estimated, its profitability would be adversely affected. See
"Business -- Marketing; -- Manufacturing; -- Regulation."
COMPETITION
The modular relocatable classroom industry is highly competitive, with the
market divided among a number of privately owned companies each of whose share
of the market the Company believes is smaller than that of the Company. In
addition, other firms with resources greater than the Company's, including
mobile home and modular office builders and recreational vehicle manufacturers,
may enter into competition with the Company in the future. Furthermore, as the
Company attempts to implement its strategy to increase sales outside of
California and to increase its sales of non-classroom products, it is
anticipated that it will encounter new competitors with more experience and a
more established position than the Company in those markets. There can be no
assurance that the Company will not encounter increased competition in the
future which could limit the Company's ability to maintain or increase its
market share and could adversely effect the Company's prices, gross margins, and
overall operating results. See "Business -- Competition."
8
<PAGE> 11
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
The Company's quarterly revenue typically has been highest in the second
and third quarters of the year when school districts generally place a large
number of orders for modular classrooms to be delivered in time for the upcoming
school year. Additionally, first and fourth quarter revenues typically are lower
due to a greater number of holidays and days of inclement weather during such
periods. The Company's operating results may vary significantly from quarter to
quarter due to a variety of factors including legislative and funding
developments, changes in the Company's product and customer mix, the
availability and cost of raw materials, the introduction of new products by the
Company or its competitors, pricing pressures, general economic and industry
conditions that affect customer demand, and other factors. The Company's results
of operations for any quarter would be adversely affected if orders are not
shipped in any quarter as anticipated.
FLUCTUATION OF STOCK PRICE
In recent periods, there has been a relatively limited market for the
Company's Common Stock, and the market price for a share of the Company's Common
Stock has fluctuated significantly. See "Market Information and Related
Matters." Although both the number of shares of the Common Stock outstanding in
the public float and the number of the Company's shareholders are expected to
increase significantly following the Offering, there can be no assurance that a
more active trading market for the Common Stock will develop or be sustained
following the Offering. Factors such as quarterly variations in the Company's
results of operations, trends in the Company's industry and market conditions
generally, and the limited and sporadic trading volume of the Company's Common
Stock which has been experienced from time to time, have caused, and may
continue to cause, the market price of the Company's Common Stock to fluctuate
significantly. In addition, the stock markets have experienced extreme price and
volume fluctuations during certain periods. These broad market fluctuations and
other factors may adversely affect the market price of the Company's Common
Stock for reasons unrelated to the Company's operating performance. Accordingly,
the price at which shares are offered hereby should not be considered an
indication of any price at which the Common Stock may trade in the future.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 9,705,836 shares of the Company's Common Stock to be outstanding
immediately following this Offering, 4,649,081 shares are held by affiliates of
the Company but are not subject to the restrictions on resale under the
Securities Act of 1933, as amended (the "Securities Act"), having been
registered for public resale from time to time under the Securities Act. All of
these shares (with certain limited exceptions) are subject to agreements which
restrict their public sale for 180 days after the date of this Prospectus
without prior approval of Bear, Stearns & Co. Inc. In addition, the Company has
registered 1,650,000 shares of Common Stock issuable upon exercise of options
granted and to be granted under the Company's existing stock option plans. Sales
of substantial amounts of these shares, or even the potential for such sales,
could have a depressive effect on the market price of shares of the Company's
Common Stock and could impair the Company's ability to raise capital through the
sale of its equity securities.
CONTROL BY EXISTING MANAGEMENT
Upon completion of this Offering, the current executive officers and
directors of the Company will continue to own or have voting control over, in
the aggregate, approximately 30% of the shares of the Company's Common Stock
then outstanding. Accordingly, the Company's current management will continue to
be able to significantly influence the outcome of elections of directors and
other matters presented to a vote of shareholders. See "Principal and Selling
Shareholders."
ABILITY TO ISSUE PREFERRED STOCK; ANTI-TAKEOVER DEVICES
The Company is authorized to issue up to 5,000,000 shares of Preferred
Stock in one or more series, the terms of which may be determined at the time of
issuance by the Board of Directors, without further action by the Company's
shareholders, and may include voting rights, preferences as to dividends and
liquidation,
9
<PAGE> 12
conversion and redemptive rights and sinking fund provisions. Although the
Company currently has no plans to issue any shares of Preferred Stock, the
issuance of Preferred Stock in the future could affect the rights of the holders
of the Company's Common Stock and thereby reduce the value of the Common Stock.
In particular, specific rights granted to future holders of Preferred Stock
could be used to restrict the Company's ability to merge with or sell its assets
to a third party, or otherwise delay, discourage, or prevent a change in control
of the Company. In addition, the Company's Articles of Incorporation provide for
the elimination of cumulative voting and the classification of the Company's
Board of Directors in certain circumstances, provisions which are also likely to
delay, discourage, or prevent a change in control of the Company. The Company
has been advised by the Underwriters that the number of holders of the Company's
Common Stock is likely to increase to at least 800 as a consequence of this
Offering, in which event the Company intends to cause these provisions of its
Articles of Incorporation to become operative by electing a classified Board of
Directors, without cumulative voting, at the next annual meeting of
shareholders.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered by the Company are estimated to be approximately $26.8
million, based on an assumed offering price of $28.625 per share (the last
reported sales price for a share of the Company's Common Stock on The Nasdaq
National Market on October 13, 1997), and after deduction of underwriting
discounts and commissions and estimated offering expenses payable by the
Company. The Company will not receive any proceeds from the sale of shares by
the Selling Shareholders.
The Company plans to use a portion of the net proceeds to repay amounts
then outstanding under the Company's $20.0 million revolving loan agreement with
a bank (the "Credit Facility"). As of September 30, 1997, borrowings of $12.6
million were outstanding under the Credit Facility. Amounts borrowed under the
Credit Facility are secured by substantially all of the Company's assets, bear
interest at a floating rate equal to 0.75% above the lender's reference rate,
and must be repaid in full by September 30, 2000. The Company expects that it
will continue to use the Credit Facility as a source of working capital after
this Offering is consummated.
The remaining net proceeds are expected to be used as additions to working
capital to finance higher levels of accounts receivable and inventories, and for
other general corporate purposes. Pending the uses described herein, it is
anticipated that all or a portion of the net proceeds will be invested in high
quality income-producing instruments such as short-term corporate investment
grade or United States Government interest-bearing securities.
10
<PAGE> 13
MARKET INFORMATION AND RELATED MATTERS
The Company's Common Stock is currently traded on The Nasdaq National
Market under the symbol "MODT." The following table sets forth on a per share
basis the high and low closing sales prices per share for the Common Stock on
The Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1995
First Quarter............................................ $ 1.750 $ 1.125
Second Quarter........................................... 1.875 1.125
Third Quarter............................................ 2.625 1.188
Fourth Quarter........................................... 2.375 1.875
1996
First Quarter............................................ 3.625 2.250
Second Quarter........................................... 5.750 2.875
Third Quarter............................................ 9.625 3.500
Fourth Quarter........................................... 9.500 6.875
1997
First Quarter............................................ 13.875 7.875
Second Quarter........................................... 13.000 10.625
Third Quarter............................................ 25.250 11.625
Fourth Quarter (through October 13)...................... 28.625 21.625
</TABLE>
On October 13, 1997, the closing sales price on The Nasdaq National Market
for a share of the Company's Common Stock was $28.625. The approximate number of
holders of record of the Company's Common Stock as of September 30, 1997, was
78.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock since 1990. The
Board of Directors currently intends to follow a policy of retaining all
earnings, if any, to finance the continued growth and development of the
Company's business and does not anticipate paying cash dividends in the
foreseeable future. Any future determination as to the payment of cash dividends
will be dependent upon the Company's financial condition and results of
operations and other factors deemed relevant by the Board of Directors.
Moreover, the Company's Credit Facility currently prohibits the payment of cash
dividends.
11
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997, and as adjusted to give effect to receipt by the Company of the net
proceeds from the sale of the 1,000,000 shares of Common Stock offered by the
Company hereby (assuming a public offering price of $28.625 per share) and the
anticipated application of the net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (1):
Bank debt (less current portion).................................... $13,332 $ --
Industrial development bonds........................................ 1,800 1,800
------- -------
Total long-term debt........................................ 15,132 1,800
======= =======
Shareholders' equity:
Preferred Stock, $0.01 par value: 5,000,000 shares authorized; none
issued and outstanding........................................... -- --
Common Stock, $0.01 par value: 20,000,000 shares authorized,
8,679,000 shares outstanding(2), (9,679,000 shares outstanding as
adjusted)........................................................ 4,043 4,053
Additional paid-in capital............................................ 15,744 42,485
Retained earnings..................................................... 800 800
------- -------
Total shareholders' equity....................................... 20,587 47,338
------- -------
Total capitalization........................................ $35,719 $49,138
======= =======
</TABLE>
- ---------------
(1) For a description of the Company's long-term debt, see Notes 5 and 6 of
Notes to Financial Statements.
(2) Excludes 1,206,933 shares issuable upon exercise of currently outstanding
options, and 196,667 shares available for the grant of additional options
under the Company's stock option plans. See "Management -- Stock Options."
12
<PAGE> 15
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected income statement and balance sheet data set forth below for
the three years ended December 31, 1994, 1995 and 1996 have been derived from
the audited financial statements of the Company included elsewhere herein. The
selected income statement and balance sheet data set forth below for the years
ended December 31, 1992 and 1993 have been derived from audited financial
statements of the Company that are not included herein. The selected income
statement and balance sheet data for the six month periods ended June 30, 1996
and 1997 have been derived from the unaudited financial statements of the
Company included elsewhere herein and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of the Company's operations for such periods.
The selected income statement and balance sheet data set forth below should be
read in conjunction with those financial statements (including the notes
thereto) and with "Management's Discussion and Analysis of Results of Operations
and Financial Condition" also included elsewhere herein. The results of the
Company's operations for the six months ended June 30, 1997 are not necessarily
indicative of results to be expected for any future period or the fiscal year
ending December 31, 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales...................................... $31,192 $19,658 $20,355 $19,386 $49,886 $12,704 $58,906
Cost of sales.................................. 30,601 21,764 17,766 16,401 42,629 10,862 47,688
------- ------- ------- ------- ------- ------- -------
Gross profit (loss)............................ 591 (2,106) 2,589 2,985 7,257 1,842 11,218
Selling, general and administrative expenses... 2,193 1,871 1,554 1,613 2,345 848 2,182
Restructuring charge(1)........................ -- 2,470 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations.................. (1,602) (6,447) 1,035 1,372 4,912 994 9,036
Interest expense, net.......................... (705) (565) (471) (387) (422) (107) (549)
Other income (expense)......................... (19) 47 42 (1) (13) 22 64
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes.............. (2,326) (6,965) 606 984 4,477 909 8,551
Provision for income taxes..................... 40 1 4 19 208 20 3,356
------- ------- ------- ------- ------- ------- -------
Net income (loss).............................. (2,366) (6,966) 602 965 4,269 889 5,195
======= ======= ======= ======= ======= ======= =======
Net income (loss) available for Common
Stock(2)..................................... $(2,366) $(6,966) $ 602 $ 799 $ 4,221 $ 841 $ 5,195
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per common share(3)............ $ (0.64) $ (1.97) $ 0.11 $ 0.12 $ 0.47 $ 0.10 $ 0.55
Weighted average shares outstanding (in
thousands)(3)................................ 3,701 3,529 5,294 6,712 9,041 8,750 9,370
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................ $ 6,263 $ 3,063 $ 4,403 $ 4,383 $14,069 $ 7,738 $26,647
Total assets................................... 28,903 16,620 15,919 15,154 34,029 21,833 58,387
Total liabilities.............................. 17,193 11,889 7,900 6,411 18,716 11,712 37,800
Long-term debt, excluding current portion(4)... 6,075 6,506 4,400 3,590 7,844 5,642 15,132
Shareholders' equity........................... 11,709 4,732 8,019 8,743 15,313 10,121 20,587
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Gross margin................................... 1.9% (10.7%) 12.7% 15.4% 14.5% 14.5% 19.0%
Operating margin............................... (5.1%) (32.8%) 5.1% 7.1% 9.8% 7.8% 15.3%
Standard classrooms sold(5).................... 899 698 680 605 1,610 413 2,066
Backlog at period end(6)....................... $13,000 $ 6,000 $ 7,000 $ 4,100 $58,000 $20,400 $80,400
</TABLE>
- ---------------
(1) Reflects the write-off of intangible assets related to the Company's 1989
purchase of "Del-Tec", which manufactured more extensively customized,
higher priced units, whose operations were discontinued in the third quarter
of 1993.
(2) After deduction of preferred stock dividends paid or accrued of $166,000 and
$48,000 for the years ended December 31, 1995 and 1996, respectively, and
$48,000 for the six months ended June 30, 1996. No shares of the Company's
preferred stock were outstanding during the six months ended June 30, 1997,
and no shares currently are outstanding. See Note 11 of Notes to Financial
Statements.
(3) Computed on a fully diluted basis.
(4) For a description of the Company's long-term debt, see Notes 5 and 6 of
Notes to Financial Statements.
(5) Determined by dividing the total square footage of floors sold during the
year by 960 square feet, the floor area of a standard classroom. See
"Business -- Modular Classrooms."
(6) The Company manufactures classrooms to fill existing orders only, and not
for inventory. Backlog consists of sales orders scheduled for completion
during the next 12 months.
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
Since its inception in 1982, the Company's principal business has been the
design, manufacture, marketing and installation of modular relocatable
classrooms. The Company's primary customers consist of individual school
districts located in California and the State of California. The need for new
classrooms in California school districts is generally governed by the number of
students per class, which is a function of the net migration of families into
and out of school districts and the total number of new students entering the
school system in any given year.
Specific provisions of California legislation govern the amount of the
State's budget which must be directed toward the public school system. A portion
of these funds may be allocated for the addition of new classrooms. In addition,
the State can raise funds to build or add new classrooms through the issuance of
general obligation bonds. One condition currently governing the receipt of State
funding for new classroom additions is that at least 30% of the classroom space
to be added must be relocatable structures, unless the school district can
demonstrate that the use of such structures is not practical in any given
situation. See "Business -- Legislation and Funding."
In the early to mid 1990's, California suffered through a recession that
resulted in statewide budgetary constraints. During this period, the amount of
State funds available for the addition of new classrooms was severely limited.
As a result, the Company experienced a decline in net sales in 1992 and 1993,
and net sales in 1994 and 1995 were essentially the same as those generated in
1993. In response, the Company initiated a cost control program which included
layoffs of approximately 80% of its staff as compared to the June 1991 work
force, and temporarily closed its plant in Lathrop, California. In addition, the
Chief Executive Officer of the Company agreed to a 50% salary reduction and each
of the Company's other top management personnel agreed to a 10% salary
reduction.
Due in large measure to the amelioration of the State budget crises and the
realization that the need for new classrooms in California far exceeded supply,
beginning in the second half of 1996 and continuing into 1997, the State has
increased the amount of funds targeted specifically for the addition of new
classrooms. In November 1996, the State implemented the Class Size Reduction
Program, the goal of which is to reduce public school class sizes in
kindergarten through the third grade. For the 1996-1997 school year the State
spent $822 million under this program, including $200 million specifically for
facilities, which may be relocatable classrooms. Primarily as a result of the
implementation of the Class Size Reduction Program, the Company's net sales
increased to $49.9 million for the year ended December 31, 1996, compared to
$19.4 million in 1995, and have increased to $58.9 million for the first half of
1997, compared to $12.7 million in the first six months of 1996. Although the
State's upcoming budget has not been finalized, based upon information available
to it, the Company believes that total State funding under the Class Size
Reduction Program for the 1997-1998 school year will be as high as $1.5 billion
for both general operations and school facilities. In addition, an $8.2 billion
school construction bond issue has been proposed, as part of a package of
legislation, for inclusion on the June 1998 California ballot, the proceeds of
which, if on the ballot and approved by the voters, would be used to construct
and modernize existing school facilities, acquire land to build new schools, and
construct or add classrooms. See "Business -- Legislation and Funding." In
response to the increased demand for its modular relocatable classrooms, the
Company re-opened the Northern California Lathrop plant in 1997, is expanding
its Southern California production capacity in Perris, and intends to further
expand production capacity at the Lathrop plant in late 1998.
14
<PAGE> 17
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
of net sales represented by certain items in the Company's statements of
operations.
PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------- -----------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 87.3 84.6 85.5 85.5 81.0
------ ------ ------ ------ ------
Gross profit............................... 12.7 15.4 14.5 14.5 19.0
Selling, general and administrative
expenses................................. 7.6 8.3 4.7 6.7 3.7
------ ------ ------ ------ ------
Income from operations..................... 5.1 7.1 9.8 7.8 15.3
Interest expense, net...................... (2.3) (2.0) (0.8) (0.8) (0.9)
Other income............................... 0.2 -- -- 0.2 0.1
------ ------ ------ ------ ------
Income before income taxes................. 3.0 5.1 9.0 7.2 14.5
Provision for income taxes................. -- 0.1 0.4 0.2 5.7
------ ------ ------ ------ ------
Net income................................. 3.0% 5.0% 8.6% 7.0% 8.8%
====== ====== ====== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Net sales for the six months ended June 30, 1997 were $58.9 million, an
increase of $46.2 million, or approximately 364%, over net sales of $12.7
million for the six months ended June 30, 1996. The increase in net sales is
principally attributable to the economic recovery of the State of California and
the continued implementation of the Class Size Reduction Program for
kindergarten through third grade classes in California's public elementary
schools, which was adopted in 1996.
Gross profit for the six months ended June 30, 1997 was $11.2 million, an
increase of $9.4 million over gross profit of $1.8 million for the same period
in 1996. Gross profit as a percentage of net sales for the six months ended June
30, 1997 was 19.0%, compared to 14.5% for the same period in 1996. The increase
was due to the increased volume, utilization of a previously idle facility, and
the realization of manufacturing efficiencies.
Selling, general and administrative expenses for the six months ended June
30, 1997 totaled $2.2 million, representing an increase of $1.3 million over the
$848,000 in selling, general and administrative expenses incurred for the six
months ended June 30, 1996. The increase was primarily due to an increase in the
number of employees required to handle the greater sales volume. However, as a
percentage of net sales, selling, general and administrative expenses decreased
to 3.7% for the six months ended June 30, 1997, from 6.7% for the same period in
1996, largely as a result of the Company's strategy of controlling selling,
general and administrative expenses in a period of growth.
Due to increased volume and average borrowings outstanding, net interest
expense increased from $107,000 for the six months ended June 30, 1996 to
$549,000 for the six months ended June 30, 1997.
The provision for income taxes was $3.4 million for the six months ended
June 30, 1997, compared to $20,000 for the six months ended June 30, 1996. The
Company's effective tax rate increased to 39.3% for the six months ended June
30, 1997, compared to 2.2% for the six months ended June 30, 1996. The effective
tax rate for the six months ended June 30, 1996 was favorably impacted by the
federal income tax benefit of remaining net operating loss carryforwards that
were generated in prior years.
15
<PAGE> 18
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales for the year ended December 31, 1996 increased to $49.9 million,
an increase of $30.5 million, or approximately 157%, from $19.4 million in 1995.
The increase in 1996 was due principally to the amelioration of the State of
California budget deficit and the implementation during the year of the Class
Size Reduction Program for kindergarten through third grade classes in
California's public elementary schools.
For the year ended December 31, 1996, gross profit was $7.3 million, an
increase of $4.3 million, or approximately 143%, over 1995 gross profit of $3.0
million. However, as a percentage of net sales, gross profit declined to 14.5%
in 1996, from 15.4% in 1995. The decline of gross profit as a percentage of net
sales was primarily attributable to a change in product mix as the Company
focused its resources on manufacturing more standardized classrooms which could
be sold in greater numbers.
In 1996, selling, general and administrative expenses increased to $2.3
million from $1.6 million, due to increases in the number of employees and an
increase in selling costs. However, because net sales increased substantially
during the year, selling, general and administrative expenses as a percentage of
net sales decreased to 4.7% in 1996 from 8.3% in 1995.
For the year ended December 31, 1996, net interest expense increased by
$35,000, from $387,000 in 1995 to $422,000 in 1996, due to slightly higher
borrowings to finance growing levels of accounts receivables and
work-in-progress inventories attributable to the large 1996 increase in net
sales.
The provision for income taxes was $208,000 for the year ended December 31,
1996, compared to $19,000 for the year ended December 31, 1995. The Company's
effective tax rate increased to 4.6% for the year ended December 31, 1996, from
1.9% for the year ended December 31, 1995, due to differences between financial
and tax accounting treatment of certain items, primarily accrued liabilities.
The effective tax rate in both periods was positively impacted by the
utilization for federal income tax purposes of net operating loss carryforwards
generated in prior years.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales for the year ended December 31, 1995 were $19.4 million, a
decrease of $969,000, or approximately 5%, from 1994 net sales of $20.4 million.
This slight decline in net sales from year to year was indicative of a
stabilized market during the California recession.
Although net sales were slightly lower in 1995 than in 1994, gross profit
increased to $3.0 million in 1995, an increase of $396,000, or approximately
15%, from $2.6 million in 1994. Gross profit as a percentage of sales increased
to 15.4% in 1995 from 12.7% in 1994. These increases were primarily due to
savings associated with the Company's cost cutting measures initiated in 1993.
In 1995 and 1994, selling, general and administrative expenses remained at
approximately $1.6 million. However, selling, general and administrative
expenses as a percentage of net sales increased to 8.3% in 1995, from 7.6% in
1994, as a result of the slight decline in 1995 net sales.
Net interest expense for the year ended December 31, 1995 decreased from
$471,000 in 1994 to $387,000 in 1995, as borrowing decreased during part of the
year due to a decline in sales. In addition, the Company was able to reduce its
borrowing by utilizing the proceeds from the 1994 Financing described below
under "Liquidity and Capital Resources."
The provision for income taxes was $19,000 for the year ended December 31,
1995, compared to $4,000 for the year ended December 31, 1994. The Company's
effective tax rate increased to 1.9% for the year ended December 31, 1995, from
0.7% for the year ended December 31, 1994, due to differences between financial
and tax accounting treatment of certain items, primarily accrued liabilities.
The effective tax rate in both periods was positively impacted by the
utilization for federal income tax purposes of net operating loss carryforwards
generated in prior years.
INFLATION
The Company does not believe that inflation had a material effect on its
results of operations during the past two years. However, there can be no
assurance that the Company's business will not be affected by inflation in the
future.
16
<PAGE> 19
QUARTERLY RESULTS
The Company's quarterly operating results may fluctuate significantly due
to a variety of factors, including changes in the Company's product and customer
mix, the introduction of new products by the Company or its competitors, pricing
pressures, general economic conditions and other factors. In addition, it can be
expected that the Company will continue to incur product development, marketing
and promotional expenses based upon management's expectations as to future
sales. Since many of these expenses are committed in advance, the Company
generally is unable to adjust spending in a timely manner to compensate for any
unexpected shortfall in sales. If operating revenues do not meet the Company's
expectations in any given quarter, quarterly operating results may be adversely
affected. There can be no assurance that the Company will be profitable in any
given quarter.
Historically, the Company's quarterly revenues have been highest in the
second and third quarters of each calendar year because a large number of orders
for modular classrooms placed by school districts require that classrooms be
constructed, delivered and installed in time for the upcoming new school year,
which generally commences in September. Additionally, first and fourth quarter
revenues are typically lower due to a greater number of holidays and days of
inclement weather during such periods. The Company typically has been able to
add employees as needed to respond to the corresponding increases in
manufacturing output required to meet this seasonal demand. In addition, the
Company's operating margins may vary on a quarterly basis depending upon the mix
of revenues between standardized classrooms and higher margin customized
classrooms and the timing of the completion of large, higher margin customized
contracts.
The following table sets forth certain quarterly financial data for each of
the four quarters in 1995 and 1996 and the first two quarters of 1997 which has
been derived from unaudited financial statements that, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such quarterly information.
The operating results for any quarter are not necessarily indicative of the
results to be expected for any future quarter. In contrast to the typical
seasonality of the Company's business, net sales in the fourth quarter of 1996
were much higher than in any other quarter of that year, reflecting the
increasing demand for the Company's classrooms experienced in recent periods.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------
FISCAL 1995 FISCAL 1996 FISCAL 1997
---------------------------------- ----------------------------------- -----------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 30, JUNE 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- ------- -------- ------- ------- ------- -------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. $3,665 $5,712 $6,758 $3,251 $3,621 $9,083 $14,285 $22,897 $25,813 $33,093
Gross profit........... 516 877 958 634 433 1,409 2,121 3,294 4,376 6,842
Income from
operations........... 123 412 630 207 117 877 1,498 2,420 3,338 5,698
Interest income
(expense)............ (100) (138) (182) 33 (38) (70) (142) (172) (219) (330)
Income before income
taxes................ 21 280 457 226 97 812 1,378 2,190 3,135 5,416
Net income............. 21 280 457 207 97 792 1,329 2,051 1,912 3,283
Net income available
for Common
Stock(1)............. 21 280 457 41 97 744 1,329 2,051 1,912 3,283
Net income per common
share(2)............. $ 0.01 $ 0.04 $ 0.07 $ 0.00 $ 0.01 $ 0.09 $ 0.14 $ 0.23 $ 0.20 $ 0.35
Weighted average shares
outstanding(2)....... 6,123 6,128 6,550 6,712 7,358 8,750 9,200 9,041 9,350 9,370
</TABLE>
- ---------------
(1) After deduction of preferred stock dividends paid or accrued of $166,000 and
$48,000 in the quarters ended December 31, 1995 and June 30 1996,
respectively. No shares of the Company's preferred stock were outstanding
during the six months ended June 30, 1997, and no shares currently are
outstanding. See Note 11 of Notes to Financial Statements.
