-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NIPsGYvv5OX/lgcjIiLb52FDH49cusNzSXr43CTDpMnXhJZwMlCM92N8hXKzIHky OD0kmlfjDk9plJTAIk2E8w== 0000892569-98-003318.txt : 19981217 0000892569-98-003318.hdr.sgml : 19981217 ACCESSION NUMBER: 0000892569-98-003318 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19981216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MODTECH HOLDINGS INC CENTRAL INDEX KEY: 0001075066 STANDARD INDUSTRIAL CLASSIFICATION: PREFABRICATED WOOD BLDGS & COMPONENTS [2452] IRS NUMBER: 330825386 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-69033 FILM NUMBER: 98770707 BUSINESS ADDRESS: STREET 1: 2830 BARRETT AVE STREET 2: PO BOX 1240 CITY: PERRIS STATE: CA ZIP: 92370 BUSINESS PHONE: 9099434014 MAIL ADDRESS: STREET 1: 4675 MACARTHUR CT., STREET 2: SUITE 710 CITY: NEWPORT STATE: CA ZIP: 92660 S-4 1 FORM S-4 1 As filed with the Securities and Exchange Commission on October 27, 1998 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION FORM S-4 Registration Statement Under the Securities Act of 1933 MODTECH HOLDINGS, INC. (Exact name of registrant as specified in its charter) DELAWARE 33-0825386 (State of Incorporation) (I.R.S. Employer Identification No.) 2830 BARRETT AVENUE, PERRIS, CALIFORNIA 92571, (909) 943-4014 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) EVAN M. GRUBER, CHIEF EXECUTIVE OFFICER 2830 BARRETT AVENUE, PERRIS, CALIFORNIA 92571, (909) 943-4014 (Name, address, including zip code, and telephone number, including area code, of agent for service of process) COPIES TO: Jon R. Haddan, Esq. Kevin A. Cudney, Esq. Haddan & Zepfel LLP Dorsey & Whitney LLP 4675 MacArthur Court, Suite 710 370 17th Street, Suite 4400 Newport Beach, California 92660 Denver, Colorado 80202 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective and the effective time of the proposed mergers described in the enclosed Joint Proxy Statement/Prospectus. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Securities Act"), check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] CALCULATION OF REGISTRATION FEE
==================================================================================================================================== Title of Each Class Proposed Maximum Proposed Maximum of Securities Amount to Offering Price Aggregate Amount of to be Registered Be Registered (1) Per Share (2) Offering Price (2) Registration Fee (2) - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, par value $0.01 per share 12,622,158 $17.00 $221,188,649 $61,490 Series A Preferred Stock, par value $0.01 per share 388,939 ====================================================================================================================================
(1) Represents the estimated maximum number of shares of Modtech Holdings, Inc. Common Stock and Series A Preferred Stock which are issuable upon consummation of the mergers. (2) Pursuant to Rule 457(f)(1) promulgated under the Securities Act, the registration fee is based on the market value of the Common Stock of Modtech, Inc. as of October 23, 1998. The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until this registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine. ================================================================================ 2 CROSS-REFERENCE SHEET TO FORM S-4 OF MODTECH HOLDINGS, INC. PART I. INFORMATION REQUIRED IN THE PROSPECTUS
ITEM NUMBER IN FORM S-4 LOCATION IN JOINT PROXY STATEMENT/PROSPECTUS ----------------------- -------------------------------------------- A. INFORMATION ABOUT THE TRANSACTION 1. Forepart of Registration Statement and Facing Page; Outside Front Cover Page of Prospectus Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Table of Contents; Where You Can Find More Information; Pages of Prospectus 3. Risk Factors, Ratio of Earnings to Outside Front Cover Page of Prospectus; Summary; Certain Fixed Charges and Other Information Risk Factors 4. Terms of the Transaction Summary; The Mergers; Certain Provisions of the Merger Agreement; Directors and Officers of Holdings Following the Mergers; Description of Holdings Capital Stock; Comparison of Rights of Stockholders 5. Pro Forma Financial Information Summary; Unaudited Pro Forma Combined Condensed Financial Statements 6. Material Contacts with the Company Being Summary; The Mergers; Certain Provisions of the Acquired Merger Agreement 7. Additional Information Required for Reoffering * by Persons and Parties Deemed to be Underwriters. 8. Interests of Named Experts and Counsel Experts; Legal Matters 9. Disclosure of Commission Position on Indemni- * fication for Securities Act Liabilities B. INFORMATION ABOUT THE REGISTRANT 10. Information with Respect to S-3 Registrants Summary; Where You Can Find More Information 11. Incorporation of Certain Information by Reference Where You Can Find More Information 12. Information with Respect to S-2 or S-3 Registrants * 13. Incorporation of Certain Information by Reference 14. Information with Respect to Registrants Other Summary; The Mergers; The Business of Modtech; Modtech Than S-2 or S-3 Registrants Common Stock Prices and Dividends; Modtech Management's Discussion and Analysis of Financial Condition and Results of Operations
1 3 C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED 15. Information with Respect to S-3 Companies * 16. Information with Respect to S-2 or S-3 * Companies 17. Information with Respect to Companies Other Summary; The Mergers; The Business of SPI; SPI than S-2 or S-3 Companies Management's Discussions and Analysis of Financial Condition and Results of Operations D. VOTING AND MANAGEMENT INFORMATION 18. Information if Proxies, Consents or Authoriza- Outside Front Cover of Prospectus; Summary; Certain Risk tions are to be Solicited Factors; The Mergers; The Special Meetings; Certain Provisions of the Merger Agreement; Description of Holdings Capital Stock; Comparison of Rights of Stockholders; Where You Can Find More Information 19. Information if Proxies, Consents or Authoriza- * tions are not to be Solicited in an Exchange Offer
- ---------- * Not applicable. 2 4 MODTECH, INC. SPI HOLDINGS, INC. MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT The Boards of Directors of Modtech, Inc. and SPI Holdings, Inc. have both unanimously approved the merger of Modtech and SPI. We are planning to accomplish the combination through concurrent mergers of Modtech and SPI into separate subsidiaries of a new holding company, named Modtech Holdings, Inc., which is called "Holdings" in this Joint Proxy Statement/Prospectus. SPI stockholders will receive 1.8785 shares of Holdings Common Stock for each share of SPI Common or Preferred Stock they own. Subject to certain adjustments described in this Joint Proxy Statement/Prospectus, they may elect to receive $49.4097 per share of SPI stock in place of Holdings Common Stock for up to 5.9176% of their SPI stock. Modtech stockholders will receive 0.8508 shares of Holdings common stock and $3.7293 in exchange for each share of Modtech Common Stock held. Subject to certain adjustments described in this Joint Proxy Statement/Prospectus, they may elect to receive up to 3.94% of their shares from Holdings as Series A Preferred Stock instead of Holdings Common Stock. Holdings' Common Stock is substantially identical to the Modtech Common Stock currently outstanding. The merger cannot be completed unless the stockholders of both companies approve the merger agreement. We have each scheduled special meetings for our stockholders to vote on the merger agreement. The Boards of Directors of Modtech and SPI have unanimously determined that the merger of their respective companies is in the best interest of their stockholders, and each Board unanimously recommends that you vote FOR approval of the merger agreement. YOUR VOTE IS VERY IMPORTANT. IN DECIDING HOW TO VOTE, YOU SHOULD CONSIDER VARIOUS RISKS WHICH ARE DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS UNDER THE HEADING, "CERTAIN RISK FACTORS," BEGINNING AT PAGE 15. Whether or not you plan to attend your meeting, please vote by completing the enclosed proxy card and mailing it to us. If you sign, date, and mail your proxy card without indicating how you want to vote, your proxy will be counted as a vote in favor of the proposals submitted at your meeting. If your shares are held in "street name," you must instruct your broker in order to vote. If you fail to return your proxy card or fail to instruct your broker, you will in effect vote against the merger agreement. The date, times and places of the special meetings are as follows: FOR MODTECH STOCKHOLDERS: ___________, December __, 1998, 10:00 a.m. Sheraton Newport Hotel 4545 MacArthur Boulevard Newport Beach, California 92660 FOR SPI STOCKHOLDERS: ___________, December __, 1998, 10:00 a.m. 9550 Hermosa Avenue Rancho Cucamonga, California 91730 This Joint Proxy Statement/Prospectus provides you with detailed information about the proposed merger. Again, we encourage you to read it carefully and understand it before you vote. You may obtain additional information about Modtech from documents that it has filed with the Securities and Exchange Commission. ___________________________________ _____________________________________ Evan M. Gruber Patrick Van Den Bossche Chief Executive Officer President and Chief Executive Officer Modtech, Inc. SPI Holdings, Inc. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES REGULATORS HAVE APPROVED THE SECURITIES TO BE ISSUED IN THIS TRANSACTION OR DETERMINED THAT THIS JOINT PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This Joint Proxy Statement/Prospectus is dated October _____, 1998 and is first being sent or given to stockholders on or about __________, 1998. 5 MODTECH, INC. 2830 BARRETT AVENUE PERRIS, CALIFORNIA 92571 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO THE STOCKHOLDERS OF MODTECH, INC.: NOTICE IS HEREBY GIVEN that a Special Meeting of the Stockholders of Modtech, Inc., a California corporation ("Modtech"), will be held at 10:00 a.m., on December __, 1998, at the Sheraton Newport Beach Hotel, 4545 MacArthur Boulevard, Newport Beach, California 92660, for the following purposes: 1. Mergers. To consider and vote upon a proposal to approve and adopt the Agreement and Plan of Reorganization and Merger, dated as of September 28, 1998 (the "Merger Agreement"), between SPI Holdings, Inc., a Colorado corporation ("SPI"), and Modtech, and the mergers contemplated therein. The Merger Agreement provides for the merger of Modtech with a subsidiary of Modtech Holdings, Inc. ("Holdings"), a newly formed Delaware corporation (the "Modtech Merger"), and the concurrent merger of SPI with a separate subsidiary of Holdings (the "SPI Merger" and, together with the Modtech Merger, the "Mergers"). Pursuant to the Mergers, both SPI and Modtech will become wholly owned subsidiaries of Holdings. At the effective time of the Mergers, each outstanding share of Modtech Common Stock other than shares owned by SPI, Modtech or their respective subsidiaries, will be converted into the right to receive $3.7293 and 0.8508 of a share of Holdings Common Stock. Subject to adjustments described in the Merger Agreement, each Modtech stockholder may elect to receive 0.8508 shares of Holdings Series A Preferred Stock in place of Holdings Common Stock at the same 0.8508 exchange ratio for up to 3.94% of their shares of Modtech Common Stock. Details of the Mergers and other important information concerning Holdings, SPI and Modtech are more fully described in the accompanying Joint Proxy Statement/Prospectus, which includes a copy of the Merger Agreement. Please review this material carefully. 2. Other Business. To transact such other business as may properly come before the Special Meeting or any postponements or adjournments thereof. The Board of Directors has fixed the close of business on ________________ _______, 1998 as the record date for the determination of the holders of Modtech Common Stock entitled to notice of, and to vote at, the Special Meeting. Only stockholders of record at the close of business on such date are entitled to notice of and to vote at the Special Meeting and any adjournment or postponement thereof. The affirmative vote of a majority of the outstanding shares of Modtech Common Stock entitled to vote thereon is necessary for approval and adoption of the Merger Agreement and approval of the Mergers. All stockholders are cordially invited to attend the Special Meeting in person; however, to ensure your representation at the Special Meeting, you are urged to mark, sign, date and return the enclosed proxy card as promptly as possible in the postage prepaid envelope enclosed for that purpose. THE VOTE OF ALL HOLDERS OF MODTECH COMMON STOCK IS IMPORTANT. WHETHER OR NOT YOU ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY CARD IN THE POSTAGE PREPAID ENVELOPE AS SOON AS POSSIBLE. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE SPECIAL MEETING. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE YOUR SHARES OF MODTECH COMMON STOCK IN PERSON. The Board of Directors unanimously recommends that the holders of Modtech Common Stock vote for approval and adoption of the Merger Agreement and the Mergers. Sincerely, /s/ EVAN M. GRUBER ----------------------------------- Evan M. Gruber CHIEF EXECUTIVE OFFICER Perris, California November __, 1998 HOLDERS OF MODTECH COMMON STOCK SHOULD NOT SEND IN THEIR STOCK CERTIFICATES WITH THEIR PROXY CARD AT THIS TIME. RECORD HOLDERS OF MODTECH COMMON STOCK AT THE EFFECTIVE TIME OF THE MERGER WILL RECEIVE A LETTER OF TRANSMITTAL WITH WHICH TO MAKE AN ELECTION TO RECEIVE A PORTION OF THE MERGER CONSIDERATION IN PREFERRED STOCK. 6 SPI HOLDINGS, INC. 9550 HERMOSA AVENUE RANCHO CUCAMONGA, CALIFORNIA 91730 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO THE STOCKHOLDERS OF SPI HOLDINGS, INC: Notice is hereby given that a Special Meeting of the Stockholders of SPI Holdings, Inc., a Colorado corporation ("SPI"), will be held at 10:00 a.m., December __, 1998, at 9550 Hermosa Avenue, Rancho Cucamonga, California 91730, for the following purposes: 1. Mergers. To consider and vote upon a proposal to approve and adopt the Agreement and Plan of Reorganization and Merger dated as of September 28, 1998 (the "Merger Agreement"), between SPI and Modtech, Inc., a California corporation ("Modtech"), and the mergers contemplated therein. The Merger Agreement provides for the merger of SPI with a subsidiary of Modtech Holdings, Inc. ("Holdings"), a newly formed Delaware corporation (the "SPI Merger"), and the concurrent merger of Modtech with a separate subsidiary of Holdings (the "Modtech Merger" and, together with the SPI Merger, the "Mergers"). Pursuant to the Mergers, both SPI and Modtech will become wholly owned subsidiaries of Holdings. At the effective time of the Mergers, each outstanding share of SPI Common Stock, and each outstanding share of SPI's several series of preferred stock ("SPI Preferred Stock" and, together with SPI Common Stock, "SPI Capital Stock"), other than shares owned by SPI, Modtech or their respective subsidiaries, will be converted into the right to receive 1.8785 shares of Holdings Common Stock. Each SPI stockholder may elect to receive in place of Holdings Common Stock $49.4097 per share for up to 5.9176% of their shares of SPI Capital Stock. If such elections do not total $8,076,133, additional shares will be converted to cash, first pro rata among those SPI stockholders who elected to receive cash and then pro rata among those SPI stockholders who did not make such an election, until the cash being paid equals $8,076,133. Details of the proposed Mergers and other important information concerning Holdings, SPI and Modtech are more fully described in the accompanying Proxy Statement/Prospectus, which includes a copy of the Merger Agreement. Please review this material carefully. 2. Other Business. To consider and act upon any other matters that may properly come before the Special Meeting or any postponement or adjournment thereof. The SPI Board of Directors has fixed the close of business on ___________, 1998 as the record date for determining the stockholders having the right to vote at the meeting or any adjournment thereof. Only stockholders of record at the close of business on that date are entitled to notice of and to vote at the Special Meeting and any postponement or adjournment thereof. The affirmative vote of 70% of the outstanding shares of SPI Common Stock and SPI Preferred Stock entitled to vote thereon, voting together as a single class, is required to approve and adopt the Merger Agreement and the Mergers. THE VOTE OF ALL HOLDERS OF SPI COMMON STOCK AND PREFERRED STOCK IS IMPORTANT. WHETHER OR NOT YOU ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY CARD IN THE POSTAGE PREPAID ENVELOPE AS SOON AS POSSIBLE. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE SPECIAL MEETING. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE YOUR SHARES OF SPI COMMON STOCK OR PREFERRED STOCK IN PERSON. The Board of Directors unanimously recommends that the holders of SPI Common Stock and Preferred Stock vote for approval and adoption of the Merger Agreement and the Mergers at the SPI Special Meeting. Sincerely, /s/ PATRICK VAN DEN BOSSCHE ----------------------------------- Patrick Van Den Bossche, PRESIDENT AND CHIEF EXECUTIVE OFFICER Rancho Cucamonga, California November __, 1998 SPI STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARD AT THIS TIME. RECORD HOLDERS OF SPI COMMON OR PREFERRED STOCK AT THE EFFECTIVE TIME OF THE MERGER WILL RECEIVE A LETTER OF TRANSMITTAL WITH WHICH TO MAKE AN ELECTION TO RECEIVE COMMON STOCK OR A COMBINATION OF COMMON STOCK AND CASH. 7 TABLE OF CONTENTS QUESTIONS AND ANSWERS ABOUT THE MODTECH/SPI MERGER...............................................1 SUMMARY.....................................................................6 The Companies....................................................6 The Special Meetings.............................................7 Record Date; Voting Power........................................7 Nasdaq Listing of Holdings Common Stock..........................7 Share Ownership of Management and Certain Stockholders...................................................7 Conflicts of Interest............................................8 Board of Directors Following the Mergers.........................8 Comparative Per Share Market Price Information....................................................8 Approvals........................................................8 Conditions to the Mergers........................................8 Termination of the Merger Agreement..............................9 Termination Fee..................................................9 Dissenters' Rights...............................................9 Opinion of Modtech's Financial Advisor..........................10 Forward-Looking Statements May Prove Inaccurate....................................................10 Comparative Historical and Pro Forma Per Share Data................................................11 Modtech Selected Financial Data..........................................................12 SPI Selected Financial Data.....................................13 Modtech and SPI Selected Unaudited Pro Forma Combined Condensed Financial Information.........................................14 CERTAIN RISK FACTORS.......................................................15 Risks Related to Mergers........................................15 Risks Related to Modtech........................................17 Risks Related to SPI............................................18 THE MERGERS................................................................20 General.........................................................20 Background of the Mergers.......................................20 Reasons for the Mergers; Recommen- dations of the Boards of Directors............................22 Form of the Mergers.............................................24 Merger Consideration............................................24 Opinion of Modtech's Financial Advisor..........................25 Procedures for Election of Merger Consideration and Surrender of Stock Certificates; Fractional Shares...............................28 Effective Time..................................................29 Effect on SPI Stock Plan........................................29 Effect on SPI Warrants..........................................30 Effect on Modtech Stock Plans...................................30 Certain Federal Income Tax Consequences.........................30 Conflicts of Interest...........................................34 Accounting Treatment............................................36 Approvals and Consents..........................................36 Nasdaq Listing..................................................37 Resales of Stock................................................37 Dissenters' Rights..............................................37 Cautionary Statement Concerning Forward- Looking Statements............................................40 THE SPECIAL MEETINGS.......................................................42 Purpose, Time and Place.........................................42 Record Date; Voting Power.......................................42 Votes Required..................................................43 Share Ownership of Management and Certain Stockholders..................................................43 Voting of Proxies...............................................43 Revocability of Proxies.........................................44 Solicitation of Proxies.........................................44 CERTAIN PROVISIONS OF THE MERGER AGREEMENT.......................................................45 Conditions to Consummation of the Mergers.......................................................45 Conduct of Business Pending the Mergers.........................46 Termination.....................................................46 Termination Fee.................................................47 Certain Representations and Warranties..........................48 Indemnification.................................................48 Fees and Expenses...............................................49 Amendment and Waiver............................................49 THE BUSINESS OF HOLDINGS...................................................51 THE BUSINESS OF MODTECH....................................................52 MODTECH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................................59 MODTECH COMMON STOCK PRICES AND DIVIDENDS............................................................63 THE BUSINESS OF SPI........................................................64 SPI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................68 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS......................................................74 DIRECTORS AND OFFICERS OF HOLDINGS FOLLOWING THE MERGERS...........................................84 Directors.......................................................84
i 8 Compensation of Holdings' Directors and Committees of the Board of Directors......................................................87 Holdings' Executive Officers....................................87 Compensation of Holdings Executive Officers......................................................87 Compensation of Modtech's Directors and Executive Officers........................................87 Compensation of SPI's Directors and Executive Officers............................................87 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF HOLDINGS..........................................91 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF MODTECH...........................................93 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF SPI...............................................95 DESCRIPTION OF HOLDINGS CAPITAL STOCK...........................................................97 COMPARISON OF RIGHTS OF STOCKHOLDERS....................................................99 EXPERTS...................................................................104 LEGAL MATTERS.............................................................104 OTHER MATTERS.............................................................104 WHERE YOU CAN FIND MORE INFORMATION....................................................104 INDEX TO FINANCIAL STATEMENTS.............................................F-1 ANNEXES Annex I - Agreement and Plan of Reorganization and Merger Annex II - Opinion of Donaldson, Lufkin & Jenrette Securities Corporation Annex III - Chapter 13 of the California General Corporation Law Relating to Dissenters' Rights Annex IV - Article 113 of the Colorado Business Corporation Act Relating to Dissenters' Rights