(2) Computed on a fully diluted basis.
17
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
Since the 1994 Financing described below, the Company has funded its
operations and capital expenditures with cash generated internally by
operations, supplemented by borrowings under various credit facilities. During
the years ended December 31, 1994, 1995 and 1996, and the six months ended June
30, 1997, the Company's operations provided (used) cash in the amounts of
approximately $428,000, $1.2 million, ($4.9 million) and ($4.5 million),
respectively. At June 30, 1997, the Company had approximately $2.7 million in
cash.
In September 1997, the Company amended its Credit Facility to increase the
amount which the Company is entitled to borrow thereunder and extend the term of
the commitment to September 30, 2000. The Company is entitled to borrow, from
time to time, up to $20.0 million, with actual borrowings limited to specified
percentages of eligible accounts receivable, equipment and inventories. On June
30, 1997, the Company was entitled to borrow up to the maximum amount of the
Credit Facility, and approximately $13.3 million was outstanding. Interest on
outstanding balances is payable at a floating rate equal to 0.75% above the
lender's reference rate. Borrowings are secured by substantially all of the
Company's assets.
The Company had working capital of $4.4 million, $14.1 million and $26.6
million at December 31, 1995, December 31, 1996 and June 30, 1997, respectively.
In the first six months of 1997, current assets increased by $24.4 million, with
an increase of $18.3 million in contracts receivable and an increase of $3.7
million in inventories, primarily as a result of the increase in net sales for
the period. Current liabilities increased by $11.8 million, with accrued
liabilities and billings in excess of costs and estimated earnings increasing by
$5.4 million and $5.7 million, respectively, as a result of the higher level of
net sales. In 1996, contracts receivable, costs and estimated earnings in excess
of billings on contracts, and inventories increased by $7.1 million, $7.6
million, and $3.5 million, respectively, as the Company's net sales increased
significantly during the second half of the year following implementation of the
State's Class Size Reduction Program. Accounts payable and accrued liabilities
increased by $5.3 million and $2.3 million, respectively, in 1996, also as a
result of the increase in net sales.
Capital expenditures amounted to $482,000, $2.0 million and $570,000 during
the years ended December 31, 1995 and 1996 and the six months ended June 30,
1997, respectively. In 1995, the majority of these expenditures was concentrated
on maintenance of equipment. Capital expenditures increased significantly in
1996 primarily as a result of the re-opening of the Company's Lathrop,
California manufacturing facility. In September 1997, the Company began
construction of an additional production line at one of its Perris, California
facilities. The Company estimates that 1997 capital expenditures, including the
costs of this additional production line, will total approximately $2.0 million.
The Company expects that capital expenditures in 1998 will be approximately $2.0
million, which includes the costs of adding a new production line at the
Northern California plant in Lathrop in late 1998.
The Company has a $4.0 million Industrial Development Bond issued by the
Industrial Development Authority of the County of San Joaquin, California, the
net proceeds of which were used to partially finance the $6.0 million cost of
construction of the Company's Lathrop, California facility. The loan to the
Company must be repaid over a 26 year period, and bears interest at a variable
rate (initially 6.75% per annum), which is repriced weekly, subject to
conversion to a fixed rate at the option of the Company under certain
conditions. The Company's obligation to make payments of principal and interest
on this loan is secured by an irrevocable letter of credit obtained by the
Company from Union Bank of California N.A. Accordingly, the Company's borrowing
capacity will be reduced during the period the letter of credit is outstanding.
As of June 30, 1997, $1.9 million principal amount of this loan remained
outstanding.
In May 1994, the Company raised net proceeds of approximately $2.7 million
through the sale of 2,850,000 shares of Series A Preferred Stock to several
private investors who are Selling Shareholders in this Offering (the "1994
Financing"). In April 1996, all of the Series A Preferred Stock was converted
into 2,850,000 shares of Common Stock. In December 1996, warrants issued to the
investors in connection with the 1994 Financing were exercised, resulting in
cash proceeds to the Company of approximately $1.6 million and the issuance of
2,204,000 additional shares of Common Stock.
18
<PAGE> 21
Management believes that the Company's existing product lines and
manufacturing capacity will enable the Company to generate sufficient cash
through operations, supplemented by the net proceeds to the Company from this
Offering and continued use of its existing line of credit, to finance the
Company's business over the next twelve months. However, additional cash
resources may be required if the Company's rate of growth exceeds currently
anticipated levels. Moreover, it may prove necessary for the Company to
construct or acquire additional manufacturing facilities in order for the
Company to compete effectively in new market areas or states which are beyond a
300 mile radius from one of its production facilities. The construction or
acquisition of new facilities could require significant additional capital.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"), effective for fiscal years ending after December 15, 1997. SFAS 128
introduces and requires the presentation of "basic" earnings per share which
represents net earnings divided by the weighted average shares outstanding
excluding all common stock equivalents. Dual presentation of "diluted" earnings
per share, reflecting the dilutive effects of all common stock equivalents, will
also be required. The diluted presentation is similar to the current
presentation of fully diluted earnings per share. Management has not determined
whether the adoption of SFAS 128 will have a material impact on the Company's
combined financial position or results of operations.
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 not determined whether the
adoption of SFAS 130 will have a material impact on the Company's combined
financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for public business enterprises to
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to 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.
19
<PAGE> 22
BUSINESS
GENERAL
The Company designs, manufactures, markets and installs modular relocatable
classrooms. Based upon 1996 net sales, the Company believes that it is the
largest manufacturer of modular relocatable classrooms in California. The
Company's classrooms are sold primarily to California school districts and to
third parties and the State of California principally for lease to California's
school districts. The Company's products include standardized classrooms, as
well as customized structures for use as libraries, gymnasiums, computer rooms
and bathroom facilities. The Company believes that its modular structures can be
substituted for virtually any part of a school. The Company's products are
engineered and constructed in accordance with structural and seismic safety
specifications adopted by the California Department of State Architects which
regulates all school construction on public land, standards which are more
rigorous than the requirements for other portable units.
As a result of net enrollment increases in California schools and budgetary
constraints experienced by the State of California which limited the
availability of funds for the addition of new classrooms over the last few years
prior to 1996, California's schools are reported to be among the most crowded in
the nation. As the State budget deficit has ameliorated, the legislature has
increased funding for new classrooms in an effort to reduce the average number
of students per class. State funding initiatives include funds from both (i) the
State's operating budget, such as the $200 million allocated for construction or
addition of classrooms out of the total of $822 million spent under the Class
Size Reduction Program for the 1996-1997 school year and as much as $1.5 billion
allocated for the 1997-1998 school year for both general operations and school
facilities, and (ii) the sale of statewide bond issues, such as the $8.2 billion
bond issue for school construction, including the addition of classrooms,
proposed as part of a package of legislation for inclusion on the June 1998
ballot. See "Business -- Legislation and Funding."
These factors have combined to increase the demand for modular relocatable
classrooms, which cost significantly less and take much less time to construct
and install than conventional school facilities, and which permit a school
district to relocate the units as student enrollments shift. In addition, the
Company's products provide added flexibility to school districts in financing
the costs of adding classroom space, since modular relocatable classrooms are
considered personal property which can be financed out of a district's operating
budget in addition to its capital budget. In recognition of these advantages,
California legislation currently requires, with certain exceptions, that at
least 30% of all new classroom space added using state funds must be relocatable
structures. See "Business -- Legislation and Funding."
STRATEGY
The Company's objective is to maintain and enhance its position as the
leading provider of modular relocatable classrooms to California's school
districts, and to diversify its business by obtaining new customers for its
classrooms both within and outside California and by further developing its
non-classroom business. The Company has adopted the following strategies to
achieve these goals: (i) further expand production capacity to meet the
increased demand for modular relocatable classrooms in California; (ii) increase
market share in California by developing products designed and engineered to
meet a variety of customer needs that can be manufactured and sold at
competitive prices; (iii) expand the market for its modular relocatable
classrooms to include private schools and day care facilities in California and
public and private schools and day care facilities out of state; (iv) expand its
non-classroom product line; and (v) continue to refine its manufacturing
processes to increase profit margins on modular relocatable classrooms.
Expand Capacity: As a result of increased demand for modular relocatable
classrooms, the Company currently is operating at or near capacity at both its
Southern California and Northern California manufacturing facilities. The
Company operates a total of six production lines in four plants, and is
currently adding a seventh production line to serve the Southern California
market. This line is expected to be fully operational by the end of 1997. The
Company is also planning to add an eighth production line to serve the Northern
California market in late 1998.
Increase Market Share: The Company believes that it has attained its
position as the largest manufacturer of modular relocatable classrooms in
California because of its ability to increase production capacity to accommodate
recent increases in demand, its efficient manufacturing processes which have
enabled the
20
<PAGE> 23
Company to be one of the low-cost providers of modular relocatable classrooms in
California, and the quality and design features of its classrooms. In addition,
the Company's Northern and Southern California manufacturing facilities enable
it to serve efficiently all of California with a minimum of transportation
costs. The Company believes that its streamlined organizational structure, the
vertical integration of its manufacturing process, and the level of its bonding
capacity and access to capital combine to provide it with several advantages
over most of its competitors, which generally are smaller, privately-owned
businesses. The Company intends to capitalize on these advantages by expanding
its marketing efforts, aggressively pursuing new contract opportunities, and
continuing to offer quality products at competitive prices, in an effort to
further increase its share of the market.
Expand the Market for Modular Classrooms: In addition to the State of
California and California school districts, the Company believes that there are
a significant number of other potential customers for its classrooms both within
and outside of California. Several adjacent states such as Arizona and Nevada
exhibit population growth and increasing levels of school enrollment. Although a
comparable regulatory environment does not exist in either of these states, the
Company believes that Arizona and Nevada will face similar problems of
overcrowded classrooms and limited funding for the financing of new classroom
construction in the next several years. In an effort to increase classroom sales
to private schools in California, and to intensify the Company's classroom
marketing efforts in Arizona and Nevada, the Company recently hired a
salesperson whose primary responsibility will be to market and sell the
Company's classrooms to these new customers.
Diversify Markets and Product Mix: The Company believes that opportunities
exist to significantly increase sales of non-classroom products from 1996
levels. The Company recently has taken steps to take advantage of these
opportunities. In 1996, the Company acquired a manufacturing facility in
Patterson, California, which enhanced the Company's ability to manufacture and
sell modular structures intended for uses other than as classrooms. Since 1995,
the Company has designed, manufactured and sold a limited number of modular
units which shelter valuable electronic equipment used by the cellular telephone
industry. From time to time, the Company also has used excess production
capacity to manufacture a variety of modular, portable buildings for commercial
uses that are not designed and engineered to the California Department of State
Architect standards for classrooms. The Company believes that its manufacturing
expertise and capacity will enable it to significantly increase its presence in
these, and possibly other, non-classroom markets.
Increase Profit Margins: The Company recently has been able to generate
increasing operating income margins. Operating income as a percentage of net
sales for the years ended December 31, 1995 and 1996, and for the six months
ended June 30, 1997, was 7.1%, 9.8% and 15.3%, respectively. These margin
improvements have been the result of increased sales, improved operating
efficiencies, and a disciplined management plan to permit only modest growth in
the overall level of general and administrative expenses as revenue grows.
Additional efficiencies are expected to be realized as the Company's new
production lines are activated and attain normalized utilization rates. The
Company also will continue to endeavor to develop new design and manufacturing
enhancements or alternatives which could be expected to reduce production costs.
INDUSTRY OVERVIEW
In recent years, the growth in population in California, both from births
and from immigration, has led to increasing school enrollments. As a result,
classrooms in many California school districts currently are reported to be
among the most crowded in the nation, with an average of 29 students per class
compared to a national average class size of 17. The California Department of
Finance has estimated that student enrollment in grades kindergarten through 12
will increase by approximately 18% over the period from 1995 through 2005.
Additionally, changes in population demographics have left many existing
permanent school facilities in older residential areas with excess capacity due
to declining enrollments, while many new residential areas are faced with a
continuing shortage of available classrooms. Consequently, it has become
necessary to add additional classrooms at many existing facilities, and to build
a number of new schools.
The construction of new schools and the addition of classrooms at existing
schools are tied to the sources and levels of funding available to California
school districts. The availability of funding for new school and
21
<PAGE> 24
classroom additions, in turn, is determined in large measure by the amount of
tax revenue raised by the State, the level of annual allocations for education
from the State's budget which is determined by educational policies that are
subject to political concerns, and the willingness of the California electorate
to approve state and local bond issues to raise money for school facilities.
In 1978, California voters approved Proposition 13, which rolled back local
property taxes (a traditional source of funding for school districts) and
limited the ability of local school districts to raise taxes to finance the
construction of school facilities. The passage of Proposition 13, coupled with
growing student populations, has increased the need for local school districts
to find ways to reduce the cost of adding classrooms. The California legislature
has adopted several statutes designed to alleviate some of the problems
associated with the shortage of classrooms and lack of local funding
alternatives. For example, in 1976, California adopted legislation that
currently requires, with certain exceptions, that at least 30% of all new
classroom space added using State funds must be relocatable structures. This
requirement may be satisfied through the purchase or lease of the Company's
classrooms. See "Business -- Legislation and Funding." Additionally, in 1979 the
California legislature adopted legislation that provides for State funding for
the purchase of relocatable classrooms that could be leased to local school
districts.
As the number of students enrolled in California schools continued to
increase throughout the 1990's, the State of California and California school
districts experienced increasing budget shortfalls. The resulting shortage of
funding available at both the State and local level led to declining sales of
modular relocatable classrooms, by the Company and on an industry-wide basis.
However, as the State budget deficit ameliorated, funding for modular
relocatable classrooms began to increase. This growth was accelerated when the
California Class Size Reduction Program was implemented in November 1996, the
goal of which is to reduce class sizes to 20 students in public elementary
schools at the kindergarten through third grade levels. For the 1996-1997 school
year, the State spent $822 million under this program, including $200 million
specifically for facilities which may be relocatable classrooms. The Company
believes that total State funding under the Class Size Reduction Program for the
1997-1998 school year will be as high as $1.5 billion for both general
operations and school facilities. In addition, an $8.2 billion bond issue for
school construction, including the addition of classrooms, has been proposed for
inclusion on the June 1998 ballot. As a result, the Company anticipates that the
near-term market for modular relocatable classrooms in California will be
significantly greater than it was in 1996, when the Company believes that
industry-wide sales of modular classrooms within California were approximately
$175 million. See "Risk Factors -- Legislation and School Funding."
When compared to the construction of a conventionally built classroom,
modular classrooms offer a number of advantages, including, among others:
<TABLE>
<S> <C>
Lower Cost -- The cost of the Company's standard classroom may be as
low as $29,000 installed, as compared to $80,000 to
$100,000 for conventional construction of a comparable
classroom;
Shorter Construction Time -- A modular classroom can be built and ready for
occupancy in a shorter period of time than that
required for state approval and construction of a
conventional facility;
Flexibility of Use -- Modular relocatable classrooms enable a school district
to use the units for short or long term needs and to
move them if necessary to meet shifts in student
populations; and
Ease of Financing -- As personal rather than real property, modular
classrooms may be leased on a long or short-term basis
from manufacturers and leasing companies. This allows
school districts to finance modular classrooms out of
both their operating and capital budgets.
</TABLE>
MODULAR RELOCATABLE CLASSROOMS
The Company's modular relocatable classrooms are designed, engineered and
constructed in accordance with structural and seismic safety specifications
adopted by the California Department of State Architects,
22
<PAGE> 25
standards which are more rigorous than the requirements for other portable
units. The Department of State Architects, which regulates all school
construction on public land, has prescribed extensive regulations regarding the
design and construction of school facilities, setting minimum qualifications for
the preparation of plans and specifications, and reviews all plans for the
construction of material modifications to any school building. Construction
authorization is not given unless the school district's architect certifies that
a proposed project satisfies construction cost and allowable area standards. The
Company subcontracts with structural engineering firms to interface with each
school district's architect or engineer to process project specifications
through the Department of State Architects. The Company believes that the
regulated environment in which the Company's classrooms are manufactured serves
as a significant barrier to market entry by prospective competitors. See
"Business -- Competition."
Conventional school facilities constructed by school districts using funds
from the State Office of Public School Construction typically require two to
three years for approval and funding. By contrast, factory-built school
buildings like the Company's standard classrooms may be pre-approved by the
State for use in school construction. Once plans and specifications for a given
classroom have been pre-approved, school districts can thereafter include in
their application to obtain State funds for new facilities a notification that
they intend to use pre-approved, standardized factory-built classrooms. This
procedure reduces the time required in the State's approval process to as little
as 90 days, thereby providing an additional incentive to use factory-built
relocatable classrooms. In all cases, continuous on-site inspection by a
licensed architect or structural engineer is required during actual manufacture
of the classrooms, with the school district obligated to reimburse the
Department for the costs of such inspection.
The Company's classrooms are manufactured and installed in accordance with
the applicable Department of State Architects building code, which supersedes
all local building codes for purposes of school construction. The classrooms
must comply with accessibility requirements for the handicapped, seismic and
fire code requirements.
The Company manufactures and installs standard, largely pre-fabricated
modular relocatable classrooms, as well as customized classrooms which are
modular in design but assembled on-site using components manufactured by the
Company together with components purchased from third party suppliers. The
Company's classrooms vary in size from two modular units containing a total of
960 square feet to 20 units that can be joined together to produce a facility
comprising 9,600 square feet. Larger configurations are also possible. Typical
prices for the Company's standard classrooms range from $29,000 to $34,000,
while prices for a custom classroom generally exceed $50,000, depending upon the
extent of customization required.
The two basic structural designs for standard and custom modular classrooms
are a rigid frame structure and a shear wall structure. The rigid frame
structure uses a steel floor and roof system, supported at each corner with
square steel tubing. These buildings have curtain walls to enclose the interior
from the outside, and have the advantage of unlimited width and length. Rigid
frame structures may be used for multipurpose rooms and physical education
buildings as well as standard classrooms. Shear wall classrooms have a maximum
width of 48 feet (four 12 foot modules) and a maximum length of 60 feet. These
classrooms use the exterior and interior walls to produce the required
structural strength and can be built at lower costs than rigid frame structures.
The Company's most popular factory-built classroom is a rigid frame design, with
two modules connected side by side to complete a 24 by 40 foot classroom.
Custom built classrooms, libraries and gymnasiums contain design variations
and dimensions such as ceiling height, pitch, overall size and interior
configuration. These units typically are not assembled at the factory but
instead are shipped in pieces, including floors, walls and roofs, and assembled
on-site. Contracts for custom built units may include the design, engineering
and layout for an entire school or an addition to a school, and involve site
preparation, grading, concrete and asphalt work and landscaping. Customized
classrooms are generally more expensive and take longer to complete than the
Company's standard classrooms.
The interior and exterior of all of the Company's modular classrooms can be
customized by employing different materials, design features and floor plans.
Most classrooms are open, but the interior of the buildings can be divided into
individual rooms by permanent or relocatable partitions. The floor covering is
usually
23
<PAGE> 26
carpet but may be linoleum or wood depending upon the intended use of the
classroom. Interior wall material is usually vinyl covered firtex over gypsum
board, while other finishes such as porcelain enamel or painted hardboard may be
used in such places as restrooms and laboratories. Electrical wiring, air
conditioning, windows, doors, fire sprinklers and plumbing are installed during
the manufacturing process. The exterior of the units is typically plywood
siding, painted to the customer's specifications, but other common siding
material may also be applied.
CLASSROOM CUSTOMERS
The Company markets and sells its modular classrooms primarily to
California school districts. The Company also sells its classrooms to the State
of California and leasing companies, both of which lease the classrooms
principally to California school districts. Sales of classrooms accounted for
90.5%, 94.2% and 97.2% of the Company's total net sales for the years ended
December 31, 1995 and 1996 and the six months ended June 30, 1997. The Company's
customers typically pay cash from general operating funds or the proceeds of
local bond issues, or lease classrooms through banks, leasing companies and
other private funding sources. See "Legislation and Funding."
Sales of classrooms to individual California school districts accounted for
approximately 80.7%, 74.5% and 82.0%, respectively, of the Company's net sales
during the years ended December 31, 1995 and 1996 and the six months ended June
30, 1997, with sales of classrooms to third party lessors to California school
districts during these periods accounting for approximately 3.1%, 7.2% and
11.6%, respectively, of the Company's net sales. The mix of school districts to
which the Company sells its products varies somewhat from year to year. Sales of
classrooms directly to the State of California during the six months ended June
30, 1997 represented approximately 3.6% of the Company's net sales for the
period, compared to approximately 12.5% of the Company's 1996 net sales and
approximately 6.7% of the Company's 1995 net sales. Sales of classrooms to
private schools, day care providers and out-of-state customers accounted for
less than one percent of the Company's net sales during the years ended December
31, 1995 and 1996 and the six months ended June 30, 1997. One of the lessors to
which the Company sells classrooms for lease to California school districts is
affiliated with the Company through common ownership by two of the Company's
directors. During the years ended December 31, 1995 and 1996 and the six months
ended June 30, 1997, sales of classrooms to this affiliated leasing company
comprised approximately 3.1%, 2.9% and 1.2%, respectively, of the Company's net
sales. See "Management -- Certain Transactions."
OTHER PRODUCTS
In addition to modular relocatable classrooms that are designed and
manufactured in accordance with the California Department of State Architects
standards, the Company also manufactures modular, portable buildings which can
be used as office facilities and construction trailers and for other commercial
purposes. Currently, most of these non-classroom products are manufactured at
the Patterson, California plant which the Company acquired in 1996. During the
years ended December 31, 1995 and 1996 and the six months ended June 30, 1997,
sales of such modular, portable buildings to commercial customers accounted, in
the aggregate, for approximately 9.5%, 5.8% and 2.8%, respectively, of the
Company's net sales. The Company also manufactures a small number of modular
structures that house and shelter electronic equipment used in the wireless
telecommunications industry. During the years ended December 31, 1995 and 1996
and the six months ended June 30, 1997, sales of modular telecommunications
equipment shelters, which are included above in sales to commercial customers,
accounted for less than one percent of the Company's net sales for each period.
SALES AND MARKETING
The Company's classroom sales force is currently divided into three
marketing regions: Northern, Central and Southern California. The Company
currently employs three classroom salespersons, each of whom is compensated on a
commission basis. These salespersons maintain contact with the individual school
districts in their respective marketing regions on a quarterly basis. They are
also in contact with architects and building inspectors employed by the school
districts, as well as school officials who may be in a position to influence
purchasing decisions.
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<PAGE> 27
Most of the Company's contracts are awarded on an open bid basis. The
marketing process for many of the Company's contracts begins prior to the time
the bid process begins. After the Company selects bids or contracts that it
desires to pursue, the Company's marketing and engineering personnel interface
directly with various school boards, superintendents or architects during the
process of formulating bid or contract specifications. The Company prepares its
bids or proposals using various criteria, including current material prices,
historical overhead costs and a targeted profit margin. Substantially all of the
Company's contracts are turnkey, including engineering and design,
manufacturing, transportation, installation and necessary site work. Open bid
contracts are normally awarded to the lowest responsible bidder.
A fourth salesperson is charged with increasing the Company's sales of
buildings to the commercial and telecommunications markets. In addition,
effective as of October 1997, the Company has hired a salesperson whose focus
will be the sale of classrooms in Nevada and Arizona, and to private schools and
day care operators in California.
MANUFACTURING AND ON-SITE INSTALLATION
The Company uses an assembly-line approach in the manufacture of its
standardized classrooms. The process begins with the fabrication of the steel
floor joists. The floor joists are welded to steel frames to form the floor
sub-assembly, which is covered by plywood flooring. Metal roof trusses and
structural supports are fabricated separately and added as the unit progresses
down the assembly-line. Installation of walls, insulation, suspended grid
ceilings, electrical wiring, air conditioning, windows, doors, fire sprinklers,
plumbing and chalk boards follow, with painting and finishing crews completing
the process. Once construction of a standard classroom commences, the building
can be completed in as little as three days. The construction of custom units
on-site, from pre-manufactured components, is similar to factory-built units in
its progressively-staged assembly process but may involve more extensive
structural connections and finish work depending upon the size and type of
building, and typically takes 30 to 60 days to complete.
The Company is vertically-integrated in the manufacture of its standardized
modular classrooms, in that the Company fabricates substantially all of its own
metal components at its facility in Perris, California, including structural
floor and roof joists, exterior roof panels, gutters, down spouts, vents, ramps,
stairs and railings. The Company believes that the ability to fabricate its own
metal components helps it reduce the costs of its products and to control their
quality and delivery schedules. The Company maintains a quality control system
throughout the manufacturing process, under the supervision of its own quality
control personnel and inspectors engaged by its customers. In addition, the
Company tracks the status of all classrooms from sale through installation.
Completed standard classroom units, or components used in customized units,
are loaded onto specially designed flat-bed trailers for towing by trucks to the
school building site. Upon arrival at the site, the units are structurally
connected, or components are assembled, and the classroom is installed on its
foundation. Connection with utilities is completed in the same manner as in
conventional on-site construction. Installation of the modular classrooms may be
on a separate foundation, or several units may be incorporated on a common
foundation under a unified roof, so that upon installation they appear to be an
integral part of an existing school facility or function as a larger building,
such as a gymnasium or cafeteria.
The Company oversees installation of its modular classrooms on-site, using
its own employees for job supervision as a general contractor and, whenever
possible, for utility hook-ups and other tasks. In many custom projects, the
Company performs or supervises subcontracted electrical, plumbing, grading,
paving and foundation work, landscaping and other site preparation work and
services. Sub-contractors are typically used for larger utility, grading,
concrete and landscaping jobs. The Company has a general contractor's license in
the State of California.