ii 9 QUESTIONS AND ANSWERS ABOUT THE MODTECH/SPI MERGER 1. Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE? A: Modtech and SPI believe that their combination will create value for both companies' stockholders through: - Product diversification -- At present, Modtech makes modular relocatable classrooms and SPI makes commercial and light industrial modular buildings. - Geographic expansion -- Modtech currently does business primarily in California and also in Nevada and Arizona. SPI currently does business in California, Arizona, Nevada, Colorado, Texas, New Mexico and other neighboring states. - Greater efficiencies in operation -- We plan to consolidate certain manufacturing and administrative functions of both companies. We will seek purchasing, shipping and other efficiencies as a result of the Mergers. - Liquidity -- Modtech stockholders will receive a total of $39,923,742 in cash. SPI stockholders will receive publicly traded stock in Holdings in exchange for their investment in SPI, which is a privately held company. SPI stockholders will also receive a total of $8,076,133 in cash. 2. Q: HOW ARE THE COMPANIES MERGING? A: They are merging through concurrent mergers with separate subsidiaries of Holdings. 3. Q: HOW DOES HOLDINGS DIFFER FROM MODTECH? A: Once the Mergers occur, Holdings will be the holding company owning both Modtech and SPI. Holdings will be a Delaware corporation. Modtech is a California corporation. Holdings common stock will be substantially the same as Modtech's existing common stock. The Holdings Board of Directors will consist of nine members, including four current directors of Modtech (Evan M. Gruber, Charles C. McGettigan, Myron A. Wick III, and Daniel J. Donahoe III); three current directors of SPI, (Patrick Van Den Bossche, Charles A. Hamilton and Charles R. Gwirtsman); and two outside directors who have not yet been selected. Evan M. Gruber, Chief Executive Officer of Modtech, will serve as the Chief Executive Officer of Holdings, and Michael G. Rhodes, Chief Operating Officer of Modtech, will serve as Chief Operating Officer and Chief Financial Officer of Holdings. They will be joined by Patrick Van Den Bossche, President of SPI, who will hold the same position at Holdings. 4. Q: WHAT WILL I RECEIVE FOR MY STOCK? A: Modtech stockholders will receive $3.7293 and 0.8508 shares of Holdings Common Stock for each share of Modtech Common Stock they own at the time of the Mergers. In place of shares of Holdings Common Stock, Modtech stockholders may elect to receive the same number of shares of Holdings Series A Preferred Stock for up to 3.94% of their shares of Modtech Common Stock. The number of shares of Holdings Series A Preferred Stock that Modtech stockholders may elect to receive will be 1 10 adjusted in accordance with the Merger Agreement. SPI stockholders will receive 1.8785 shares of Holdings Common Stock for each share of SPI Common or Preferred stock that they own. Each SPI stockholder may elect to receive, in place of Holdings Common Stock, $49.4097 per share of SPI stock for up to 5.9176% of the total shares of SPI Common Stock and SPI Preferred Stock they own. The cash to be paid and the shares to be issued in the Mergers is sometimes referred to in this Joint Proxy Statement/Prospectus as the "Merger Consideration." With respect to the Modtech Merger, the cash and shares is sometimes referred to as the "Modtech Merger Consideration," and, with respect to the SPI Merger, as the "SPI Merger Consideration." 5. Q: WILL HOLDINGS COMMON STOCK BE LISTED FOR TRADING ON THE NASDAQ NATIONAL MARKET? A: Yes, Holdings Common Stock will be listed on the Nasdaq National Market, but Holdings Series A Preferred Stock will not be listed. 6. Q: HOW DO I ELECT TO RECEIVE CASH FOR A PORTION OF MY SHARES? A: SPI Stockholders: You will make your election on the letter of transmittal we will send to you through ChaseMellon Shareholder Services LLC, our Exchange Agent for the Mergers. In order for your election to be effective, you must send in your SPI stock certificates along with the letter of transmittal. You may make different elections for each share of SPI Common or Preferred Stock (collectively, "SPI Capital Stock") that you own. If you do not make an election on the letter of transmittal, you will receive 1.8785 shares of Holdings Common Stock for each share of SPI Capital Stock that you own. Modtech Stockholders: You may not make an election to receive a different proportion of cash and securities. You will receive $3.7293 and 0.8508 shares of Holdings Common Stock for each share of Modtech Common Stock you own. However, you may elect to receive Holdings Series A Preferred Stock in place of Holdings Common Stock for up to 3.94% of your shares of Modtech Common Stock. You will make your elections when you send in your Modtech stock certificate with the letter of transmittal that the Exchange Agent will send to you shortly after the Mergers are completed. 7. Q: WHY ARE MODTECH STOCKHOLDERS BEING OFFERED THE RIGHT TO SELECT HOLDINGS SERIES A PREFERRED STOCK IN PLACE OF HOLDINGS COMMON STOCK? A: Holdings Series A Preferred Stock is being offered in order for the Modtech Merger to meet the requirements of Section 351 of the Internal Revenue Code and is being offered to all Modtech stockholders because California law requires all stockholders in a merger be offered the same consideration. Because the Holdings Series A Preferred Stock does not have voting rights and will not be listed on any exchange (See "Description of Holdings Capital Stock"), it is anticipated that no Modtech stockholders, other than Proactive Partners, L.P. and Lagunitas Partners, will select Holdings Series A Preferred Stock in place of Holdings Common Stock. Proactive Partners, L.P., and Lagunitas Partners have agreed to accept all of Holdings Series A Preferred Stock offered in order for the Modtech Merger to meet the requirements 2 11 of Section 351 of the Internal Revenue Code. 8. Q: IF I AM AN SPI STOCKHOLDER AND ELECT TO RECEIVE $49.4097 A SHARE FOR UP TO 5.9176% OF MY SHARES, CAN I BE REQUIRED TO ACCEPT MORE CASH? A: Yes. The Merger Agreement requires that the total cash elected by SPI stockholders must equal $8,076,133. If the total cash does not equal $8,076,133, additional shares of SPI Common and Preferred Stock will be converted to cash at $49.4097 per share pro rata among SPI stockholders who elected to receive cash for some of their shares until the total cash to be paid for SPI Capital Stock equals $8,076,133. In such a case, stockholders who elected to receive cash for less than 5.9176% of the shares, as well as stockholders who elected to receive cash for 5.9176% of their shares, may be required to accept more cash. 9. Q: IF I AM AN SPI STOCKHOLDER, CAN I ELECT TO RECEIVE $49.4097 A SHARE FOR MORE THAN 5.9176% OF MY SHARES? A: No. You may not voluntarily elect to receive cash for more than 5.9176% of your shares, although you may be required to accept cash for more shares as stated in the preceding answer. 10. Q: IF I AM AN SPI STOCKHOLDER AND DO NOT ELECT TO RECEIVE $49.4097 A SHARE FOR ANY OF MY SHARES, CAN I BE REQUIRED TO ACCEPT CASH? A: Yes. If all those SPI stockholders who elected to convert a portion of their shares to cash have all of their remaining shares converted to cash and the total cash to be paid for shares of SPI Capital Stock is still less than $8,076,133, then stockholders who did not elect to have any shares converted to cash will have their shares converted to cash pro rata based on all remaining shares not yet converted to cash until the total cash to be paid equals $8,076,133. 11. Q: HOW WILL FRACTIONAL SHARES BE HANDLED? A: Holdings will not issue fractional shares. Instead, Holdings will pay cash to each SPI stockholder and Modtech stockholder who would otherwise be entitled to receive a fractional share of Holdings Common Stock. The payment will be based on the closing price of Modtech Common Stock on the last trading day on the Nasdaq National Market prior to the completion of the Mergers. Each Modtech stockholder who would otherwise be entitled to receive a fractional share of Holdings Series A Preferred Stock will receive shares of Holdings Series A Preferred Stock rounded upward to the nearest number of whole shares. 12. Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGERS? A: We have been advised by tax counsel that (1) the cash received in the Mergers will be taxable to the stockholders, and (2) the shares of Holdings Common Stock and Holdings Series A Preferred Stock will be received tax free. Tax matters are very complicated and the tax consequences of the Mergers will depend on the facts of your own situation. You should consult your tax advisors for a full understanding of the tax consequences of the Mergers to you. See "The Mergers -- Certain Federal Income Tax Consequences." 3 12 13. Q: SHOULD I SEND IN MY SPI OR MODTECH STOCK CERTIFICATES NOW? A: No. After the Mergers are completed, the Exchange Agent will send SPI stockholders and Modtech stockholders written instructions for exchanging their stock certificates. 14. Q: WHAT DO I NEED TO DO NOW? A: Please mail your signed proxy card in the enclosed postage prepaid return envelope as soon as possible, so that your shares may be represented and voted at the appropriate stockholders' meeting. YOUR VOTE IS VERY IMPORTANT. If you sign and send in your proxy and do not indicate how you want to vote, your proxy will be counted as a vote in favor of the proposals. If you do not vote or you abstain, it will have the effect of a vote against the proposals. You may withdraw your proxy up to and on the day of your stockholders' meeting by following the directions on page 44. Modtech's meeting will take place on ___________, December __, 1998 at 10:00 a.m. and SPI's meeting will take place on ___________, December __, 1998 at 10:00 a.m. You should sign and mail your proxy card even if you are planning to attend your meeting as you can still withdraw your proxy, change your vote or attend your meeting and vote in person. 15. Q: WHAT AM I BEING ASKED TO VOTE UPON? A: SPI stockholders: You are being asked to approve the Merger Agreement which provides that SPI will become, through merger, a wholly owned subsidiary of Holdings. It is intended that you will receive Holdings' Common Stock tax free, but you will be taxed on any cash you may receive. You are urged to consult your own tax advisors. Modtech stockholders: You are being asked to approve the Merger Agreement which provides that Modtech will become, through merger, a wholly owned subsidiary of Holdings. It is intended that you will receive Holdings Common Stock and, if you elect, Holdings Series A Preferred Stock, tax free. You will be taxed on any cash you receive. You are urged to consult your own tax advisors. 16. Q: HOW MANY SHARES OF HOLDINGS STOCK WILL BE OUTSTANDING AFTER THE MERGERS ARE COMPLETED? A: After the Mergers, Holdings is expected to have approximately 14,844,519 shares outstanding on a fully diluted basis. This includes approximately 12,622,158 shares of Common Stock, 388,939 shares of Series A Preferred Stock and options to acquire 1,833,422 shares of Common Stock. The options will be currently exercisable for approximately 1,325,851 shares. 17. Q: WHAT VOTE IS REQUIRED FOR APPROVAL? A: The Mergers must be approved: - by holders of 70% of the votes entitled to be cast by holders of the outstanding shares of SPI Common Stock and SPI's Series A-1, A-2, A-3, A-4, A-5 and A-6 Preferred Stock, with the Common and Preferred Stock voting together as a single class, and - by holders of a majority of the votes entitled to be cast by holders of the outstanding shares of Modtech Common Stock. 4 13 18. Q: WHAT DO THE MODTECH AND SPI BOARDS OF DIRECTORS RECOMMEND? A: Each Board of Directors unanimously approved the Merger Agreement and recommends that their company's stockholders vote FOR the proposal to approve the Merger Agreement and the Mergers. 19. Q: WHAT RISKS SHOULD I CONSIDER? A: The exchange ratios of cash and Holdings shares for SPI and Modtech shares are fixed. These exchange ratios will not change even if the market price of Modtech Common Stock decreases before the Mergers occur. Accordingly, the value of the Holdings stock and cash you receive when the Mergers occur may be lower than the current market value of Modtech's Common Stock. You should review "Certain Risk Factors" on pages 15 through 19, as well as the countervailing factors considered by each company's Board of Directors described under "The Mergers--Reasons for the Mergers; Recommendations of the Boards of Directors." 20. Q: WHEN ARE THE MERGERS EXPECTED TO OCCUR? A: We are working to complete the Mergers by the end of 1998. 21. Q: WHAT WILL HOLDINGS DIVIDEND POLICY BE? A: Holdings will continue Modtech's dividend policy. Modtech has not declared a cash dividend to common stockholders since 1990 and has no present intention to pay a dividend in the future. 22. Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY SHARES FOR ME? A: Your broker will vote your shares only if you provide instructions on how to vote. Otherwise, without instructions, your shares will not be voted. Shares that are not voted will have the effect of votes against the proposals. 5 14 SUMMARY The Mergers described in this document are complex. This summary highlights selected information from this document, but may not contain all the information that is important to you. For a more complete understanding of the Mergers and for a more complete description of the legal terms of the Mergers, you should read this entire document carefully, as well as the additional documents we refer you to. See "Where You Can Find More Information" (page 104). THE COMPANIES MODTECH, INC. 2830 Barrett Avenue Perris, California 92571 (909) 943-4014 Modtech designs, manufactures, markets and installs modular relocatable classrooms. Based upon 1997 net sales, Modtech believes that it is the largest manufacturer of modular relocatable classrooms in California. Modtech's classrooms are sold primarily to California school districts directly and to third parties and the State of California primarily for lease to California's school districts. Modtech's classrooms are engineered and constructed in accordance with structural and seismic safety specifications adopted by the California Department of State Architects which regulates all school construction on public land. These standards are more rigorous than the requirements for other portable units. Modtech currently operates a total of seven production lines at five plants, which serve Arizona and the Northern and Southern California markets. Organized in 1982, Modtech maintains an Internet Web site that contains information concerning its products and personnel and copies of its most recent press releases at the address "http://www.modt.com." SPI HOLDINGS, INC. 9550 Hermosa Avenue Rancho Cucamonga, California 91730 (909) 484-4280 SPI is a leading designer, manufacturer and wholesaler of commercial and light industrial modular buildings in the United States. Through its four manufacturing plants, SPI designs and builds modular buildings to customer specifications for a wide array of uses, including corporate and professional office space; governmental, educational, recreational and religious facilities; and construction site offices. SPI's end users include a number of Fortune 500 companies. SPI's modular buildings serve as temporary, semi-permanent and permanent facilities and can function as free-standing buildings or additions to existing structures. SPI's modular buildings range in size and complexity from a basic 720-square foot module to a 50,000-square foot building combining several structures and may contain multiple stories. SPI distributes its products through national dealers, such as GE Capital Modular Space and Williams Scotsman, and through multiple regional and local dealers. These dealers lease (or, less frequently, sell) modular buildings to a diverse end user market. SPI's operations and sales are presently concentrated in the State of California and the Southwestern United States. SPI's predecessor was founded in 1972. Since August 1997, SPI, through its operating subsidiary, SPI Manufacturing, Inc., has completed three strategic 6 15 acquisitions. In its first acquisition, the Company converted the manufacturing facility of a mobile home builder to a fully operational modular construction facility to provide additional manufacturing capacity in California. It then acquired Office Master of Texas, Inc., located in Glen Rose, Texas, and Rosewood Enterprises, Inc., located in Phoenix, Arizona, both of which are leading modular building manufacturers in their respective regional markets. MODTECH HOLDINGS, INC. 2830 Barrett Avenue Perris, California 92571 (909) 943-4014 Holdings is a newly formed Delaware corporation. Holdings has not yet conducted any business. Following the Mergers, Modtech stockholders will own about 65.9% of Holdings Common Stock and SPI stockholders will own about 34.1% of Holdings Common Stock. Since Modtech and SPI will become wholly-owned subsidiaries of Holdings through the Mergers, the business of Holdings will consist of the businesses of Modtech and SPI. Holdings will be a leading manufacturer of modular classrooms and commercial and light industrial modular buildings. Holdings will seek to achieve increased product and geographic diversification, as well as increased operating efficiencies. Over the next several years, Holdings will selectively pursue acquisition opportunities in high-growth geographic areas of the United States. THE SPECIAL MEETINGS (PAGE 42) The Special Meeting of Modtech Stockholders will be held at the Sheraton Newport Hotel, 4545 MacArthur Boulevard, Newport Beach, California, on ___________, December __, 1998 at 10:00 a.m. At the meeting, Modtech stockholders will be asked to approve the Merger Agreement and the Mergers. The Special Meeting of SPI Stockholders will be held at 9550 Hermosa Avenue, Rancho Cucamonga, California 91730, on _________, ___________, 1998 at 10:00 a.m. At the meeting, SPI stockholders will be asked to approve the Merger Agreement and the Mergers. RECORD DATE; VOTING POWER (PAGE 42); You are entitled to vote at your stockholders' meeting if you owned shares as of the close of business on ___________, 1998, the Record Date. On the Record Date, there were ___________ shares of SPI Capital Stock entitled to vote at the Meeting of SPI Stockholders. Holders of SPI Capital Stock each are entitled to one vote for each share of SPI Capital Stock held of record on the Record Date . On the Record Date, there were __________ shares of Modtech Common Stock entitled to vote at the Special Meeting of Modtech Stockholders. Holders of Modtech Common Stock are entitled to one vote for each share of stock held of record on the Record Date. NASDAQ LISTING OF HOLDINGS COMMON STOCK (PAGE 37) Holdings will apply to list the Holdings Common Stock to be issued in connection with the Mergers on the Nasdaq National Market. Holdings Series A Preferred Stock will not be listed on any exchange. SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN STOCKHOLDERS (PAGE 43) On the Record Date, directors and executive officers of Modtech owned and will be entitled to vote ____________ shares of Modtech Common Stock, or approximately _____% of the voting power of the Modtech Common Stock outstanding on the Record Date. 7 16 On the Record Date, directors and executive officers of SPI owned and will be entitled to vote __________ shares of SPI Capital Stock , or approximately _______% of the voting power of SPI voting stock outstanding on the Record Date. CONFLICTS OF INTEREST (PAGE 34) Directors and executive officers of SPI and Modtech have interests in the Mergers as employees and/or directors that are different from, or in addition to, yours as a stockholder, including transaction advisory fees, employment agreements, stock options, and other employment benefits. The Board of Directors of Modtech and SPI each independently determined that these conflicts of interest did not affect the benefits of the Mergers to their company and stockholders. BOARD OF DIRECTORS FOLLOWING THE MERGERS (PAGE 86) The Board Directors of Holdings will be comprised of Evan M. Gruber, Charles C. McGettigan, Myron A. Wick, Daniel J. Donahoe III (all of whom are currently members of the Modtech Board), Patrick Van Den Bossche, Charles A. Hamilton and Charles R. Gwirtsman (all of whom are currently members of the SPI Board), and two outside directors to be nominated at a later date. COMPARATIVE PER SHARE MARKET PRICE INFORMATION (PAGE 63) Shares of Modtech Common Stock are listed on the Nasdaq National Market. On September 28, 1998, the last full trading day on the Nasdaq National Market prior to the public announcement of the Mergers, the last reported sales price was $20.125. On ___________, 1998, the last full trading day prior to the date of first mailing of this Joint Proxy Statement/Prospectus, the last reported sales price was $_________ a share. The shares of SPI Capital Stock are privately held. There were no reported sales of these shares during 1998. APPROVALS (PAGE 36) We are prohibited by U.S. antitrust laws from completing the Mergers until after we have furnished certain information and materials to the Antitrust Division of the Department of Justice and the Federal Trade Commission and a required waiting period has ended. We each filed the required forms and accompanying information and requested early termination of the waiting period. On __________1998, the Federal Trade Commission granted our request and the waiting period expired. CONDITIONS TO THE MERGERS (PAGE 45) We will complete the Mergers only if we satisfy several conditions, including the following: - - holders of 70% of the voting power of the SPI Capital Stock and holders of a majority of the voting power of the Modtech Common Stock vote to adopt the Merger Agreement and the Mergers; - - no legal restraints or prohibitions prevent the consummation of the Mergers; - - all material approvals and authorizations are received; - - not more than 5% of the Modtech or SPI stockholders exercise their dissenters' rights. - - certain agreements relating to the employment of key employees, the registration and temporary restriction of resale of shares of Holdings held by affiliates and the engagement of, and payment of fees to, certain financial advisors are executed; and - - our lawyers deliver certain tax opinions. 8 17 Unless prohibited by law, either SPI or Modtech could waive a condition that has not been satisfied and complete the Mergers anyway. TERMINATION OF THE MERGER AGREEMENT PAGE 46) We can jointly agree to call off the Mergers at any time before completing them. Either of us can call off the Mergers if: - - the other party's stockholders fail to approve the Mergers; - - the Mergers have not been completed by March 28, 1999; - - any government or court issues an order or takes another action enjoining or prohibiting one or both of the Mergers; - - the other party materially breaches any of its representations, warranties or agreements under the Merger Agreement, and such breach is not cured within 10 days; or - - the other party's Board of Directors withdraws or adversely modifies its approval or recommendation of the Merger Agreement or the Mergers. Either party may call off the Mergers in order to pursue another merger or similar transaction proposed by a third party before completion of the Mergers, if that party's Board of Directors determines the third-party proposal is superior to the Mergers. TERMINATION FEE (PAGE 47) If either party terminates the Merger Agreement to enter into an agreement with a third party to sell or to merge with another company, it must pay to the other party to the Merger Agreement, a termination fee of $2 million and must reimburse the other party's transaction expenses. If either party terminates the Merger Agreement because - - the other party's stockholders fail to approve the Mergers; - - the other party materially breaches any of its representations, warranties or agreements under the Merger Agreement and the breach is not cured within 10 days; or - - the other party's Board of Directors withdraws or adversely modifies its approval or recommendation of the Merger Agreement or the Mergers, the other party must pay to the terminating party a fee of $2 million and must reimburse the terminating party's expenses. DISSENTERS' RIGHTS (PAGE 37) As a stockholder of Modtech or SPI, you may have dissenters' rights as described below. If you are considering whether to assert dissenters' rights, you should be aware that the value for your shares could be determined under applicable law to be greater than, equal to, or less than the consideration you would receive in the Mergers if you did not elect to assert dissenters' rights. MODTECH Modtech is organized under California law. Modtech stockholders who properly "dissent" from the Mergers by not voting in favor of the Mergers and otherwise following the procedures required by California law will have the right to have their shares purchased for their "fair market value" instead of participating in the Mergers, but only if either their shares are subject to restrictions on transfer imposed by Modtech or by law or regulation, or if the holders of 5% or more of Modtech's Common Stock dissent. SPI 9 18 SPI is organized under Colorado law. SPI stockholders who properly "dissent" from the Mergers will have the right to have their shares purchased for their "fair value" rather than participating in the Mergers. SPI stockholders may dissent by not voting in favor of the Mergers and by otherwise following the procedures required by Colorado law. OPINION OF MODTECH'S FINANCIAL ADVISOR (PAGE 25) In deciding to approve the Mergers, the Modtech Board considered an opinion from its financial advisor, Donaldson, Lufkin & Jenrette Securities Corporation, as to the fairness of the consideration to be received by the Modtech stockholders under the Merger Agreement from a financial point of view. This opinion is attached as Annex II to this Joint Proxy Statement/Prospectus. We encourage you to read and consider this opinion carefully, as well as the information under "The Mergers -- Opinion of Modtech's Financial Advisor." SPI did not obtain a fairness opinion. FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (PAGE 40) Modtech and SPI have each made forward-looking statements in this document (and in documents that are incorporated by reference) that are subject to risks and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations of Modtech, SPI or Holdings. Also, when we use words such as "believes," "expects," "anticipates," "intends," "plans," "estimates" or similar expressions, we are making forward-looking statements. Stockholders should note that actual events and results may differ materially from those expressed in forward-looking statements due to a number of factors, including changes in legislation relating to funding for modular classrooms, changes in building code laws or regulations, changes in Federal income tax laws and general economic and market factors. 10 19 COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA The table below sets forth (a) the historical earnings per share, cash dividends per share and book value per share data of Modtech for the six months ended June 30, 1998 (unaudited) and the year ended December 31, 1997, and (b) the unaudited pro forma per share data of SPI for the six months ended June 30, 1998 and the year ended December 31, 1997. It also sets forth the unaudited pro forma combined per share data of Modtech and SPI for the six months ended June 30, 1998 and for the year ended December 31, 1997. The data should be read in conjunction with the historical financial statements and notes thereto and the selected historical financial data elsewhere in this Joint Proxy Statement/Prospectus. The data should also be read in conjunction with the Unaudited Pro Forma Combined Condensed Financial Statements included elsewhere in this Joint Proxy Statement/Prospectus.