In addition to approvals by the Department of State Architects, licensed
inspectors representing various school districts are on-site at each
manufacturing facility of the Company to continuously inspect the construction
of classrooms for structural integrity. On-site inspections after installation
are also made by local fire departments for purposes of determining adequate
accessibility.
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<PAGE> 28
The Company currently has four manufacturing facilities. Two are located in
Southern California, in Perris, California which is approximately 60 miles east
of Los Angeles. The Company has another two facilities near Lathrop, California.
Lathrop is located approximately 75 miles east of San Francisco. With the
re-opening of the Lathrop plant in early 1997, the Company currently has a total
of six production lines in operation, with a seventh scheduled to commence
production in Perris by the end of 1997. An eighth production line is scheduled
to be added at the Lathrop plant in late 1998.
The standard contractual warranty for the Company's modular relocatable
classrooms is one year, although it may be varied by contract specifications.
Purchased equipment installed by the Company, such as air conditioning units,
carry the manufacturers' standard warranty. Warranty costs have not been
material in the past.
The Company believes that there are multiple sources of supplies available
for all raw materials and equipment used in manufacturing its classrooms, most
of which are standard construction items such as steel, plywood and wallboard.
BACKLOG
The Company manufactures classrooms to fill existing orders only, and not
for inventory. As of December 31, 1996, the backlog of sales orders was
approximately $58.0 million, up from approximately $7.0 million at December 31,
1994 and $4.1 million at December 31, 1995. Backlog at June 30, 1997 was $80.4
million, compared to backlog of $20.4 million at June 30, 1996. Only orders
which are scheduled for completion during the following 12-month period are
included in the Company's backlog. The rate of booking new contracts can vary
from month to month, and customer changes in delivery schedules can occur. For
these reasons, among others, the Company's backlog as of any particular date may
not be representative of actual sales for any succeeding period.
COMPETITION
The Company believes that, based upon 1996 net sales, it is the largest
modular relocatable classroom manufacturer in California. However, the modular
relocatable classroom industry is highly competitive, with the market divided
among a number of privately-owned companies whose share of the market is smaller
than that of the Company. The Company believes that the nature of the bidding
process, the level of performance bonding required, and the industry's regulated
environment serve as barriers to market entry, and that the expertise of its
management gives it an advantage over competitors. Nevertheless, the Company
believes that additional competitors may enter the market in the future, some of
whom may have significantly greater capital and other resources than are
available to the Company, and that competition may therefore increase.
The Company also believes that its expertise in site preparation and
on-site installation gives it a competitive advantage over many manufacturers of
higher-priced, customized modular units, while its vertically integrated,
assembly-line approach to manufacturing enables the Company to be one of the low
cost producers of standardized, modular relocatable classrooms in California.
Unlike many of its competitors, the Company manufactures most of its own metal
components which allows the Company to maintain quality control over these
components and to produce them at a lower average cost than that at which they
could be obtained from outside sources. The Company also believes that the
quality and appearance of its buildings, and its reputation for reliability in
completion of its contracts, enable it to maintain a favorable position among
its competition.
The Company categorizes its current competition based upon the geographic
market served (Northern California versus Southern California), as well as upon
the relative degree of customization of products sold. Beyond a radius of
approximately 300 miles, the Company believes that transportation costs
typically will either significantly increase the prices at which it bids for
given projects, or will substantially erode the Company's gross profit margins.
The primary competitors of the Company for standardized classrooms are
believed to be Aurora Modular Industries in Southern California and American
Modular Systems in Northern California. Profiles Structures,
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<PAGE> 29
Inc. in Southern California and Design Mobile Systems in Northern California are
the Company's primary competitors in the market for higher-priced, customized
classrooms. Each of these four competitors is a privately-owned company.
PERFORMANCE BONDS
A substantial portion of the Company's sales require that the Company
provide bonds to ensure that the contracts will be performed and completed in
accordance with contract terms and conditions, and to assure that subcontractors
and materialmen will be paid. In determining whether to issue a performance bond
on behalf of the Company, bonding companies consider a variety of factors
concerning the specific project to be bonded, as well as the Company's levels of
working capital, shareholders' equity and outstanding indebtedness. From time to
time the Company has had, and in the future may again encounter, difficulty in
obtaining bonding for a given project. Although it has had no difficulty in
obtaining the necessary bonding in the last twelve months, the Company believes
that its difficulty in obtaining bonding for certain large projects from time to
time in the past has been attributable to the Company's levels of working
capital, shareholders' equity and indebtedness, and not to concerns about the
Company's ability to perform the work required under the contract. To assist the
Company in obtaining performance bonds in certain instances, the Company's
executive officers have been required to indemnify the bonding companies against
all losses they might suffer as a result of providing performance bonds for the
Company. The proceeds to the Company from this Offering are expected to enhance
the Company's ability to obtain performance bonds, furnish security, and meet
other financial requirements associated with bidding for larger contracts and
performing work simultaneously under a greater number of contracts.
REGULATION OF CLASSROOM CONSTRUCTION
In 1933, the California Legislature adopted the Field Act, which generally
provides that school facilities must be constructed in accordance with more
rigorous structural and seismic safety specifications than are applicable to
general commercial buildings. Under the Field Act, the Department of General
Services, through the Department of State Architects, has prescribed extensive
regulations regarding the design and construction of school facilities, and
reviews all plans for the construction of material modifications to any school
building. Construction authorization is not given unless the school district's
architect certifies that a proposed project satisfies construction cost and
allowable area standards. In addition, the Field Act provides for the submittal
of complete plans, cost estimates, and filing fees by the school district to the
Department of General Services, for the adoption of regulations setting minimum
qualifications for the preparation of plans and specifications, and the
supervision of school construction by a licensed architect or structural
engineer.
Additionally, California legislation provides that certain factory-built
school buildings may be pre-approved by the State for use in school
construction. Once plans and specifications for a given classroom have been
pre-approved by the Department of General Services, school districts can
thereafter include in their application to obtain State funds for new facilities
a notification that they intend to use pre-approved, standardized factory-built
classrooms. This procedure reduces the time required in the State's approval
process thereby providing additional incentive to use factory-built relocatable
classrooms. The Department of General Services provides for the continuous
on-site inspection during actual manufacturing of the classrooms, with the
school districts obligated to reimburse the Department for the costs of such
inspection.
LEGISLATION AND FUNDING
The demand for modular relocatable classrooms in California is affected by
various statutes. These statutes, among other things, prescribe the methods by
which the Company's customers, primarily individual school districts, obtain
funding for the construction of new school facilities, and the manner in which
available funding is to be spent by the school districts.
In 1978, Proposition 13 was approved, which rolled back property taxes and
limited the ability of local school districts to rely upon revenue from such
taxes to finance the construction of school facilities. As a result, financing
for new school construction and rehabilitation of existing schools by California
school districts
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<PAGE> 30
is currently provided, at the state level, by funds derived from general revenue
sources or statewide bond issues, and, at the local level, by local bond issues
and fees imposed on the developers of residential, commercial and industrial
real property ("Developer Fees"). Historically, the primary source of financing
for the purchase or lease of relocatable classrooms has been state funding.
STATE FUNDING
Until the adoption of the Class Size Reduction Program in 1996, the most
important source of funding at the State level for new school facilities was
through the issuance and sale of statewide general obligation bonds which are
repaid out of the State's General Funds. Proposals to issue such bonds are
placed on statewide ballots from time-to-time in connection with general or
special elections, and require approval by a majority of the votes cast in
connection with such proposals. As in the case of the Class Size Reduction
Program, the State also may annually allocate funds from the State's budget for
the support of school districts and community college districts.
Authority for Bond Financing. Under the School Building Lease -- Purchase
Law of 1976, the State Allocation Board is empowered to purchase or lease school
facilities using funds from the periodic issuance of general obligation bonds of
the State of California. These purchased or leased school facilities may be made
available by the State Allocation Board to school districts. Certain matching
funds, usually derived from Developer Fees, are required to be supplied by the
school districts seeking state funded facilities. If the school districts
acquire relocatable structures using Developer Fees, the amount of the required
matching funds is reduced by the cost of such facilities. This reduction in
matching funds is intended to provide an incentive for school districts to lease
relocatable classrooms. As a condition of funding any project under this
program, at least 30% of new classroom space to be added must be comprised of
relocatable structures, unless relocatable structures are not available or
special conditions of terrain, climate or unavailability of space make the use
of relocatable structures impractical. In addition, State funds under this
program are not available to school districts which are determined to have an
adequate amount of square footage available for their student population.
Recently, a package of bills was introduced that would, among other things,
(i) revise the School Building Lease-Purchase Law of 1976 including elimination
of the requirement that at least 30% of all classroom space to be added using
State funds be relocatable classrooms, (ii) place an $8.2 billion bond issue for
school construction on the June 1998 ballot, and (iii) include a proposed
amendment to the California Constitution on the June 1998 ballot. The proposed
Constitutional amendment would modify Proposition 13 by reducing the percentage
vote required for approval of tax increases to support local bond issuances from
two-thirds to a simple majority. However, both houses of the California
Legislature passed different versions of this package of bills, which were
returned to a conference committee. Each bill must still be approved by both
houses of the Legislature as revised by the conference committee. In addition,
none of these bills would become operative as currently proposed unless the $8.2
billion bond issue is approved by a majority of the California voters and the
proposed amendment to the California Constitution is approved by two-thirds of
the California voters.
In response to the adoption of Proposition 13, the State of California
adopted the California Emergency Classroom Law of 1979, pursuant to which the
State Allocation Board may spend up to $35 million per year from available funds
to purchase relocatable classrooms to be leased to school districts. Relocatable
classrooms are not available to school districts under this program if the
school district has available local bond proceeds that could be used to purchase
classroom facilities, unless the district has approved projects pending under
the School Building Lease-Purchase Law of 1976. The State has, in the past,
funded this program primarily from the proceeds of statewide bond issues
approved by voters.
Budget Allocations. Proposition 98, which was approved in 1988, requires
the State to allocate annually from the State's budget, for the support of
school districts and community college districts, a minimum amount equal to the
same percentage of funds as was appropriated for the support of those
institutions in fiscal year 1986-87. While this requirement may be suspended for
a given year by emergency legislation, it has the effect of limiting the ability
of the California legislature to reduce the level of school funding from that in
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<PAGE> 31
existence in 1986-87. The State raises the necessary funds through proceeds from
the sale of statewide bond issues, income tax revenues and other revenues. A
recent reduction in California's corporate tax rates, and a proposed reduction
in personal income tax rates, may affect future levels of the State's income tax
revenues.
In November 1996, California implemented the Class Size Reduction Program
in response to overcrowding in classrooms in the state and its assumed negative
impact on learning. An additional impetus for the program was a study conducted
by Tennessee State University which indicated that students in small classrooms
outperformed their peers from larger classes at least through the eighth grade
on standardized tests in math and reading. The goal of the California Class Size
Reduction Program is to reduce public elementary school class sizes in
kindergarten through the third grade. Under this program, schools that reduce
class size to 20 students in those grades will receive additional funds. For the
1996-1997 school year, a school district was entitled to receive $25,000 for
each new classroom added which reduced the average class size for a specified
grade level to 20 students or less. Among other ways new classrooms can quickly
and inexpensively be added, school districts may reconfigure existing space to
convert it to classrooms from other uses, or purchase or lease a modular
relocatable classroom.
LOCAL FUNDING
Local school districts in California have the ability to issue local
general obligation bonds for the acquisition and improvement of real property
for school construction. These bond issues require the approval of two-thirds of
the voters in the district and are repaid using the proceeds of increases in
local property taxes. A local school district may also levy Developer Fees on
new development projects in the district, subject to a maximum rate set by state
law. The Developer Fees can only be levied if the project can be shown to
contribute to the need for additional school facilities and the fee levied is
reasonably related to such need. In addition, California law provides for the
issuance of bonds by Community Facilities Districts which can be formed by a
variety of local government agencies, including school districts. These
districts, known as "Mello-Roos" districts, can have flexible boundaries and the
tax imposed to repay the bonds can be based on property use, acreage, population
density or other factors.
OTHER LEGISLATION
California legislation adopted in 1989 provides that school districts which
currently lease any building which does not meet the prescribed structural
standards must have replaced nonconforming buildings with conforming ones by
September 1, 1990. However, any district has the right to request a one-time
waiver for a maximum of three years upon presentation of satisfactory evidence
to the State Allocation Board that the district is proceeding in a timely
fashion with a program that will eliminate the need for the nonconforming
facilities within that time period. The State has authorized districts to renew
these waivers through 2000 and may grant further waivers. The Company
understands that a number of school districts have requested and been granted
such waivers. Based upon information received by the State Allocation Board from
school districts and provided to the Company, it is believed that there are more
than 4,500 trailers currently being used as classrooms by school districts
throughout California that eventually must be replaced with conforming
facilities by these school districts.
California has taken steps to encourage local school districts to adopt
year-round school programs to help increase the use of existing school
facilities and reduce the need for additional school facilities. School
districts requesting state funding under the School Building Lease-Purchase Law
of 1976 or the Emergency Classroom Law of 1979 discussed above must submit a
study examining the feasibility of implementing in the district a year-round
educational program that is designed to increase pupil capacity in the district
or in overcrowded high school attendance areas. The feasibility study
requirement is waived, however, if the district demonstrates that emergency or
urgent conditions exist in the district that necessitate the immediate need for
relocatable buildings. The demand for new school facilities, including
relocatable classrooms, would be adversely affected in the event that a
significant number of California school districts implemented year-round school
programs. In addition, a significant increase in the level of voluntary or
mandatory busing of students from overcrowded schools to schools with excess
capacity could adversely affect demand for new school facilities.
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LITIGATION
The Company from time to time is involved in various lawsuits related to
its ongoing business operations, primarily collection actions or vendor
disputes. In the opinion of management, no pending lawsuit will result in any
material adverse effect upon the Company or its financial condition.
ENVIRONMENTAL MATTERS
The Company is subject to a variety of federal, state and local
governmental regulations related to the storage, use and disposal of any
hazardous materials used by the Company in connection with the manufacture of
its products. Both the governmental regulations and the costs associated with
complying with such regulations are subject to change in the future.
EMPLOYEES
At June 30, 1997, the Company had 832 employees, including 789 in
manufacturing, 4 in sales, 20 in operations and 19 in general management and
administration. The Company's employees are not represented by a labor union,
and it has experienced no work stoppages. The Company believes that its employee
relations are good.
PROPERTIES
The Company's principal executive and administrative facilities are located
in approximately 11,400 square feet of modular buildings at its primary
manufacturing facility located in Perris, California. This manufacturing
facility occupies twenty-five acres, with approximately 200,000 square feet of
covered production space under roof, pursuant to a lease expiring in 2014. A
second facility in Perris occupies approximately thirty acres, with
approximately 120,000 square feet of covered production space under roof,
pursuant to a lease expiring in 2014. This second facility also includes
approximately 80,000 square feet under roof used as a metal working facility.
The Company's third plant consists of a 400,000 square foot manufacturing
facility on a 30-acre site in Lathrop, California that is leased through 2019.
The fourth plant, which was leased for up to five years in October 1996,
consists of approximately 50,000 square feet of manufacturing areas on a 4 acre
site in Patterson, California. The Company believes that its existing facilities
are well-maintained and in good operating condition, and, with the additional
production lines currently being added or planned for addition in 1998, meet the
requirements for its immediately foreseeable business needs. Each of the
Company's current facilities other than the Patterson plant is leased from an
affiliate. See "Management -- Certain Transactions."
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<PAGE> 33
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
------------------------------ ---- ----------------------------------------------------
<S> <C> <C>
Gerald B. Bashaw.............. 62 Chairman of the Board of Directors
Evan M. Gruber................ 44 Chief Executive Officer and Director
Michael G. Rhodes............. 36 Chief Operating Officer and Chief Financial Officer
Robert W. Campbell............ 41 Director
James D. Goldenetz............ 47 Director
Charles C. McGettigan......... 52 Director
James M. Phillips, Jr......... 49 Director
Myron A. Wick III............. 53 Director
</TABLE>
Mr. Bashaw founded the Company in 1982. Previously, he served as the Vice
President of Operations and then President of Aurora Modular Industries, a
manufacturer of modular classrooms, mobile homes, office trailers, and modular
houses and buildings, which he co-founded in 1965.
Mr. Gruber joined the Company in January 1989 as its Chief Financial
Officer, and was elected to the Company's Board of Directors and as its Chief
Executive Officer in January 1990. Prior to joining the Company, Mr. Gruber, who
is a certified public accountant, worked at his own public accounting firm in
Costa Mesa, California, which he founded in 1978.
Mr. Rhodes joined the Company in 1988 and was the Company's controller
through 1992. In 1993 he was elected Chief Financial Officer, and in 1996 was
elected Chief Operating Officer. Prior to his joining the Company, Mr. Rhodes
worked for a public accounting firm.
Mr. Campbell, who was elected to the Company's Board of Directors in 1992,
is a Managing Director of Corporate Finance at L.H. Friend, Weinress, Frankson &
Presson, Inc. From 1993 to 1995, Mr. Campbell was Senior Vice
President -- Investment Banking at Baraban Securities, Incorporated. From 1982
to 1993, Mr. Campbell was employed by The Seidler Companies, Inc. as Senior Vice
President -- Corporate Finance.
Mr. Goldenetz, who currently serves as the President of Class Leasing,
Inc., joined the Company as a director in January 1988, after previously serving
as the President of Aurora Modular Industries since January 1982. He began work
in the modular classroom industry, in production, at Aurora Modular Industries
in 1969.
Mr. McGettigan was elected to the Board of Directors in June 1994 in
connection with the 1994 Financing. Mr. McGettigan is a co-founder and managing
director of the investment banking firm of McGettigan, Wick & Co., Inc. and a
co-founder and general partner of Proactive Investment Managers, L.P., the
general partner of Proactive Partners, L.P., a merchant banking fund formed in
1991. Prior to founding McGettigan, Wick & Co., Inc., he was a Principal,
Corporate Finance of Hambrecht & Quist and a senior vice president of Dillon,
Read & Co. Mr. McGettigan is a director of Digital Dictation, Inc.; I-Flow
Corporation; Onsite Energy; Phoenix Network, Inc.; PMR Corporation; Sonex
Research, Inc.; Vie de France Corporation; Tanknology-NDE and Wray-Tech
Instruments Inc.
Mr. Phillips became a director of the Company upon the consummation of the
Company's initial public offering in July 1990. Mr. Phillips has been an
attorney for the last 20 years, practicing primarily in the areas of corporate
and securities law. After practicing law for 13 years with a number of law
firms, including Gibson, Dunn & Crutcher, Paul, Hastings, Janfosky & Walker, and
Brobeck, Phleger & Harrison, Mr. Phillips established his own firm in 1990.
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<PAGE> 34
Mr. Wick joined the Company's Board of Directors in June 1994 in connection
with the 1994 Financing. Mr. Wick is currently a managing director and founder
of McGettigan, Wick & Co., Inc., an investment banking firm formed in 1988, and
a general partner of Proactive Investment Managers, L.P., the general partner of
Proactive Partners, L.P., a merchant banking fund formed in 1991. Mr. Wick is a
director of Children's Discovery Centers; Digital Dictation Inc.; Electrostatic
Devices; Tanknology-NDE; Sonex Research, Inc. and Wray-Tech Instruments Inc.
EXECUTIVE COMPENSATION
The following table summarizes the annual and long term compensation paid
by the Company during the fiscal years ended December 31, 1994, 1995 and 1996 to
those persons who were, as of December 31, 1996, (i) the Chief Executive Officer
of the Company, and (ii) the other compensated executive officers of the
Company, if any, whose total annual salary and bonus exceeded $100,000 during
the year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
AWARDS
--------------------
ANNUAL COMPENSATION RESTRICTED PAYOUTS
--------------------------- STOCK ------- ALL OTHER
SALARY BONUS OTHER AWARDS OPTIONS LTIP COMPENSATION(1)
NAME AND PRINCIPAL POSITION YEAR $ $ $ $ # PAYOUTS $
- ------------------------------------- ---- -------- -------- ----- ---------- ------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Evan M. Gruber....................... 1996 $158,000 $137,000 -- -- 110,000 -- $ 4,615
Chief Executive Officer 1995 150,000 15,000 -- -- 25,000 -- 3,654
and Director 1994 125,000 -- -- -- 350,000 -- 4,030
Michael G. Rhodes.................... 1996 $ 90,000 $ 24,000 -- -- 105,000 -- $ 4,827
Chief Operating Officer, 1995 87,000 12,100 -- -- 20,000 -- 129
Chief Financial Officer 1994 85,000 -- -- -- 10,000 -- 4,124
</TABLE>
- ---------------
(1) The figures shown in the last column designated "All Other Compensation"
represent the executive officer's share of the Company's contribution to the
401(k) Plan. See "Management -- 401(k) Plan."
Each non-employee director is paid an annual retainer of $4,000, plus
$1,000 for each board and board committee meeting attended, and is granted an
option to purchase 5,000 shares of the Company's Common Stock at the end of each
year of service on the Board of Directors. See "Management -- Stock Options."
The Company has and will continue to pay the expenses of its non-employee
directors in attending Board meetings. No additional compensation is paid to any
employee director for serving on the Company's Board of Directors.
EMPLOYMENT AGREEMENT
In connection with the 1994 Financing, the Company entered into a
three-year employment agreement with Mr. Gruber, which in September 1996 the
Compensation Committee voted unanimously to extend through 1999. The agreement
includes, among other provisions, a base annual salary of not less than $150,000
per year, which was increased to $200,000 in October 1996, with periodic
increases equal to the rate of increase in the Consumer Price Index, and the
grant of an option to purchase 200,000 shares of the Company's Common Stock at
$1.50 per share. Additionally, under the agreement, Mr. Gruber is entitled to
receive a bonus equal to two and one-half percent of the amount, if any, by
which the net income before taxes of the Company for the year in question
exceeds $1 million.
401(K) PLAN
Under the Company's 401(k) Plan, officers and other employees of the
Company may elect to defer up to 12% of their compensation, subject to
limitations under the Internal Revenue Code. The Company makes annual
contributions on a 50% matching basis. Amounts deferred are deposited by the
Company in a trust account for distribution to employees upon retirement,
attainment of age 59 1/2, permanent disability, death, termination of employment
or the occurrence of conditions constituting extraordinary hardship. For the
year ended December 31, 1996, the Company contributed $4,615 and $4,827 as
matching contributions for the accounts of Mr. Gruber and Mr. Rhodes,
respectively.
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STOCK OPTIONS
In June 1989, the Company's Board of Directors adopted, and the Company's
shareholders approved, the Modtech, Inc. 1989 Stock Option Plan (the "1989
Plan"). The 1989 Plan provides for the grant of both incentive and nonstatutory
options to purchase up to an aggregate of 400,000 shares of the Company's Common
Stock. Incentive stock options can be granted only to employees, including
officers, of the Company, while nonstatutory 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. Participants
in the 1989 Plan are selected by the Board of Directors of the Company, or by a
committee of Directors selected by the Board as a whole. The Board or the
committee is empowered to determine the terms and conditions of each option
granted under the 1989 Plan, subject to the limitations that the exercise price
of incentive stock options cannot be less than the fair market value of the
Common Stock on the date of grant (110% if granted to an employee who owns 10%
or more of the Common Stock), no option can have a term in excess of ten years
(five years if granted to an employee owning 10% or more of the Common Stock)
and no incentive stock option can be granted to anyone other than a full-time
employee of the Company or its subsidiaries. Nonstatutory options may be granted
under the 1989 Plan with an exercise price of not less than 85% of the fair
market value of the Common Stock at the date of grant. As of December 31, 1996,
options to purchase 265,500 shares, at a weighted average exercise price of
$1.92, were outstanding under the 1989 Plan.
In March 1994, the Company's Board of Directors authorized the grant of
options to purchase up to 200,000 shares of the Company's Common Stock, and, in
connection with the private placement of Series A Preferred Stock in May 1994,
authorized the grant of options to purchase up to an additional 500,000 shares
of the Company's Common Stock (collectively, the "1994 Plans"). Since approval
of these options by the shareholders of the Company has not and will not be
sought, all options granted under the 1994 Plans will be deemed nonstatutory
options that do not entitle the recipients thereof the special federal income
tax treatment afforded to the recipients of incentive stock options. The
Company's Board of Directors, with Mr. Gruber abstaining, approved the grant to
Mr. Gruber of an option to purchase up to 150,000 shares of Common Stock at
$1.19 per share, and in May 1994, again with Mr. Gruber abstaining, approved the
grant of an option to Mr. Gruber to purchase up to an additional 200,000 shares
of Common Stock under the 1994 Plans, at $1.50 per share, as required by his new
employment agreement. See "Management -- Employment Agreements." As of December
31, 1996, options to purchase a total of 620,000 of these shares, at exercise
prices ranging from $1.19 to $4.50, were outstanding.
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. These
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). Additionally,
each non-employee director will be granted a non-statutory stock option to
purchase 5,000 shares at fair market value per share on the date of grant, for
each year of continuous service on the Company's Board of Directors. At December
31, 1996, options to purchase an aggregate of 110,000 of these shares, at the
exercise price of $4.50 per share, were outstanding.
33
<PAGE> 36
The following table sets forth certain information regarding options
granted by the Company during the year ended December 31, 1996 to the executive
officers of the Company identified in the Summary Compensation Table set forth
above:
OPTIONS GRANTED IN CALENDAR YEAR 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT ASSUMED
NO. OF % OF ANNUAL RATES OF STOCK
SHARES TOTAL PRICE APPRECIATION
SUBJECT TO OPTIONS FOR OPTION TERM(3)
OPTIONS GRANTED TO EXERCISE EXPIRATION ---------------------
NAME OF OPTIONEE GRANTED(1) EMPLOYEES PRICE(2) DATE 5% 10%
- ------------------------------------- ---------- ---------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Evan M. Gruber....................... 110,000 35% $2.13 12/31/2005 $129,000 $318,000
Michael G. Rhodes.................... 105,000 33% 2.13-4.50 7/11/2006 188,500 464,500
</TABLE>
- ---------------
(1) Options are exercisable starting 12 months after the grant date with 25%
vesting each year.