YEAR ENDED SIX MONTHS ENDED MODTECH - HISTORICAL: DECEMBER 31, 1997 JUNE 30, 1998 - --------------------- ----------------- ---------------- Earnings per share................ $1.47 $0.93 Cash dividends per share.......... - - Book value per share.............. $5.43 $5.78 YEAR ENDED SIX MONTHS ENDED SPI - PRO FORMA DECEMBER 31, 1997 JUNE 30, 1998 - --------------- ----------------- ---------------- Earnings per share................ $1.05 $0.47 Cash dividends per share.......... - - Book value........................ 5.29 5.7 MODTECH AND SPI PRO FORMA COMBINED GIVING EFFECT YEAR ENDED SIX MONTHS ENDED TO THE MERGERS DECEMBER 31, 1997 JUNE 30, 1998 - ------------------------- ----------------- ---------------- Earnings per share................ $1.09 $0.74 Cash dividends per share.......... - -
MODTECH AND SPI COMBINED PRO FORMA BOOK VALUE PER SHARE FOR SIX MONTHS ENDED JUNE 30, 1998 ------------------- $6.96(A)
- ----------- (A) Includes goodwill of approximately $8.37 per share. 11 20 MODTECH SELECTED FINANCIAL DATA The selected financial data which follows should be read in conjunction with the audited financial statements and accompanying notes, the unaudited condensed financial statements and accompanying notes of Modtech and "Modtech Management's Discussion and Analysis of Results of Operations and Financial Condition" included elsewhere in this Joint Proxy Statement/Prospectus. The condensed consolidated financial statements of Modtech as of June 30, 1998 and 1997 and for the periods then ended are unaudited; however, in Modtech's opinion, they reflect all adjustments, consisting only of normal recurring items, necessary for a fair presentation of the financial position and results of operations for such periods. See "Where You Can Find More Information."
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------------------------- --------------------- INCOME STATEMENT DATA: 1993 1994 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- --------- --------- Net sales ................................... $ 19,658 $ 20,355 $ 19,386 $ 49,886 $ 134,050 $ 58,906 $ 75,876 Cost of goods sold........................... 21,764 17,766 16,401 42,629 107,367 47,688 58,675 --------- --------- --------- --------- --------- --------- --------- 16,401 Gross profit (loss) ......................... (2,106) 2,589 2,985 7,257 26,683 11,218 17,201 Selling, general & administrative expenses .. 1,871 1,554 1,613 2,345 5,156 2,182 2,741 Restructuring charge (A) .................... 2,470 -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- Income (loss) from operations ............... (6,447) 1,035 1,372 4,912 21,527 9,036 14,460 Interest income (expense), net .............. (565) (471) (387) (422) (909) (549) 389 Other income (expense) ...................... 47 42 (1) (13) 92 64 15 --------- --------- --------- --------- --------- --------- --------- Income (loss) before income taxes ........... (6,965) 606 984 4,477 20,711 8,551 14,864 Provision for income taxes .................. (1) (4) (19) (208) 7,703 3,356 5,649 --------- --------- --------- --------- --------- --------- --------- Net income (loss) ........................... (6,966) 602 965 4,269 13,008 5,195 9,215 ========= ========= ========= ========= ========= ========= ========= Net income (loss) available for Common Stock (B) ................................. $ (6,966) $ 602 $ 799 $ 4,221 $ 13,008 $ 5,195 $ 9,215 ========= ========= ========= ========= ========= ========= ========= Basic earnings (loss) per share (C) ......... $ (2.02) $ 0.19 $ 0.25 $ 0.77 $ 1.47 0.60 0.93 Weighted average shares outstanding (C) ..... 3,455 3,209 3,170 5,461 8,854 8,670 9,856 Diluted earnings (loss) per common share (C)(G) ............................. $ (2.02) $ 0.11 $ 0.14 $ 0.47 $ 1.31 0.55 0.83 Weighted average shares outstanding (C) ..... 3,455 5,294 6,712 $ 9,041 9,898 9,370 11,100
AS OF DECEMBER 31, AS OF JUNE 30, --------------------------------------------------------- --------------------- BALANCE SHEET DATA: 1993 1994 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- --------- --------- Working capital ............................. $ 3,063 $ 4,403 $ 4,383 $ 14,069 $ 36,417 $ 26,647 $ 44,473 Total assets ................................ 16,620 15,919 15,154 34,029 68,220 58,387 83,536 Total liabilities ........................... 11,889 7,900 6,411 18,716 20,177 37,800 26,563 Long-term debt, excluding current portion (D) 6,506 4,400 3,590 7,844 -- 15,132 -- Stockholders' equity ........................ 4,732 8,019 8,743 15,313 48,043 20,587 56,973
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------------------------- --------------------- SELECTED OPERATING DATA: 1993 1994 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- --------- --------- Gross margin ................................ (10.7%) 12.7% 15.4% 14.5% 19.9% 19.0% 22.7% Operating margin ............................ (32.8%) 5.1% 7.1% 9.8% 16.1% 15.3% 19.1% Standard classrooms sold (E) ................ 680 698 605 1,610 4,514 2,066 2,600 Backlog at period end (F) ................... $ 6,000 $ 7,000 $ 4,100 $ 58,000 $ 71,000 $ 80,400 $ 60,100
- ---------- (A) Reflects the write-off of intangible assets related to the Company's 1989 purchase of "Del-Tec", which manufactured more extensively customized, higher priced units. Del Tec's operations were discontinued in the third quarter of 1993. (B) After deduction of preferred stock dividends paid or accrued of $166,000 and $48,000 for the years ended December 31, 1995 and 1996, respectively. No shares of the Company's preferred stock were outstanding during the six months ended June 30, 1997, and no shares currently are outstanding. See Note 11 of Notes to Modtech's Financial Statements. (C) Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 "Earnings per Share." All prior periods have been restated accordingly. (D) For a description of the Company's long-term debt, see Notes 5 and 6 of Notes to Modtech's Financial Statements. (E) Determined by dividing the total square footage of floors sold during the year or six months by 960 square feet, the floor area of a standard classroom. See "The Business of Modtech--General." (F) The Company manufactures classrooms to fill existing orders only, and not for inventory. Backlog consists of sales orders scheduled for completion during the next 12 months. 12 21 SPI SELECTED FINANCIAL DATA The selected financial data which follows should be read in conjunction with the audited financial statements and accompanying notes of SPI, the unaudited condensed financial statements and accompanying notes of SPI, and the "SPI Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Joint Proxy Statement/Prospectus. The condensed consolidated financial statements of SPI as of June 30, 1998 and for the three months ended June 30, 1997 and 1998 are unaudited; however, in SPI management's opinion, they reflect all adjustments, consisting of only normal recurring items, necessary for a fair presentation of the financial position and results of operations for such periods. The information presented below does not give pro forma effect to acquisitions completed by SPI during any of the periods presented.
PREDECESSOR SPI (A) ----------------------------------------------------------------------------------------------------- Two Three Months Year Months YEAR ENDED Ended Ended Ended JANUARY 31, March 27, March 31, June 30, June 30, ------------------------------------------------- ----------- ----------- ----------- ----------- 1994 1995 1996 1997 1997 1998 1997 1998 ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- (dollars in thousands, except per share data and operating data) (unaudited) STATEMENT OF OPERATIONS DATA: Net sales ................ $ 8,873 $ 17,132 $ 13,429 $ 24,113 $ 6,033 $ 42,180 $ 9,837 $ 20,925 Cost of sales ............ 7,378 13,113 10,541 19,035 4,106 32,458 7,526 16,588 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Gross profit (B) ......... 1,495 4,019 2,888 5,078 1,927 9,722 2,261 4,337 Selling, general and administrative expenses. 1,312 2,383 2,609 1,644 507 2,667 499 1,183 Management and monitoring fees ................... -- -- -- -- -- 225 56 84 Depreciation and amortization ........... 26 43 49 78 13 1,751 306 667 ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income from operations ... 157 1,593 230 3,356 1,407 5,079 1,400 2,403 Interest income (expense), net .................... 10 21 80 78 21 (1,439) (382) 835 Other income (expense) .. -- -- 34 (6) 90 36 2 (1) ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income before income taxes .................. 167 1,614 344 3,428 1,518 3,676 1,020 1,569 Income tax provision ..... 57 518 141 1,409 660 1,580 439 550 ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss) ........ $ 110 $ 1,096 $ 203 $ 2,019 $ 858 $ 2,096 $ 581 $ 1,019 ========== =========== =========== =========== =========== =========== =========== =========== PER SHARE DATA (C): Basic net income per share............... $ 1.30 $ .36 $ .47 =========== =========== =========== Diluted net income per share .................. $ 1.12 $ .31 $ .40 =========== =========== =========== Number of shares used in computing basic net income per share ....... 1,612,785 1,600,000 2,190,616 Number of shares used in computing diluted net income (loss) per share............... 1,877,928 1,856,931 2,527,088 SELECTED OPERATING DATA: Number of structures sold during period .......... 505 1,165 879 1,560 404 2,659 632 1.295 Average price per structure .............. $ 17,570 $ 4,705 $ 15,277 $ 15,457 $ 14,933 $ 15,863 15,565 16,284 BALANCE SHEET DATA: Working capital (deficit)............... $ 842 $ 1,920 $ 1,701 $ 3,671 $ 4,547 $ 1,170 $ 531 $ (1,138) Total assets ............. 1,921 3,517 4,511 7,648 9,250 25,768 19,483 53,271 Long-term debt, net ...... -- -- -- 13 -- 11,624 9,691 26,023 Total stockholders' equity.................. 1,062 2,158 2,361 4,380 5,238 6,702 4,700 13,157
- ---------- (A) SPI applied purchase accounting upon its acquisition by management and an investor group on March 27, 1997. Accordingly, the financial statements of SPI are not comparable to its statements prior to the acquisition. Also, SPI adopted a March 31 year-end upon consummation of the acquisition. (B) SPI's historical presentation and allocation of expenses is not consistent with the presentation of Modtech's gross profit. SPI has not adjusted its gross profit calculation to conform with Modtech's presentation. (C) Per share data is computed in accordance with SFAS No. 128. See Note 2 to SPI's Consolidated Financial Statements. 13 22 MODTECH AND SPI SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION The summary unaudited pro forma combined condensed financial information has been derived from, or prepared on a basis consistent with, the unaudited pro forma combined condensed financial statements of Modtech and SPI included elsewhere in this Joint Proxy Statement/Prospectus. This data is presented for illustrative purposes only and is not necessarily indicative of the combined results of operations or financial position that would have occurred if the Mergers had occurred at the beginning of each period presented or on the dates indicated, nor is it necessarily indicative of future operating results or financial position of the combined companies.
SIX MONTHS ENDED JUNE 30, YEAR ENDED 1998 OR AS OF DECEMBER 31, JUNE 30, 1997 1998 ----------- ----------- (dollars in thousands, except per share data) INCOME STATEMENT DATA: Revenues ..................................................... $ 214,547 $ 117,802 Net income ................................................... $ 13,830 $ 9,361 Basic earnings per share ..................................... $ 1.09 $ 0.74 Diluted earnings per share ................................... $ 0.93 $ 0.63 BALANCE SHEET DATA: Total assets ................................................. $ 183,584 Borrowings under investment agreements and other debt ........ $ 61,510 Stockholders' equity ......................................... $ 87,907 Book value per share ......................................... $ 6.96(A)
- ----------- (A) Includes goodwill of approximately $8.37 per share. 14 23 CERTAIN RISK FACTORS In considering whether to approve and adopt the Merger Agreement, the stockholders of SPI and Modtech should consider, among other risk factors, the following: RISKS RELATED TO THE MERGERS FIXED MERGER CONSIDERATION DESPITE POTENTIAL CHANGE IN MODTECH STOCK PRICE The share exchange ratios and the cash payment price to be paid in the Modtech Merger and the SPI Merger as described elsewhere in this Joint Proxy Statement/Prospectus (See "The Mergers -- Merger Consideration") will not be adjusted despite any increase or decrease in the price of Modtech Common Stock. The price of Modtech Common Stock when the Mergers occur may vary from its price at the date of this Joint Proxy Statement/Prospectus and at the date of the Special Meetings. For example, during the 12-month period ending on September 30, 1998, 1998, the closing price of Modtech Common Stock varied from a low of $11.625 to a high of $29.750 and ended that period at $17.500. (See "Modtech Common Stock Prices and Dividends" for further information). Further variations in the price of Modtech's Common Stock from the date of this Joint Proxy Statement/Prospectus may be the result of changes in the business or operations of Modtech or the prospects of its businesses, changes in market assessments of Modtech or SPI's business, operations, or prospects, or in market assessments of the effects of the Mergers, or the likelihood they will be consummated, the tax effects of the Mergers, and the timing thereof, as well as general market and economic conditions and other factors. At the time of the SPI Special Meeting and the Modtech Special Meeting, the holders of Modtech and SPI shares will not know the exact value of the Holdings shares that they will receive when the Mergers are completed. Modtech and SPI stockholders are urged to obtain current market quotations for Modtech Common Stock. INTEGRATION OF OPERATIONS For the Mergers to result in the anticipated long-term strategic benefits, the management of Holdings must integrate the administrative, production, engineering and accounting functions of the two companies and coordinate their separate sales and marketing systems in a profitable manner. SPI has not yet fully integrated the operations of its recent acquisitions, Rosewood Enterprises, Inc. and Office Master of Texas, Inc. Any difficulties encountered in integrating the businesses of Modtech and SPI, or in completing the integration of Rosewood and Office Master, could adversely impact the operations of one or both companies. DECREASE IN CASH AND INCREASE IN DEBT As of June 30, 1998, Modtech had about $25 million in cash and no long-term debt. Almost all of Modtech's cash reserves will be used to partially pay the cash portion of the Merger Consideration to Modtech and SPI stockholders. Following the Mergers, Modtech's assets, together with the assets of SPI, will be encumbered by approximately $45 million of new debt. The proceeds from this debt will be used to pay the balance of the cash portion of the Merger Consideration, refinance SPI's existing debt, pay transaction expenses of the Mergers and fund working capital needs. As a result of the decrease in cash, the debt must be serviced by cash from operations. If current levels of operations of Modtech or SPI decrease, cash from operations may not be sufficient to service Holdings' debt. CHANNELS OF DISTRIBUTION Modtech has historically sold most of its products through its direct sales force, while SPI has historically sold most of its products through its independent dealer network. There is a conflict between these two channels of distribution. While SPI does not intend to alter its relationship with its 15 24 independent dealers, it must be able to assure its dealers that they will not be displaced by Modtech's internal sales force. The failure to provide such assurances, or the perception by one or more significant independent dealers that SPI will rely on Modtech's direct sales force, could adversely affect SPI's future sales. CONTROL BY PRINCIPAL STOCKHOLDERS Upon completion of the Mergers, the current executive officers and directors of Modtech and the current executive officers and directors of SPI will, together, continue to own or have voting control over about 36.2% of the shares of Holdings Common Stock then outstanding. See "Security Ownership of Certain Beneficial Owners and Management of Holdings." They will be able to substantially control the outcome of all matters presented to the stockholders for approval if they choose to vote together. These matters include election of directors, mergers, consolidations or the sale of all or substantially all of the assets of Holdings. POTENTIAL FOR TAXATION OF MERGER CONSIDERATION Neither Modtech nor SPI have asked the Internal Revenue Service ("IRS") to rule on the tax consequences of the Mergers. Modtech and SPI are relying on the opinions of their tax lawyers that the Mergers will not be taxable to the Modtech or SPI stockholders, except for the cash received. A lawyer's tax opinion is not binding on the IRS. If the IRS disagrees with the tax position taken by Modtech and SPI, it may assess taxes (plus penalties and interest), in addition to the taxes described in the opinion of tax counsel. Modtech's and SPI's position might not be upheld by the courts if challenged by the IRS. See "The Mergers-- Certain Federal Income Tax Consequences." DEPENDENCE ON KEY PERSONNEL Holdings will be dependent upon its executive officers, Evan M. Gruber, Patrick Van Den Bossche and Michael G. Rhodes. Although Holdings has employment agreements with each of these individuals, any of its executive officers can terminate their employment if they choose to do so. If this occurred, operations could be disrupted. SHARES ELIGIBLE FOR FUTURE SALE Of the 12,622,158 shares of Holdings Common Stock to be outstanding immediately following the Mergers, approximately 8,466,676 shares will be held by "affiliates" as determined under Rule 145 of the Securities Act of 1933. The exact number of shares held by affiliates will be determined by the elections the SPI stockholders make in the type of Merger Consideration they wish to receive. See "The Mergers -- Merger Consideration." Certain affiliates have executed "lock up" agreements which would restrict their ability to resell approximately 8,172,676 shares received in the Mergers for a period of 90 days following the closing of the Mergers. Following the expiration of such 90-day period, the parties to these lock-up agreements, in addition to any other affiliates, subject to Rule 145, may immediately resell their shares subject to the volume limitations of Rule 144. In addition to their Rule 145 resale rights, Holdings has granted these affiliates "piggyback" registration rights, which entitle them to have a portion of their shares included in any future registered offerings Holdings may make. Finally, there will be 1,833,422 shares of Holdings Common Stock registered for sale upon exercise of stock options granted and to be granted under the stock option plans Holdings will adopt in connection with the Mergers. Sales of substantial amounts of shares of Holdings Common Stock, or even the potential for such sales, could lower the market price of the Common Stock and impair the ability of Holdings to raise capital through the sale of equity securities. 16 25 RISKS RELATED TO MODTECH LEGISLATION AND SCHOOL FUNDING The demand for modular relocatable classrooms in California is affected by various statutes which, among other things, prescribe the way in which all school classrooms to be constructed on public lands must be designed and engineered, the methods by which Modtech's customers, primarily individual school districts, obtain funding for the construction of new facilities, and the manner in which available funding is spent. As a result, Modtech's business is heavily dependent upon the legislative and educational policies and financial condition of the State of California. Funding for new school construction and rehabilitation of existing schools by California school districts currently is provided primarily at the State level, through annual allocations of funds derived from general revenue sources and statewide bond issues. In addition, school districts obtain funding for the purchase or lease of school facilities through the imposition of developers' fees and local bond issuances. The availability of this funding is subject to financial and political considerations which vary from district to district. The use of funding provided by the State is also affected by the legislative policies of the State of California. For example, existing legislation requires, with certain exceptions, that 30% of new classroom space added using state funds must be relocatable structures. Modtech's classroom units qualify as relocatable structures. There are, however, alternative structures that are less relocatable in nature than Modtech's classrooms that may also satisfy this legislative requirement. Shortages of financial resources at either State or local levels, or changes in the legislative or educational policies of the State of California, could have a material adverse effect upon Modtech. A bill recently passed the California Legislature, which, if approved by the voters, will eliminate the requirement that 30% of all classroom space added using California state funds be relocatable classrooms. The legislation would replace this provision with a requirement that, in order for school districts to increase the amount of funds to be received from developers in excess of the statutory level, school districts must show that 20% of all classroom space, not just space to be added, consists of relocatable classrooms. CYCLICAL INDUSTRY Modtech's modular classrooms are purchased predominately by school districts in California. The ability of California school districts to finance the acquisition of Modtech's products is largely dependent upon the level of funding available from the State, which is not tied to demand. Despite a growing student population, Modtech reported losses from 1991 through 1993 when certain school districts experienced budget shortfalls. CONCENTRATION OF CUSTOMERS Modtech's sales to date have been limited almost exclusively to customers in California. Modtech markets and sells its modular classrooms primarily to California school districts, as well as to the State of California and leasing companies who lease the classrooms to school districts. During the year ended December 31, 1997, approximately 98.1% of Modtech's net sales was attributable to the sale of classrooms, with sales of classrooms to individual school districts and third party lessors to school districts representing approximately 90.2% of Modtech's net sales, and sales of classrooms to the State of California accounting for approximately 7.9% of net sales for the year. PRODUCT SPECIFICATIONS AND REGULATION Most of Modtech's contracts require Modtech to build classrooms which meet certain established state mandated function and manufacturing specifications. Under such contracts, which are typically fixed-price contracts, Modtech assumes the liability for 17 26 correcting, without additional compensation, any deficiencies which cause its classrooms to fail inspection and certification tests. Modtech relies upon its experience and expertise to evaluate the potential for such liability and to price its bids accordingly. In addition, Modtech attempts to minimize the risk of additional exposure by adopting strict quality control standards and subjecting its units under construction to extensive testing under the supervision of inspectors hired by Modtech's customers. To date, Modtech's operating performance has not been materially impacted by such potential liability. However, should Modtech incur such liability significantly in excess of that estimated, its profitability would be adversely affected. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY Modtech's quarterly revenue typically has been highest in the second and third quarters of the year when school districts generally place a large number of orders for modular classrooms to be delivered in time for the upcoming school year. Additionally, first and fourth quarter revenues are typically lower due to a greater number of holidays and days of inclement weather during such periods. RISKS RELATED TO SPI ABSENCE OF COMBINED OPERATING HISTORY The SPI pro forma combined financial results cover periods during which Office Master and Rosewood were not under common control or management with SPI and, therefore, may not be indicative of SPI's future financial or operating results. The success of SPI will depend on management's ability to complete the integration of Office Master and Rosewood. The inability of SPI to successfully integrate Office Master and Rosewood and to coordinate and integrate certain operational, administrative, and accounting functions and computer systems would have a material adverse effect on SPI. RELIANCE ON INDEPENDENT DEALERS SPI's products are sold primarily through a network of independent dealers. SPI has few formal marketing or other agreements with its dealers, and substantially all of SPI's dealers also market and sell products of other manufacturers. During the pro forma 12-month period ended December 31, 1997, one of SPI's dealers, GE Capital Modular Space, accounted for about 48.9% of SPI's revenues, and another dealer, Williams Scotsman, accounted for about 20.3% of SPI's revenues. GE Capital Modular Space accounted for about 33.1% of SPI's revenues during the pro forma six-month period ended June 30, 1998, and Williams Scotsman accounted for about 30.2% of SPI's revenues during the same period. The pro forma revenues of SPI include all revenues of SPI, Rosewood and Office Master for the referenced periods. Product demand from any specific dealer may fluctuate. Any prolonged downturn in demand from one major dealer, or a coincidental downturn from a combination of dealers could have a material adverse effect on SPI. In addition, an adverse change in SPI's relationship with any of its major dealers, any change in the manner in which any of these dealers conduct business with SPI, including increased pricing pressures from SPI's larger dealers, or any exclusive or preferred provider arrangements between these dealers and any of SPI's competitors, could have a material adverse effect on SPI. LOW BARRIERS TO ENTRY The barriers to entry into the commercial and light industrial modular building industry are relatively low, consisting primarily of capital required to develop manufacturing facilities and the availability of a qualified labor pool. Manufacturers of other modular buildings, including housing and classrooms, who possess a skilled work force and manufacturing facilities, could easily adapt their 18 27 manufacturing facilities to produce modular structures, and might choose to do so, during an economic downturn in their industry. AVAILABILITY OF MANUFACTURING EMPLOYEES SPI's assembly line process requires a significant number of manufacturing employees, many of whom are employed at relatively low wages. In periods of low unemployment, SPI has experienced difficulty in finding suitable replacements for its workforce when turnover occurs. Additionally, the remote location of SPI's Office Master facility in Glen Rose, Texas, may make it difficult to hire employees at that facility. SPI's inability to hire and retain sufficient numbers of manufacturing employees at any of its operating facilities could have a material adverse effect on SPI. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY Historically, SPI's quarterly sales in the fourth calendar quarter (October through December) are lowest, and quarterly sales in the third calendar quarter (July through September) are highest. Fourth quarter revenues typically are lower due to customer budget and fiscal constraints and as a result of the reduction in demand due to adverse weather conditions during such period. 19 28 THE MERGERS GENERAL Modtech, Inc., a California corporation ("Modtech"), and SPI Holdings, Inc., a Colorado corporation ("SPI"), are furnishing this Joint Proxy Statement/Prospectus to holders of shares of (i) SPI common stock, no par value ("SPI Common Stock"), (ii) SPI Series A-1, A-2, A-3, A-4, A-5, and A-6 Convertible Preferred Stock, no par value ("SPI Preferred Stock" and, together with the SPI Common Stock, "SPI Capital Stock"), in connection with the solicitation of proxies by the Board of Directors of SPI (the "SPI Board") for use at the special meeting of stockholders of SPI to be held on December __, 1998, or any adjournment or postponement thereof (the "SPI Special Meeting"), and to holders of shares of Modtech Common Stock, no par value ("Modtech Common Stock"), in connection with the solicitation of proxies by the Board of Directors of Modtech (the "Modtech Board") for use at the special meeting of stockholders of Modtech to be held on December __, 1998, or any adjournment or postponement thereof (the "Modtech Special Meeting" and, together with the SPI Special Meeting, the "Special Meetings"). At the Special Meetings, holders of Modtech Common Stock and SPI Capital Stock will be asked to vote upon proposals to approve and adopt - - the Agreement and Plan of Reorganization and Merger, dated as of September 28, 1998, between Modtech and SPI (the "Merger Agreement"), which provides, among other things, that Modtech and SPI will each merge with separate subsidiaries of Modtech Holdings, Inc., a Delaware corporation ("Holdings"); - - in the case of the Modtech Special Meeting, the merger of a wholly owned subsidiary of Holdings, "Modtech Merger Sub" into Modtech (the "Modtech Merger"); and - - in the case of the SPI Special Meeting, the merger of another wholly owned subsidiary of Holdings, "SPI Merger Sub" into SPI (the "SPI Merger"). The mergers contemplated by the Merger Agreement are referred to herein as the "Mergers." As a result of the Mergers, Modtech and SPI will each become a wholly-owned subsidiary of Holdings. This Joint Proxy Statement/Prospectus also serves as a prospectus of Holdings with respect to the shares of its Common Stock, par value $0.01 per share ("Holdings Common Stock"), and its Series A Preferred Stock, par value $0.01 per share ("Holdings Series A Preferred Stock") that will be issued to (1) holders of outstanding shares of Modtech Common Stock upon completion of the Modtech Merger and (2) holders of outstanding shares of SPI Capital Stock upon completion of the SPI Merger. See "The Mergers--Merger Consideration." BACKGROUND OF THE MERGERS Following completion of its second public offering of shares of common stock in November 1997, Modtech has sought to increase its sales of non-classroom products and to expand outside of the California marketplace. Its initial goal was to commence operations in Arizona as soon as possible, and, in January and February 1998, its Chief Executive Officer, Evan M. Gruber, met with the management of Rosewood Enterprises, Inc., a 20 29 modular commercial builder located in Phoenix, Arizona, concerning Modtech's potential acquisition of that company. However, unknown to Modtech at the time, Rosewood was already in acquisition discussions with SPI. In March 1998, Modtech completed the purchase of Trac Modular Manufacturing, Inc., a modular commercial builder located in Glendale, Arizona. SPI closed the acquisition of Rosewood in April 1998. Following SPI's acquisition of Rosewood, Evan Gruber called Patrick Van Den Bossche, President of SPI, to introduce himself. This led to a meeting on May 4, 1998 at SPI's facility in Rancho Cucamonga, California. At the meeting, Mr. Gruber and Mr. Van Den Bossche discussed the modular building industry in general. Mr. Gruber mentioned the possibility of a merger between the two companies. Mr. Gruber and Mr. Van Den Bossche discussed operating philosophies and objectives and the potential strategic benefits to the two companies of a business combination. They agreed to give additional thought to such a combination and to meet again in the near future. On May 22, 1998, Mr. Gruber and two directors of Modtech, Charles McGettigan and Myron Wick III, met with Mr. Van Den Bossche and four directors of SPI, Mark King, Bruce Rogers, Charles Gwirtsman, and Charles Hamilton, in San Francisco, California, to further discuss a possible business combination. A number of proposals were considered, but none were seriously pursued. SPI informed Modtech that SPI intended to proceed with an initial public offering that had been in preparation since the end of April 1998. While SPI continued to pursue a possible public offering, Modtech and SPI continued to discuss a business combination on a periodic basis through early July 1998. In the second week of July, SPI was informed by its underwriters that market conditions were not conducive to the completion of SPI's public offering. Based on these discussions, SPI and its underwriters decided to postpone its offering. On July 13, 1998, a senior management team from SPI, including two directors, met with Modtech's senior management, including two directors, at Modtech's headquarters in Perris, California to further discuss terms of a potential merger and to initiate SPI's due diligence review of Modtech. The following day, a senior management team from Modtech traveled to SPI's headquarters in Rancho Cucamonga, California to commence Modtech's due diligence review of SPI. Negotiations and due diligence reviews, including on-site visits of each company's facilities by the other company's management team, continued through late July 1998. On August 11, 1998, SPI's attorneys delivered a draft form of the Merger Agreement to Modtech and its attorneys. On August 19, 1998, senior management and certain directors of Modtech and SPI, and the attorneys for SPI and Modtech met to negotiate certain specific terms of the Merger Agreement. Further negotiations continued into early September 1998. During this period, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") was asked by Modtech to advise it in connection with the proposed transaction and to render a fairness opinion. On September 9, 1998, the Modtech Board of Directors and Modtech's attorneys met and discussed in detail the terms of the proposed business combination, the exchange ratio and cash consideration to be paid, the reasons for the transaction, and the due diligence findings by Modtech's management concerning SPI. Representatives from DLJ participated in a portion of the meeting by telephone during which Modtech's Board of Directors discussed with them the fairness of the proposed transaction to the Modtech stockholders. Modtech's Board authorized senior management to proceed with further negotiations. On September 10, 1998, the SPI Board of Directors and SPI's attorneys met and discussed in detail the terms of the proposed business 21 30 combination, the exchange ratio and cash consideration to be paid, the reasons for the transaction, and the due diligence findings by SPI's management concerning Modtech. SPI's Board unanimously approved the terms of the Merger Agreement and Mergers presented to it, subject to final changes to the merger documentation and completion of the due diligence by management. The merger documentation and due diligence were completed in late September. On September 28, 1998, Modtech's Board of Directors held a special telephonic meeting to further consider and vote on the proposed transaction. Representatives of DLJ reviewed with the Board certain financial analyses relating to the transaction and rendered an oral fairness opinion, which it confirmed in writing later that day. After considering and discussing the various presentations at the meeting, and at prior meetings, the Modtech Board of Directors unanimously approved the Merger Agreement and the Mergers. The Merger Agreement was signed and delivered that evening by both Modtech and SPI after the close of business. The signing was publicly announced shortly after the opening of the securities markets on September 29, 1998. REASONS FOR THE MERGERS; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS Modtech and SPI believe that their combination will create value for both companies' stockholders by providing opportunities to achieve substantial benefits that would not be available to either company alone. Specifically, the combination allows for substantial synergy in three identified areas: - - Product Diversification. Modtech currently manufactures modular relocatable classrooms. SPI makes commercial and light industrial modular buildings. The Mergers move Modtech towards accomplishing its goal of a decreased dependency on the California Public School System. Additionally, the Mergers enhance Modtech's capability for the production of other types of modular structures for commercial customers. - - Geographic Diversification. At present, Modtech manufactures modular relocatable classrooms, of which approximately 98% are sold to California public schools. Modtech's strategy for the past few years has been to increase its efforts to expand the market for its classrooms to include neighboring states. SPI currently does business in California, Arizona, Nevada, Colorado Texas, New Mexico and other neighboring states. - - Operating Efficiencies. Modtech and SPI plan to consolidate certain of the manufacturing and administrative functions of both companies. Additionally, efficiencies in purchasing and shipping may be realized due to increased levels of production. The Boards of Directors of each company also considered various other factors that contributed to their approval and recommendation of the Merger Agreement and the Mergers. Those factors include: (1) the terms and conditions of the Merger Agreement, including an exchange ratio that provides certainty about the number of shares to be issued and received in the Mergers; and (2) the expected, although not certain, treatment of the Mergers as tax-free exchanges of stock, with only the cash received being taxable. The SPI Board also considered the advantages of obtaining liquidity for its stockholders through the merger with Modtech, a publicly-traded company, and also reducing the risk to its stockholders in the combined company. Immediately following the Mergers, Holdings will have a lower debt to historical operating cash flow ratio than SPI had on a stand-alone basis. The Modtech Board also considered a number of other items and factors, including, without limitation, the following: 22 31 - - the financial presentation of DLJ to the Modtech Board and that firm's opinion that the Modtech Merger Consideration to be received by the stockholders of Modtech pursuant to the Merger Agreement is fair to such stockholders from a financial point of view; - - Modtech's business, management, financial performance and condition, strategic objectives, prospects and competitive position, and the recommendations of Modtech's management; - - a review of strategic alternatives, including other possible business combinations and, based on such review, the belief that a transaction with another company may not offer terms with advantages comparable to those of a business combination with SPI; - - the value of the cash component of the Modtech Merger Consideration on a per share basis, after adjustments for the number of shares of Holdings Common Stock and Holdings Series A Preferred Stock to be received by Modtech stockholders in the Modtech Merger; - - the ability of the stockholders of Modtech to continue to participate in Modtech's business as part of Holdings after the Mergers and to benefit from the potential appreciation of Holdings Common Stock; - - due diligence review of the financial condition, results of operations and business prospects of SPI; - - the terms and conditions of the Merger Agreement and the parties' respective representations, warranties, covenants, agreements and conditions to their respective obligations, including the condition that the Mergers be approved by Modtech's stockholders; and - - the risk that benefits sought in the Mergers would not be obtained, the risk that the Mergers would not be consummated, the fact that, with a fixed exchange ratio, the relative values of Modtech and SPI are fixed by the parties in advance and would not take into account subsequent changes or changed market perceptions, and the effect of the public announcement of the Mergers on the trading price of the Modtech Common Stock. The Modtech Board also considered the factors set forth in the section entitled "Certain Risk Factors." Each company's Board determined that the potential advantages of the Mergers far outweighed the disadvantages. Each company's Board concluded that the Mergers would result in its company's stockholders realizing greater value than its company could deliver to them alone. Based on the consideration of these and other relevant matters, each company's Board unanimously determined that the Merger Agreement and the Mergers are in the best interests of its company and its company's stockholders. The foregoing discussion of the factors considered by each company's Board is not intended to be exhaustive, but is believed to include all material factors considered by each company's Board. In reaching its decision to approve the Merger Agreement and the Mergers, neither company's Board quantified or assigned any relative weights to the factors considered, or considered any one factor to be determinative, and individual directors may have given different weight to different factors. THE MODTECH BOARD OF DIRECTORS AND THE SPI BOARD OF DIRECTORS HAVE EACH UNANIMOUSLY CONCLUDED THAT THE MERGERS ARE IN THE BEST INTERESTS OF THEIR RESPECTIVE STOCKHOLDERS, AND EACH UNANIMOUSLY RECOMMENDS THAT ITS STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER 23 32 AGREEMENT AND THE MERGERS. SEE "THE MERGERS -- CONFLICTS OF INTERESTS." FORM OF THE MERGERS If the approval of the holders of Modtech Common Stock is obtained and all other conditions to the Modtech Merger are satisfied or waived, pursuant to the Modtech Merger Agreement, the Modtech Merger Sub will be merged with and into Modtech, with Modtech being the surviving corporation after the Modtech Merger and a wholly owned subsidiary of Holdings. If the approval of the holders of SPI Capital Stock is obtained and all other conditions to the SPI Merger are satisfied or waived, pursuant to the SPI Merger Agreement, the SPI Merger Sub will be merged into SPI, with SPI being the surviving corporation after the SPI Merger and a wholly owned subsidiary of Holdings. The date on which the closing of the Mergers occurs is referred to herein as the "Closing Date." MERGER CONSIDERATION SPI. Except for the shares owned by SPI or any of its subsidiaries, at the time when the Mergers are completed by the filing of Certificates of Merger with the appropriate Secretaries of State (the "Effective Time"), each share of SPI Capital Stock will be converted into the right to receive 1.8785 shares of Holdings Common Stock. Each SPI stockholder on the Record Date may elect to receive $49.4097 per share for up to 5.9176% of the SPI Capital Stock instead of shares of Holdings Common Stock. If SPI stockholders do not elect to receive a total of $8,076,133 in cash in place of shares of Holdings Common Stock, those SPI stockholders who have elected to receive cash for some of their SPI Capital Stock, including those who have elected to receive cash for the maximum 5.9176% of their SPI Capital Stock, will have all or a portion of their remaining SPI Capital Stock converted into cash until the cash being paid for SPI Capital Stock equals $8,076,133. The conversion will be pro rata among such stockholders electing to receive cash based on the shares of SPI Capital Stock held by them that they did not voluntarily elect to convert to cash. If all such shares are converted to cash and the total cash being paid still does not equal $8,076,133, then all SPI stockholders who did not elect to have any of their shares converted to cash will have their shares converted to cash pro rata based on the number of shares held by each of them until the total cash being paid for shares of SPI Capital Stock equals $8,076,133. Any shares of SPI Capital Stock owned by SPI, or any of its subsidiaries, will automatically be cancelled and retired at the Effective Time and will cease to exist, and no Holdings Common Stock or other consideration will be delivered in exchange therefor. MODTECH. Except for shares owned by Modtech or any of its subsidiaries, at the Effective Time, without any action on the part of any Modtech stockholder, each issued and outstanding share of Modtech Common Stock will be converted into the right to receive $3.7293 and 0.8508 shares of Holdings Common Stock. Each Modtech stockholder as of the Record Date may elect to receive, in place of Holdings Common Stock, 0.8508 shares of Holdings Series A Preferred Stock for each share of Modtech Common Stock in an amount up to 3.94% of their shares of Modtech Common Stock. If Modtech stockholders do not elect to receive a total of 388,939 shares of Holdings Series A Preferred Stock in place of Holdings Common Stock, two major Modtech stockholders, Lagunitas Partners and Proactive Partners, L.P. will be allocated shares of Holdings Series A Preferred Stock pro rata based on their total shares of Modtech Common Stock, until the total number of shares of Holdings Series A Preferred Stock to be received by Modtech stockholders in the Modtech Merger equals 388,939. The number of shares of Holdings Series A Preferred Stock to be 24 33 received by Modtech stockholders will be adjusted upward or downward to the extent necessary to comply with the minimum requirements of Section 351 of the Internal Revenue Code. Any shares of Modtech Common Stock owned by Modtech or any of its subsidiaries will automatically be cancelled and retired at the Effective Time and will cease to exist, and no Holdings Common or Preferred Stock or other consideration will be delivered in exchange therefor. OPINION OF MODTECH'S FINANCIAL ADVISOR On September 28, 1998, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") rendered an oral opinion to the Modtech Board to the effect that, as of such date and based upon the qualifications and assumptions made and matters considered by DLJ described in its written opinion dated September 28, 1998 (the "Fairness Opinion"), the Merger Consideration to be received in the Mergers by holders of shares of Modtech Common Stock pursuant to the Merger Agreement is fair from a financial point of view to such holders. THE FULL TEXT OF THE FAIRNESS OPINION IS ATTACHED HERETO AS ANNEX II. THE SUMMARY OF THE FAIRNESS OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED BY REFERENCE TO THE FULL TEXT OF THE FAIRNESS OPINION. MODTECH STOCKHOLDERS ARE URGED TO READ THE FAIRNESS OPINION CAREFULLY AND IN ITS ENTIRETY FOR THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, OTHER MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY DLJ IN CONNECTION WITH SUCH FAIRNESS OPINION. The Fairness Opinion was prepared for the Modtech Board of Directors and was directed only to the fairness from a financial point of view, as of the date thereof, of the consideration to be received by the holders of Modtech Common Stock pursuant to the Merger Agreement. DLJ expressed no opinion in the Fairness Opinion as to the prices at which Holdings Common Stock or Holdings Series A Preferred Stock would actually trade at any time. DLJ was not asked to opine as to the underlying business decision of the Modtech Board to proceed with the Mergers, and the Fairness Opinion does not address this decision. The Fairness Opinion does not constitute a recommendation to any stockholder as to how such stockholder should vote on the Mergers. As part of its investment banking business, DLJ is regularly engaged in the valuation of businesses and securities in connection with mergers, acquisitions, underwritings, sales and distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. The Modtech Board was informed that DLJ had previously advised SPI and certain of its stockholders with respect to possible transactions with Modtech and other financing alternatives. In arriving at the Fairness Opinion, DLJ reviewed the Merger Agreement and certain exhibits thereto. DLJ also reviewed financial and other information that was publicly available or furnished to DLJ by Modtech and SPI, including information provided during discussions with their respective managements. Included in the information provided during such discussions were certain financial projections of Modtech prepared by the management of Modtech and certain financial projections of SPI prepared by the management of SPI. In addition, DLJ compared certain financial and/or securities data of Modtech and SPI with publicly available information concerning various companies whose securities are traded in public markets, reviewed the historical stock prices and trading volumes of Modtech Common Stock, reviewed prices and premiums paid in certain other business combinations and conducted such other financial studies, such as discounted cash flow analysis and contribution analysis, and investigations as DLJ deemed appropriate for purposes of rendering the Fairness Opinion. 