(2) The exercise price was the market price of a share of the Company's Common
Stock on the date of grant.
(3) On December 31, 1996, the closing sales price for a share of the Company's
Common Stock on The Nasdaq National Market was $7.875.
The following table sets forth information regarding options exercised
during the year ended December 31, 1996 by the executive officers of the Company
identified in the Summary Compensation Table set forth above, as well as the
aggregate value of unexercised options held by such executive officers at
December 31, 1996. The Company has no outstanding stock appreciation rights,
either freestanding or in tandem with options.
AGGREGATED OPTION EXERCISES LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END($)(1)
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Evan M. Gruber........... -- -- 201,250 333,750 $ 1,312,000 $ 2,095,000
Michael G. Rhodes........ -- -- 62,000 148,000 248,000 760,000
</TABLE>
- ---------------
(1) Calculated based on the closing sales price of the Company's Common Stock as
reported on The Nasdaq National Market on December 31, 1996, which was
$7.875 per share.
CERTAIN TRANSACTIONS
The Company leases its two facilities located in Perris, California, and
the land on which the manufacturing facility is located in Lathrop, California,
from Mr. Bashaw and general partnerships of which Messrs. Bashaw, Goldenetz and
Gruber together own a controlling interest, pursuant to standard industrial
leases. Under the terms of these leases, the Company is obligated to pay base
monthly payments which aggregate $67,000, subject to escalation in accordance
with changes in applicable cost of living indices. Due to the recent declines in
real estate values, Mr. Bashaw and the general partnerships reduced the base
monthly lease rates for the year ending December 31, 1994, for the manufacturing
facilities to an aggregate of $36,000. This base rent is subject to upward
adjustment to market rates each year based on annual market surveys conducted by
the parties. Because real estate values have remained depressed, no such
adjustment has yet been made. These leases expire in 2014 and 2019.
Messrs. Goldenetz and Gruber together own 60% of the capital stock of Class
Leasing, Inc., a California corporation ("Class Leasing"), in which the Company
has no ownership interest. Mr. Goldenetz is a full-time employee of Class
Leasing, serving as its President. In 1996, Mr. Gruber spent less than 10 hours
per month in connection with the affairs of Class Leasing. Class Leasing
purchases modular relocatable classrooms from the Company, upon standard terms
and at standard wholesale prices, and leases them to third parties primarily
34
<PAGE> 37
under three-year leases, cancelable yearly. During the years ended December 31,
1994, 1995, and 1996, and the six months ended June 30, 1997, the Company sold
modular relocatable classrooms to Class Leasing for aggregate purchase prices of
$1,009,000, $600,000, $1,453,000 and $745,000, respectively, which represented
approximately 5%, 3%, 3% and 1% of the Company's net sales for each of those
periods.
Messrs. Gruber and Rhodes have personally guaranteed certain of the
Company's obligations and the repayment by the Company of amounts which surety
companies may be required to expend under the terms of performance bonds issued
in connection with manufacturing contracts undertaken by the Company. No
payments have been made to Messrs. Gruber and Rhodes for the guarantees provided
by them.
In 1996, the Company paid $7,500 to L.H. Friend, Weinress, Frankson &
Presson, Inc. ("L.H. Friend") for certain financial advisory services. Robert W.
Campbell, a director of the Company, is an executive officer of L.H. Friend. In
addition, L.H. Friend is one of the Underwriters of this Offering.
For legal services rendered, the Company paid the law firm of Phillips &
Haddan LLP legal fees of approximately $20,000 during the year ended December
31, 1996. James M. Phillips, Jr., a director of the Company, is a principal of
the law firm of Phillips & Haddan LLP.
The Company is a party to an employment agreement with Mr. Gruber, and to
indemnification agreements with each of its directors and executive officers.
See "Management -- Employment Agreement" and "Description of Capital
Stock -- Limitation of Liability and Indemnification."
35
<PAGE> 38
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1997, and as
adjusted to reflect the sale of 1,000,000 shares by the Company and the sale of
2,000,000 shares by the Selling Shareholders, by (i) each director of the
Company, (ii) each person or group known to the Company to be the beneficial
owner of more than 5% of the outstanding Common Stock, (iii) each Selling
Shareholder, and (iv) all Directors and executive officers of the Company as a
group. Except as may be indicated in the footnotes to the table, each of such
persons has the sole voting and investment power with respect to the shares
owned, subject to applicable community property laws. Except as otherwise
indicated, the address of each holder identified below is in care of the
Company, 2830 Barrett Avenue, Perris, California 92571.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO NUMBER OF AFTER THE
OFFERING(1) SHARES OFFERING(1)
------------------- BEING -------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ----------------------------------------------- ---------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Gerald B. Bashaw (2)(15)....................... 583,674 6.7% 175,000 408,674 4.2%
Evan M. Gruber (3)(15)......................... 416,995 4.6 75,000 341,995 3.4
Michael G. Rhodes (4)(15)...................... 88,250 1.0 25,000 63,250 *
Robert W. Campbell (5)......................... 21,000 * -- 21,000 *
James D. Goldenetz (6)(15)..................... 159,531 1.8 25,000 134,531 1.4
Charles C. McGettigan (7)(14).................. 3,014,186 34.6 992,000 2,022,186 20.8
James M. Phillips, Jr. (8)..................... 15,000 * -- 15,000 *
Myron A. Wick, III (7)(14)..................... 3,014,186 34.6 992,000 2,022,186 20.8
Jon D. Gruber (9)(14).......................... 5,259,096 60.4 1,700,000 3,559,096 36.7
J. Patterson McBaine (10)(14).................. 5,199,896 59.7 1,700,000 3,499,896 36.1
Gruber & McBaine Capital Management
(11)(14)(15)................................. 2,172,410 24.9 708,000 1,464,410 15.1
Platinum Partners, L.P. (12)................... 522,000 6.0 -- 522,000 5.4
Proactive Partners, L.P. (13)(14)(15).......... 2,983,441 34.3 992,000 1,991,441 20.5
All directors and officers as a group (9
persons) (2)(3)(4)(5)(6)(7)(8)(15)........... 4,298,636 46.5 1,292,000 3,006,636 29.3
</TABLE>
- ---------------
* Less than one percent.
(1) In calculating beneficial and percentage ownership, all shares of Common
Stock which a named shareholder will have the right to acquire within 60
days of the date of this Prospectus upon exercise of stock options are
deemed to be outstanding for the purpose of computing the ownership of such
shareholder, but are not deemed to be outstanding for the purpose of
computing the percentage of Common Stock owned by any other shareholder. As
of September 30, 1997, an aggregate of 8,705,836 shares of Common Stock
were outstanding. Does not give effect to the potential issuance of
1,206,933 shares of Common Stock upon exercise of stock options that have
been granted but currently are not, and within 60 days of the date of this
Prospectus will not be, exercisable, or of up to 196,667 additional shares
issuable upon exercise of options available for the future grant of options
under the Company's stock option plans. See "Management -- Stock Options."
(2) Includes 10,000 shares issuable upon exercise of stock options.
(3) Includes 316,250 shares issuable upon exercise of stock options, but does
not include 352,083 shares issuable upon exercise of stock options which
have been granted but currently are not exercisable. Evan M. Gruber and Jon
D. Gruber are not related.
(4) Includes 61,250 shares issuable upon exercise of stock options, but does
not include 204,250 shares issuable upon exercise of stock options which
have been granted but currently are not exercisable.
(5) Includes 15,000 shares issuable upon exercise of stock options.
(6) Includes 105,000 shares issuable upon exercise of stock options.
36
<PAGE> 39
(7) Includes 20,745 shares owned of record directly by each of Messrs.
McGettigan and Wick, and all shares owned of record by Proactive Partners,
L.P. and affiliates of which Messrs. McGettigan and Wick are general
partners. Also includes options to purchase 10,000 shares which have been
granted to each of Messrs. McGettigan and Wick for serving on the Company's
Board of Directors.
(8) All of these shares are issuable upon exercise of stock options.
(9) Includes 103,245 shares owned of record directly by Mr. Gruber, all shares
owned of record by Proactive Partners, L.P. and affiliates, of which Mr.
Gruber is a general partner, and all shares owned of record by Gruber &
McBaine Capital Management and affiliates, of which Mr. Gruber is a general
partner. Jon D. Gruber and Evan M. Gruber are not related.
(10) Includes 44,045 shares owned of record directly by Mr. McBaine, all shares
owned of record by Proactive Partners and affiliates, of which Mr. McBaine
is a general partner, and all shares owned of record by Gruber & McBaine
Capital Management and affiliates, of which Mr. McBaine is a general
partner.
(11) Includes 110,200 shares owned of record directly by Gruber & McBaine
Capital Management, all shares owned of record by Proactive Partners, L.P.
and affiliates, and 2,062,210 shares owned of record by Lagunitas Partners,
Gruber & McBaine International and GMJ Investments, affiliated entities.
(12) These shares are owned of record by Platinum Partners, L.P., a
Massachusetts limited partnership (the "Partnership"), and also are deemed
to be beneficially owned by Hori Capital Management, Inc., the sole general
partner of the Partnership, and by Calvin G. Hori, the sole shareholder,
director and President of Hori Capital Management, Inc., the address of
each of which is One Washington Mall, 7th Floor, Boston, Massachusetts
02108.
(13) Includes 2,828,884 shares owned of record by Proactive Partners, L.P. and
154,557 shares owned of record by Fremont Proactive Partners, an affiliated
entity.
(14) The address of each of Charles C. McGettigan, Myron A. Wick, III, Jon D.
Gruber, J. Patterson McBaine, Gruber & McBaine Capital Management and
Proactive Partners, L.P. is 50 Osgood Place, San Francisco, CA 94133.
(15) In the event the Underwriter's over-allotment option is exercised in full,
Messrs. Bashaw, Gruber, Rhodes and Goldenetz, and Gruber & McBaine Capital
Management and Proactive Partners, L.P. would sell an additional 18,125,
25,000, 15,000, 15,000, 159,300 and 217,575 shares, respectively, and would
beneficially own 4.0%, 3.2%, 0.5%, 1.2%, 13.4% and 18.3%, respectively, of
the Common Stock outstanding after the Offering.
37
<PAGE> 40
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, $.01 par value, of which 8,705,836 shares were issued and
outstanding as of September 30, 1997, and 5,000,000 shares of Preferred Stock,
$.01 par value, of which no shares currently are outstanding.
COMMON STOCK
Holders of the Common Stock are entitled to one vote per share on each
matter submitted to a vote of the shareholders of the Company and to cumulate
votes for the election of directors. Subject to preferences that may be
applicable to the holders of any outstanding Preferred Stock, each holder of
Common Stock is entitled to receive ratably such dividends, if any, as may be
declared by the Company's Board of Directors out of funds legally available
therefor. See "Dividend Policy." Upon the liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to share ratably in all
assets of the Company which are legally available for distribution, after
payment of all debts and other liabilities and the liquidation preference of any
outstanding Preferred Stock. Holders of Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of Common
Stock are, and the shares to be sold by the Company in this Offering, will be,
when issued and delivered, validly issued, fully-paid and nonassessable under
the laws of the State of California.
PREFERRED STOCK
The Company's Board of Directors is authorized, subject to any limitations
prescribed by the laws of the State of California, but without further vote or
action by the Company's shareholders, to provide for the issuance of Preferred
Stock in one or more series, to establish from time to time the number of shares
to be included in each such series, to fix the designations, powers, preferences
and rights of the shares of each such series and any qualifications, limitations
or restrictions thereof, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then
outstanding). The Board may authorize and issue Preferred Stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of Common Stock. In addition, the issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no current plans to issue any shares of Preferred
Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services L.L.C.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As allowed by the California General Corporation Law, the Articles of
Incorporation of the Company provide that the liability of the directors of the
Company for monetary damages shall be eliminated to the fullest extent
permissible under California law. This is intended to eliminate the personal
liability of a director for monetary damages in an action brought by or in the
right of the Company for breach of a director's duties to the Company or its
shareholders except for liability for acts or omissions that involve intentional
misconduct or knowing and culpable violation of law, for acts or omissions that
a director believes to be contrary the best interests of the Company or its
shareholders or that involve the absence of good faith on the part of the
director, for any transaction from which a director derived an improper personal
benefit, for acts or omissions that show a reckless disregard for the director's
duty to the Company or its shareholders in circumstances in which the director
was aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of serious injury to the Company or its
shareholders, for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the Company
or its shareholders, with respect to certain contracts in which a director has a
material financial interest and for approval of certain improper distributions
to shareholders or certain loans or guarantees. This provision does not limit or
eliminate the rights of the Company or any shareholder to seek non-monetary
relief such as an injunction or rescission in the event of a breach of a
director's duty of care.
38
<PAGE> 41
The Company's Bylaws require the Company to indemnify its officers,
directors, employees and other agents to the full extent permitted by law,
including those circumstances in which indemnification would otherwise be
discretionary. In addition, the Company's Articles of Incorporation expressly
authorize the use of indemnification agreements and, with the approval of its
shareholders, the Company has entered into separate indemnification agreements
with each of its directors. The Company's Board of Directors has authorized
similar indemnification agreements for the Company's officers. These agreements
may require the Company, among other things, to indemnify directors and officers
against certain liabilities that may arise by reason of their status or service
as directors and officers, and to advance their expenses incurred as a result of
any proceeding against them as to which they could be indemnified.
CHANGES UPON BECOMING A LISTED CORPORATION
The Articles of Incorporation of the Company provide that, upon the Company
becoming a "listed corporation" (as defined below), the Board of Directors will
be divided into three classes of directors, serving staggered three-year terms,
and cumulative voting will be eliminated. As a result, if the Company becomes a
listed corporation, approximately one-third of the Board of Directors will be
elected each year and no shareholder will be entitled to cumulate votes in the
election of directors.
The Company will be deemed to be a "listed corporation" if it has
outstanding shares listed on the New York or American Stock Exchanges or the
Company has outstanding securities designated as qualified for trading as a
national market system security on the National Association of Securities
Dealers Automated Quotation System ("Nasdaq"), or any successor national market
system, if the Company has at least 800 holders of its equity securities as of
the record date of the Company's most recent annual meeting of shareholders. For
purposes of determining the number of holders of the Company's equity
securities, there would be included, in addition to the number of record holders
reflected on the Company's stock records, the number of holders of the equity
securities held in the name of any nominee holder and certified by such nominee
holder. The Company would be required to maintain any such certification with
the record of shareholders for inspection and copying as provided under the
General Corporation Law of California.
The Company's Common Stock currently is listed on The Nasdaq National
Market, and the Company has been advised by the Underwriters that the number of
holders of the Company's Common Stock is likely to increase to at least 800 as a
consequence of this Offering. In such event, the Company would be deemed to be a
"listed corporation," and intends to cause the classified board provision in its
Articles of Incorporation to become operative by electing a classified board,
without cumulative voting, at its next annual meeting of shareholders. This may
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its shareholders. In addition, the classified board provision
could delay shareholders who do not like the policies of the Board of Directors
from removing a majority of the Board for two years, unless they can show cause
and obtain the requisite vote. Also, without cumulative voting, a purchaser of a
block of stock of the Company constituting less than a majority of the
outstanding shares will have no assurance of proportional representation on the
Board of Directors. Following this offering, the current directors and executive
officers of the Company will continue to own or have voting control over an
aggregate of 4,649,081 shares of the Company's Common Stock, or approximately
30% of the shares then outstanding. See "Principal and Selling Shareholders."
39
<PAGE> 42
UNDERWRITING
The Underwriters named below have severally agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase from the Company and
the Selling Shareholders the number of shares of Common Stock set forth opposite
their respective names below. The Underwriters are required to purchase and pay
for all of such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NAME OF UNDERWRITER COMMON STOCK
--------------------------------------------------------------- ------------
<S> <C>
Bear, Stearns & Co. Inc........................................
Cruttenden Roth Incorporated...................................
L.H. Friend, Weinress, Frankson & Presson, Inc.................
---------
Total................................................ 3,000,000
=========
</TABLE>
The Underwriters have advised the Company and the Selling Shareholders that
they propose to offer the Common Stock to the public on the terms set forth on
the cover page of this Prospectus. The Underwriters may allow selected dealers a
concession of not more than $ per share, and the Underwriters may
allow, and such dealers may re-allow, a concession of not more than $
per share to certain other dealers. After the initial offering, the price and
concessions and re-allowances to dealers may be changed by the Underwriters. The
Common Stock is offered subject to receipt and acceptance by the Underwriters
and to certain other conditions, including the right to reject orders in whole
or in part.
Certain of the Selling Shareholders have granted a 30-day option to the
Underwriters to purchase up to a maximum of 450,000 additional shares of Common
Stock to cover over-allotments, if any, at the same price per share as the
initial 3,000,000 shares to be purchased by the Underwriters. To the extent the
Underwriters exercise this option, each of the Underwriters will be committed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the foregoing table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act, or will contribute to payments
the Underwriters may be required to make in respect thereof.
The Company has also agreed not to offer, issue, sell, contract to sell,
grant any option for the sale of, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or any rights to acquire Common
Stock for a period of 90 days after the date of this Prospectus, without the
prior written consent of Bear, Stearns & Co. Inc., subject to certain limited
exceptions. The executive officers and directors of the Company, including the
Selling Shareholders, have agreed with the Underwriters that they that they will
not, without the prior written consent of Bear, Stearns & Co. Inc., offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable for Common Stock for a period of 180
days after the date of this Prospectus, subject to certain limited exceptions.
The Underwriters may engage in over-allotments, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids for and purchases of the Common Stock so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchase of the Common Stock in the open market in order to
cover syndicate short positions. Penalty bids permit the Underwriters to reclaim
a selling concession from a syndicate member when the shares of Common Stock
originally sold by such syndicate member are purchased in a stabilizing
transaction or syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Common Stock to be higher than it would
otherwise be in the absence of such transactions. These transactions, if
commenced, may be discontinued at any time.
40
<PAGE> 43
LEGAL MATTERS
Certain legal matters with respect to the legality under California law of
the issuance of the shares of Common Stock offered hereby will be passed upon
for the Company and the Selling Shareholders by Phillips & Haddan LLP, Newport
Beach, California. James M. Phillips, Jr., a principal in the firm of Phillips &
Haddan LLP, is a member of the Company's Board of Directors and holds options to
purchase 15,000 shares of the Company's Common Stock. Certain legal matters will
be passed upon for the Underwriters by Gibson, Dunn & Crutcher LLP, Los Angeles,
California.
EXPERTS
The financial statements and schedules of the Company as of December 31,
1995 and 1996, and for each of the years in the three-year period ended December
31, 1996, have been included herein and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Commission file
number for the Company is 0-18680. Such reports and other information may be
inspected and copied at the Commission's Public Reference Section, Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, where copies can be obtained at
prescribed rates, as well as at the Commission's regional offices at Northwest
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
7 World Trade Center, Suite 1300, New York, New York 10048. The Commission also
maintains a website that contains reports, proxy and other information filed
electronically with the Commission, the address of which is http://www.sec.gov.
In addition, this material may also be inspected at the offices of The Nasdaq
National Market at 1735 K Street, N.W., Washington, D.C. 20006, where copies may
be obtained at prescribed rates.
The Company has filed with the Commission under the Securities Act of 1933,
as amended (the "Securities Act"), a Registration Statement on Form S-1 (the
"Registration Statement") with respect to the shares of Common Stock to be
offered and sold hereby. This Prospectus is included as a part of the
Registration Statement, but does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
herein are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit or appendix to
the Registration Statement, each such statement being qualified in all respects
by such reference. The Registration Statement in full, including the exhibits
and schedules thereto, may be inspected without charge at the Commission's
Public Reference Section, Room 1024, located at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies thereof may also be obtained from the Commission
upon payment of prescribed fees by writing to the Commission at the above
address.
41
<PAGE> 44
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Balance Sheets:
December 31, 1995 and 1996, and June 30, 1997 (unaudited)........................... F-3
Statements of Income:
Years ended December 31, 1994, 1995 and 1996, and
Six Months ended June 30, 1996 and 1997 (unaudited).............................. F-4
Statements of Shareholders' Equity:
Years ended December 31, 1994, 1995 and 1996, and
Six Months ended June 30, 1997 (unaudited)....................................... F-5
Statements of Cash Flows:
Years ended December 31, 1994, 1995 and 1996, and
Six Months ended June 30, 1996 and 1997 (unaudited).............................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 45
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Modtech, Inc.:
We have audited the accompanying balance sheets of Modtech, Inc. as of
December 31, 1995 and 1996 and the related statements of income, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996. 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 Modtech, Inc. as of December
31, 1995 and 1996 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1996, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Orange County, California
March 21, 1997
F-2
<PAGE> 46
MODTECH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (Note 5)
Current assets:
Cash.................................................. $ 561,000 $ 405,000 $ 2,703,000
Contracts receivable, less allowance for contract
adjustments of $408,000, $413,000 and $410,000 at
December 31, 1995, 1996 and June 30, 1997
(unaudited), respectively (note 2)................. 3,169,000 10,310,000 28,659,000
Costs and estimated earnings in excess of billings on
contracts (notes 3 and 8).......................... 1,454,000 9,103,000 8,945,000
Inventories........................................... 646,000 4,167,000 7,852,000
Due from affiliates (note 8).......................... 766,000 754,000 886,000
Notes receivable from affiliates (note 8)............. 483,000 45,000 45,000
Prepaid assets........................................ 73,000 137,000 204,000
Other current assets.................................. 52,000 20,000 21,000
----------- ----------- -----------
Total current assets.......................... 7,204,000 24,941,000 49,315,000
----------- ----------- -----------
Property and equipment, net (note 4).................... 7,158,000 8,553,000 8,577,000
----------- ----------- -----------
Notes receivable from affiliates (note 8)............... 237,000 -- --
Other assets............................................ 555,000 535,000 495,000
----------- ----------- -----------
Total other assets............................ 792,000 535,000 495,000
----------- ----------- -----------
$15,154,000 $34,029,000 $58,387,000
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 1,105,000 $ 6,410,000 $ 7,137,000
Accrued liabilities................................... 956,000 3,214,000 8,580,000
Billings in excess of costs and estimated earnings on
contracts (notes 3 and 8).......................... 760,000 1,148,000 6,851,000
Current maturities of long-term debt (notes 6 and
8)................................................. -- 100,000 100,000
----------- ----------- -----------
Total current liabilities..................... 2,821,000 10,872,000 22,668,000
Note payable (note 5)................................... 1,590,000 5,944,000 13,332,000
Long-term debt, less current maturities (notes 6 and
8).................................................... 2,000,000 1,900,000 1,800,000
----------- ----------- -----------
Total liabilities............................. 6,411,000 18,716,000 37,800,000
----------- ----------- -----------
Shareholders' equity:
5% Convertible Preferred Stock, Series A. Authorized
5,000,000 shares; issued and outstanding 2,850,000,
none and none at December 31, 1995, 1996 and June
30, 1997 (unaudited), respectively (note 11)....... 2,685,000 -- --
Common Stock, $.01 par. Authorized 20,000,000 shares;
issued and outstanding 3,053,000, 8,649,000 and
8,679,000 at December 31, 1995, 1996 and June 30,
1997 (unaudited), respectively (notes 10 and 11)... 1,055,000 4,015,000 4,043,000
Additional paid-in capital............................ 13,619,000 15,693,000 15,744,000
Retained earnings (deficit)........................... (8,616,000) (4,395,000) 800,000
----------- ----------- -----------
Total shareholders' equity.................... 8,743,000 15,313,000 20,587,000
Commitments and contingencies (notes 3, 5, 8 and 14)....
----------- ----------- -----------
$15,154,000 $34,029,000 $58,387,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 47
MODTECH, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales (notes 8 and 12)...... $20,355,000 $19,386,000 $49,886,000 $12,704,000 $58,906,000
Cost of goods sold (note 8)..... 17,766,000 16,401,000 42,629,000 10,862,000 47,688,000
----------- ----------- ----------- ----------- -----------
Gross profit............... 2,589,000 2,985,000 7,257,000 1,842,000 11,218,000
Selling, general and
administrative expenses....... 1,554,000 1,613,000 2,345,000 848,000 2,182,000
----------- ----------- ----------- ----------- -----------
Income from operations..... 1,035,000 1,372,000 4,912,000 994,000 9,036,000
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest expense.............. (576,000) (486,000) (446,000) (127,000) (572,000)
Interest income (note 8)...... 105,000 99,000 24,000 20,000 23,000
Other -- net.................. 42,000 (1,000) (13,000) 22,000 64,000
----------- ----------- ----------- ----------- -----------
(429,000) (388,000) (435,000) (85,000) (485,000)
----------- ----------- ----------- ----------- -----------
Income before income
taxes.................... 606,000 984,000 4,477,000 909,000 8,551,000
Income taxes (note 7)........... 4,000 19,000 208,000 20,000 3,356,000
----------- ----------- ----------- ----------- -----------
Net income................. $ 602,000 $ 965,000 $ 4,269,000 $ 889,000 $ 5,195,000
----------- ----------- ----------- ----------- -----------
5% Convertible Preferred Stock
dividend (note 11)............ -- (166,000) (48,000) (48,000) --
Net income available for
Common Stock............. $ 602,000 $ 799,000 $ 4,221,000 $ 841,000 $ 5,195,000
=========== =========== =========== =========== ===========
Primary earnings per share...... $ 0.12 $ 0.13 $ 0.49 $ 0.10 $ 0.55
=========== =========== =========== =========== ===========
Weighted-average shares
outstanding................... 5,098,000 6,027,000 8,709,000 8,750,000 9,370,000
=========== =========== =========== =========== ===========
Fully diluted earnings per
share......................... $ 0.11 $ 0.12 $ 0.47 $ 0.10 $ 0.55
=========== =========== =========== =========== ===========
Weighted-average shares
outstanding................... 5,294,000 6,712,000 9,041,000 8,750,000 9,370,000
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 48
MODTECH, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
5% CONVERTIBLE PREFERRED STOCK
STOCK COMMON STOCK PURCHASE ADDITIONAL RETAINED
------------------------ ---------------------- NOTES PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL (DEFICIT)
---------- ----------- --------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993...................... -- $ -- 3,209,000 $1,109,000 $(274,000) $13,913,000 $(10,017,000)
Sale of preferred stock
(note 11)................. 2,850,000 2,685,000 -- -- -- -- --
Net income.................. -- -- -- -- -- -- 602,000
---------- ----------- --------- ---------- --------- ----------- ------------
Balance, December 31,
1994...................... 2,850,000 $ 2,685,000 3,209,000 $1,109,000 $(274,000) $13,913,000 $ (9,415,000)
Adjustment of stock purchase
notes receivable.......... -- -- (156,000) (54,000) 274,000 (294,000) --
Dividend (note11)........... -- -- -- -- -- -- (166,000)
Net income.................. -- -- -- -- -- -- 965,000
---------- ----------- --------- ---------- --------- ----------- ------------
Balance, December 31,
1995...................... 2,850,000 2,685,000 3,053,000 1,055,000 -- 13,619,000 (8,616,000)
Conversion of preferred
stock (note 11)........... (2,850,000) (2,685,000) 2,850,000 2,685,000 -- -- --
Conversion of options and
warrants (notes 10 and
11)....................... -- -- 2,746,000 275,000 -- 2,074,000 --
Dividend (note 11).......... -- -- -- -- -- -- (48,000)
Net income.................. -- -- -- -- -- -- 4,269,000
---------- ----------- --------- ---------- --------- ----------- ------------
Balance, December 31,
1996...................... -- -- 8,649,000 4,015,000 -- 15,693,000 (4,395,000)
Conversion of options (notes
10 and 11) (unaudited).... -- -- 30,000 28,000 -- 51,000 --
Net income (unaudited)...... -- -- -- -- -- -- 5,195,000
---------- ----------- --------- ---------- --------- ----------- ------------
Balance, June 30, 1997
(unaudited)............... -- $ -- 8,679,000 $4,043,000 $ -- $15,744,000 $ 800,000
========== =========== ========= ========== ========= =========== ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 49
MODTECH, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 602,000 $ 965,000 $ 4,269,000 $ 889,000 $ 5,195,000
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization.......... 608,000 563,000 540,000 257,000 534,000
Increase (decrease) in allowance for
contract adjustments................. (275,000) (17,000) (5,000) -- 3,000
Loss (gain) on sale of equipment....... (39,000) (20,000) 17,000 (5,000) --
Changes in assets and liabilities:
(Increase) decrease in contracts
receivable........................... 1,363,000 (65,000) (7,136,000) (3,575,000) (18,352,000)
(Increase) decrease in costs and
estimated earnings in excess of
billings............................. (551,000) 330,000 (7,649,000) (3,005,000) 158,000
(Increase) decrease in inventories..... (174,000) 338,000 (3,521,000) (857,000) (3,685,000)
(Increase) decrease in amounts due from
affiliates........................... (290,000) (257,000) 687,000 555,000 (132,000)
(Increase) decrease in prepaids and
other assets......................... 183,000 54,000 (12,000) 93,000 (28,000)
Increase (decrease) in accounts
payable.............................. (1,583,000) (436,000) 5,305,000 1,988,000 727,000
Increase in accrued liabilities........ 475,000 35,000 2,258,000 210,000 5,366,000
Increase (decrease) in billings in
excess of costs and earnings......... 109,000 (276,000) 388,000 951,000 5,703,000
----------- ----------- ----------- ----------- ------------
Net cash provided by (used in)
operating activities................. 428,000 1,214,000 (4,859,000) (2,499,000) (4,511,000)
----------- ----------- ----------- ----------- ------------
Cash flows from investing activities:
Proceeds from sale of equipment.......... 81,000 46,000 6,000 12,000 12,000
Purchase of property and equipment....... (200,000) (482,000) (1,958,000) (353,000) (570,000)
----------- ----------- ----------- ----------- ------------
Net cash used in investing
activities........................... (119,000) (436,000) (1,952,000) (341,000) (558,000)
----------- ----------- ----------- ----------- ------------
Cash flows from financing activities:
Net principal borrowings (payments) under
revolving credit lines................. (1,804,000) (310,000) 4,354,000 2,152,000 7,388,000
Principal payments on long-term debt..... (1,185,000) (503,000) -- -- (100,000)
(Adjustment of) stock purchase note
receivable by exchange of Common
Stock.................................. -- (74,000) -- -- --
Net proceeds from issuance of Common
Stock shares........................... -- -- 2,349,000 -- 79,000
Declared dividends....................... -- (166,000) (48,000) (48,000) --
Conversion of stock warrants and
options................................ -- -- -- 536,000 --
Net proceeds from sale of convertible
preferred stock (note 11).............. 2,685,000 -- -- -- --
----------- ----------- ----------- ----------- ------------
Net cash provided by (used in)
financing activities................. (304,000) (1,053,000) 6,655,000 2,640,000 7,367,000
----------- ----------- ----------- ----------- ------------
Net increase (decrease) in cash........ 5,000 (275,000) (156,000) (200,000) 2,298,000
Cash at beginning of year.................. 831,000 836,000 561,000 561,000 405,000
----------- ----------- ----------- ----------- ------------
Cash at end of year........................ $ 836,000 $ 561,000 $ 405,000 $ 361,000 $ 2,703,000
=========== =========== =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 50
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, 1996
AND JUNE 30, 1996 AND 1997 (UNAUDITED)
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 of Miller Structures, Inc. - California. In addition, the
Company assumed certain liabilities. The Company entered into a lease agreement
to rent the manufacturing facility. Miller Structures, Inc. - California
manufactures and markets factory-built buildings.
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.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or less
to be cash equivalents. Substantially all cash deposits are maintained in one
financial institution.
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 in Excess of Costs and Estimated Earnings on
Contracts," represents billings in excess of revenues recognized.
F-7
<PAGE> 51
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, 1996
AND JUNE 30, 1996 AND 1997 (UNAUDITED)
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. The Company held finished inventory of
$202,000 and $0 at December 31, 1995 and 1996, respectively.
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 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.
F-8
<PAGE> 52
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, 1996
AND JUNE 30, 1996 AND 1997 (UNAUDITED)
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.
EARNINGS PER SHARE
Earnings per share are computed on the basis of the weighted average number
of common and dilutive common equivalent shares outstanding during each year.
RECLASSIFICATION
Certain amounts in the 1994 and 1995 financial statements have been
reclassified to conform to the 1996 presentation.
2. CONTRACTS RECEIVABLE
Contracts receivable consisted of customer billings for:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1995 1996 1997
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Completed contracts.......................... $ 675,000 $ 7,723,000 $ 1,366,000
Contracts in progress........................ 2,613,000 2,103,000 25,288,000
Retentions................................... 289,000 897,000 2,415,000
---------- ----------- -----------
3,577,000 10,723,000 29,069,000
Less allowance for contract adjustments...... (408,000) (413,000) (410,000)
---------- ----------- -----------
$3,169,000 $10,310,000 $28,659,000
========== =========== ===========
</TABLE>
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>
DECEMBER 31,
----------------------------- JUNE 30,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Net costs and estimated earnings on
uncompleted contracts................... $ 22,744,000 $ 39,093,000 $93,369,000
Billings to date.......................... (22,213,000) (31,173,000) 91,266,000
------------ ------------ -----------
531,000 7,920,000 2,103,000
Net unbilled receivables (payables) from
completed contracts..................... 163,000 35,000 (9,000)
------------ ------------ -----------
$ 694,000 $ 7,955,000 $ 2,094,000
============ ============ ===========
</TABLE>
F-9
<PAGE> 53
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, 1996
AND JUNE 30, 1996 AND 1997 (UNAUDITED)
These amounts are shown in the accompanying balance sheets under the
following captions:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1995 1996 1997
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts.......... $1,254,000 $ 8,971,000 $ 8,812,000
Costs and estimated earnings in excess of
billings on completed contracts............ 200,000 132,000 133,000
---------- ----------- -----------
Costs and estimated earnings in excess
of billings........................... 1,454,000 9,103,000 8,945,000
---------- ----------- -----------
Billings in excess of costs and estimated
earnings on uncompleted contracts.......... (722,000) (1,052,000) (6,709,000)
Billings in excess of costs and estimated
earnings on completed contracts............ (38,000) (96,000) (142,000)
---------- ----------- -----------
Billings in excess of costs and estimated
earnings................................ (760,000) (1,148,000) (6,851,000)
---------- ----------- -----------
$ 694,000 $ 7,955,000 $ 2,094,000
========== =========== ===========
</TABLE>
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Leasehold improvements.................................... $ 7,241,000 $ 7,581,000
Machinery and equipment................................... 2,492,000 3,536,000
Trucks and automobiles.................................... 164,000 107,000
Office equipment.......................................... 469,000 222,000
Construction in progress.................................. 261,000 567,000
----------- -----------
10,627,000 12,013,000
Less accumulated depreciation and amortization............ (3,469,000) (3,460,000)
----------- -----------
$ 7,158,000 $ 8,553,000
=========== ===========
</TABLE>
5. NOTE PAYABLE -- REVOLVING CREDIT AGREEMENT
In 1995 the Company entered into a new revolving loan commitment that will
expire in September 1998. The Company is entitled to borrow, from time to time,
up to $10,000,000 with actual borrowings limited to specific percentages of
eligible contracts receivable, equipment and inventories. On December 31, 1996,
borrowings were limited to $8,136,000 and actual outstanding borrowings were
$5,944,000. The interest rate is calculated at the prime lending rate (8.25% at
December 31, 1996) plus two percent (2%) per annum. The loan is secured by
substantially all of the Company's assets.
In addition, the Company has one standby letter of credit with the bank for
$2,036,000 on which no amounts were outstanding as of December 31, 1996.
F-10
<PAGE> 54
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, 1996
AND JUNE 30, 1996 AND 1997 (UNAUDITED)
6. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Industrial development bonds................................ $2,000,000 $2,000,000
Less current portion of long-term debt...................... -- (100,000)
---------- ----------
$2,000,000 $1,900,000
========== ==========
</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 $2 million letter of credit,
and bear interest at an initial rate of 6.75% and fluctuate weekly. The interest
rate was 3.75% at December 31, 1996. Repayment of the bonds will be $100,000 per
year through 2015, with the remaining balance paid off in 2016.
Annual maturities of long-term debt outstanding at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
Year ending December 31:
1997........................................................... $ 100,000
1998........................................................... 100,000
1999........................................................... 100,000
2000........................................................... 100,000
2001........................................................... 100,000
Thereafter..................................................... 1,500,000
----------
$2,000,000
==========
</TABLE>
7. INCOME TAXES
The components of the 1994, 1995 and 1996 provision for Federal and state
income taxes are summarized below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------- ----------------------
1994 1995 1996 1996 1997
------ ------- -------- ------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal...................... $ -- $14,000 $ 91,000 $ 8,000 $2,600,000
State........................ 4,000 5,000 117,000 12,000 756,000
------ ------- -------- ------- ----------
Deferred:
Federal...................... -- -- -- -- --
State........................ -- -- -- -- --
------ ------- -------- ------- ----------
$4,000 $19,000 $208,000 $20,000 $3,356,000
====== ======= ======== ======= ==========
</TABLE>
F-11
<PAGE> 55
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, 1996
AND JUNE 30, 1996 AND 1997 (UNAUDITED)
Income tax expense 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>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Taxes, U.S. statutory rates..................... 34.0% 34.0% 34.0% 34.0% 34.0%
State taxes, less Federal benefit............... -- -- -- -- 5.8
Utilization of income tax benefit relating to
loss carryover................................ (34.0) (34.0) (34.0) (34.0) (7.2)
Other........................................... 0.7 1.9 4.6 2.2 6.7
----- ----- ----- ----- ----
Total taxes on income................. 0.7% 1.9% 4.6% 2.2% 39.3%
===== ===== ===== ===== ====
</TABLE>
Deferred tax liabilities, which amounted to approximately $68,000 and
$270,000 at December 31, 1995 and 1996, respectively, primarily result from
temporary differences between financial and tax accounting treatment of revenue
recognition on contracts and depreciation. Deferred tax assets, which amounted
to approximately $2,819,000 and $1,429,000 at December 31, 1995 and 1996,
respectively, were mainly comprised of net operating loss carryforwards and
accrued liabilities. The Company's net operating loss carryforward at December
31, 1996 amounted to approximately $615,000, and expires in 2008 and 2009. For
the years ended December 31, 1995 to 1996 the Company reduced the net deferred
tax asset to zero by a valuation allowance. The valuation allowance for the net
deferred tax assets as of December 31, 1995 was $2,751,000. The net change for
the year ended December 31, 1996 was a decrease of $1,592,000, resulting in a
remaining valuation allowance of $1,159,000.
8. TRANSACTIONS WITH RELATED PARTIES
SALES
The Company sells modular classrooms to certain companies and partnerships,
the shareholders and partners of which are either officers, shareholders or key
employees of the Company. The buildings are then leased to various school
districts by the related companies and partnerships.
The table below summarizes the classroom sales to related parties:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ---------------------
1994 1995 1996 1996 1997
---------- -------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales............................ $1,009,000 $600,000 $1,453,000 $269,000 $745,000
Cost of goods sold............... 870,000 531,000 1,239,000 236,000 655,000
Gross profit percentage.......... 13.8% 11.5% 14.7% 12.3% 12.1%
========== ========= ========== ========= =========
</TABLE>
The related party purchases modular relocatable classrooms from the
Company, upon standard terms and at standard wholesale prices.
F-12
<PAGE> 56
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, 1996
AND JUNE 30, 1996 AND 1997 (UNAUDITED)
Due from affiliates includes a portion of unpaid invoices as a result of
the above transactions. As of December 31, 1995 and 1996 these amounts totaled
$376,000 and $432,000, respectively. Additional amounts arising from these
transactions are included in the following captions:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- --------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ $ -- $418,000 $397,000
Billings in excess of costs and estimated earnings on
uncompleted contracts................................ (30,000) (13,000) (47,000)
======== ======== ========
</TABLE>
NOTES RECEIVABLE
At December 31, 1995, the Company had two notes receivable from a related
party partnership aggregating $483,000. The partnership is composed of officers
and shareholders of the Company. One note was paid in full during 1996 and the
other note, in the amount of $45,000, which bears interest at 10% and is payable
upon demand, remained outstanding at December 31, 1996.
At December 31, 1995 the Company also had demand notes receivable of
$132,000 and $105,000 due from related party partnerships. These notes were paid
in full during 1996.
Unpaid interest related to the above notes totaled $390,000 at December 31,
1995 and $322,000 at December 31, 1996 and are included in due from affiliates.
The Company is negotiating payment terms on the accrued interest and anticipates
full payment during 1997.
OPERATING LEASES
The Company leases various land at its manufacturing facilities. The
present manufacturing facility leases are with the Company's primary shareholder
and partnerships composed of officers and shareholders. All related party leases
require monthly payments which aggregate $67,000. In connection with the lease
at the Lathrop facility, the Company made a $83,000 security deposit during
1990.
In 1994, due to declines in real estate values the Company's primary
shareholder and partnerships reduced the monthly lease rates for the
manufacturing facilities to an aggregate of $36,000. The reduced rents will
continue for as long as real estate values remain depressed.
Future minimum lease payments under these leases are discussed in Note 14.
Included in cost of sales is $418,000, $435,000 and $447,000 in rent expense
paid to related parties for the years ended December 31, 1994, 1995 and 1996,
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 $41,000, $37,000 and
$53,000 in 1994, 1995 and 1996, 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
F-13
<PAGE> 57
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, 1996
AND JUNE 30, 1996 AND 1997 (UNAUDITED)
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 this 1989 Plan are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
December 31, 1993................................. 400,000 $ 1.91
Granted......................................... 75,000 1.50
Terminated...................................... (75,000) 1.45
Exercised....................................... -- --
-------- ------
December 31, 1994................................. 400,000 1.92
Granted......................................... 45,000 2.125
Terminated...................................... (45,000) 3.00
Exercised....................................... -- --
-------- ------
December 31, 1995................................. 400,000 1.82
Granted......................................... -- --
Terminated...................................... -- --
Exercised....................................... (134,500) 1.62
-------- ------
December 31, 1996................................. 265,500 1.92
Granted......................................... -- --
Terminated...................................... -- --
Exercised (unaudited)........................... (13,650) 2.78
-------- ------
June 30, 1997 (unaudited)......................... 251,850 $ 1.87
======== ======
</TABLE>
As of December 31, 1996, 185,900 options are vested and exercisable at
prices ranging from $.625 to $10.00 per share under the 1989 Plan.
As of June 30, 1997, 179,750 options are vested and exercisable at prices
ranging from $.625 to $10.00 per share under the 1989 Plan (unaudited).
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.
F-14
<PAGE> 58
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, 1996
AND JUNE 30, 1996 AND 1997 (UNAUDITED)
Stock options outstanding under the March 1994 Plan, are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
December 31, 1993................................. 180,000 $ 1.19
Granted......................................... 20,000 1.50
Terminated...................................... -- --
Exercised....................................... -- --
------- ------
December 31, 1994................................. 200,000 1.22
Granted......................................... -- --
Terminated...................................... -- --
Exercised....................................... -- --
------- ------
December 31, 1995................................. 200,000 1.22
Granted......................................... -- --
Terminated...................................... -- --
Exercised....................................... (20,000) 1.19
------- ------
December 31, 1996................................. 180,000 1.22
Granted......................................... -- --
Terminated...................................... -- --
Exercised (unaudited)........................... (14,500) 1.37
------- ------
June 30, 1997 (unaudited)......................... 165,500 $ 1.21
======= ======
</TABLE>
As of December 31, 1996, 95,000 options are vested and exercisable at
prices ranging from $1.19 to $1.50 per share under the March 1994 Plan.
As of June 30, 1997, 123,000 options are vested and exercisable at prices
ranging from $1.19 to $1.50 per share under the March 1994 Plan (unaudited).
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-15
<PAGE> 59
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, 1996
AND JUNE 30, 1996 AND 1997 (UNAUDITED)
Stock options outstanding under this 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
Exercised........................................ -- --
------- ------
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.......................................... -- --
Terminated....................................... -- --
Exercised (unaudited)............................ (1,250) 2.13
------- ------
June 30, 1997 (unaudited).......................... 438,750 $ 2.06
======= ======
</TABLE>
As of December 31, 1996, 108,750 options are vested and exercisable at
prices ranging from $1.50 to $4.50 per share under the May 1994 Plan.
As of June 30, 1997, 198,750 options are vested and exercisable at prices
ranging from $1.50 to $4.50 per share under the May 1994 Plan (unaudited).
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). At December
31, 1996, 110,000 options were granted at an exercise price of $4.50 and of
these, 30,000 options were vested and exercisable. In January 1997, an
additional 215,833 options were granted at an exercise price of $7.88 and in
June 1997, 25,000 options were granted at an exercise price of $12.62. At June
30, 1997, 30,000 options were vested and exercisable at $4.50 per share under
the 1996 Plan (unaudited).
The per share weighted-average fair value of stock options granted during
1995 and 1996 was $1.28 and $1.94, 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 an expected life of four years;
1996 -- expected dividend yield 0%, risk-free interest rate ranging from 6.57%
to 7.80%, volatility factor of 72.66%, and an expected life of four years. The
Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly,
no compensation cost has been recognized for its stock options in the financial
statements. Had the Company determined compensation cost
F-16
<PAGE> 60
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, 1996
AND JUNE 30, 1996 AND 1997 (UNAUDITED)
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>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
----------------------- -----------------------
1995 1996 1996 1997
-------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income:
As reported........................ $965,000 $4,269,000 $889,000 $5,195,000
Pro forma.......................... 862,000 3,658,000 783,000 4,434,000
======== ========== ======== ==========
Primary earnings per share:
As reported........................ $ 0.13 $ 0.49 $ 0.10 $ 0.55
Pro forma.......................... 0.11 0.42 0.09 0.47
======== ========== ======== ==========
Fully diluted earnings per share:
As reported........................ $ 0.12 $ 0.47 $ 0.10 $ 0.55
Pro forma.......................... 0.11 0.40 0.09 0.47
======== ========== ======== ==========
</TABLE>
Pro forma net income reflects only options granted in 1995 and 1996.
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 AND WARRANTS
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 the price of $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 exercised
during 1996 resulting in the issuance of 2,204,000 shares of common stock and
proceeds to the Company of approximately $1,643,000. Dividends in the amount of
$166,000 and $48,000 were declared for the years ended December 31, 1995 and
1996, respectively.
The Company also had outstanding 375,000 stock warrants at a price of
$1.1875 in connection with a 1994 bank financing agreement. All these warrants
were exercised during 1996.
12. MAJOR CUSTOMERS
The Company had sales to one major customer which represented the following
percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
State of California................................. 28% 9% 13%
== = ==
</TABLE>
Sales to individual California school districts accounted 67.0%, 87.9% and
79.4% of the Company's net sales for 1994, 1995 and 1996, respectively.
F-17
<PAGE> 61
MODTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, 1996
AND JUNE 30, 1996 AND 1997 (UNAUDITED)
13. SUPPLEMENTAL CASH FLOW DISCLOSURES
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid during the year
for:
Interest.................. $531,000 $248,000 $421,000 $180,000 $506,000
Income taxes.............. -- -- 24,000 -- --
======== ======== ======== ======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:
During 1995, $274,000 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>
<S> <C>
Year ending December 31:
1997........................................... $ 496,000
1998........................................... 489,000
1999........................................... 480,000
2000........................................... 435,000
2001........................................... 435,000
Thereafter..................................... 6,325,000
----------
$8,660,000
==========
</TABLE>
Of the $8,660,000 in future rental payments, substantially all is payable
to related parties (note 8). Rent expense for the years ended December 31, 1994,
1995 and 1996 was $418,000, $435,000 and $447,000, respectively.
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.
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.
F-18
<PAGE> 62
[PHOTOGRAPH]
<PAGE> 63
======================================================
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
SHAREHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. UNDER NO CIRCUMSTANCES SHALL THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO
DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 6
Use of Proceeds........................ 10
Market Information and Related
Matters.............................. 11
Dividend Policy........................ 11
Capitalization......................... 12
Selected Financial Data................ 13
Management's Discussion and Analysis of
Results of Operations and Financial
Condition............................ 14
Business............................... 20
Management............................. 31
Principal and Selling Shareholders..... 36
Description of Capital Stock........... 38
Underwriting........................... 40
Legal Matters.......................... 41
Experts................................ 41
Available Information.................. 41
Index to Financial Statements.......... F-1
</TABLE>
======================================================
======================================================
3,000,000 SHARES
MODTECH LOGO
COMMON STOCK
--------------------
PROSPECTUS
--------------------
BEAR, STEARNS & CO. INC.
CRUTTENDEN ROTH
INCORPORATED
L.H. FRIEND, WEINRESS,
FRANKSON & PRESSON, INC.
OCTOBER , 1997
======================================================
<PAGE> 64
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Company anticipates that the expenses incurred or to be incurred by the
Company in connection with the preparation and filing of this Registration
Statement and the transactions contemplated hereby will be approximately as
follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
------------------------------------------------------------------ --------
<S> <C>
Registration fees................................................. $ 35,000
Transfer agent and registrar costs................................ 5,000
Printing and duplication costs.................................... 75,000
Legal fees and expenses........................................... 90,000
Accounting fees and expenses...................................... 70,000
Miscellaneous..................................................... 25,000
--------
Total................................................... $300,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As allowed by the California General Corporation Law, the Articles of
Incorporation of the Company provide that the liability of the directors of the
Company for monetary damages shall be eliminated to the fullest extent
permissible under California law. This is intended to eliminate the personal
liability of a director for monetary damages in an action brought by or in the
right of the Company for breach of a director's duties to the Company or its
shareholders except for liability for acts or omissions that involve intentional
misconduct or knowing and culpable violation of law, for acts or omissions that
a director believes to be contrary the best interests of the Company or its
shareholders or that involve the absence of good faith on the part of the
director, for any transaction from which a director derived an improper personal
benefit, for acts or omissions that show a reckless disregard for the director's
duty to the Company or its shareholders in circumstances in which the director
was aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of serious injury to the Company or its
shareholders, for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the Company
or its shareholders, with respect to certain contracts in which a director has a
material financial interest and for approval of certain improper distributions
to shareholders or certain loans or guarantees. This provision does not limit or
eliminate the rights of the Company or any shareholder to seek non-monetary
relief such as an injunction or rescission in the event of a breach of a
director's duty of care.