25 34 In rendering the Fairness Opinion, DLJ relied upon and assumed the accuracy and completeness of all of the financial and other information that was available to it from public sources, that was provided to it by Modtech or SPI or their respective representatives, or that was otherwise reviewed by DLJ. With respect to the financial projections supplied to DLJ, DLJ assumed that they were reasonably prepared on a basis reflecting the best currently available estimates and judgments of the managements of Modtech and SPI as to the future operating and financial performance of Modtech and SPI, respectively. DLJ did not assume responsibility for making any independent evaluation of the assets or liabilities of Modtech or SPI, or for making any independent verification of the information reviewed by DLJ. DLJ also assumed that the cash portion of the consideration to be received by the holders of Modtech Common Stock would not otherwise be received by such holders in the ordinary course of business. The Fairness Opinion was necessarily based on economic, market, financial and other conditions as they existed on, and on the information made available to DLJ as of, the date of the Fairness Opinion. The Fairness Opinion was based, in part, on publicly available information as of September 23, 1998. Although subsequent developments may affect its Fairness Opinion, DLJ does not have any obligation to update, revise or reaffirm its opinion. The following is a summary of the presentation made by DLJ to the Modtech Board of Directors at its September 28, 1998 meeting, in connection with rendering the Fairness Opinion. Stock Price History. To provide contextual data and comparative market data, DLJ reviewed the daily closing prices for the 12-month period ending September 22, 1998 of Modtech Common Stock and compared such closing stock prices with the closing stock prices of two publicly traded modular building companies, Butler Manufacturing Company and Miller Building Systems, Inc. and the Russell 2000 Index. The two modular building companies were the only two directly comparable companies identified by DLJ which were publicly traded. This information was presented solely to provide the Modtech Board with background information regarding the stock prices of Modtech Common Stock relative to its peers and an appropriate index. Comparable Publicly Traded Company Analysis. DLJ believed that this form of analysis was not meaningful because of an insufficient number of publicly traded companies in the modular building industry. Comparable Merger & Acquisition Transaction Analysis. DLJ believed that this form of analysis was not meaningful because of an insufficient number of recent merger and acquisition transactions in the modular building industry. Earnings Per Share Impact. DLJ analyzed the earnings per share impact of the Mergers to holders of Modtech Common Stock. For the latest 12-month period ending June 30, 1998, and the projected fiscal years ending December 1998, 1999 and 2000, the Mergers resulted in accretion (dilution) of (22.7%) or ($0.36) per share, (11.3%) or ($0.18) per share, 4.3% or $0.08 per share and 4.5% or $0.10 per share, respectively. In arriving at these accretion (dilution) results, DLJ compared Holdings' pro forma earnings per share estimates with First Call's estimates of Modtech's earnings per share, and assumed the Mergers would not result in any synergies. Comparable Premiums Paid Analysis. DLJ determined the implied premium over the common stock trading prices for one day, one week and four weeks prior to the announcement date of 293 selected domestic merger or acquisition transactions involving companies not necessarily comparable to Modtech, ranging from $200 million to $400 million in transaction value and completed from January 1995 through September 17, 1998. The average premiums for the selected transactions over the common stock trading prices for : (i) one day prior to the 26 35 announcement date was 29.0%; (ii) one week prior to the announcement date was 33.1%; and (iii) four weeks prior to the announcement date was 44.3%. Applying the above average comparable premiums to the closing price of the Modtech Common Stock on one day, one week and four weeks prior to September 22, 1998 implies a valuation per share of Modtech Common Stock of $25.32, $23.79 and $27.96, respectively, as compared to the closing prices of the Modtech Common Stock one day, one week and four weeks prior to September 22, 1998 of $19.63, $17.88 and $19.38, respectively. Contribution Analysis. DLJ analyzed the relative contributions of Modtech and SPI to the pro forma combined entity based on selected financial data, assuming no synergies. In this analysis, DLJ compared the 65.6% fully diluted ownership interest that holders of Modtech Common Stock will have in the pro forma combined entity with the relative contribution of Modtech to certain financial data for the pro forma combined entity, including revenue, earnings before interest, taxes, depreciation and amortization ("EBITDA") and earnings before interest and taxes ("EBIT") for the fiscal years ending December 31, 1998 ("Fiscal Year 1998") and December 31, 1999 ("Fiscal Year 1999"). In each case, the financial data for the pro forma combined entity was determined by adding the financial data for Modtech and SPI. This analysis indicated that Modtech would contribute: (i) 64.5% and 64.9% of the pro forma combined entity's sales for Fiscal Year 1998 and Fiscal Year 1999, respectively; (ii) 69.5% and 67.9% of the pro forma combined entity's EBITDA for Fiscal Year 1998 and Fiscal Year 1999, respectively; and (iii) 71.4% and 68.9% of the pro forma combined entity's EBIT for Fiscal Year 1998 and Fiscal Year 1999, respectively. DLJ also compared the 65.6% ownership interest that holders of Modtech Common Stock will have in the pro forma combined entity with the relative contribution of Modtech to the estimated net income of the pro forma combined entity (determined by adding the net income of Modtech and SPI for Fiscal Year 1998 and Fiscal Year 1999). This analysis indicated that Modtech would contribute 73.5% and 70.2% of the net income of the pro forma combined entity for Fiscal Year 1998 and Fiscal Year 1999, respectively. Discounted Cash Flow Analysis. DLJ performed a discounted cash flow analysis (i.e., an analysis of the present value of projected cash flows using the discount rates and terminal year EBITDA multiples indicated below) of Modtech, SPI and Holdings using projections and assumptions provided by the management of Modtech. The discounted cash flow for all three entities was estimated using discount rates ranging from 9% to 12% and terminal multiples of estimated EBITDA for each entity's fiscal year ending December 31, 2003 ranging from 6.0x to 8.0x. This analysis assumed no synergies and yielded an implied common equity value range for Holdings of $28.70 to $32.29 per fully diluted share of Holdings, and an implied equity value range per share (including the cash distribution) for Modtech of $28.16 to $31.22 as compared to the price of September 23, 1998 of $20.50. The summary set forth above does not purport to be a complete description of the analyses performed by DLJ but describes, in summary form, the material elements of the presentations made by DLJ to the Modtech Board of Directors on September 28, 1998. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. Each of the analyses conducted by DLJ was carried out in order to provide a different perspective on the transaction and to add to the total mix of information available. DLJ did not form a conclusion as to whether any individual analysis, considered in isolation, supported or failed to support an opinion as to fairness from a financial point of view. Rather, in reaching its conclusion, DLJ considered the results of the analyses in light of each other and ultimately 27 36 reached its opinion based on the results of all analyses taken as a whole. Accordingly, notwithstanding the separate factors summarized above, DLJ has indicated to Modtech that it believes that its analyses must be considered as a whole and that selecting portions of its analyses and the factors considered by it, without considering all analyses and factors, could create an incomplete view of the evaluation process underlying its opinion. The analyses performed by DLJ are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses. Pursuant to the terms of an engagement agreement dated September 25, 1998, Modtech agreed to pay DLJ a fee of $750,000, irrespective of the conclusion reached therein. In addition, Modtech has agreed to reimburse DLJ promptly for all out-of-pocket expenses (including the reasonable fees and expenses of counsel) incurred by DLJ in connection with the Fairness Opinion and to indemnify DLJ and certain related persons against certain liabilities in connection with its engagement, including liabilities under U.S. federal securities laws. In the ordinary course of business, DLJ and its affiliates may own or actively trade the securities of Modtech for their own accounts and for the accounts of their customers and, accordingly, may at any time hold a long or short position in Modtech securities. PROCEDURES FOR ELECTION OF MERGER CONSIDERATION AND SURRENDER OF STOCK CERTIFICATES; FRACTIONAL SHARES SPI. In order to receive the SPI Merger Consideration (See "The Mergers -- Merger Consideration -- SPI"), SPI stockholders must surrender to ChaseMellon, the Exchange Agent, whose address is 400 South Hope Street, 4th Floor, Los Angeles, California 90071, the certificate or certificates for their shares of SPI Capital Stock. As soon as feasible, after the Effective Time, the Exchange Agent will send to each SPI stockholder a letter of transmittal and instructions for use in surrendering their certificates and making an election to receive cash at $49.4097 per share in place of Holdings Common Stock for up to 5.9176% of their shares, if they so desire. The method of making adjustments to stockholder elections as described above (See "The Mergers -- Merger Consideration -- SPI") will be set forth in the letter of transmittal. Any necessary adjustments to stockholder elections will be made by the Exchange Agent. SPI stockholders will not receive any fractional shares of Holdings Common Stock. Instead, they will be paid cash equal to the closing price of a share of Modtech Common Stock on the Nasdaq National Market on the last business day prior to the closing of the Mergers, multiplied by the fraction of a share they otherwise would have received. After the Effective Time, there will be no further transfer on the records of SPI or its transfer agent of certificates representing shares of SPI Capital Stock, and, if such certificates are presented to SPI for transfer, they will be cancelled against delivery of the SPI Merger Consideration pursuant to the Merger Agreement. Until surrendered in accordance with the Merger Agreement, each certificate for shares of SPI Capital Stock will be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the SPI Merger Consideration pursuant to the Merger Agreement. No interest will be paid or will accrue on any cash payable as consideration in the Mergers or in lieu of any fractional shares of Holdings Common Stock. HOLDERS OF SPI CAPITAL STOCK SHOULD NOT SEND ANY OF THEIR STOCK CERTIFICATES TO SPI OR THE EXCHANGE AGENT AT THIS TIME. Modtech. In order to receive the Modtech Merger Consideration, Modtech stockholders must surrender to ChaseMellon, the Exchange Agent, whose address is 400 South Hope Street, 4th Floor, 28 37 Los Angeles, California 90071, the certificate or certificates, representing their shares of Modtech Common Stock. As soon as feasible after the Effective Time, the Exchange Agent will send to each Modtech stockholder a letter of transmittal and instructions for use in surrendering their certificates and making an election to receive Holdings Series A Preferred Stock for up to 3.94% of their Modtech Common Stock. NO MODTECH STOCKHOLDER IS REQUIRED TO ELECT TO RECEIVE HOLDINGS SERIES A PREFERRED STOCK, SINCE TWO MAJOR MODTECH STOCKHOLDERS, LAGUNITAS PARTNERS AND PROACTIVE PARTNERS, L.P., HAVE AGREED TO ACCEPT ALL THE SHARES OF HOLDINGS SERIES A PREFERRED STOCK TO BE ISSUED IN THE MODTECH MERGER. The method of making adjustments to stockholder elections and the amount of Holdings Series A Preferred Stock to be allocated as described above (See, "The Mergers -- Merger Consideration -- Modtech") will be set forth in the letter of transmittal. Any necessary adjustments to stockholder elections or the number of shares of Holdings Series A Preferred Stock to be allocated will be made by the Exchange Agent. Modtech stockholders will not receive any fractional shares of Holdings Common Stock or Holdings Series A Preferred Stock. Instead, they will be paid cash equal to the closing price of a share of Modtech Common Stock on the Nasdaq National Market on the last trading day prior to the closing of the Mergers multiplied by the fraction of a share of Holdings Common Stock they otherwise would have received. Shares of Holdings Series A Preferred Stock will be rounded upward to the nearest whole number of shares. After the Effective Time of the Merger, there will be no further transfer on the records of Modtech or its transfer agent of certificates representing shares of Modtech Common Stock, and, if such certificates are presented to Modtech for transfer, they will be cancelled against delivery of the Modtech Merger Consideration pursuant to the Merger Agreement. Until surrendered in accordance with the Merger Agreement, each certificate for shares of Modtech Common Stock will be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the Modtech Merger Consideration pursuant to the Merger Agreement. No interest will be paid or will accrue on any cash payable as consideration in the Mergers or in lieu of any fractional shares of Holdings Common Stock. HOLDERS OF MODTECH COMMON STOCK SHOULD NOT SEND ANY OF THEIR STOCK CERTIFICATES TO MODTECH OR THE EXCHANGE AGENT AT THIS TIME. EFFECTIVE TIME On the Closing Date, the parties will file certificates of merger or other appropriate documents (in any such case, the "Certificates of Merger") and will make all other filings or recordings required under the Delaware General Corporation Law ("DGCL"), the California General Corporation Law and the Colorado Business Corporation Act. The Mergers will become effective at such time as the Certificate of Mergers are duly filed with the Secretary of State of the State of Delaware, or at such later time as Modtech and SPI specify in the Certificates of Merger (the time the Mergers become effective being the "Effective Time"). Such filing will be made as promptly as practicable after satisfaction or waiver of the conditions to the Mergers set forth in the Merger Agreement. EFFECT ON SPI STOCK PLAN The Merger Agreement provides that, as a result of the Mergers, the vesting of all options outstanding under SPI's Second Amended and Restated 1997 Stock Option Plan ("SPI Options") that are not then at least 75% vested will be accelerated pro rata based on the unvested portion of such options until all SPI Options are in the aggregate 75% vested. An option is considered 75% vested if the number of shares purchased under any prior exercise of the option, plus the number of shares the option is exercisable for immediately prior to the completion of the 29 38 Mergers, equals 75% of the total number of shares covered by the original grant of the option. 5.9176% of the shares covered by the vested portion of each SPI Option will be converted into the right to receive $49.4097 per share in cash, less the applicable per share exercise price of each SPI Option. Each remaining SPI Option will be converted into and become a right to acquire 1.8785 shares of Holdings Common Stock for each share of SPI Common Stock previously covered by the converted SPI Option. EFFECT ON SPI WARRANTS The Merger Agreement provides that all outstanding warrants to purchase SPI Common Stock ("SPI Warrants") will be deemed exercised immediately prior to the Effective Time. At the Effective Time, 5.9176% of the SPI Warrants held by each warrant holder will be converted into the right to receive $49.4097 per share in cash, less the applicable exercise price of the SPI Warrants. Each remaining SPI Warrant will be converted into the right to receive 1.8785 shares of Holdings Common Stock upon payment of the adjusted warrant exercise price. EFFECT ON MODTECH STOCK PLANS The Merger Agreement provides that, as a result of the Mergers, all outstanding options to purchase Modtech Common Stock ("Modtech Options") that are not then at least 75% vested will be accelerated pro rata based on the unvested portion of such options until all Modtech Options are in the aggregate 75% vested. An option is considered 75% vested if the number of shares purchased under any prior exercise of the option, plus the number of shares the option is exercisable for immediately prior to the completion of the Mergers, equals 75% of the total number of shares covered by the original grant of the option. 14.6709% of the shares covered by the vested portion of each Modtech Option will be converted into the right to receive $25.00 per share in cash, less the applicable per share exercise price. Each remaining Modtech Option will be converted into and become a right to acquire 0.8508 shares of Holdings Common Stock for each share of Modtech Common Stock previously covered by the converted Modtech Option. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following is a summary of the material United States federal income tax considerations generally applicable to holders of Modtech Common Stock and holders of SPI Capital Stock who, pursuant to the Mergers, exchange such stock holdings for the Merger Consideration. Consummation of the Modtech Merger is conditioned upon the receipt by Modtech of an opinion of Gibson, Dunn & Crutcher LLP, special tax counsel to Modtech, based upon requested representation letters and dated the Closing Date, to the effect that the Modtech Merger will qualify as an exchange governed by Section 351 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). Consummation of the SPI Merger is conditioned upon the receipt by SPI of an opinion of Dorsey & Whitney LLP, counsel to SPI, based upon requested representation letters and dated the Closing Date, to the effect that the SPI Merger will qualify as a reorganization under Section 368 of the Internal Revenue Code. The summary below assumes that the Modtech Merger and the SPI Merger will be treated for United States federal income tax purposes in accordance with those opinions. This summary is based upon the current provisions of the Internal Revenue Code, currently applicable Treasury regulations thereunder, judicial decisions, and current administrative decisions and rulings. There can be no assurance that the Internal Revenue Service ("IRS") will not take a contrary view, and no ruling from the IRS has been or will be sought regarding tax treatment of the Modtech Merger and the SPI Merger. Future legislative, judicial or administrative changes or interpretations could alter or modify the statements and conclusions set forth in this summary, and any such change or 30 39 interpretations could be retroactive and could affect the tax consequences to the stockholders of Modtech and SPI. The following summary does not address all aspects of federal income taxation that may be important to particular stockholders in light of their personal investment circumstances or to stockholders subject to special treatment under the federal income tax laws (including life insurance companies, foreign persons, tax-exempt entities, and holders who acquired their Modtech Common Stock or SPI Capital Stock pursuant to the exercise of employee stock options or otherwise as compensation) and does not address any aspect of state, local or foreign taxation. This summary also assumes that the Modtech Common Stock and the SPI Capital Stock will be held as capital assets on the Closing Date. Treatment of Holders of Modtech Common Stock. Except as discussed below under "Cash in Lieu of Fractional Shares," a holder of Modtech Common Stock will recognize gain realized in the transaction but will not recognize any loss realized in the transaction. The amount of gain that is recognized will be equal to the lesser of (i) the amount of gain realized in the transaction (i.e., the excess of (a) the sum of the amount of cash and the fair market value of Holdings Common Stock and Holdings Series A Preferred Stock received over (b) the tax basis of the Modtech Common Stock relinquished) and (ii) the amount of cash received. The amount of such recognized gain will be subject to federal income tax at capital gain rates or ordinary income rates depending upon whether the receipt of cash is viewed as a redemption of stock or as a dividend distribution under the rules discussed below. Because the Modtech stockholders will, as a group, possess more than 50% of the total value of shares of all classes of stock of Holdings following the Mergers, the treatment of any gain recognized by a Modtech stockholder as capital gain or as dividend income must be determined by applying the rules of Section 302 of the Internal Revenue Code. As to each Modtech stockholder, this is determined by viewing Holdings as redeeming a portion of a Modtech stockholder's Modtech Common Stock for the amount of cash received by such stockholder in the Modtech Merger. To determine whether the redemption is treated as a dividend distribution or as a redemption of the stockholder's Modtech Common Stock, a Modtech stockholder must compare his or her proportionate, percentage interest in Modtech prior to the Modtech Merger with such stockholder's indirect proportionate, percentage interest in Modtech after the Modtech Merger by reason of such stockholder's direct ownership of Holdings Common Stock and Holdings Series A Preferred Stock. Such comparison should take into account the Holdings Common Stock issued to the SPI stockholders in the SPI Merger. The cash distribution received by a Modtech stockholder will be treated as a redemption of such stockholder's stock rather than a dividend if, under the redemption tests of Section 302 of the Internal Revenue Code, such distribution (i) is "not essentially equivalent to a dividend" with respect to the stockholder, or (ii) results in a "substantially disproportionate" redemption of such stockholder's equity interest in Modtech (the "Section 302 Tests"). A redemption will be "substantially disproportionate" if (i) after the redemption the stockholder owns less than 50% of the total combined voting power of all classes of stock of Modtech entitled to vote, and (ii) the percentage ownership of Modtech "common stock" and "voting stock" immediately after the redemption is less than 80% of the stockholder's percentage ownership in such stock immediately before the redemption. If the redemption from a Modtech stockholder fails to satisfy the "substantially disproportionate" test, such stockholder may nonetheless satisfy the "not essentially equivalent to a dividend" test. Under the principles established in United States v. Davis, 397 U.S. 301 (1970), a distribution to a 31 40 Modtech stockholder will not be "essentially equivalent to a dividend" if it results in a "meaningful reduction" in such stockholder's proportionate stock interest in Modtech. If a stockholder with a relatively minimal stock interest in Modtech and no exercise of control over corporate affairs suffers a reduction in his proportionate interest in Modtech as a result of the redemption, that stockholder should be regarded as having suffered a meaningful reduction of his or her interest in Modtech. For example, the IRS has held in a published ruling that in the case of a less than 1% stockholder who does not have management control over the corporation, any reduction in proportionate interest will constitute a "meaningful reduction." In applying the Section 302 Tests, the constructive stock ownership rules of Internal Revenue Code Section 318 apply and require that each Modtech stockholder take into account not only the Modtech Common Stock directly owned by the stockholder, but also Modtech Common Stock owned by certain of the stockholder's family members, stock owned by partnerships, trusts, corporations and other entities in which the stockholder has an interest, as well as Modtech Common Stock the stockholder has a right or option to acquire. If none of the redemption tests under Section 302 of the Internal Revenue Code is satisfied, the cash received by a Modtech stockholder will be treated as a dividend to the extent of such stockholder's allocable portion of the earnings and profits (as determined for federal income tax purposes) of Modtech and Holdings. If the amount of cash exceeds a Modtech stockholder's allocable portion of earnings and profits, the excess will be treated first as a return of capital to the extent of such stockholder's tax basis in his or her shares and then as capital gain. Because the determination of whether cash received in the Modtech Merger will be treated as the distribution of a dividend generally will depend upon the particular facts and circumstances of each Modtech stockholder, each Modtech stockholder is strongly advised to consult their own tax advisor regarding the tax treatment of cash received pursuant to the Modtech Merger. Treatment of Holders of SPI Capital Stock. Except as discussed below under "Cash in Lieu of Fractional Shares," a holder of SPI Capital Stock that only receives Holdings Common Stock will not recognize gain or loss. A holder of SPI Capital Stock that receives a combination of Holdings Common Stock and cash will recognize gain realized in the transaction but will not recognize any loss realized in the transaction. The amount of gain that is recognized will be calculated separately for each block of SPI Capital Stock, in an amount equal to the lesser of (i) the amount of gain realized with respect to such block (i.e., the excess of (a) the sum of the amount of cash and the fair market value of Holdings Common Stock received that is allocable to such block over (b) the tax basis of the block of SPI Capital Stock relinquished) and (ii) the amount of cash received that is allocable to such block. The amount of such recognized gain will be subject to federal income tax at capital gain rates or ordinary income rates depending upon whether the receipt of cash is viewed as a redemption of stock or as a dividend distribution under the rules discussed below. The determination of whether the exchange of SPI Capital Stock for cash pursuant to the SPI Merger has the effect of a distribution of a dividend will be made by applying the Section 302 Tests that are described above under "Treatment of Holders of Modtech Common Stock," and by also taking into account any shares of Holdings Common Stock considered to be owned by such SPI stockholder by reason of the constructive ownership rules of Internal Revenue Code Section 318 that are also described above under "Treatment of Holders of Modtech Common Stock." Pursuant to the principles established in Clark v. Commissioner, 489 U.S. 726 (1989), the Section 302 32 41 Tests are applied to an SPI stockholder by comparing the proportionate, percentage interest of an SPI stockholder in Holdings after the SPI Merger with the proportionate, percentage interest in Holdings such stockholder would have had if such stockholder had received solely Holdings Common Stock in the SPI Merger. This comparison is made as though Holdings had issued solely Holdings Common Stock to such stockholder in the SPI Merger and in a hypothetical redemption Holdings had then redeemed a portion of its Holdings Common Stock for the amount of cash the stockholder actually received