The Company's Bylaws require the Company to indemnify its officers,
directors, employees and other agents to the full extent permitted by law,
including those circumstances in which indemnification would otherwise be
discretionary. In addition, the Company's Articles of Incorporation expressly
authorize the use of indemnification agreements and, with the approval of its
shareholders, the Company has entered into separate indemnification agreements
with each of its directors. The Company's Board of Directors has authorized
similar indemnification agreements for the Company's officers. These agreements
may require the Company, among other things, to indemnify directors and officers
against certain liabilities that may arise by reason of their status or service
as directors and officers, and to advance their expenses incurred as a result of
any proceeding against them as to which they could be indemnified.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In May 1994, the Company raised net proceeds of approximately $2.7 million
through the sale of 2,850,000 shares of Series A Preferred Stock to several
private investors who are participating as Selling Shareholders in the Offering,
without registration under the Securities Act of ,1933, as amended (the
"Securities Act"), in reliance upon the exemption from such registration
provided by Section 4(2) thereof. In April 1996, all of the Series A Preferred
Stock was converted into 2,850,000 shares of Common Stock. In
II-1
<PAGE> 65
December 1996, warrants issued to the investors in connection with the preferred
stock financing were exercised, resulting in cash proceeds to the Company of
approximately $1.6 million and the issuance of 2,746,000 additional shares of
Common Stock. All of these shares were also issued without registration under
the Securities Act in reliance upon the exemption from such registration
provided by Section 4(2) thereof. All of the 5,596,000 shares of Common Stock
issued to the private investors have been registered for resale from time to
time under the Securities Act pursuant to the Company's Registration Statement
on Form S-3 which became effective under the Securities Act on January 6, 1995.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed herewith as part of this Registration
Statement:
<TABLE>
<C> <S>
1 Form of Underwriting Agreement
3.1 Articles of Incorporation *
3.2 Bylaws*
5 Opinion of Phillips & Haddan LLP
10.1 Lease between the Company and Pacific Continental Modular Enterprises,
relating to the Barrett Street property in Perris, California.*
10.2 Lease between the Company and Gerald Bashaw, relating to the Morgan Street
Property in Perris, California.*
10.3 Lease between the Company and BMG2, relating to the property in Lathrop,
California.*
10.4 Industrial Development Bond agreements.*
10.5 Amendment to Loan and Security Agreement between the Company and Coast
Business Credit Corporation (previously filed).
10.6 Form of Indemnity Agreement between the Company and its executive officers
and directors.*
10.7 Employment Agreement between the Company and Evan M. Gruber.*
23.1 Consent of KMPG Peat Marwick LLP
23.2 Consent of Phillips & Haddan LLP (to be included as part of Exhibit 5)
24 Power of attorney (set forth on the Signatures page of the Registration
Statement)
27 Financial Data Schedule (previously filed)
</TABLE>
- ---------------
* Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 (Commission File No. 0-18680).
(b) The following financial statement schedules are filed herewith as part
of this Registration Statement:
Schedule II -- Valuation and Qualifying Accounts
II-2
<PAGE> 66
ITEM 17. UNDERTAKINGS
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registration pursuant to the provisions described under Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of competent jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(i) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)1() or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 67
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Perris, State of California, on November 3, 1997.
MODTECH, INC.
By: /s/ EVAN M. GRUBER
------------------------------------
Evan M. Gruber,
Chief Executive Officer
Each director and/or executive officer of the Company whose signature
appears below hereby constitutes and appoints Evan M. Gruber and Michael G.
Rhodes, and each of them, as true and lawful attorneys-in-fact and agents for
the undersigned, acting together or alone, with full powers of substitution and
resubstitution, for the undersigned and in the undersigned's name, place and
stead, in any and all capacities, to sign and file any and all amendments
(including post-effective amendments) and exhibits to this Registration
Statement on Form S-1, and any and all applications and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, acting together or alone, full powers and
authority to do and perform each and every act and thing requisite or necessary
or desirable to be done, hereby ratifying and confirming all that said
attorneys-in-fact and agents, acting together or alone, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- -------------------------- ----------------
<S> <C> <C>
/s/ EVAN M. GRUBER Chief Executive Officer November 3, 1997
- ----------------------------------------------- and Director
Evan M. Gruber
/s/ MICHAEL G. RHODES Chief Operations and November 3, 1997
- ----------------------------------------------- Financial Officer
Michael G. Rhodes (principal financial and
accounting officer)
Director November 3, 1997
- -----------------------------------------------
Gerald B. Bashaw
/s/ JAMES D. GOLDENETZ Director November 3, 1997
- -----------------------------------------------
James D. Goldenetz
/s/ JAMES M. PHILLIPS, JR. Director November 3, 1997
- -----------------------------------------------
James M. Phillips, Jr.
/s/ ROBERT W. CAMPBELL Director November 3, 1997
- -----------------------------------------------
Robert W. Campbell
/s/ CHARLES C. MCGETTIGAN Director November 3, 1997
- -----------------------------------------------
Charles C. McGettigan
/s/ MYRON A. WICK, III Director November 3, 1997
- -----------------------------------------------
Myron A. Wick, III
</TABLE>
II-4
<PAGE> 68
SCHEDULE II
MODTECH, INC.
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1994, 1995 AND 1996
AND JUNE 30, 1996 AND 1997 (UNAUDITED)
<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, 1994................... $ 700,000 $ -- $ (275,000) $ 425,000
========= ====== ========== =========
Year ended December 31, 1995................... $ 425,000 $ -- $ (17,000) $ 408,000
========= ====== ========== =========
Six months ended June 30, 1996 (unaudited)..... $ 408,000 $ -- $ -- $ 408,000
========= ====== ========== =========
Year ended December 31, 1996................... $ 408,000 $6,000 $ (1,000) $ 413,000
========= ====== ========== =========
Six months ended June 30, 1997 (unaudited)..... $ 413,000 $ -- $ (3,000) $ 410,000
========= ====== ========== =========
</TABLE>
<PAGE> 69
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF EXHIBIT
- ------ ----------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement
3.1 Articles of Incorporation*
3.2 Bylaws*
5 Opinion of Phillips & Haddan LLP
10.1 Lease between the Company and Pacific Continental Modular Enterprises, relating to
the Barrett Street property in Perris, California.*
10.2 Lease between the Company and Gerald Bashaw, relating to the Morgan Street
Property in Perris, California.*
10.3 Lease between the Company and BMG2, relating to the property in Lathrop,
California.*
10.4 Industrial Development Bond agreements.*
10.5 Amendment to Loan and Security Agreement between the Company and Coast Business
Credit Corporation (previously filed).
10.6 Form of Indemnity Agreement between the Company and its executive officers and
directors.*
10.7 Employment Agreement between the Company and Evan M. Gruber.*
23.1 Consent of KMPG Peat Marwick LLP
23.2 Consent of Phillips & Haddan LLP (to be included as part of Exhibit 5)
24 Power of attorney (set forth on the Signatures page of the Registration Statement)
27 Financial Data Schedule (previously filed)
</TABLE>
- ---------------
* Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 (Commission File No. 0-18680).
<PAGE> 1
EXHIBIT 1
3,000,000 Shares of Common Stock
Modtech, Inc.
UNDERWRITING AGREEMENT
November , 1997
BEAR, STEARNS & CO. INC.
CRUTTENDEN ROTH INCORPORATED
L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC.
as the Underwriters
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
Dear Sirs:
Modtech, Inc., a corporation organized and existing under the laws of
California (the "Company"), proposes, subject to the terms and conditions stated
herein, to issue and sell to the several underwriters named in Schedule I hereto
(the "Underwriters") an aggregate of 1,000,000 shares of common stock, par value
$0.01 per share, of the Company (the "Common Stock") and the selling
shareholders of the Company named in Schedule II hereto (the "Selling
Shareholders") propose to sell to the Underwriters an additional 2,000,000
shares of Common Stock, which aggregate of 3,000,000 shares of Common Stock are
referred to herein as the "Firm Shares." In addition, for the sole purpose of
covering over-allotments in connection with the sale of the Firm Shares, certain
Selling Shareholders (as set forth on Schedule II hereto) propose to sell to the
Underwriters, at the option of the Underwriters, up to an additional 450,000
shares (the "Additional Shares") of Common Stock. The Firm Shares and any
Additional Shares purchased by the Underwriters are referred to herein as the
"Shares." The Shares are more fully described in the Registration Statement
referred to below.
1. Representations and Warranties of the Company and the Selling
Shareholders.
A. The Company represents and warrants to, and agrees with,
the Underwriters that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and may have filed an
amendment or amendments thereto, on Form S-1 (No. 333-37473), for the
registration of the Shares under the Securities Act of 1933, as amended (the
"Act"). Such registration statement, including the prospectus, financial
statements and schedules, exhibits and all other documents filed as a part
thereof, as amended at the time of effectiveness of the registration statement,
including any
<PAGE> 2
information deemed to be a part thereof as of the time of effectiveness pursuant
to paragraph (b) of Rule 430A or Rule 434 of the Rules and Regulations of the
Commission under the Act (the "Regulations"), is herein called the "Registration
Statement" and the prospectus, in the form first filed with the Commission
pursuant to Rule 424(b) of the Regulations or filed as part of the Registration
Statement at the time of effectiveness if no Rule 424(b) or Rule 434 filing is
required, is herein called the "Prospectus." The term "preliminary prospectus"
as used herein means a preliminary prospectus as described in Rule 430 of the
Regulations.
(b) At the time of the effectiveness of the Registration
Statement or the effectiveness of any post-effective amendment to the
Registration Statement, when the Prospectus is first filed with the Commission
pursuant to Rule 424(b) or Rule 434 of the Regulations, when any supplement to
or amendment of the Prospectus is filed with the Commission and at the Closing
Date and the Additional Closing Date, if any, (as hereinafter respectively
defined), the Registration Statement and the Prospectus and any amendments
thereof and supplements thereto complied or will comply in all material respects
with the applicable provisions of the Act and the Regulations and does not or
will not contain an untrue statement of a material fact and does not or will not
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein (i) in the case of the Registration
Statement, not misleading and (ii) in the case of the Prospectus, in light of
the circumstances under which they were made, not misleading. When any related
preliminary prospectus was first filed with the Commission (whether filed as
part of the registration statement for the registration of the Shares or any
amendment thereto or pursuant to Rule 424(a) of the Regulations) and when any
amendment thereof or supplement thereto was first filed with the Commission,
such preliminary prospectus and any amendments thereof and supplements thereto
complied in all material respects with the applicable provisions of the Act and
the Regulations and did not contain an untrue statement of a material fact and
did not 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 were made not misleading. No representation and warranty is
made in this subsection (b), however, with respect to any information contained
in or omitted from the Registration Statement or the Prospectus or any related
preliminary prospectus or any amendment thereof or supplement thereto in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of any Underwriter through you as herein stated
expressly for use in connection with the preparation thereof. If Rule 434 is
used, the Company will comply with the requirements of Rule 434.
(c) KPMG Peat Marwick LLP, who have certified the financial
statements and supporting schedules included in the Registration Statement, are
independent public accountants as required by the Act and the Regulations.
(d) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, except as set forth
in the Registration Statement and the Prospectus, there has been no material
adverse change or any development involving a prospective material adverse
change in the business, prospects, properties, operations, condition (financial
or other) or results of operations of the Company and its subsidiary taken as a
whole,
2
<PAGE> 3
whether or not arising from transactions in the ordinary course of business, and
since the date of the latest balance sheet presented in the Registration
Statement and the Prospectus, neither the Company nor its subsidiary has
incurred or undertaken any liabilities or obligations, direct or contingent,
which are material to the Company and its subsidiary taken as a whole, except
for liabilities or obligations which are reflected in the Registration Statement
and the Prospectus.
(e) This Agreement and the transactions contemplated herein
have been duly and validly authorized by the Company and this Agreement has been
duly and validly executed and delivered by the Company.
(f) The execution, delivery, and performance of this Agreement
by the Company and the consummation by the Company of the transactions
contemplated hereby do not and will not (i) conflict with or result in a breach
of any of the terms and provisions of, or constitute a default (or an event
which with notice or lapse of time, or both, would constitute a default) under,
or result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or its subsidiary pursuant to any material
agreement, instrument, franchise, license or permit to which the Company or its
subsidiary is a party or by which either of such corporations or their
respective properties or assets may be bound or (ii) violate or conflict with
any provision of the articles of incorporation or by-laws of the Company or its
subsidiary or any judgment, decree, order, statute, rule or regulation of any
court or any public, governmental or regulatory agency or body having
jurisdiction over the Company or its subsidiary or any of their respective
properties or assets. No consent, approval, authorization, order, registration,
filing, qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over the Company
or its subsidiary or any of their respective properties or assets is required
for the execution, delivery and performance of this Agreement by the Company or
the consummation by the Company of the transactions contemplated hereby,
including the issuance, sale and delivery of the Shares to be issued, sold and
delivered by the Company hereunder, except the registration under the Act of the
Shares and such consents, approvals, authorizations, orders, registrations,
filings, qualifications, licenses and permits as may be required under state
securities or Blue Sky laws in connection with the purchase and distribution of
the Shares by the Underwriters.
(g) All of the outstanding shares of Common Stock are duly and
validly authorized and issued, fully paid and nonassessable and were not issued
and are not now in violation of or subject to any preemptive rights. The Shares,
when issued, delivered and sold in accordance with this Agreement, will be duly
and validly issued and outstanding, fully paid and nonassessable, and will not
have been issued in violation of or be subject to any preemptive rights. The
Company had, at October [10], 1997, an authorized and outstanding capitalization
as set forth in the Registration Statement and the Prospectus. The Common Stock,
the Firm Shares and the Additional Shares conform to the descriptions thereof
contained in the Registration Statement and the Prospectus.
(h) Other than ___________, a California corporation that is a
wholly owned subsidiary of the Company, the Company does not have any
subsidiaries and does not own
3
<PAGE> 4
any equity interests in any other entity. Each of the Company and its subsidiary
has been duly organized and is validly existing as a corporation in good
standing under the laws of its respective jurisdiction of incorporation. Each of
the Company and its subsidiary is duly qualified and in good standing as a
foreign corporation in each jurisdiction in which the character or location of
its properties (owned, leased or licensed) or the nature or conduct of its
business makes such qualification necessary, except for those failures to be so
qualified or in good standing which will not in the aggregate have a material
adverse effect on the Company and its subsidiary taken as a whole. Each of the
Company and its subsidiary has all requisite power and authority, and all
necessary consents, approvals, authorizations, orders, registrations,
qualifications, licenses and permits of and from all public, regulatory or
governmental agencies and bodies, to own, lease and operate its properties and
conduct its business as now being conducted and as described in the Registration
Statement and the Prospectus, and no such consent, approval, authorization,
order, registration, qualification, license or permit contains a materially
burdensome restriction not adequately disclosed in the Registration Statement
and the Prospectus.
(i) Except as described in the Prospectus, there is no
litigation or governmental proceeding to which the Company or its subsidiary is
a party or to which any property of the Company or its subsidiary is subject or
which is pending or, to the knowledge of the Company, contemplated against the
Company or its subsidiary which could reasonably be expected to result in any
material adverse change or any development involving a material adverse change
in the business, prospects, properties, operations, condition (financial or
other) or results of operations of the Company and its subsidiary taken as a
whole or which is required to be disclosed in the Registration Statement and the
Prospectus.
(j) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which constitutes or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Shares.
(k) The financial statements, including the notes thereto, and
supporting schedules included in the Registration Statement and the Prospectus
present fairly the financial position of the Company as of the dates indicated
and the results of its operations for the periods specified; except as otherwise
stated in the Registration Statement, said financial statements have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis; and the supporting schedules included in the Registration
Statement present fairly the information required to be stated therein.
(l) Except as described in the Prospectus, no holder of
securities of the Company has any rights to the registration of securities of
the Company because of the filing of the Registration Statement or otherwise in
connection with the sale of the Shares contemplated hereby.
4
<PAGE> 5
(m) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration as an
"investment company" under the Investment Company Act of 1940.
(n) Except as disclosed in the Prospectus, and except as to
violations, breaches, defaults and events of default that individually or in the
aggregate would not have a material adverse effect on the Company and its
subsidiary taken as a whole, (i) neither the Company nor its subsidiary is in
violation or default of any provision of its articles of incorporation or
bylaws, or other organizational documents, or is in breach of or default with
respect to any provision of any agreement, judgment, decree, order, mortgage,
deed of trust, lease, franchise, license, indenture, permit or other instrument
to which the Company or its subsidiary is a party or by which the Company or its
subsidiary or any of its respective properties are bound; and (ii) there does
not exist any state of facts that constitutes an event of default on the part of
the Company or its subsidiary as defined in such documents or which, with notice
or lapse of time or both, would constitute such an event of default.
(o) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations that have not
been described or filed as required. The descriptions of the contracts in the
Prospectus are accurate in all material respects and fairly present the
information required by the Act and/or the Rules and Regulations to be presented
in Form S-1; except as disclosed in the Prospectus, the contracts so described
in the Prospectus are in full force and effect on the date hereof, and, neither
the Company, its subsidiary nor, to the best of the Company's knowledge, any
other party is in breach of or default under any of such contracts other than
any such breach or default as would not, individually or in the aggregate,
prevent or adversely affect the transactions contemplated by this Agreement or
result in a material adverse change in the condition (financial or other),
properties, business, results of operations or prospects of the Company and its
subsidiary taken as a whole.
(p) Except as disclosed in the Prospectus, there are no legal
or governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened to which the Company is or may be a party or of
which property owned or leased by the Company is or may be the subject or
related to environmental or discrimination matters, that, individually or in the
aggregate, could reasonably prevent or adversely affect the transactions
contemplated by this Agreement or result in a material adverse change in the
condition (financial or other), properties, business, results of operations or
prospects of the Company and its subsidiary taken as a whole; and no labor
disturbance by the employees of the Company or its subsidiary exists or is
imminent that might be expected to affect adversely such condition, properties,
business, results of operations or prospects. Neither the Company nor its
subsidiary is a party or subject to the provisions of any injunction, judgment,
decree or order of any court, regulatory body, administrative agency or other
governmental body that could reasonably be expected to result in a material
adverse change in the condition (financial or other), properties, business,
results of operations or prospects of the Company and its subsidiary taken as a
whole.
5
<PAGE> 6
(q) Each of the Company and its subsidiary has good and
marketable title to all the properties and assets reflected as owned by it in
the financial statements hereinabove described (or elsewhere in the Prospectus),
subject to no lien, mortgage, pledge, charge or encumbrance of any kind except
(i) those, if any, reflected in such financial statements (or elsewhere in the
Prospectus), or (ii) those which are not material in amount and do not adversely
affect the use made and proposed to be made of such property by the Company or
its subsidiary. Each of the Company and its subsidiary holds its leased
properties under valid and binding leases, with such exceptions as are not
materially significant in relation to the business of the Company and its
subsidiary taken as a whole. Except as disclosed in the Prospectus, each of the
Company and its subsidiary owns or leases all such properties as are necessary
to its operations as now conducted or as proposed to be conducted.
(r) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as described in
or specifically contemplated by the Prospectus: (i) neither the Company nor its
subsidiary has incurred any material liabilities or obligations, indirect,
direct or contingent, or entered into any material verbal or written agreement
or other transaction that is not in the ordinary course of business or that
could result in a material reduction in the future earnings of the Company and
its subsidiary taken as a whole; (ii) neither the Company nor its subsidiary has
sustained any loss or interference with its business or properties from fire,
flood, windstorm, accident or other calamity, whether or not covered by
insurance, that materially and adversely affects the condition (financial or
other), business, results of operations or prospects of the Company and its
subsidiary taken as a whole; (iii) neither the Company nor its subsidiary has
paid or declared any dividends or other distributions with respect to its
capital stock and neither the Company nor its subsidiary is in default in the
payment of principal of or interest on any outstanding debt obligations; (iv)
there has not been any change in the capital stock (other than upon the sale of
the Shares hereunder and upon the exercise of options and other rights described
in the Registration Statement) or increase in indebtedness material to the
Company and its subsidiary taken as a whole (other than in the ordinary course
of business); and (v) there has not been any material adverse change in the
condition (financial or other), business, properties, results of operations or
prospects of the Company and its subsidiary taken as a whole.
(s) Except as disclosed in or specifically contemplated by the
Prospectus, the Company has sufficient trademarks, trade names, patent rights,
mask works, copyrights, licenses, approvals and governmental authorizations to
conduct its business as now conducted; the expiration of any trademarks, trade
names, patent rights, mask works, copyrights, licenses, approvals or
governmental authorizations would not have a material adverse effect on the
condition (financial or other), business, results of operations or prospects of
the Company and its subsidiary taken as a whole; except as disclosed in or
specifically contemplated by the Prospectus, the Company has no knowledge of any
material infringement by it or its customers, with respect to their use of the
Company's trademarks, trade name rights, patent rights, mask works, copyrights,
licenses, trade secrets or other similar rights of others, and there is no claim
being made against the Company, its subsidiary or its customers with respect to
their use of the Company's products, which claims are regarding trademarks,
trade names, patents, mask works,
6
<PAGE> 7
copyrights, licenses, trade secrets or other infringements which could have a
material adverse effect on the condition (financial or other), business, results
of operations or prospects of the Company and its subsidiary taken as a whole.
(t) Neither the Company nor its subsidiary has been advised,
or has any reason to believe, that it is not conducting business in compliance
with all applicable laws, rules and regulations of the jurisdictions in which it
is conducting business, including, without limitation, all applicable local,
state and federal environmental laws and regulations; except where failure to be
so in compliance would not materially adversely affect the condition (financial
or other), business, results of operations or prospects of the Company and its
subsidiary taken as a whole.
(u) Each of the Company and its subsidiary has filed all
necessary federal, state and foreign income and franchise tax returns and has
paid all taxes shown as due thereon; and the Company has no knowledge of any tax
deficiency which has been or might be asserted or threatened against the Company
or its subsidiary which could materially and adversely affect the business,
operations or properties of the Company and its subsidiary taken as a whole.
(v) The Company has not distributed and will not distribute
prior to the Closing Date any offering material in connection with the offering
and sale of the Shares other than the Prospectus, the Registration Statement and
the other materials permitted by the Act.
(w) The Company and its subsidiary maintain insurance of the
types, with insurers, and in the amounts as are reasonable and customary in the
business in which it is engaged, including, but not limited to, insurance
covering real and personal property leased by the Company or its subsidiary
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and effect.
(x) Neither the Company nor its subsidiary has at any time
during the last five years (i) made any unlawful contribution to any candidate
for foreign or domestic office, or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any foreign or federal or state
governmental officer or official or other person charged with similar public or
quasi-public duties, other than payments required or permitted by the laws of
the United States or any jurisdiction thereof.
(y) Other than the Underwriters acting in their capacity as
such, no person is or will be owed any finders fee or commission or similar
payment in connection with the transactions contemplated by this Agreement.
B. Each of the Selling Shareholder, severally and not jointly,
represents and warrants to, and agrees with the Underwriters that:
(a) Such Selling Shareholder has, and on the Closing Date and
the Additional Closing Date hereinafter defined will have, good and valid title
to the Firm Shares and/or the Additional Shares, as applicable, proposed to be
sold by such Selling Shareholder
7
<PAGE> 8
hereunder on such Closing Date and full right, power and authority to enter into
this Agreement and to sell, assign, transfer and deliver such Shares hereunder,
free and clear of all voting trust arrangements, liens, encumbrances, equities,
security interests, restrictions, rights (including, to the knowledge of such
Selling Shareholder, preemptive rights) and claims whatsoever. [None of the Firm
Shares and none of the Additional Shares proposed to be sold by such Selling
Shareholder are subject to any adverse claim (within the meaning of Section
8-102(a)(1) of the California Uniform Commercial Code) and, to the knowledge of
such Selling Shareholder, no basis for such claim exists or will exist at the
time of the Closing or the Additional Closing, as the case may be; and upon
delivery of and payment for such Shares hereunder, such Selling Shareholder will
transfer good and valid title thereto to the Underwriters who acquire such
shares in good faith and without notice of any adverse claim (within the meaning
of Section 8-105(a) of the California Uniform Commercial Code), free and clear
of all liens, encumbrances, equities, claims, restrictions, rights (including
preemptive rights), security interests, voting trusts or other defects of title
whatsoever.
(b) Such Selling Shareholder has executed and delivered a
Custody Agreement and Power of Attorney (hereinafter referred to as the
"Shareholders Agreement") and in connection herewith such Selling Shareholder
further represents, warrants and agrees that such Selling Shareholder has
deposited in custody, under the Shareholders Agreement, with the agent named
therein (the "Agent") as custodian, certificates in negotiable form for the
Shares to be sold hereunder by such Selling Shareholder, for the purpose of
further delivery pursuant to this Agreement. Such Selling Shareholder agrees
that the Shares to be sold by such Selling Shareholder on deposit with the Agent
are subject to the interests of the Company and the Underwriters, that the
arrangements made for such custody are to that extent irrevocable, and that the
obligations of such Selling Shareholder hereunder shall not be terminated,
except as provided in this Agreement or in the Shareholders Agreement, by any
act of such Selling Shareholder, by operation of law, by the death or incapacity
of such Selling Shareholder or by the occurrence of any other event. If the
Selling Shareholder should die or become incapacitated, or if any other event
should occur, before the delivery of the Shares hereunder, the documents
evidencing Shares then on deposit with the Agent shall be delivered by the Agent
in accordance with the terms and conditions of this Agreement as if such death,
incapacity or other event had not occurred, regardless of whether or not the
Agent shall have received notice thereof. This Agreement and the Shareholders
Agreement have been duly executed and delivered by or on behalf of such Selling
Shareholder and the form of such Shareholders Agreement has been delivered to
you.
(c) This Agreement and the Shareholders Agreement and the
transactions contemplated herein and in the Shareholders Agreement have been
duly and validly authorized by such Selling Shareholder and the Shareholders
Agreement has been duly and validly executed and delivered by such Selling
Shareholder.
(d) The performance of this Agreement, the execution, delivery
and performance of the Shareholders Agreement and the consummation of the
transactions contemplated hereby and by the Shareholders Agreement will not (i)
conflict with or result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with
8
<PAGE> 9
notice or lapse of time, or both, would constitute a default) under, or the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of such Selling Shareholder pursuant to, any agreement, instrument,
franchise, license or permit to which such Selling Shareholder is a party or by
which such Selling Shareholder's properties or assets may be bound or (ii)
violate or conflict with any provision of the charter documents of such Selling
Shareholder, if such Selling Shareholder is not an individual, or any judgment,
decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over such Selling
Shareholder or any of its properties or assets. No consent, approval,
authorization, order, registration, filing, qualification, license or permit of
or with any court or any public, governmental or regulatory agency or body
having jurisdiction over such Selling Shareholder or any of its properties or
assets is required for the performance of this Agreement, the execution,
delivery and performance of the Shareholders Agreement or the consummation of
the transactions contemplated hereby and by the Shareholders Agreement, the
registration under the Act of the Shares and such consents, approvals,
authorizations, orders, registrations, filings, qualifications, licenses or
permits as may be required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the Underwriters.
(e) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to or which has constituted or that
might reasonably be expected to cause or result in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Shares.
(f) To the extent that any statements or omissions are made in
the Registration Statement, the Prospectus or any amendment or supplement
thereto in reliance upon and in conformity with written information furnished to
the Company by such Selling Shareholder specifically for use therein, at the
time of the effectiveness of the Registration Statement or the effectiveness of
any post-effective amendment to the Registration Statement, when the Prospectus
is first filed with the Commission pursuant to Rule 424(b) or Rule 434 of the
Regulations, when any supplement to or amendment of the Prospectus is filed with
the Commission and at the Closing Date and the Additional Closing Date, if any,
(as hereinafter respectively defined), the Registration Statement and the
Prospectus and any amendments thereof and supplements thereto complied or will
comply in all material respects with the applicable provisions of the Act and
the Regulations and does not or will not contain an untrue
9
<PAGE> 10
statement of a material fact and does not or will not omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein (i) in the case of the Registration Statement, not misleading and (ii)
in the case of the Prospectus, in light of the circumstances under which they
were made, not misleading. To the extent that any statements or omissions are
made in any related preliminary prospectus or any amendment thereof or
supplement thereto in reliance upon and in conformity with written information
furnished by the Company by such Selling Shareholder specifically for use
therein, when any such related preliminary prospectus was first filed with the
Commission (whether filed as part of the registration statement for the
registration of the Shares or any amendment thereto or pursuant to Rule 424(a)
of the Regulations) and when any amendment thereof or supplement thereto was
first filed with the Commission, such preliminary prospectus and any amendments
thereof and supplements thereto complied in all material respects with the
applicable provisions of the Act and the Regulations and did not contain an
untrue statement of a material fact and did not 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 were made not misleading.
No representation and warranty is made in this subsection (b), however, with
respect to any information contained in or omitted from the Registration
Statement or the Prospectus or any related preliminary prospectus or any
amendment thereof or supplement thereto in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter through you as herein stated expressly for use in connection with
the preparation thereof.
2. Purchase, Sale and Delivery of the Shares.
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, (i) the Company agrees to sell to the Underwriters and the
Underwriters, severally and not jointly, agree to purchase from the Company, at
a purchase price per share of $_______, the number of Firm Shares set forth
opposite the respective names of the Underwriters in Column 1 of Schedule I
hereto, (ii) the Selling Shareholders, severally and not jointly, agree to sell
to the several Underwriters and the Underwriters, severally and not jointly,
agree to purchase from the Selling Shareholders, at the same price per share as
specified in clause (i) hereof, the number of Firm Shares set forth opposite the
respective names of the Underwriters in Column (2) of Schedule I hereto, plus
(in either case) any additional number of Shares which such Underwriter may
become obligated to purchase pursuant to the provisions of Section 9 hereof. The
number of Firm Shares to be sold by each Selling Shareholder to each Underwriter
shall be the number which bears the same proportion to the total number of Firm
Shares to be sold by such Selling Shareholder, as specified in Column (1) of
Schedule II hereto, as the number of Firm Shares set forth opposite the name of
such Underwriter in Column (2) of Schedule I (or such number increased as set
forth in Section 9 hereof) bears to 2,000,000, subject to such adjustments to
eliminate any fractional shares as you in your sole discretion shall make.
(b) Payment of the purchase price for, and delivery of
certificates for, the Shares shall be made at the office of [Phillips & Haddan
LLP, 4675 MacArthur Court, Suite 710, Newport Beach, California 92660], or at
such other place as shall be agreed upon by you, the Selling Shareholders and
the Company, at 7:00 A.M., California time, on the third or fourth business day
(as permitted under Rule 15c6-1 under the Exchange Act) (unless postponed in
accordance with the provisions of Section 9 hereof) following the date of the
effectiveness of the Registration Statement (or, if the Company has elected to
rely upon Rule 430A of the Regulations, the third or fourth business day (as
permitted under Rule 15c6-1 under the Exchange Act) after the determination of
the public offering price of the Shares), or such other time not later than ten
business days after such date as shall be agreed upon by you, the Selling
Shareholders and the Company (such time and date of payment and delivery being
herein called the "Closing Date"). Payment shall be made to the Company by wire
transfer in same day funds and to each of the Selling Shareholders by certified
or official bank check drawn in federal funds or similar same day funds, against
delivery to you for the respective accounts of the Underwriters of certificates
for the Shares to be purchased by them. Certificates for the Shares shall be
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registered in such name or names and in such authorized denominations as you may
request in writing at least two full business days prior to the Closing Date.
The Company and the Selling Shareholders will permit you to examine and package
such certificates for delivery at least one full business day prior to the
Closing Date.
(c) In addition, certain of the Selling Shareholders (as set
forth in Column (2) of Schedule II hereto) hereby grant to the Underwriters the
option to purchase up to 450,000 Additional Shares at the same purchase price
per share to be paid by the Underwriters to the Company and the Selling
Shareholders for the Firm Shares as set forth in this Section 2, for the sole
purpose of covering over-allotments in the sale of Firm Shares by the
Underwriters. This option may be exercised at any time, in whole or in part, on
or before the 30th day following the date of the Prospectus, by written notice
by you to the Company and the Selling Shareholders or the Agent. Such notice
shall set forth the aggregate number of Additional Shares as to which the option
is being exercised and the date and time, as reasonably determined by you, when
the Additional Shares are to be delivered (such date and time being herein
sometimes referred to as the "Additional Closing Date"); provided, however, that
the Additional Closing Date shall not be earlier than the Closing Date or
earlier than the second full business day after the date on which the option
shall have been exercised nor later than the eighth full business day after the
date on which the option shall have been exercised (unless such time and date
are postponed in accordance with the provisions of Section 9 hereof). The
Company will cause certificates for the Additional Shares to be registered in
such name or names and in such authorized denominations as you may request in
writing at least two full business days prior to the Additional Closing Date.
The Company and the Selling Shareholders will permit you to examine and package
such certificates for delivery at least one full business day prior to the
Additional Closing Date.
The number of Additional Shares to be sold by each Selling
Shareholder shall be the number which bears the same proportion to the total
number of Additional Shares that are to be sold by the Selling Shareholders on
the Additional Closing Date, as specified in the notice provided to the Selling
Shareholders or the Agent, as the maximum number of Additional Shares that may
be sold by such Selling Shareholder as set forth opposite such Selling
Shareholder's name in Column (2) of Schedule II hereof bears to 450,000 (the
"Additional Share Allotment"). The number of Additional Shares to be sold by
each Selling Shareholder to each Underwriter shall be the number which bears the
same ratio to such Selling Shareholder's Additional Share Allotment as the
number of Additional Shares set forth opposite the name of such Underwriter in
Column (3) of Schedule I hereto (or such number increased as set forth in
Section 9 hereof) bears to 450,000, subject, however, to such adjustments to
eliminate any fractional shares as you in your sole discretion shall make.
Payment for the Additional Shares shall be made by certified
or official bank check or checks drawn in federal funds or similar same day
funds payable to the order of the applicable Selling Shareholders at the offices
of [Phillips & Haddan LLP, 4675 MacArthur Court, Suite 710, Newport Beach,
California 92660] or such other location as may be mutually acceptable, upon
delivery of the certificates for the Additional Shares to you for the respective
accounts of the Underwriters.
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3. Offering. Upon your authorization of the release of the Firm Shares,
the Underwriters propose to offer the Shares for sale to the public upon the
terms set forth in the Prospectus.
4. Covenants of the Company and the Selling Shareholders.
A. The Company covenants and agrees with the several
Underwriters that:
(a) If the Registration Statement has not yet been declared
effective the Company will use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
possible, and if Rule 430A is used or the filing of the Prospectus is otherwise
required under Rule 424(b) or Rule 434, the Company will file the Prospectus
(properly completed if Rule 430A has been used) pursuant to Rule 424(b) or Rule
434 within the prescribed time period and will provide evidence satisfactory to
you of such timely filing. If the Company elects to rely on Rule 434, the
Company will prepare and file a term sheet that complies with the requirements
of Rule 434.
The Company will notify you immediately (and, if requested by
you, will confirm such notice in writing) (i) when the Registration Statement
and any amendments thereto become effective, (ii) of any request by the
Commission for any amendment of or supplement to the Registration Statement or
the Prospectus or for any additional information, (iii) of the mailing or the
delivery to the Commission for filing of any amendment of or supplement to the
Registration Statement or the Prospectus, (iv) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration Statement or
any post-effective amendment thereto or of the initiation, or the threatening,
of any proceedings therefor, (v) of the receipt of any comments from the
Commission, and (vi) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for that
purpose. If the Commission shall propose or enter a stop order at any time, the
Company will make every reasonable effort to prevent the issuance of any such
stop order and, if issued, to obtain the lifting of such order as soon as
possible. The Company will not file any amendment to the Registration Statement
or any amendment of or supplement to the Prospectus (including the prospectus
required to be filed pursuant to Rule 424(b)or Rule 434) that differs from the
prospectus on file at the time of the effectiveness of the Registration
Statement before or after the effective date of the Registration Statement to
which you shall reasonably object in writing after being timely furnished in
advance a copy thereof.
(b) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act any event shall have occurred as a result
of which the Prospectus as then amended or supplemented would, in the judgment
of the Underwriters or the Company include an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it shall be necessary at any
time to amend or supplement the Prospectus or Registration Statement to comply
with the Act or the Regulations,
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the Company will notify you promptly and prepare and file with the Commission an
appropriate amendment or supplement (in form and substance satisfactory to you)
which will correct such statement or omission and will use its best efforts to
have any amendment to the Registration Statement declared effective as soon as
possible.
(c) The Company will promptly deliver to each of you two
signed copies of the Registration Statement, including exhibits and all
amendments thereto, and the Company will promptly deliver to each of the
Underwriters such number of copies of any preliminary prospectus, the
Prospectus, the Registration Statement, and all amendments of and supplements to
such documents, if any, as you may reasonably request.
(d) The Company will endeavor in good faith, in cooperation
with you, at or prior to the time of effectiveness of the Registration
Statement, to qualify the Shares for offering and sale under the securities laws
relating to the offering or sale of the Shares of such jurisdictions as you may
designate and to maintain such qualification in effect for so long as required
for the distribution thereof; except that in no event shall the Company be
obligated in connection therewith to qualify as a foreign corporation or to
execute a general consent to service of process.
(e) The Company will make generally available (within the
meaning of Section 11(a) of the Act) to its security holders and to you as soon
as practicable, but not later than 45 days after the end of its fiscal quarter
in which the first anniversary date of the effective date of the Registration
Statement occurs, an earnings statement (in form complying with the provisions
of Rule 158 of the Regulations) covering a period of at least 12 consecutive
months beginning after the effective date of the Registration Statement.
(f) During the period of 90 days from the date of the
Prospectus, the Company will not, without the prior written consent of Bear,
Stearns & Co. Inc., on behalf of the Underwriters, issue, sell, offer or agree
to sell, grant any option for the sale of, or otherwise dispose of, directly or
indirectly, any Common Stock (or any securities convertible into, exercisable
for or exchangeable for Common Stock), and the Company will obtain the
undertaking of each of its officers and directors, and such of its shareholders
(other than the Selling Shareholders) as have been heretofore designated by you
and listed on Schedule III attached hereto not to engage in any of the
aforementioned transactions on their own behalf during the period 180 days from
the date of the Prospectus, other than the sale by the Company and the Selling
Shareholders of Shares hereunder and the Company's issuance of Common Stock upon
the exercise of presently outstanding stock options, in each case as disclosed
in the Prospectus.
(g) During a period of three years from the effective date of
the Registration Statement, the Company will furnish to you copies of (i) all
reports to its shareholders; and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or any
national securities exchange.
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<PAGE> 14
(h) The Company will apply the proceeds from the sale of the
Shares as set forth under "Use of Proceeds" in the Prospectus.
(i) The Company will use its best efforts to cause the Shares
to be authorized for quotation on the Nasdaq National Market System.
B. Each of the Selling Shareholders, severally and not jointly,
covenants and agrees with the Underwriters that during the period of 180 days
from the date of the Prospectus, such Selling Shareholder will not, without the
prior written consent of Bear, Stearns & Co. Inc., on behalf of the
Underwriters, sell, offer or agree to sell, encumber, pledge, grant any option
for the sale of, or otherwise dispose of, directly or indirectly, any Common
Stock (or any securities convertible into, exercisable for or exchangeable for
Common Stock), other than the sale by such Selling Shareholder of Shares
hereunder as disclosed in the Prospectus.
5. Payment of Expenses. Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company and the Selling Shareholders hereunder, including
those in connection with (i) preparing, printing, duplicating, filing and
distributing the Registration Statement, as originally filed and all amendments
thereof (including all exhibits thereto), any preliminary prospectus, the
Prospectus and any amendments or supplements thereto (including, without
limitation, fees and expenses of the Company's accountants and counsel and the
fees and expenses of counsel representing the Selling Shareholders), the
underwriting documents (including this Agreement, the Agreement Among
Underwriters and the Selling Agreement) and all other documents related to the
public offering of the Shares (including those supplied to the Underwriters in
quantities as hereinabove stated), (ii) the issuance, transfer and delivery of
the Shares to the Underwriters, including any transfer or other taxes payable
thereon, (iii) the qualification of the Shares under state or foreign securities
or Blue Sky laws, including the costs of printing and mailing a preliminary and
final "Blue Sky Survey" and the fees of counsel for the Underwriters and such
counsel's disbursements in relation thereto, (iv) quotation of the Shares on the
Nasdaq National Market System, (v) filing fees of the Commission and the
National Association of Securities Dealers, Inc., (vi) the cost of printing
certificates representing the Shares and (vii) the cost and charges of any
transfer agent or registrar.
6. Conditions of Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company and the Selling Shareholders herein contained, as of
the date hereof and as of the Closing Date (for purposes of this Section 6
"Closing Date" shall refer to the Closing Date for the Firm Shares and any
Additional Closing Date, if different, for the Additional Shares), to the
absence from any certificates, opinions, written statements or letters furnished
to you or to Gibson, Dunn & Crutcher LLP ("Underwriters' Counsel") pursuant to
this Section 6 of any misstatement or omission, to the performance by the
Company of its obligations hereunder, and to the following additional
conditions:
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(a) The Registration Statement shall have become effective not
later than [4:00] P.M., New York time, on the date of this Agreement, or at such
later time and date as shall have been consented to in writing by you; if the
Company shall have elected to rely upon Rule 430A or Rule 434 of the
Regulations, the Prospectus shall have been filed with the Commission in a
timely fashion in accordance with Section 4(a) hereof; and, at or prior to the
Closing Date no stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereof shall have been issued and no
proceedings therefor shall have been initiated or threatened by the Commission.
(b) At the Closing Date you shall have received the opinion of
Phillips & Haddan LLP, counsel for the Company, dated the Closing Date addressed
to the Underwriters and in form and substance satisfactory to Underwriters'
Counsel, to the effect that:
(i) Each of the Company and its subsidiary has been duly
organized and is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation. Each of the Company and its
subsidiary is duly qualified and in good standing as a foreign corporation
in each jurisdiction in which the character or location of its properties
(owned, leased or licensed) or the nature or conduct of its business makes
such qualification necessary, except for those failures to be so qualified
or in good standing which will not in the aggregate have a material
adverse effect on the Company and its subsidiary taken as a whole. Each of
the Company and its subsidiary has all requisite corporate authority to
own, lease and license its respective properties and conduct its business
as now being conducted and as described in the Registration Statement and
the Prospectus. All of the issued and outstanding capital stock of the
subsidiary of the Company has been duly and validly issued and is fully
paid and nonassessable and was not issued in violation of preemptive
rights and, is owned directly or indirectly by the Company, free and clear
of any lien, encumbrance, claim, security interest, restriction on
transfer, shareholders' agreement, voting trust or other defect of title
whatsoever.
(ii) The Company has an authorized capital stock as set
forth in the Registration Statement and the Prospectus. All of the
outstanding shares of Common Stock are duly and validly authorized and
issued, are fully paid and nonassessable and were not issued in violation
of or subject to any preemptive rights. The Shares to be delivered on the
Closing Date have been duly and validly authorized and, when delivered by
the Company or the Selling Shareholders, as the case may be, in accordance
with this Agreement, will be duly and validly issued, fully paid and
nonassessable and will not have been issued in violation of or subject to
any preemptive rights. The Common Stock, the Firm Shares and the
Additional Shares conform to the descriptions thereof contained in the
Registration Statement and the Prospectus.
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(iii) The Common Stock currently outstanding is listed, and
the Shares to be sold under this Agreement to the Underwriters are duly
authorized for quotation on the Nasdaq National Market System.
(iv) This Agreement has been duly and validly authorized,
executed and delivered by the Company.
(v) To the best knowledge of such counsel, there is no
litigation or governmental or other action, suit, proceeding or
investigation before any court or before or by any public, regulatory or
governmental agency or body pending or threatened against, or involving
the properties or business of, the Company or its subsidiary, that is of a
character required to be disclosed in the Registration Statement and the
Prospectus that has not been properly disclosed therein.
(vi) The execution, delivery, and performance of this
Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby by the Company do not and will not (A)
conflict with or result in a breach of any of the terms and provisions of,
or constitute a default (or an event which with notice or lapse of time,
or both, would constitute a default) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Company or its subsidiary pursuant to, any agreement, instrument,
franchise, license or permit known to such counsel to which the Company or
its subsidiary is a party or by which any of such corporations or their
respective properties or assets may be bound or (B) violate or conflict
with any provision of the articles of incorporation or by-laws of the
Company or its subsidiary, or, to the best knowledge of such counsel, any
judgment, decree, order, statute, rule or regulation of any court or any
public, governmental or regulatory agency or body having jurisdiction over
the Company or its subsidiary or any of their respective properties or
assets. No consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental, or regulatory agency or body having jurisdiction over the
Company or its subsidiary or any of their respective properties or assets
is required for the execution, delivery and performance by the Company of
this Agreement or the consummation by the Company of the transactions
contemplated hereby, except for (1) such as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters (as to which such counsel
need express no opinion) and (2) such as have been made or obtained under
the Act.
(vii) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial
statements and schedules and other financial data included or incorporated
by reference
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<PAGE> 17
therein, as to which no opinion need be rendered) comply as to form in all
material respects with the requirements of the Act and the Regulations.
(viii) The Registration Statement is effective under the
Act, and, to the best knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement or any post-effective
amendment thereof has been issued and no proceedings therefor have been
initiated or threatened by the Commission and all filings required by Rule
424(b) of the Regulations have been made.
(ix) Except as disclosed in the Prospectus, and except as
to violations, breaches, defaults and events of default that individually
or in the aggregate would not have a material adverse effect on the
Company and its subsidiary taken as a whole, (i) neither the Company nor
its subsidiary is in violation or default of any provision of its articles
of incorporation or bylaws, or other organizational documents, or, to the
best knowledge of such counsel, is in breach of or default with respect to
any provision of any judgment, decree or order, or any material agreement,
mortgage, deed of trust, lease, franchise, license, indenture, permit or
other instrument to which the Company or its subsidiary is a party or by
which the Company or its subsidiary or any of its respective properties
are bound; and (ii) there does not exist any state of facts that
constitutes an event of default on the part of the Company or its
subsidiary as defined in such documents or which, with notice or lapse of
time or both, would constitute such an event of default.
(x) There are no contracts or other documents required to
be described in the Registration Statement or to be filed as exhibits to
the Registration Statement by the Act or by the Rules and Regulations that
have not been described or filed as required. The descriptions of the
contracts in the Prospectus are accurate in all material respects and
fairly present the information required by the Act and/or the Rules and
Regulations to be presented in Form S-1; except as disclosed in the
Prospectus, the contracts so described in the Prospectus are in full force
and effect on the date hereof, and, to the best knowledge of such counsel,
neither the Company, its subsidiary nor any other party is in breach of or
default under any of such contracts other than any such breach or default
as would not, individually or in the aggregate, prevent or adversely
affect the transactions contemplated by this Agreement or result in a
material adverse change in the condition (financial or other), properties,
business, results of operations or prospects of the Company and its
subsidiary taken as a whole.
(xi) Except as disclosed in the Prospectus, to the best
knowledge of such counsel, there are no legal or governmental actions,
suits or proceedings pending or threatened to which the Company is or may
be a party or of which property owned or leased by the Company is or may
be the subject or
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related to environmental or discrimination matters, that might,
individually or in the aggregate, prevent or adversely affect the
transactions contemplated by this Agreement or result in a material
adverse change in the condition (financial or other), properties,
business, results of operations or prospects of the Company and its
subsidiary taken as a whole. To the best knowledge of such counsel,
neither the Company nor its subsidiary is a party or subject to the
provisions of any injunction, judgment, decree or order of any court,
regulatory body, administrative agency or other governmental body that
could be expected to result in a material adverse change in the condition
(financial or other), properties, business, results of operations or
prospects of the Company and its subsidiary taken as a whole.
(xii) To the best knowledge of such counsel, neither the
Company nor its subsidiary has been advised, or has any reason to believe,
that it is not conducting business in compliance with all applicable laws,
rules and regulations of the jurisdictions in which it is conducting
business, including, without limitation, all applicable local, state and
federal environmental laws and regulations; except where failure to be so
in compliance would not materially adversely affect the condition
(financial or other), business, results of operations or prospects of the
Company and its subsidiary taken as a whole.
(xiii) To the best knowledge of such counsel, neither the
Company nor its subsidiary has at any time during the last five years (i)
made any unlawful contribution to any candidate for domestic office, or
failed to disclose fully any contribution in violation of law, or (ii)
made any payment to federal, state or local governmental officer or
official or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the
United States or any jurisdiction thereof.
(xiv) In addition, such opinion shall also contain a
statement that such counsel has participated in conferences with officers
and representatives of the Company, representatives of the independent
public accountants for the Company and the Underwriters at which the
contents of the Prospectus and related matters were discussed and,
although such counsel does not assume responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus and expresses no opinion with respect thereto
(except to the extent otherwise stated in the such opinion) , no facts
have come to the attention of such counsel which would lead such counsel
to believe that either the Registration Statement at the time it became
effective (including the information deemed to be part of the Registration
Statement at the time of effectiveness pursuant to Rule 430A(b) or Rule
434, if applicable), or any amendment thereof made prior to the Closing
Date as of the date of such amendment, contained an untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that
the Prospectus as of its date (or
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<PAGE> 19
any amendment thereof or supplement thereto made prior to the Closing Date
as of the date of such amendment or supplement) and as of the Closing Date
contained or contains an untrue statement of a material fact or omitted or
omits to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading (it being understood that such
counsel need express no belief or opinion with respect to the financial
statements and schedules and other financial data included or incorporated
by reference therein).
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters'
Counsel, familiar with the applicable laws; (B) as to matters of fact, to the
extent they deem proper, on certificates of responsible officers of the Company
and certificates or other written statements of officers of departments of
various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and its subsidiary, provided that
copies of any such statements or certificates shall be delivered to
Underwriters' Counsel. The opinion of such counsel for the Company shall state
that the opinion of any such other counsel is in form satisfactory to such
counsel and, in their opinion, you and they are justified in relying thereon.
(c) At the Closing Date you shall have received the opinions
of Phillips & Haddan LLP, counsel for certain of the Selling Shareholders, and
Cooley Godward LLP, counsel for certain of the Selling Shareholders, dated the
Closing Date addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) Each of the Selling Shareholders that is not an
individual has been duly organized and is validly existing as a limited
partnership or a limited liability company, as the case may be, in good
standing under the laws of its jurisdiction of organization. Each of the
Selling Shareholders that is not an individual has all requisite authority
under its partnership agreement or limited liability company operating
agreement, as the case may be, and each of the Selling Shareholders that
is an individual has all requisite capacity to perform this Agreement, to
execute, deliver and perform the Shareholders Agreement and to consummate
the transactions contemplated hereby and by the Shareholders Agreement and
to sell, transfer and deliver the shares being sold by such Selling
Shareholder (the "Seller Shares") under this Agreement in the manner
provided in this Agreement and in the Shareholders Agreement. This
Agreement and the Shareholders Agreement have been duly executed and
delivered by or on behalf of each of the Selling Shareholders and each of
this Agreement and the Shareholders Agreement is the valid and legally
binding obligation of each Selling Shareholder, enforceable against each
Selling Shareholder in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
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reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by equitable principles and limitations on
availability of equitable relief, including specific performance, and
except as rights to indemnity or contribution may be limited by federal or
state securities laws or other applicable laws and the public policy
underlying such laws.
(ii) Upon the delivery by each Selling Shareholder to
the several Underwriters of certificates, duly endorsed for transfer, for
the Seller Shares against payment therefor as provided in this Agreement,
assuming that each of the Underwriters that has severally purchased such
Seller Shares acquires such Seller Shares in good faith and without notice
of any adverse claim (within the meaning of Section 8-102(a)(1) of the
California Uniform Commercial Code), such Underwriter will have acquired
all of the rights of such Selling Shareholder to the Seller Shares sold by
such Selling Shareholder under this Agreement and, in addition, title to
such Seller Shares will be been transferred to the several Underwriters,
free and clear of any adverse claim.