in the SPI Merger. In making this comparison, it is likely that the effect of the Modtech Merger would be taken into account as though Holdings had issued solely Holdings Common Stock in the Modtech Merger and in a hypothetical redemption Holdings had then redeemed a portion of its Holdings Common Stock for the amount of cash received by the Modtech stockholders. If receipt of cash by an SPI stockholder has the effect of a distribution of a dividend, the gain recognized will be treated as a dividend to the extent of the stockholder's ratable share of SPI's undistributed earnings and profits, as determined for federal income tax purposes. If the amount of cash exceeds an SPI stockholder's ratable share of earnings and profits, the excess will be treated first as a return of capital to the extent of such stockholder's tax basis in his or her shares and then as capital gain. Any gain that does not have the effect of a distribution of a dividend will be a capital gain. Because the determination of whether cash received in the SPI Merger will be treated as the distribution of a dividend generally will depend upon the particular facts and circumstances of each SPI stockholder, each SPI stockholder is strongly advised to consult their own tax advisor regarding the tax treatment of cash received pursuant to the SPI Merger. The Merger Agreement provides that, subject to the limits therein, each SPI stockholder may elect which of such stockholder's SPI Capital Stock, if any, will be exchanged for cash in the SPI Merger. In the event the receipt of cash by an SPI stockholder is not treated as a dividend, as explained above, the tax treatment of the cash may be different depending on which shares of SPI Capital Stock are deemed to be exchanged for cash and which shares are deemed to be exchanged for Holdings Common Stock. While there is some authority suggesting that a stockholder's allocation of stock and cash to certain shares of SPI Capital Stock should be respected, there can be no assurance that the IRS will not take a contrary position. Because of the absence of definitive authority, SPI stockholders are strongly advised to consult with their own tax advisors. Basis and Holding Period of the Holdings Common Stock and Holdings Series A Preferred Stock. The basis of the Holdings Common Stock (including any fractional shares for which cash is received described below) received by a Modtech stockholder or an SPI stockholder in the Mergers will equal the basis of the Modtech Common Stock or SPI Capital Stock surrendered by such stockholder in the respective Merger, decreased by the amount of cash received by such stockholder, and increased by the amount of capital gain recognized by such stockholder and the amount treated as a dividend to such stockholder. As to any Modtech stockholder that receives both Holdings Common Stock and Holdings Series A Preferred Stock, such basis amount shall be allocated to each class of stock based upon the relative fair market value of each class. As to SPI stockholders, the basis of the Holdings Common Stock received in the SPI Merger will be determined separately with respect to each block of SPI Capital Stock surrendered in the SPI Merger. The holding period of the Holdings Common Stock and the Holdings Series A Preferred Stock will include the period during which the Modtech Common Stock or SPI Capital Stock surrendered in the Mergers was held. 33 42 Cash in Lieu of Fractional Shares. Cash received by a Modtech stockholder or SPI stockholder in lieu of a fractional share interest of Holdings Common Stock will be treated as having been received as a distribution in full payment in exchange for the fractional share interest in Holdings Common Stock which such stockholder would otherwise be entitled to receive, and will qualify as capital gain or loss, or as a dividend under the Section 302 Tests discussed above. Conversion of Holdings Series A Preferred Stock. A holder of Holdings Series A Preferred Stock will not recognize income, gain or loss upon the conversion of such stock into Holdings Common Stock. A holder's basis in the Holdings Common Stock received upon conversion will equal the basis of the Holdings Series A Preferred Stock so converted, and the holding period of the Holdings Common Stock received upon conversion will include the holding period of the Holdings Series A Preferred Stock so converted. Reporting Requirements and Backup Withholding. Each Modtech stockholder and SPI stockholder will be required to retain records and file with such holder's United States federal income tax return a statement setting forth certain facts relating to the Modtech Merger and the SPI Merger. Backup withholding at the rate of 31% may apply with respect to certain payments unless the recipient (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. A stockholder who does not provide Holdings with its correct taxpayer identification number may be subject to penalties imposed by the IRS. Any amounts withheld under the backup withholding rules may be allowed as a refund or credit against the stockholder's federal income tax liability, provided that certain required information is furnished to the IRS. Holdings will report to stockholders of Holdings and to the IRS the amount of "reportable payments" and any amount withheld with respect to Holdings Common Stock and Holdings Series A Preferred Stock during each calendar year. THIS FEDERAL INCOME TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY AND MAY NOT APPLY TO ALL HOLDERS OF MODTECH COMMON STOCK OR ALL HOLDERS OF SPI CAPITAL STOCK. SUCH HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGERS. CONFLICTS OF INTEREST In considering the respective recommendations of the Modtech Board and the SPI Board with respect to the Mergers, stockholders of Modtech and SPI should be aware that, as described below, certain members of SPI's and Modtech's management and Boards may have interests in the Mergers that are different from, or in addition to, the interests of stockholders of Modtech and SPI, and that may create potential conflicts of interest. The Modtech Board and the SPI Board have each considered these interests, among other matters, in approving and adopting the Merger Agreement and the Mergers. Holdings Board of Directors. Four of the eight current directors of Modtech, Evan M. Gruber, Charles C. McGettigan, Myron A. Wick III and Daniel J. Donahoe III, will become directors of Holdings. Three of the six current directors of SPI, Patrick Van Den Bossche, Charles A. Hamilton and Charles R. Gwirtsman, will become directors of Holdings. Holdings Executive Officers. Evan M. Gruber, Chief Executive Officer of Modtech, Patrick Van Den Bossche, President of SPI, and Michael G. Rhodes, Chief Operating Officer and Chief Financial Officer of Modtech, will each hold the same 34 43 positions with Holdings as they presently hold with SPI or Modtech. In connection with the Merger Agreement, Holdings will enter into employment agreements with these officers. See "Directors and Executive Officers of Holdings Following the Mergers -- Compensation of Executive Officers." Transaction Fees. KRG Capital Partners, LLC ("KRG"), Infrastructure and Environmental Private Equity Management III, LLC ("IEPEM"), Argentum Capital Partners II, L.P. ("Argentum") and NationsCredit Commercial Corporation ("NationsCredit"), which control in the aggregate approximately 96.1% of the voting power of SPI, will receive a total of $1,250,000 in transaction fees in connection with the Mergers. At the closing of the Mergers, $750,000 of the transaction fees will be paid and allocated as follows: KRG - $573,170; IEPEM - $126,525; Argentum - $25,305; and NationsCredit - $25,000. The remaining $500,000 balance of the fees will be paid to KRG over two years in equal monthly installments. Upon the closing of a business acquisition by Holdings, during each of the first and second years after the closing of the Mergers, all remaining monthly payments of the transaction fees for that year will become immediately due and payable. KRG will also be retained by Holdings for a period of three years to provide transaction advisory services in connection with any future acquisitions of Holdings following completion of the Mergers. This agreement may be renewed by the parties on a year-to-year basis for a maximum of two additional years. Holdings may terminate the transaction advisory services agreement at any time after its second anniversary upon 90 days' prior written notice. Under the transaction advisory agreement, KRG will receive a fee of $75,000 for acquisitions under $5 million, a fee of $100,000 for acquisitions greater than $5 million but less than $15 million, and a fee of not less than $100,000 for acquisitions in excess of $15 million. During the third year of the agreement and any subsequent extension, KRG will receive an annual base advisory fee of $250,000. The principals of KRG, Mark M. King, Bruce L. Rogers, and Charles R. Gwirtsman, are presently directors of SPI. Mr. Gwirtsman will serve as a director of Holdings following the Mergers. McGettigan, Wick & Co., Inc. will receive a $1,250,000 fee in connection with the completion of the Mergers. The fee will be payable over not more than two years, with $750,000 paid at the completion of the Mergers, $250,000 paid upon the earlier of the closing of the first business acquisition following the Mergers or the first anniversary of the Mergers, and $250,000 paid upon the earlier of the closing of the second business acquisition following the Mergers or the second anniversary of the Mergers. The principals of McGettigan, Wick & Co., Inc. are Charles C. McGettigan and Myron A. Wick III, who are also principals of Proactive Partners, L.P., which beneficially controls about 23.6% of the voting power of Modtech. Mr. McGettigan and Mr. Wick are directors of Modtech and will be directors of Holdings. Indemnification. The Merger Agreement also provides that, from and after the Effective Time, Holdings and SPI will indemnify, defend, protect and hold harmless the present and former officers and directors of SPI, subject to certain limitations, for all claims arising as a result of their service to SPI or relating to the Merger Agreement and the Mergers. See "Certain Provisions of The Merger Agreement--Indemnification." Registration Rights Agreement. After the completion of the Mergers, the current executive officers and directors of Modtech and the beneficial owners of more than 5% of Modtech Common Stock (See "Security Ownership of Certain Beneficial Owners and Management of Modtech"), the current executive officers and directors of SPI and the beneficial owners of more than 5% of SPI's Capital Stock (See, "Security Ownership of Certain Beneficial Owners and Management of SPI"), and certain individual stockholders of SPI or such 35 44 beneficial owners, will be entitled to have their shares of Holdings Common Stock registered for resale to the public under certain conditions. Under a Registration Rights Agreement between Holdings and these stockholders, in the event that Holdings determines to register, under the Securities Act of 1933, any of its equity securities for its own account, these stockholders will be entitled to notice of Holdings' registration and will be entitled to include in the registration their shares of Holdings Common Stock specified in a written request to Holdings. These "piggyback" registration rights are subject to certain conditions and limitations, including the right of Holdings not to include any of these stockholders' shares among the securities covered by a registration statement if the aggregate market value of such shares is less than $1 million, or the Board of Directors of Holdings determines in good faith that including such shares among the securities covered by the registration statement would have a materially detrimental effect on the offering and would therefore not be in the best interest of Holdings. If the offering is underwritten, the underwriter may also exclude some or all of the shares of these stockholders from the registration statement, if it determines marketing factors require a limitation on the number of shares to be underwritten. ACCOUNTING TREATMENT The SPI Merger will be accounted for under the purchase method of accounting, in accordance with generally accepted accounting principles. Under the purchase method of accounting, the purchase price of SPI, including direct costs of the Mergers, will be allocated among the assets acquired and liabilities assumed based upon their estimated fair values, with the excess purchase consideration allocated to goodwill. The conversion of Modtech Common Stock into Holdings Common Stock and Series A Preferred Stock will be treated as a reorganization, with no change in the recorded amount of Modtech's assets and liabilities. The financial statements of Modtech will become the financial statements of Holdings. The results of Holdings' operations will include the results of operations of SPI commencing at the Closing Date. The Unaudited Pro Forma Combined Condensed Financial Statements appearing elsewhere in this Joint Proxy Statement/Prospectus are based upon certain assumptions and allocate the purchase price to assets and liabilities based upon preliminary estimates of their respective fair values. The unaudited pro forma adjustments and combined amounts are included for informational purposes only. If the Mergers are consummated, then Holdings's financial statements will reflect effects of acquisition adjustments only from the Closing Date. THE ACTUAL ALLOCATION OF THE PURCHASE PRICE MAY DIFFER SIGNIFICANTLY FROM THE ALLOCATION REFLECTED IN THE UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS. APPROVALS AND CONSENTS The Merger Agreement provides that SPI and Modtech will use their best efforts and cooperate with one another (i) in promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained under any applicable law or regulation or from any governmental authorities or third parties in connection with the Mergers, and (ii) in promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits or authorizations. Under applicable federal anti-trust law, certain acquisitions may not be consummated unless notice has been given and certain information furnished to the Antitrust Division of the United States Department of Justice (the "Antitrust Division") and the Federal Trade Commission ("FTC") and specified waiting period requirements have been satisfied, unless earlier termination has been granted. SPI, Modtech, Proactive Partners, L.P., and Lagunitas Partners L.P., each filed with the Antitrust Division 36 45 and the FTC a Notification and Report Form with respect to the Mergers. SPI's filing was made October 8, 1998, and the filing of the other three parties were made on October 20, 1998. On November 19, 1998, the waiting period will expire. NASDAQ LISTING Holdings will use its best efforts to cause the shares of Holdings Common Stock issued in the Mergers to be approved for listing on the Nasdaq National Market, subject to notice of issuance, prior to the Closing Date. This listing is a condition to closing the Mergers. Holdings does not intend to list the Holdings Series A Preferred Stock. Effective at the Closing Date, Modtech Common Stock will be delisted from the Nasdaq National Market and deregistered under the Securities Exchange Act of 1934. RESALES OF STOCK Shares of Holdings Common Stock and Holdings Series A Preferred Stock to be issued in connection with the Mergers will be registered under the Securities Act of 1933 (the "Securities Act"). Such shares will be freely transferable, except that shares received by any person who may be deemed to be an affiliate of SPI or Modtech within the meaning of Rule 145 of the Securities Act may not be resold except in mergers permitted by such Rule or as otherwise permitted under the Securities Act. While the shares of Holdings Common Stock will be listed on the Nasdaq National Market, the shares of Holdings Series A Preferred Stock will not be listed. There will be no market for Holdings Series A Preferred Stock and one is not likely to develop. DISSENTERS' RIGHTS SPI Stockholders You, as a record holder of shares of SPI Capital Stock, will be entitled to assert dissenters' rights under Article 113 of the Colorado Business Corporation Act in connection with the Mergers. The following discussion is not a complete statement of the law pertaining to dissenters' rights under the Colorado Business Corporation Act and is qualified in its entirety by reference to the full text of Article 113 reprinted as Annex IV to this Joint Proxy Statement/Prospectus. If you do not wish to accept the SPI Merger Consideration, Article 113 authorizes you to dissent from the Mergers and obtain payment of the "fair value" for your shares of SPI Capital Stock. To assert dissenters' rights, you must: (i) provide written notice to SPI, before the vote is taken on the proposed Mergers, of your intention to demand payment of the fair value for your shares if the Mergers are completed; and (ii) not vote your shares in favor of the Mergers. If you do not satisfy these requirements, you will not be entitled to receive payment for your shares under Article 113. "Fair value," with respect to your shares of SPI Capital Stock, means the value of your shares immediately before the Closing Date of the Mergers, excluding any appreciation or depreciation in anticipation of the Mergers, unless such exclusion would be inequitable. Interest will accrue on the fair value from the Closing Date of the Mergers to the date of payment at the average rate currently paid by SPI on its principal bank loans. You should be aware that the fair value of your shares of SPI Capital Stock as determined under Colorado law could be greater than, equal to, or less than the consideration you would receive if you did not elect to assert dissenters' rights. 37 46 If the Mergers are authorized at the SPI Special Meeting, SPI will mail to you, and all other stockholders who complied with the requirements of Article 113 and are entitled to demand payment of the fair value for their shares of SPI Capital Stock, a written dissenters' notice. The notice will be given no later than 10 days after the Closing Date of the Mergers and will be accompanied by a copy of Article 113. The notice will also (i) state that the Mergers were authorized and state the Closing Date of the Mergers; (ii) state an address at which SPI will receive payment demands and the address of a place where certificates for certificated shares of SPI Capital Stock must be deposited; (iii) supply a form for demanding payment, which form will request that you state an address where you would like your payment to be made; (iv) set the date by which SPI must receive your payment demand and certificates for certificated shares of SPI Capital Stock, which date will not be less than 30 days after the date your notice is given; and (v) state all other information that is required to be given to you under Colorado law. In the event that you still wish to assert your dissenters' rights after receiving your notice from SPI, you must: (i) deliver a completed payment demand to SPI, which may be on the payment demand form supplied to you by SPI, and (ii) deposit your certificates for certificated shares of SPI Capital Stock with SPI. You will still retain all rights of a stockholder, except the right to transfer your shares of SPI Capital Stock, until the Closing Date of the Mergers. After the Closing Date of the Mergers, however, you will have only the right to receive payment of the fair value for your shares of SPI Capital Stock. Except as described below, both your demand for payment and deposit of certificates are irrevocable. If you fail to make your payment demand and deposit the share certificates by the date set in the dissenters' notice delivered by SPI, you will not be entitled to payment under Article 113. Upon the Closing Date of the Mergers or upon SPI's receipt of your payment demand, whichever is later, SPI will pay to you, and each other dissenter who complied with the procedures to demand payment under Colorado law, at the address you provided in your payment demand, the amount SPI estimates to be the fair value of your shares of SPI Capital Stock, plus accrued interest. Your payment will be accompanied by SPI's audited balance sheet for the year ended March 31, 1998, an audited income statement for that year, and an audited statement of cash flow for that year, as well as the latest available unaudited financial statements, if any, for the interim period. Also included with your payment will be a statement of SPI's estimate of the fair value of your shares, an explanation of how the interest on your payment was calculated, and a statement of your right to demand additional payment under Article 113. In addition, SPI will again provide you with a copy of the full text of Article 113 of the Colorado Business Corporation Act. If the Closing Date of the Mergers has not occurred within 60 days after the date set by which SPI must receive your payment demand, SPI will return your deposited certificates. If, however, the Closing Date of the Mergers subsequently occurs, then SPI will send to you a new dissenters' notice, and all of the provisions of Article 113 summarized above will again be applicable. As mentioned above, you may have the right under Colorado law to demand additional payment for your shares of SPI Capital Stock. If you believe that the amount paid or offered by SPI for your shares is less than the fair value or that the interest due was incorrectly calculated, or if SPI fails to make payment within 60 days after the date set by which SPI must receive your payment demand, or if SPI fails to return the deposited certificates as required under Article 113, you may give written notice to SPI of your estimate of the fair value of your shares, and of the amount of interest due, and you may demand payment of such estimate, less any payment already made by SPI. You will waive your right to demand payment of your estimate unless you deliver your demand to SPI within 30 days after SPI made or 38 47 offered payment of the fair value of your shares of SPI Capital Stock. If your demand for additional payment remains unresolved, SPI may, within 60 days after receiving your demand, commence a court proceeding and petition the District Court for Denver County, Colorado, to determine the fair value of your shares, plus accrued interest. If SPI does not commence the proceeding within the 60-day period, it shall pay to you, and each other dissenter whose demand for additional payment remains unresolved, the amount demanded. The court may assess the costs of the court proceedings between the parties as it deems equitable. Under Colorado law, if you decide to dissent and obtain payment of the fair value for your shares of SPI Capital Stock, you may not challenge the Mergers, unless the Mergers are unlawful or fraudulent with respect to the stockholders of SPI. Modtech Stockholders Since Modtech's Common Stock is traded on the Nasdaq National Market, you will not be entitled to dissenters' rights if you object to the Mergers, unless your shares are subject to restrictions on transfer imposed by Modtech or by law or regulation, or unless the holders of at least 5% of Modtech's outstanding Common Stock make appropriate demands under Chapter 13 of the California General Corporation Law (the "California Corporations Code"). The following discussion is not a complete statement of the law pertaining to the rights of such "dissenting stockholders" under the California Corporations Code and is qualified in its entirety by reference to the full text of Chapter 13, which is reprinted as Annex III to this Joint Proxy Statement/Prospectus. Under the California Corporations Code, if you do not wish to accept the Modtech Merger Consideration upon completion of the Merger, you may elect to receive payment for the fair market value of your shares if: (1) you meet the requirements of the preceding paragraph; (2) your shares were outstanding on the Record Date; (3) your shares were not voted in favor of the Mergers; (4) you make a written demand that Modtech purchase your shares of Modtech Common Stock at fair market value; and (5) you submit your stock certificates for endorsement. Your shares will then be considered "Dissenting Shares." The fair market value of your Dissenting Shares is determined as of the day before the first announcement of the terms of the Mergers, excluding any appreciation or depreciation as a consequence of the proposed Mergers, but adjusted for any stock split, reverse stock split or stock dividend that becomes effective thereafter. Within 10 days following approval of the Mergers by Modtech stockholders, Modtech must mail to you and each other holder of shares of Modtech Common Stock on the Record Date not voted in favor of the Mergers, a notice of the approval of the Mergers, a statement of the price determined by Modtech to represent the fair market value of the Dissenting Shares (which shall constitute an offer by Modtech to purchase such Dissenting Shares at such stated price), and a description of the procedures for you and such holders to exercise your rights under Chapter 13 of the California Corporations Code as dissenting stockholders. Within 30 days after the date on which the notice of the approval of the Mergers by the outstanding shares of Modtech Common Stock is mailed to you, you must demand that Modtech repurchase your Dissenting Shares in a statement setting forth the number and class of Dissenting Shares held of record by you that you are demanding that Modtech purchase, and a statement of what you claim to be the fair market value of the Dissenting Shares as of the day before the announcement of the proposed Mergers. The statement of fair market value in your demand will be treated as an offer by you to sell the Dissenting Shares at such price to Modtech. You 39 48 must also submit to Modtech certificates representing any Dissenting Shares that you demand Modtech purchase, so that such Dissenting Shares may either be stamped or endorsed with the statement that the shares are Dissenting Shares or exchanged for certificates of appropriate denomination so stamped or endorsed. If, upon your surrender of the certificates representing the Dissenting Shares, Modtech and you agree upon the price to be paid for the Dissenting Shares and agree that such shares are Dissenting Shares, then the agreed price is required by law to be paid to you within the later of 30 days after the date of such agreement or 30 days after any statutory or contractual conditions to the consummation of the Mergers are satisfied or waived. If Modtech and you disagree on the price for such Dissenting Shares or disagree as to whether such shares are entitled to be classified as Dissenting Shares, you have the right to bring an action in California Superior Court to resolve the dispute. The action must be brought within six months after the date on which the notice of the approval of the Mergers by Modtech stockholders is first mailed. In such action, the California Superior Court may determine whether the shares of Modtech Common Stock held by you are Dissenting Shares, the fair market value of such shares, or both. You should assume that Modtech will not take any action to perfect your dissenters' rights. To exercise your dissenters' rights, you should strictly comply with the procedures set forth in Chapter 13 of the California Corporations Code. You should consult with your legal advisor before electing or attempting to exercise your dissenters' rights. Failure to follow any Chapter 13 procedures may result in termination or waiver of dissenters' rights under Chapter 13. The California Corporations Code provides, among other things, that you may not withdraw the demand for payment of the fair market value of your Dissenting Shares unless Modtech consents to such request for withdrawal. If you perfect your dissenters' rights you will not be entitled to surrender your Modtech Common Stock for payment of the Modtech Merger Consideration. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS Modtech and SPI have each made forward-looking statements in this document (and in certain documents that are incorporated by reference in this Joint Proxy Statement/Prospectus) that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of the respective company's management, and on information currently available to such management. Forward-looking statements include the information concerning possible or assumed future results of operations of Modtech, SPI and Holdings set forth under "Summary," "The Mergers--Background of the Mergers," "The Mergers--Reasons for the Mergers; Recommendations of the Boards of Directors" and "Unaudited Pro Forma Condensed Combined Financial Statements," and statements preceded by, followed by, or that include the words "believes," "expects," "anticipates," "intends," "plans," "estimates" or similar expressions. 40 49 Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results and stockholder values of the combined companies following the Mergers may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond Modtech's, SPI's, and Holdings' ability to control or predict. Stockholders are cautioned not to place undue reliance on any forward-looking statements. In addition, Modtech, SPI and Holdings do not have any intention or obligation to update forward-looking statements after they distribute this Joint Proxy Statement/Prospectus, even if new information, future events or other circumstances have made them incorrect or misleading. Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The principal important risk factors that could cause the combined companies' actual performance and future events and actions to differ materially from such forward-looking statements, include, but are not limited to, changes in legislation relating to funding for modular classrooms, changes in building code laws or regulations, and changes in general economic and market factors that affect the prices of securities or the industries in which Modtech and SPI do business. 41 50 THE SPECIAL MEETINGS PURPOSE, TIME AND PLACE This Joint Proxy Statement/Prospectus is being furnished to stockholders of Modtech in connection with the solicitation of proxies by the Modtech Board for use at the Modtech Special Meeting and to stockholders of SPI in connection with the solicitation of proxies by the SPI Board for use at the SPI Special Meeting. SPI. The SPI Special Meeting is to be held on December __, 1998, at 10:00 a.m., at 9550 Hermosa Avenue, Rancho Cucamonga, California 91730. At the SPI Special Meeting, holders of SPI Common Stock and SPI Preferred Stock will be asked to consider and vote upon a proposal to approve the Merger Agreement and the Mergers, and such other matters as may properly come before the SPI Special Meeting. MODTECH. The Modtech Special Meeting is to be held on December __, 1998, at 10:00 a.m., at the Sheraton Newport Hotel, 4545 MacArthur Boulevard, Newport Beach, California 92660. At the Modtech Special Meeting, holders of Modtech Common Stock will be asked to consider and vote upon a proposal to approve and adopt the Merger Agreement and the Mergers, and such other matters as may properly come before the Modtech Special Meeting. RECORD DATE; VOTING POWER SPI. The SPI Board has fixed the close of business on _________, 1998 (the "Record Date") as the record date for determining the holders of SPI Capital Stock entitled to notice of, and to vote at, the SPI Special Meeting. Only holders of record of SPI Capital Stock at the close of business on the Record Date will be entitled to notice of, and to vote at, the SPI Special Meeting. At the close of business on the Record Date, (i) __________ shares of SPI Common Stock were issued and outstanding and entitled to vote at the SPI Special Meeting; and (ii) _________ shares of SPI Preferred Stock were issued and outstanding and entitled to vote at the SPI Special Meeting. Holders of record of SPI Common Stock and SPI Preferred Stock are entitled to one vote for each share of SPI Common Stock held of record on the Record Date and one vote for each share of SPI Preferred Stock held of record on the Record Date on any matter which may properly come before the SPI Special Meeting. Votes may be cast at the SPI Special Meeting in person or by proxy. See "The Special Meetings--Voting of Proxies." The presence at the SPI Special Meeting, either in person or by proxy, of the holders of a majority of the voting power represented by the SPI Common Stock and SPI Preferred Stock (voting together and not as separate classes of stock) is necessary to constitute a quorum in order to transact business at the SPI Special Meeting. In the event that a quorum is not present at the SPI Special Meeting, such meeting will be adjourned or postponed in order to solicit additional proxies. MODTECH. The Modtech Board has fixed the close of business on _________, 1998 as the record date for determining the holders of Modtech Common Stock entitled to notice of, and to vote at, the Modtech Special Meeting. Only holders of record of Modtech Common Stock at the close of business on the Record Date will be entitled to notice of, and to vote at, the Modtech Special Meeting. At the close of business on the Record Date, (i) _________ shares of Modtech Common Stock were issued and outstanding and entitled to vote at the Modtech Special Meeting. Holders of record of Modtech Common Stock are entitled to one vote per share on any matter which may properly come before the Modtech Special Meeting. Votes may be cast at 42 51 the Modtech Special Meeting in person or by proxy. See "The Special Meetings--Voting of Proxies." The presence at the Modtech Special Meeting, either in person or by proxy, of the holders of a majority of the outstanding Modtech Common Stock entitled to vote, is necessary to constitute a quorum of the Modtech Common Stock, in order to transact business at the Modtech Special Meeting. In the event that a quorum is not present at the Modtech Special Meeting, it is expected that such meeting will be adjourned or postponed in order to solicit additional proxies. VOTES REQUIRED SPI. Approval of the proposal to adopt the Merger Agreement and the Mergers, including the SPI Merger, will require the affirmative vote of 70% of the combined voting power of the outstanding shares of SPI Common Stock and SPI Preferred Stock entitled to vote thereon. Under applicable Colorado law, in determining whether the proposal to approve and adopt the Merger Agreement and the Mergers has received the requisite number of affirmative votes, abstentions will be counted and have the same effect as a vote against the proposals. MODTECH. Approval of each of the proposals to adopt the Merger Agreement and the Mergers, including the Modtech Merger, will require the affirmative vote of the majority of the voting power of the outstanding shares of Modtech Common Stock entitled to vote thereon. Under applicable California law, in determining whether either proposal has received the requisite number of affirmative votes, abstentions will be counted and have the same effect as a vote against the proposals. Brokers who hold shares of Modtech Common Stock as nominees, in the absence of instructions from the beneficial owners thereof, will not have discretionary authority to vote such shares for the approval and adoption of the Merger Agreement and the Mergers. Any shares which are not voted because the nominee-broker lacks such discretionary authority will be counted and have the same effect as a vote against the proposals. SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN STOCKHOLDERS SPI. As of the close of business on the Record Date, SPI's directors and executive officers and their affiliates had the right to vote _______ outstanding shares of SPI Common Stock and _________ outstanding shares of SPI Preferred Stock (collectively representing approximately ______% of the voting power of all classes of SPI Capital stock). MODTECH. As of the close of business on the Record Date, Modtech's directors and executive officers and their affiliates had the right to vote ________________ outstanding shares of Modtech Common Stock (collectively representing approximately % of the voting power of the Modtech Common Stock). VOTING OF PROXIES Shares represented by properly executed proxies received in time for the Modtech or SPI Special Meeting will be voted at the meeting in the manner specified by such proxies. You should be aware that, if your proxy is properly executed but does not contain voting instructions, your proxy will be voted FOR approval of the Merger Agreement, including the Mergers. It is not expected that any matter other than as described herein will be brought before the Modtech Special Meeting or the SPI Special Meeting. If other matters are properly presented before either of these meetings, the persons named in your proxy will have authority to vote on such matters without consulting you. These matters may include a proposal to adjourn or postpone the meeting in order to solicit additional votes in favor of the Merger Agreement and the Mergers. 43 52 REVOCABILITY OF PROXIES The grant of a proxy on the enclosed Modtech or SPI proxy card does not preclude a stockholder from voting in person. A stockholder of SPI may revoke a proxy at any time prior to its exercise by: - - delivering, prior to the SPI Special Meeting, to SPI, 9550 Hermosa Avenue, Rancho Cucamonga, California 91730, Attention: Secretary, a written notice of revocation bearing a later date or time than the proxy; - - delivering to the Secretary of SPI a duly executed proxy bearing a later date or time than the revoked proxy; or - - attending the SPI Special Meeting and voting in person. A stockholder of Modtech may revoke a proxy at any time prior to its exercise by: - - delivering, prior to the Modtech Special Meeting, to the Secretary of Modtech, James D. Goldenetz, Modtech, Inc., 2830 Barrett Avenue, Perris, California 92571, a written notice of revocation bearing a later date or time than the proxy; - - delivering to the Secretary of Modtech a duly executed proxy bearing a later date or time than the revoked proxy; or - - attending the Modtech Special Meeting and voting in person. Attendance at the Modtech Special Meeting or the SPI Special Meeting will not by itself constitute revocation of a proxy. Neither Modtech nor SPI expects to adjourn their Special Meeting for a period of time long enough to require the setting of a new Record Date for the meeting. If an adjournment occurs, it will have no effect on the ability of either Modtech's or SPI's stockholders of record as of the Record Date to exercise their voting rights or to revoke any previously delivered proxies. SOLICITATION OF PROXIES Modtech will pay 68% of the costs of preparing, filing, printing and mailing this Joint Proxy Statement/Prospectus, including filing fees, and SPI will pay 32% of such costs. Each company shall bear 100% of any additional costs incurred by it in soliciting proxies from its stockholders. Arrangements will be made with brokerage houses and other custodians, nominees and fiduciaries for the forwarding of solicitation material to the beneficial owners of Modtech Common Stock held of record by such persons, and Modtech will reimburse such company's custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses in connection therewith. In addition to solicitation by mail, the directors, officers and employees of each company and their subsidiaries may solicit proxies from their stockholders by telephone, telegram or in person. Neither Modtech nor SPI have retained any third party to assist them in soliciting proxies in connection with the Modtech Special Meeting or the SPI Special Meeting. DO NOT SEND STOCK CERTIFICATES IN WITH YOUR PROXY CARD. 44 53 CERTAIN PROVISIONS OF THE MERGER AGREEMENT The following is a brief summary of certain provisions of the Merger Agreement, which is attached as Annex I to this Joint Proxy Statement/Prospectus and incorporated herein by reference. Other provisions of the Merger Agreement are summarized elsewhere in this Joint Proxy Statement/Prospectus. These summaries are qualified in their entirety by reference to the Merger Agreement. CONDITIONS TO CONSUMMATION OF THE MERGERS Each party's obligation to complete the Mergers is subject to a number of conditions which must be met or waived by the Closing Date. These conditions include: - - The approval of the Merger Agreement and the Mergers by the Modtech and SPI stockholders; - - The approval for listing on the NASDAQ National Market, subject to official notice of issuance, of the shares of Holdings Common Stock to be issued in the Mergers; - - The expiration or early termination of the waiting period that applies to the Mergers under applicable federal anti-trust laws; - - The receipt of all licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and other third parties as are necessary in connection with the Mergers contemplated by the Merger Agreement, except where failure to obtain them would not materially dilute the aggregate benefits of the Mergers to SPI and Modtech; - - The representations and warranties of the other party in the Merger Agreement shall be accurate; - - The registration statement of which this Joint Proxy Statement/Prospectus is a part shall be effective, and not subject to a stop order or any proceedings or threats to suspend its effectiveness; - - The receipt of all necessary approvals under state securities laws relating to the issuance of Holdings Common Stock; - - Holdings shall have a credit facility mutually agreeable to SPI and Modtech, of which about $45 million will be used to refinance SPI's existing credit facility and pay part of the cash portion of the Merger Consideration and transaction expenses; - - No more than 5% of the shares of Modtech Common Stock and no more than 5% of the shares of SPI Capital Stock can have exercised, and not withdrawn, their dissenters' rights; - - The absence of any governmental order, rule or injunction, or any law or regulation prohibiting the Mergers or impairing Holdings' ability to operate the business of Modtech and SPI on a consolidated basis; - - The absence of any action or proceeding challenging the Mergers or seeking material damages in connection with the Mergers; - - The execution of (1) a Registration Rights Agreement providing certain piggyback registration rights to certain affiliates of Modtech and SPI, (2) a Transaction Advisory Agreement with KRG retaining it as Holdings advisor in connection with future acquisitions following the completion of the Mergers for a period of three years, and (3) Employment Agreements with Evan M. Gruber, Patrick Van Den Bossche and Michael G. Rhodes; and 45 54 - - Each party must have performed and complied in all material respects with all of its material obligations under the Merger Agreement by the Closing Date; SPI's obligation to complete the Mergers is subject to the following additional condition: - - The receipt of a tax opinion that the SPI Merger will qualify as a reorganization under Internal Revenue Code Section 368. Modtech's obligation to complete the Mergers is subject to the following additional condition: - - The receipt of a tax opinion that the Modtech Merger, together with the SPI Merger, will qualify as an exchange under Internal Revenue Code Section 351. CONDUCT OF BUSINESS PENDING THE MERGERS Modtech and SPI have each agreed in the Merger Agreement to take or refrain from taking certain actions from the date of the Merger Agreement until the completion of the Mergers. Subject to certain exceptions set forth in the Merger Agreement, they have agreed as follows: Interim Operations. They will (1) conduct and cause each of their subsidiaries to conduct their businesses according to their ordinary and usual course; and (2) use and cause their subsidiaries to use their best efforts to preserve intact their business organizations and good will in all material respects, keep available the services of their officers and employees as a group, and maintain satisfactory relationships with lessees, suppliers, distributors, customers, banks and others having business relationships with them. Capital Stock. They will not (1) declare or pay any dividends on their outstanding shares of capital stock; (2) amend their organizational documents; (3) issue any shares of capital stock (except upon exercise of warrants and options issued and outstanding on the date of the Merger Agreement); (3) split their stock; (4) issue any debt securities or borrow any money (other than bank borrowings in the ordinary course of business consistent with past practices); (5) purchase or redeem any shares of their capital stock; (6) grant any options, warrants or other securities; (7) enter into any agreements that would require them to acquire any shares of their capital stock, except pursuant to employee benefit plans, programs or arrangements in existence on the date of the Merger Agreement; or (8) otherwise change their capitalization. Communication and Notification. They will confer on a frequent basis to report on material operational matters and the general status of ongoing operations. Each will notify the other party of any emergency or other changes in the normal course of its business or the businesses of its subsidiaries or any governmental actions which would have a material adverse effect on its business and that of their subsidiaries, taken as a whole. Agreements. They will not enter into or materially amend any employment, severance or similar agreement or any agreement with respect to any business combination, other than the Mergers and one potential acquisition by SPI previously disclosed to Modtech's Chief Executive Officer, any acquisition or disposition of a material amount of assets or securities, or any release of any material contract rights not in the ordinary course of business. Further Assurances. They will use all reasonable efforts to take all other actions necessary to complete the Mergers. TERMINATION The Merger Agreement may be terminated and abandoned at any time prior to the Effective Time, whether before or after approval of the Mergers by the stockholders of SPI and Modtech: 46 55 - - by mutual written consent of Modtech and SPI; - - by either party if (a) any court or other United States governmental body has taken any action enjoining, restraining or otherwise prohibiting one or both of the Mergers; (b) the Mergers have not been completed by March 28, 1999 (other than due to the breach of the Merger Agreement by the party seeking to terminate the Merger Agreement); (c) any required approval of the stockholders of either party has not been obtained; or (d) if the other party materially breaches its representations, warranties or agreements under the Merger Agreement and fails to perform any of its material obligations under this Agreement and such breach has not been cured within 10 days after receipt of written notice of such failure; - - by either party if the other party's Board withdraws or adversely modifies its recommendation to approve the Merger Agreement or the Mergers, or resolves to do any of the foregoing; - - by Modtech or SPI if they receive a proposal from a third party to merge, consolidate, or enter into a similar transaction , or to sell all or any significant portion of its assets or equity securities ("Third Party Acquisition Proposal") and their Board decides that the Third Party Acquisition Proposal is a "Superior Proposal" by determining: (1) in good faith that the Third Party Acquisition Proposal is more favorable to their stockholders than the Mergers; and (2) upon the advice of their legal counsel that to continue to recommend that their stockholders vote in favor of the Mergers after receipt of the Third Party Acquisition Proposal would not be consistent with their fiduciary duties. After making the foregoing determinations, the terminating party's Board must give the other party three days prior written notice of its intent to terminate the Merger Agreement. The notice must include a detailed summary of the terms and conditions of the Superior Proposal. Upon termination, the Merger Agreement will become void and have no effect, without any liability or obligation on the part of Modtech or SPI, other than the payment of expenses as described in "Certain Provisions of the Merger Agreement -- Fees and Expenses" below, and the payment of the termination fee described below. Termination will not relieve any party from any breach of the representations, warranties, covenants or agreements set forth in the Merger Agreement prior to termination. TERMINATION FEE If Modtech satisfies all conditions to completion of the Mergers within its control and does not take any action to prevent or unreasonably delay completion of the Mergers, it will be entitled to a termination fee from SPI if SPI terminates the Merger Agreement because of its receipt of a Superior Proposal, or if Modtech terminates the Merger Agreement because: - - SPI materially breaches any of its representations, warranties or agreements under the Merger Agreement and fails to cure the breach within ten days after receipt of notice of the breach; - - the required approval of the SPI stockholders has not been obtained; or - - the SPI Board has withdrawn or adversely modified its recommendation of approval of the Merger Agreement or the Mergers. The termination fee to be paid by SPI will be equal to Modtech's fees and expenses related to the Mergers, plus $2 million. If SPI satisfies all conditions to completion of the Mergers within its control and does not take any action to prevent or unreasonably delay completion of the Mergers, it shall be entitled to a termination 47 56 fee from Modtech if Modtech terminates the Merger Agreement because of its receipt of a Superior Proposal, or if SPI terminates the Merger Agreement because: - - Modtech materially breaches any of its representations, warranties or agreements under the Merger Agreement and fails to cure the breach within ten days after receipt of notice of the breach; - - the required approval of the Modtech stockholders has not been obtained; or - - the Modtech Board has withdrawn or adversely modified its recommendation of approval of the Merger Agreement or the Mergers. The termination fee to be paid by Modtech will be equal to SPI's fees and expenses related to the Mergers plus $2 million. The termination fees are the sole remedy of Modtech and SPI if the Merger Agreement is terminated for any of the reasons described above. CERTAIN REPRESENTATIONS AND WARRANTIES The Merger Agreement contains customary and reciprocal representations and warranties by SPI and Modtech relating to, among other things, to: - - their organization, good standing and corporate power and that of their subsidiaries; - - ownership of subsidiaries; - - capital structure; - - corporate power to enter into, and due authorization, execution and delivery of the Merger Agreement; - - the execution and delivery of the Merger Agreement not violating their charter documents, applicable law, and certain material agreements; - - accuracy of certain reports and financial statements supplied by them and, in the case of Modtech filed with the Securities and Exchange Commission; - - the absence of undisclosed liabilities; - - the accuracy of information supplied by them in connection with this Joint Proxy Statement/Prospectus; - - the