(iii) The sale of the Seller Shares to the Underwriters
by each Selling Shareholder pursuant to this Agreement, the compliance by
such Selling Shareholder with the other provisions of this Agreement and
the Shareholders Agreement and the consummation of the other transactions
contemplated hereby and by the Shareholders Agreement do not (A) to the
best knowledge of such counsel, require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained and such as may be required
under state securities or "Blue Sky" laws, or (B) to the best knowledge of
such counsel, conflict with or result in a breach or violation of any of
the terms and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, lease or other agreement or instrument known to
such counsel to which such Selling Shareholder is a party or by which such
Selling Shareholder or any of such Selling Shareholder's properties or
assets are bound; and nothing has come to the attention of such counsel
which causes such counsel to believe that the sale of the Seller Shares to
the Underwriters pursuant to this Agreement, the compliance by such
Selling Shareholder with the other provisions of this Agreement and the
Shareholders Agreement and the consummation of the transactions
contemplated hereby and by the Shareholders Agreement will result in a
violation of any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
known to such counsel to be applicable to such Selling Shareholder, other
than state securities or "Blue Sky" laws, as to which such counsel may
express no opinion.
(iv) In addition, such opinion shall also contain a
statement (if and to the extent applicable) that such counsel has
participated in conferences with officers and representatives of the
Company, representatives of the
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independent public accountants for the Company and the Underwriters at
which the contents of the Prospectus and related matters were discussed
and, although such counsel does not assume responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus and expresses no opinion with
respect thereto (except to the extent otherwise stated in the such
opinion) , no facts have come to the attention of such counsel which would
lead such counsel to believe that either the Registration Statement at the
time it became effective (including the information deemed to be part of
the Registration Statement at the time of effectiveness pursuant to Rule
430A(b) or Rule 434, if applicable), or any amendment thereof made prior
to the Closing Date as of the date of such amendment, contained an untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus as of its date (or any amendment
thereof or supplement thereto made prior to the Closing Date as of the
date of such amendment or supplement) and as of the Closing Date contained
or contains an untrue statement of a material fact or omitted or omits to
state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they
were made, not misleading (it being understood that such counsel need
express no belief or opinion with respect to the financial statements and
schedules and other financial data included or incorporated by reference
therein).
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters'
Counsel, familiar with the applicable laws; (B) as to matters of fact, to the
extent they deem proper, on certificates of the Selling Shareholders or of
responsible partners, officers, managers or managing members, as the case may
be, of the Selling Shareholders and certificates or other written statements of
officers of departments of various jurisdictions having custody of documents
respecting the existence or good standing of any Selling Shareholder that is not
an individual, provided that copies of any such statements or certificates shall
be delivered to Underwriters' Counsel. [Such counsel, in rendering its opinion
under subparagraph (iii)(B) above, may specifically state that it is relying
solely upon a certificate of the Selling Shareholders or of responsible
partners, officer, managers or managing members, as the case may be, of Selling
Shareholders and has made no independent investigation] The opinion of such
counsel for the Selling Shareholders shall state that the opinion of any such
other counsel is in form satisfactory to such counsel and, in their opinion, you
and they are justified in relying thereon.
(d) All proceedings taken in connection with the sale of the
Firm Shares and the Additional Shares as herein contemplated shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and the
Underwriters shall have received from said Underwriters' Counsel a favorable
opinion, dated as of the Closing Date with respect to the
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<PAGE> 22
issuance and sale of the Shares, the Registration Statement and the Prospectus
and such other related matters as you may reasonably require, and the Company
shall have furnished to Underwriters' Counsel such documents as they request for
the purpose of enabling them to pass upon such matters.
(e) At the Closing Date you shall have received a certificate
of the Chief Executive Officer and Chief Financial Officer of the Company, dated
the Closing Date, to the effect that (i) the condition set forth in subsection
(a) of this Section 6 has been satisfied, (ii) as of the date hereof and as of
the Closing Date the representations and warranties of the Company set forth in
Section 1.A hereof are accurate, (iii) as of the Closing Date the obligations of
the Company to be performed hereunder on or prior thereto have been duly
performed and (iv) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, the Company and its
subsidiary have not sustained any material loss or interference with their
respective businesses or properties from fire, flood, hurricane, accident or
other calamity, whether or not covered by insurance, or from any labor dispute
or any legal or governmental proceeding, and there has not been any material
adverse change, or any development involving a material adverse change, in the
business prospects, properties, operations, condition (financial or otherwise),
or results of operations of the Company and its subsidiary taken as a whole,
except in each case as described in or contemplated by the Prospectus.
(f) At the Closing Date you shall have received a certificate
of each of the Selling Shareholders, dated the Closing Date, to the effect that
(i) as of the date hereof and as of the Closing Date the representations and
warranties of such Selling Shareholder set forth in Section 1.B hereof are
accurate and (ii) as of the Closing Date the obligations of such Selling
Shareholder to be performed hereunder on or prior thereto have been duly
performed.
(g) At the time this Agreement is executed and at the Closing
Date, you shall have received a letter, from KPMG Peat Marwick LLP, independent
public accountants for the Company, dated, respectively, as of the date of this
Agreement and as of the Closing Date addressed to the Underwriters and in form
and substance satisfactory to you, to the effect that: (i) they are independent
certified public accountants with respect to the Company within the meaning of
the Act and the Regulations and stating that the answer to Item 10 of the
Registration Statement is correct insofar as it relates to them; (ii) stating
that, in their opinion, the financial statements and schedules of the Company
included in the Registration Statement and the Prospectus and covered by their
opinion therein comply as to form in all material respects with the applicable
accounting requirements of the Act and the applicable published rules and
regulations of the Commission thereunder; (iii) on the basis of procedures
consisting of a reading of the latest available unaudited interim consolidated
financial statements of the Company and its subsidiary, a reading of the minutes
of meetings and consents of the shareholders and boards of directors of the
Company and its subsidiary and the committees of such boards subsequent to
December 31, 1996, inquiries of officers and other employees of the Company and
its subsidiary who have responsibility for financial and accounting matters of
the Company and its subsidiary with respect to transactions and events
subsequent to December 31, 1996 and other specified procedures and
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<PAGE> 23
inquiries to a date not more than five days prior to the date of such letter,
nothing has come to their attention that would cause them to believe that: (A)
the unaudited consolidated financial statements and schedules of the Company
presented in the Registration Statement and the Prospectus do not comply as to
form in all material respects with the applicable accounting requirements of the
Act and the applicable published rules and regulations of the Commission
thereunder or that such unaudited consolidated financial statements are not
fairly presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
consolidated financial statements included in the Registration Statement and the
Prospectus; (B) with respect to the period subsequent to June 30, 1997 there
were, as of the date of the most recent available monthly consolidated financial
statements of the Company and its subsidiary, if any, and as of a specified date
not more than five days prior to the date of such letter, any changes in the
capital stock or long-term indebtedness of the Company or any decrease in the
net current assets or stockholders' equity of the Company, in each case as
compared with the amounts shown in the most recent balance sheet presented in
the Registration Statement and the Prospectus, except for changes or decreases
which the Registration Statement and the Prospectus disclose have occurred or
may occur or which are set forth in such letter or (C) during the period from
June 30, 1997 to the date of the most recent available monthly consolidated
financial statements of the Company and its subsidiary, if any, and to a
specified date not more than five days prior to the date of such letter, there
was any decrease, as compared with the corresponding period in the prior fiscal
year, in total revenues, or total or per share net income, except for decreases
which the Registration Statement and the Prospectus disclose have occurred or
may occur or which are set forth in such letter; (iv) on the basis of procedures
consisting of a reading of the unaudited pro forma consolidated financial
statements of the Company and its subsidiary, inquiries of officers and other
employees of the Company and its subsidiary who have responsibility for
financial and accounting matters of the Company and its subsidiary with respect
to the basis for their determination of the pro forma adjustments and other
specified procedures and inquiries to a date not more than five days prior to
the date of such letter, nothing has come to their attention that would cause
them to believe that such unaudited pro forma consolidated financial statements
do not comply as to form in all materials respects with the applicable
accounting requirements of Rule 11-02 of Regulation S-X and that the pro forma
adjustments have not been properly applied to the historical amounts in the
compilation of such statements; and (iv) stating that they have compared
specific dollar amounts, numbers of shares, percentages of revenues and
earnings, and other financial information pertaining to the Company and its
subsidiary set forth in the Registration Statement and the Prospectus, which
have been specified by you prior to the date of this Agreement, to the extent
that such amounts, numbers, percentages, and information may be derived from the
general accounting and financial records of the Company and its subsidiary or
from schedules furnished by the Company, and excluding any questions requiring
an interpretation by legal counsel, with the results obtained from the
application of specified readings, inquiries, and other appropriate procedures
specified by you set forth in such letter, and found them to be in agreement.
(h) Prior to the Closing Date the Company shall have furnished
to you such further information, certificates and documents as you may
reasonably request.
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<PAGE> 24
(i) You shall have received from each person who is a director
or officer of the Company or shareholder that has been heretofore designated by
you and listed on Schedule III hereto an agreement to the effect that such
person will not, directly or indirectly, without the prior written consent of
Bear, Stearns & Co. Inc., on behalf of the Underwriters, offer, sell, offer or
agree to sell, grant any option to purchase or otherwise dispose (or announce
any offer, sale, grant of an option to purchase or other disposition) of any
shares of Common Stock (or any securities convertible into, exercisable for or
exchangeable or exercisable for shares of Common Stock) for a period of 180 days
after the date of the Prospectus.
(j) At the Closing Date, the Shares shall have been authorized
for quotation on the Nasdaq National Market System.
(k) Prior to the Closing Date, the Company and the Selling
Shareholders shall have furnished to you such further information, certificates
and documents as you may reasonably request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
cancelled by you at, or at any time prior to, the Closing Date and the
obligations of the Underwriters to purchase the Additional Shares may be
cancelled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company and the Selling
Shareholders in writing, or by telephone, telex or telegraph, confirmed in
writing.
7. Indemnification.
(a) The Company and the Selling Shareholders, jointly and
severally, agree to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), against any and all losses, liabilities, claims, damages and
expenses whatsoever as incurred (including but not limited to attorneys' fees
and any and all expenses whatsoever incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation), joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the registration statement for the registration of
the Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any supplement thereto or
amendment thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
the Company will not be liable in any such case to the extent but only to
24
<PAGE> 25
the extent that any such loss, liability, claim, damage or expense arises out of
or is based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in conformity
with written information furnished to the Company by or on behalf of any
Underwriter through you expressly for use therein; provided, however, that the
Company and the Selling Shareholders will not be liable in any such case to the
extent but only to the extent that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter expressly for use therein; provided, further, however,
that in no case shall any Selling Shareholder be liable or responsible for any
amount in excess of the total proceeds from the offering (net of underwriting
discounts and commissions but before deducting expenses) received by such
Selling Shareholder from the Underwriters for the Shares sold by such Selling
Shareholder pursuant to this Agreement. This indemnity agreement will be in
addition to any liability which the Company and any of the Selling Shareholders
may otherwise have including under this Agreement.
(b) Each Underwriter severally, and not jointly, agrees to
indemnify and hold harmless the Company, each Selling Shareholder, each of the
directors of the Company, each of the officers of the Company who shall have
signed the Registration Statement, and each other person, if any, who controls
the Company or any Selling Shareholder within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, against any losses, liabilities,
claims, damages and expenses whatsoever as incurred (including but not limited
to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), jointly or severally, to which they or any of them
may become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the registration statement for the registration
of the Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through you expressly for use therein; provided,
however, that in no case shall any Underwriter be liable or responsible for any
amount in excess of the underwriting discount applicable to the Shares purchased
by such Underwriter hereunder. This indemnity will be in addition to any
liability which any Underwriter may otherwise have including under this
Agreement. The Company and the Selling Shareholders acknowledge that the
statements set forth in the last paragraph of the cover page and in the ______
paragraph[s] under the caption "Underwriting" in the Prospectus constitute the
only information furnished in writing by or on behalf of any Underwriter
expressly for use in the registration statement relating to the Shares as
originally filed or in any amendment
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<PAGE> 26
thereof, any related preliminary prospectus or the Prospectus or in any
amendment thereof or supplement thereto, as the case may be.
(d) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7). In case any such action is
brought against any indemnified party, and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), it being understood,
however, that the indemnifying party shall, in connection with any one such
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable at any time for the reasonable fees and expenses or only (i) one
principal firm of attorneys and (ii) one local counsel in each jurisdiction in
which, in the reasonable discretion of such principal firm, it is deemed
necessary to retain such local counsel for the indemnified party or parties.
Anything in this subsection to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent; provided, however, that such consent was not
unreasonably withheld.
8. Contribution. In order to provide for contribution in circumstances in
which the indemnification provided for in Section 7 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, the Company, any Selling Shareholder
and the Underwriters who would otherwise be liable as an indemnifying party
under Section 7 of this Agreement shall contribute to the aggregate losses,
claims, damages, liabilities and expenses of the nature contemplated by such
indemnification provision (including any investigation, legal and other expenses
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claims asserted, but after deducting in the case of
losses, claims, damages, liabilities and expenses suffered by the Company, such
Selling Shareholder or such Underwriter any contribution received by the
Company, such Selling Shareholder or such Underwriter from persons, other than
(i) the Underwriters or such Selling Shareholder in the case of the Company,
(ii) the Company or any Underwriter, in the case
26
<PAGE> 27
of such Selling Shareholder, and (iii) the Company or any Selling Shareholder in
the case of the Underwriters, who may also be liable for contribution, including
persons who control the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, officers of the Company who signed the
Registration Statement and directors of the Company) as incurred to which the
Company, any such Selling Shareholder and one or more of the Underwriters may be
subject, in such proportions as is appropriate to reflect the relative benefits
received by the Company, such Selling Shareholder and the Underwriters from the
offering of the Shares or, if such allocation is not permitted by applicable law
or indemnification is not available as a result of the indemnifying party not
having received notice as provided in Section 7 hereof, in such proportion as is
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company, such Selling Shareholder and the Underwriters
in connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company, such
Selling Shareholder and the Underwriters shall be deemed to be in the same
proportion as (x) the total proceeds from the offering (net of underwriting
discounts and commissions but before deducting expenses) received by the
Company, (y) the total proceeds from the offering (net of underwriting discounts
and commissions but before deducting expenses) received by such Selling
Shareholder and (z) the underwriting discounts and commissions received by the
Underwriters, respectively, in each case as set forth in the table on the cover
page of the Prospectus. The relative fault of the Company, of such Selling
Shareholder and the Underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company, such Selling Shareholder or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company,
the Selling Shareholders and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 8 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this Section 8, (i) in no case shall any Underwriter be liable or responsible
for any amount in excess of the underwriting discount applicable to the Shares
purchased by such Underwriter hereunder, (ii) in no case shall any Selling
Shareholder be liable or responsible for any amount in excess of the total
proceeds from the offering (net of underwriting discounts and commissions but
before deducting expenses) received by such Selling Shareholder and (iii) no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. Notwithstanding the provisions of
this Section 8 and the preceding sentence, no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages that such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. For purposes of this Section 8, each person, if
any, who controls an Underwriter within the meaning of Section 15 of the
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<PAGE> 28
Act or Section 20(a) of the Exchange Act shall have the same rights to
contribution as such Underwriter, each person, if any, who controls any Selling
Shareholder within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act shall have the same rights to contribution as such Selling
Shareholder and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of
the Company who shall have signed the Registration Statement and each director
of the Company shall have the same rights to contribution as the Company,
subject in each case to clauses (i) through (iii) of this Section 8. Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a claim
for contribution may be made against another party or parties, notify each party
or parties from whom contribution may be sought, but the omission to so notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have under this
Section 8 or otherwise. No party shall be liable for contribution with respect
to any action or claim settled without its consent; provided, however, that such
consent was not unreasonably withheld.
9. Default by an Underwriter.
(a) If any Underwriter or Underwriters shall default in its or
their obligation to purchase Firm Shares or Additional Shares hereunder, and if
the Firm Shares or Additional Shares with respect to which such default relates
do not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares
or Additional Shares, to which the default relates shall be purchased by the
non-defaulting Underwriters in proportion to the respective proportions which
the numbers of Firm Shares set forth opposite their respective names in Schedule
I hereto bear to the aggregate number of Firm Shares set forth opposite the
names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of
the Firm Shares or Additional Shares, as the case may be, you may in your
discretion arrange for yourself or for another party or parties (including any
non-defaulting Underwriter or Underwriters who so agree) to purchase such Firm
Shares or Additional Shares, as the case may be, to which such default relates
on the terms contained herein. In the event that within five calendar days after
such a default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with respect to
the Additional Shares, the obligations of the Underwriters to purchase and of
certain of the Selling Shareholders to sell the Additional Shares shall
thereupon terminate, without liability on the part of the Company or the Selling
Shareholders, as the case may be, with respect thereto (except in each case as
provided in Section 5, 7(a), 7(b) and 8 hereof) or the Underwriters, but nothing
in this Agreement shall relieve a defaulting Underwriter or Underwriters of its
or their liability, if any, to the other Underwriters, the Company and the
Selling Shareholders for damages occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to
which the default relates are to be purchased by the non-defaulting
Underwriters, or are to be purchased by another party or parties as aforesaid,
you or the Company shall have the right to postpone the
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<PAGE> 29
Closing Date or Additional Closing Date, as the case may be, for a period, not
exceeding five business days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus or in any other
documents and arrangements, and the Company agrees to file promptly any
amendment or supplement to the Registration Statement or the Prospectus which,
in the opinion of Underwriters' Counsel, may thereby be made necessary or
advisable. The term "Underwriter" as used in this Agreement shall include any
party substituted under this Section 9 with like effect as if it had originally
been a party to this Agreement with respect to such Firm Shares and Additional
Shares.
10. Survival of Representations and Agreements. All representations and
warranties, covenants and agreements of the Underwriters, the Company and the
Selling Shareholders contained in this Agreement, including the agreements
contained in Section 5, the indemnity agreements contained in Section 7 and the
contribution agreements contained in Section 8, shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any Underwriter or any controlling person thereof, by or on behalf of the
Company, any of its officers and directors or any controlling person thereof or
by or on behalf of any Selling Shareholder, any of its officers and directors or
any controlling person, and shall survive delivery of and payment for the Shares
to and by the Underwriters. The representations contained in Section 1 and the
agreements contained in Sections 5, 7, 8 and 11(d) hereof shall survive the
termination of this Agreement, including termination pursuant to Section 9 or 11
hereof.
11. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective, upon the later of
when (i) you, the Company and the Selling Shareholders shall have received
notification of the effectiveness of the Registration Statement or (ii) the
execution of this Agreement. If either the public offering price or the purchase
price per Share has not been agreed upon prior to 5:00 P.M., New York time, on
the fifth full business day after the Registration Statement shall have become
effective, this Agreement shall thereupon terminate without liability to the
Company, the Selling Shareholders or the Underwriters except as herein expressly
provided. Until this Agreement becomes effective as aforesaid, it may be
terminated by the Company by notifying you and the Selling Shareholders or the
Agent or by you notifying the Company and the Selling Shareholders or the Agent.
Notwithstanding the foregoing, the provisions of this Section 11 and of Sections
1, 5, 7 and 8 hereof shall at all times be in full force and effect.
(b) You shall have the right to terminate this Agreement at
any time prior to the Closing Date or the obligations of the Underwriters to
purchase the Additional Shares at any time prior to the Additional Closing Date,
as the case may be, (i) if trading in the Common Stock shall have been suspended
by the Commission or by the Nasdaq National Market System; (ii) if any domestic
or international event or act or occurrence has materially disrupted, or in your
opinion will in the immediate future materially disrupt, the market for the
Company's securities or securities in general; or (iii) if trading on the New
York or American Stock Exchanges or on the Nasdaq National Market System shall
have been suspended, or minimum or maximum prices for trading shall have been
fixed, or maximum ranges for prices for securities shall have been
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<PAGE> 30
required, on the New York or American Stock Exchanges or on the Nasdaq National
Market System by the New York or American Stock Exchanges or by the Nasdaq
National Market System or by order of the Commission or any other governmental
authority having jurisdiction; or (iv) if a banking moratorium has been declared
by a state or federal authority or if any new restriction materially adversely
affecting the distribution of the Firm Shares or the Additional Shares, as the
case may be, shall have become effective; or (v) (A) if the United States
becomes engaged in hostilities or there is an escalation of hostilities
involving the United States or there is a declaration of a national emergency or
war by the United States or (B) if there shall have been such change in
political, financial or economic conditions if the effect of any such event in
(A) or (B) as in your judgment makes it impracticable or inadvisable to proceed
with the offering, sale and delivery of the Firm Shares or the Additional
Shares, as the case may be, on the terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11
shall be by telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of
the provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company or any Selling Shareholder to perform any agreement herein or comply
with any provision hereof, the Company will, subject to demand by you, reimburse
the Underwriters for all out-of-pocket expenses (including the fees and expenses
of their counsel), incurred by the Underwriters in connection herewith.
12. Notices. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, N.Y. 10167, Attention: Mr. Henry J. Aboodi; if sent to the Company,
shall be mailed, delivered, or telegraphed and confirmed in writing to the
Company, 2380 Barrett Avenue, Perris, California 92572, Attention: Mr. Evan M.
Gruber; and if sent to any Selling Shareholder, shall be mailed, delivered, or
telegraphed and confirmed in writing to the Company, 2380 Barrett Avenue,
Perris, California 92572, Attention: Mr. Evan M.
Gruber, as Attorney-in-Fact.
13. Parties. This Agreement shall insure solely to the benefit of, and
shall be binding upon, the Underwriters, the Company and the Selling
Shareholders, and the controlling persons, directors, officers, employees and
agents referred to in Section 7 and 8, and their respective successors and
assigns, and no other person shall have or be construed to have any legal or
equitable right, remedy or claim under or in respect of or by virtue of this
Agreement or any provision herein contained. The term "successors and assigns"
shall not include a purchaser, in its capacity as such, of Shares from any of
the Underwriters.
30
<PAGE> 31
14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.
31
<PAGE> 32
If the foregoing correctly sets forth the understanding between you and
the Company, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
MODTECH, INC.
By:___________________________________
Evan M. Gruber
Chief Executive Officer
--------------------------------------
Evan M. Gruber
As Attorney-in-Fact for the Selling
Shareholders named in Schedule II hereto
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
CRUTTENDEN ROTH INCORPORATED
L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC.
By: Bear, Stearns & Co. Inc.
By: ________________________________________
Stephen Parish, Senior Managing Director
32
<PAGE> 33
SCHEDULE I
THE UNDERWRITERS
<TABLE>
<CAPTION>
Column (2)
Column (1) Number of Firm
Number of Firm Shares to be Column (3)
Shares to be Purchased from Maximum No. of
Purchased from the Selling Additional Shares
Name of Underwriter the Company Shareholders to be Purchased
------------------- ----------- ------------ ---------------
<S> <C> <C> <C>
Bear, Stearns & Co. Inc.
Cruttenden Roth
Incorporated
L.H. Friend, Weinress,
Frankson & Presson, Inc.
Total....... 1,000,000 2,000,000 450,000
</TABLE>
33
<PAGE> 34
SCHEDULE II
THE SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
Column (2)
Column (1) Maximum No. of
Number of Firm Shares Additional Shares
Name of Selling Shareholder to be Sold to be Sold
--------------------------- ---------- ----------
<S> <C> <C>
Gerald B. Bashaw 175,000 18,125
James D. Goldenetz 25,000 15,000
Evan M. Gruber 75,000 25,000
Michael G. Rhodes 25,000 15,000
Proactive Partners, L.P. 933,800 210,000
Fremont Proactive Partners, 58,200 7,575
L.P.
Lagunitas Partners 708,000 159,300
Total 2,000,000 450,000
</TABLE>
34
<PAGE> 35
SCHEDULE III
OTHER SHAREHOLDERS EXECUTING LOCK-UP AGREEMENTS
Charles C. McGettigan
Myron A. Wick, III
Robert W. Campbell
J. Patterson McBaine
James M. Phillips
Gruber & McBaine Capital Management
GMJ Investments
Gruber & McBaine International
35
<PAGE> 1
PHILLIPS & HADDAN LLP
Attorneys at Law
4675 MacArthur Court, Suite 710
Newport Beach, California 92660
(714) 752-6100
Facsimile (714) 752-6161
Exhibit 5
November 3, 1997
Modtech, Inc.
2830 Barrett Ave
Perris, CA 92751
Gentlemen:
In connection with the pending Registration Statement on Form S-1 (the
"Registration Statement") filed by our client Modtech, Inc., a California
corporation (the "Company"), with the Securities and Exchange Commission (File
No. 333-37473) for the purpose of registering for sale under the Securities Act
of 1933, as amended, up to an aggregate of 3,450,000 shares of the Company's
Common Stock, $.01 par value, of which up to 1,000,000 are to be issued and
sold by the Company ("Shares"), we have been requested to provide our opinion
as to certain legal matters regarding the issuance of the Shares.
For the purpose of rendering this opinion, we made such have legal and
factual examination and inquiries as we have deemed necessary or appropriate
for purposes of this opinion. On the basis of such examination and inquiries,
and relying thereon, we are of the Opinion that the Shares, when issued and
paid for in the manner described in the Registration Statement, will be duly
authorized and validly issued, fully paid and nonassessable under the laws of
the State of California.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Opinions" in the Prospectus which comprises a part of the Registration
Statement.
Very truly yours,
/s/ PHILLIPS & HADDAN, LLP
PHILLIPS & HADDAN, LLP
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
Modtech, Inc.:
The audits referred to in our report dated March 21, 1997, included the related
financial statement schedule as of December 31, 1996, and for each of the years
in the three-year period ended December 31, 1996, included in the registration
statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, the 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.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Orange County, California
October 31, 1997