absence of certain changes or events since the date of the most recent financial statements provided; - - the absence of pending or threatened litigation, certain labor matters and compliance with all applicable laws; - - benefit plans and other matters relating to the Employee Retirement Income Security Act of 1974, as amended, and employment matters; - - filing of tax returns and payment of taxes; - - environmental matters; - - good title to properties and assets free of liens; - - insurance matters; and - - brokers' fees and expenses. INDEMNIFICATION The Merger Agreement provides that, after the Effective Time, Holdings will indemnify, defend and hold harmless the current and former directors, officers and employees of Modtech, SPI and their respective subsidiaries (each, an "Indemnified Party") 48 57 against all costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of actions or omissions occurring at or prior to the Closing Date (including, without limitation, the Mergers) to the fullest extent that such persons are indemnified under the laws of the States of California or Colorado and the certificates of incorporation and bylaws, as in effect on the date thereof, of Modtech, SPI and their respective subsidiaries or any existing indemnification agreement with either Modtech or SPI. In the event of any such loss, expense, claim, damage or liability, Holdings will cooperate in the defense of any such matter and any determination required to be made with respect to whether an officer's or director's conduct complies with the standards set forth under applicable law and any such certificate of incorporation or bylaws will be made by independent counsel (which will not be counsel that provides material services to Holdings or its subsidiaries) selected by Holdings and reasonably acceptable to such officer or director; provided, that in the absence of applicable judicial precedent to the contrary, such counsel, in making such determination, will presume such officer's or director's conduct complied with such standard and Holdings will have the burden to demonstrate that such officer's or director's conduct failed to comply with such standard. In addition, the Merger Agreement provides that, for a period of six years after the Effective Time, Holdings will maintain officers' and directors' liability insurance covering those of the Indemnified Parties who are covered, in their capacities as current or former officers and directors of Modtech, by Modtech's existing officers' and directors' liability insurance policies, and those of the Indemnified Parties who are covered in their capacities as current or former officers and directors of SPI, by SPI's existing officers' and directors' liability insurance policies, on terms substantially no less advantageous to such Indemnified Parties than such existing insurance. Additionally, Holdings is required to keep in effect provisions in its and Modtech's and SPI's organizational documents providing for exculpation of director and officer liability and its indemnification of the indemnified parties to the fullest extent permitted under the Delaware, California or Colorado corporate statutes, as applicable, which provisions will not be amended except as required by applicable law or except to make changes permitted by law that would enlarge the indemnified parties' right of indemnification. FEES AND EXPENSES Whether or not the Mergers are consummated, all costs and expenses incurred in connection with the Merger Agreement and the Mergers contemplated thereby will be paid by the party incurring the expenses, except that the following expenses will be paid 68% by Modtech and 32% by SPI for: - - the filings made under applicable anti-trust laws for Modtech, SPI and their affiliates; - - the Securities and Exchange Commission's filing fee for the registration statement for Holdings Common Stock on Form S-4 of which this Joint Proxy Statement/Prospectus is a part; and - - the expenses incurred in preparing, printing and mailing the registration statement and the Joint Proxy Statement/Prospectus. In addition, SPI will reimburse Modtech for 32% of the fee paid by Modtech to DLJ for the Fairness Opinion. AMENDMENT AND WAIVER The Merger Agreement may be amended by the parties at any time before or after required approval of the Mergers by the stockholders of SPI and of Modtech; except that after such approvals, 49 58 changes to the amount of cash and Holdings Common Stock to be received by the Modtech stockholders or the SPI stockholders may not be made without further approval by such stockholders. Prior to the Effective Time, the parties may (i) extend the time for the performance of any obligation or other act of any other party to the Merger Agreement, (ii) waive any inaccuracies in the representations and warranties contained in the Merger Agreement or in any document delivered pursuant thereto and (iii) waive compliance with any of the agreements or conditions contained in the Merger Agreement. All waivers must be in writing. 50 59 THE BUSINESS OF HOLDINGS Following the Mergers, Holdings will be one of the leading modular building manufacturers in the country with substantial product and geographic diversification. It will be the leading provider of modular classrooms in the State of California and a leading provider of modular buildings to customers in California, Nevada, Arizona, New Mexico, Utah, Colorado and Texas and other neighboring states. The Mergers will create a company with pro forma revenues of approximately $215 million for the 12 months ended December 31, 1997 and with the size and scope to allow for purchasing efficiencies and other manufacturing and marketing synergies. The Mergers will also strengthen and deepen the management team of the combined enterprise. 51 60 THE BUSINESS OF MODTECH GENERAL Modtech's modular relocatable classrooms are designed, engineered and manufactured in accordance with structural and seismic safety specifications adopted by the California Department of State Architects. These standards are more rigorous than the requirements for other portable units, and supersede all local building codes. Modtech subcontracts with structural engineering firms to interface with each school district's architect or engineer to process project specifications through the Department of State Architects. Conventional school facilities constructed by school districts using funds from the State Office of Public School Construction typically require two to three years for approval and funding. Standardized factory-built school classrooms like Modtech's, based on pre-approved plans and specifications, can be approved by the State for construction in as little as 90 days. In all cases, continuous on-site inspection by a licensed architect or structural engineer is required during actual manufacturing of the classrooms, with the school district obligated to reimburse the Department for the costs of such inspection. In addition to its standard largely pre-fabricated classrooms, Modtech also manufactures and installs relocatable customized classrooms which are modular in design but assembled on-site using components manufactured by Modtech, together with components purchased from third-party suppliers. Modtech's classrooms vary in size from two modular units containing a total of 960 square feet to 20 units that can be joined together to produce a facility comprising 9,600 square feet. Larger configurations are also possible. Typical prices for Modtech's standard classrooms range from $29,000 to $34,000, while prices for a custom classroom generally exceed $50,000, depending upon the extent of customization required. CLASSROOM CUSTOMERS Modtech markets and sells its modular classrooms primarily to California school districts. Modtech also sells its classrooms to the State of California and leasing companies, both of which lease the classrooms principally to California school districts. Sales of classrooms accounted for 94.2%, 98.1% and 98.9% of Modtech's total net sales for the years ended December 31, 1996 and 1997 and the six months ended June 30, 1998, respectively. Modtech's customers typically pay cash from general operating funds or the proceeds of local bond issues, or lease classrooms through banks, leasing companies and other private funding sources. Sales of classrooms to individual California school districts accounted for approximately 74.5%, 71.1% and 73.2%, respectively, of Modtech's net sales during the years ended December 31, 1996 and 1997 and the six months ended June 30, 1998, with sales of classrooms to third-party lessors to California school districts during these periods accounting for approximately 7.2%, 19.1% and 14.2%, respectively, of Modtech's net sales. The mix of school districts to which Modtech sells its products varies somewhat from year to year. Sales of classrooms directly to the State of California during the six months ended June 30, 1998 represented approximately 11.5% of Modtech's net sales for the period, compared to approximately 7.9% of Modtech's 1997 net sales and approximately 12.5% of Modtech's 1996 net sales. Sales of classrooms to private schools, day care providers and out-of-state customers accounted for less than 1%of Modtech's net sales during the years ended December 31, 1996 and 1997 and the six months ended June 30, 1998. One of the lessors to which Modtech sells classrooms for lease to California school districts is affiliated with Modtech through common ownership by two of Modtech's directors. During the years ended December 31, 1996 and 1997 and the six months ended June 30, 1998, sales of classrooms to this affiliated leasing 52 61 company comprised approximately 2.9%, 2.2% and 2.7, respectively, of Modtech's net sales. See "Where You Can Find More Information." OTHER PRODUCTS In addition to modular relocatable classrooms, Modtech also manufactures modular, portable buildings which can be used as office facilities and construction trailers and for other commercial purposes. During the years ended December 31, 1996 and 1997 and the six months ended June 30, 1998, sales of such modular, portable buildings to commercial customers accounted, in the aggregate, for approximately 5.8%, 1.9% and 1.1%, respectively, of Modtech's net sales. Modtech also manufactures a small number of modular structures that house and shelter electronic equipment used in the wireless telecommunications industry. During the years ended December 31, 1996 and 1997 and the six months ended June 30, 1998, sales of modular telecommunications equipment shelters accounted for less than 1.0% of Modtech's net sales for each period. SALES AND MARKETING Modtech's classroom sales force is currently divided into three marketing regions: Northern, Central and Southern California. Modtech currently employs three classroom salespersons, each of whom is compensated on a commission basis. These salespersons maintain contact with the individual school districts in their respective marketing regions on a quarterly basis. They are also in contact with architects and building inspectors employed by the school districts, as well as school officials who may be in a position to influence purchasing decisions. Most of Modtech's contracts are awarded on an open bid basis. The marketing process for many of Modtech's contracts begins prior to the time the bid process begins. After Modtech selects bids or contracts that it desires to pursue, Modtech's marketing and engineering personnel interface directly with various school boards, superintendents or architects during the process of formulating bid or contract specifications. Modtech prepares its bids or proposals using various criteria, including current material prices, historical overhead costs and a targeted profit margin. Substantially all of Modtech's contracts are turnkey, including engineering and design, manufacturing, transportation, installation and necessary site work. Open bid contracts are normally awarded to the lowest responsible bidder. A fourth salesperson is charged with increasing Modtech's sales of buildings to the commercial and telecommunications markets. In addition, Modtech has two salespeople who focus on the sale of classrooms in Nevada and Arizona, and to private schools and day care operators in California. MANUFACTURING AND ON-SITE INSTALLATION Modtech uses an assembly line approach in the manufacture of its standardized classrooms. Modtech is vertically integrated in the manufacture of its standardized modular classrooms, in that Modtech fabricates substantially all of its own metal components at its facility in Perris, California. Modtech believes that the ability to fabricate its own metal components helps it reduce the costs of its products and to control their quality and delivery schedules. Modtech maintains a quality control system throughout the manufacturing process, under the supervision of its own quality control personnel and inspectors engaged by its customers. Modtech oversees installation of its modular classrooms on-site, using its own employees for job supervision as a general contractor and, whenever possible, for utility hook-ups and other tasks. In many custom projects, Modtech performs or supervises subcontracted electrical, plumbing, grading, paving and foundation work, landscaping and other site preparation work and services. Subcontractors are typically used for larger utility, grading, concrete and landscaping jobs. Modtech has a general contractor's license in the State of California. 53 62 In addition to approvals by the Department of State Architects, licensed inspectors representing various school districts are on-site at each manufacturing facility of Modtech to continuously inspect the construction of classrooms for structural integrity. On-site inspections after installation are also made by local fire departments for purposes of determining adequate accessibility. Modtech currently has five manufacturing facilities. Two are located in Perris, California, which is approximately 60 miles east of Los Angeles. Modtech has two additional facilities near Lathrop, California. Lathrop is located approximately 75 miles east of San Francisco. Modtech's fifth facility is located in Glendale, Arizona, approximately ten miles from Phoenix. Modtech currently has a total of eight production lines in operation. A ninth production line is scheduled to be added at the Lathrop plant in late 1998. WARRANTIES The standard contractual warranty for Modtech's modular relocatable classrooms is one year, although it may be varied by contract specifications. Purchased equipment installed by Modtech, such as air conditioning units, carry the manufacturers' standard warranty. Warranty costs have not been material in the past. SUPPLIES Modtech believes that there are multiple sources of supplies available for all raw materials and equipment used in manufacturing its classrooms, most of which are standard construction items such as steel, plywood and wallboard. BACKLOG Modtech manufactures classrooms to fill existing orders only, and not for inventory. As of December 31, 1997, the backlog of sales orders was approximately $71.0 million, up from approximately $4.1 million at December 31, 1995 and $58.0 million at December 31, 1996. Backlog at June 30, 1998 was $60.1 million, compared to backlog of $80.4 million at June 30, 1997. Only orders which are scheduled for completion during the following 12-month period are included in Modtech's backlog. The rate of booking new contracts can vary from month to month, and customer changes in delivery schedules can occur. For these reasons, among others, Modtech's backlog as of any particular date may not be representative of actual sales for any succeeding period. COMPETITION The modular relocatable classroom business is highly competitive. Based on 1997 net sales, Modtech believes that it is the largest modular relocatable classroom manufacturer in California. The primary competitors of Modtech for standardized classrooms are believed to be Aurora Modular Industries in Southern California and American Modular Systems in Northern California. Profiles Structures in Southern California and Design Mobile Systems in Northern California are Modtech's primary competitors in the market for higher-priced, customized classrooms. Each of these four competitors is a privately-owned company. Modtech believes that additional competitors may enter the market in the future, some of whom may have significantly greater capital and other resources than are available to Modtech, and that competition may therefore increase. Modtech believes its vertically integrated, assembly line approach to manufacturing enables it to be one of the low-cost producers of standardized, modular relocatable classrooms in California. Unlike many of its competitors, Modtech manufactures most of its own metal components, which allows Modtech to maintain quality control over these components and to produce them at a lower average cost than that at which they could be obtained from outside sources. Modtech also believes that the quality and appearance of its buildings, and its reputation for reliability in completion of its contracts, enable it to maintain a favorable position among its competition. 54 63 Beyond a radius of approximately 300 miles, Modtech believes that transportation costs typically will either significantly increase the prices at which it bids for given projects, or will substantially erode Modtech's gross profit margins. PERFORMANCE BONDS A substantial portion of Modtech's sales require that Modtech provide bonds to ensure that the contracts will be performed and completed in accordance with contract terms and conditions, and to assure that subcontractors and materialmen will be paid. In determining whether to issue a performance bond on behalf of Modtech, bonding companies consider a variety of factors concerning the specific project to be bonded, as well as Modtech's levels of working capital, stockholders' equity and outstanding indebtedness. From time to time, Modtech has had difficulty in obtaining bonding for a given project. It may encounter such difficulty again in the future. REGULATION OF CLASSROOM CONSTRUCTION In 1933, the California Legislature adopted the Field Act, which generally provides that school facilities must be constructed in accordance with more rigorous structural and seismic safety specifications than are applicable to general commercial buildings. Under the Field Act, the Department of General Services, through the Department of State Architects, has prescribed extensive regulations regarding the design and construction of school facilities, and reviews all plans for the construction of material modifications to any school building. Construction authorization is not given unless the school district's architect certifies that a proposed project satisfies construction cost and allowable area standards. In addition, the Field Act provides for the submittal of complete plans, cost estimates, and filing fees by the school district to the Department of General Services, for the adoption of regulations setting minimum qualifications for the preparation of plans and specifications, and the supervision of school construction by a licensed architect or structural engineer. FUNDING The demand for modular relocatable classrooms in California is affected by various statutes. These statutes prescribe the methods by which Modtech's customers, primarily individual school districts, obtain funding for the construction of new school facilities, and the manner in which available funding is to be spent by the school districts. Financing for new school construction and rehabilitation of existing schools by California school districts is currently provided, at the state level, by funds derived from general revenue sources or statewide bond issues. At the local level, financing is provided by local bond issues and fees imposed on the developers of residential, commercial and industrial real property. Historically, the primary source of financing for the purchase or lease of relocatable classrooms has been state funding. Class Size Reduction Program. In November 1996, California implemented the Class Size Reduction Program in response to overcrowding in classrooms in the state. Under this program, public schools that reduce class size to 20 students in kindergarten through third grade receive additional funds. New classrooms may be added by reconfiguring existing space, building new conventional classrooms, or purchasing or leasing modular relocatable classrooms. General Obligation Bonds. Until the adoption of the Class Size Reduction Program in 1996, the most important source of funding at the State level for new school facilities was through the issuance and sale of statewide general obligation bonds which must be placed on statewide ballots and approved by the voters. Bond Financing. Under the School Building Lease - Purchase Law of 1976, the State Allocation Board is empowered to purchase or lease school facilities using funds from the periodic issuance of general obligation bonds of the State of California. These purchased or leased school facilities may be made available by the State Allocation Board to school districts. Certain matching funds, usually 55 64 derived from fees imposed on real estate developers, are required to be supplied by the school districts seeking state funded facilities. If the school districts acquire relocatable structures using these developer fees, the amount of the required matching funds is reduced by the cost of such facilities. This reduction in matching funds is intended to provide an incentive for school districts to lease relocatable classrooms. As a condition of funding any project under this program, at least 30% of new classroom space to be added must be comprised of relocatable structures, unless relocatable structures are not available or special conditions of terrain, climate or unavailability of space make the use of relocatable structures impractical. In addition, State funds under this program are not available to school districts which are determined to have an adequate amount of square footage available for their student population. Senate Bill 50, which was recently passed by the California Legislature, revised the School Building Lease -- Purchase Law of 1976 by eliminating the requirement that at least 30% of all new classroom space being added using California state funds must be relocatable classrooms. In general, it replaced this provision with a requirement that, in order for school districts to increase the amount of funds to be received from developers in excess of the current statutory level, the school districts must show that 20% of all classroom space in the district, not just new space to be added, consists of relocatable classrooms. The bill also placed a $9.2 billion bond issue on the November 1998 ballot. The bill will not become operative unless the $9.2 billion bond issue is approved by a majority of the California voters. The bill allocates from the bond issue $2.9 billion for growth and new construction, and $2.2 billion for modernization and reconstruction through the year 2001. In addition, it allocates $700 million for class-size reductions to fully implement the program from kindergarten through third grade. The costs to implement the foregoing will include land acquisition costs, hiring of new teachers, remodeling of existing structures and construction of new permanent and relocatable structures. The bill does not designate the specific usage of funds, and the actual amount spent on relocatable classrooms will vary among school districts. California Emergency Classroom Law of 1979. Under the California Emergency Classroom Law of 1979, the State Allocation Board may spend up to $35 million per year from available funds to purchase relocatable classrooms to be leased to school districts. Relocatable classrooms are not available to school districts under this program if the school district has available local bond proceeds that could be used to purchase classroom facilities, unless the district has approved projects pending under the School Building Lease-Purchase Law of 1976. The State has, in the past, funded this program primarily from the proceeds of statewide bond issues approved by voters. Budget Allocations. Proposition 98, which was approved in 1988, requires the State to allocate annually from the State's budget, for the support of school districts and community college districts, a minimum amount equal to the same percentage of funds as was appropriated for the support of those institutions in fiscal year 1986-87. While this requirement may be suspended for a given year by emergency legislation, it has the effect of limiting the ability of the California legislature to reduce the level of school funding from that in existence in 1986-87. The State raises the necessary funds through proceeds from the sale of statewide bond issues, income tax revenues and other revenues. A recent reduction in California's corporate tax rates, and a proposed reduction of personal income tax rates might affect future levels of the State's income tax revenues. Local Funding. Local school districts in California have the ability to issue local general obligation bonds for the acquisition and improvement of real property for school construction. These bond issues require the approval of two-thirds of the voters in the district and are repaid using the proceeds of increases in local property taxes. A local school district may also levy developer fees on new development projects in the district, subject to a maximum rate set by state law. The developer fees can only be levied if the project can be shown to contribute to the need for additional school facilities and the fee levied is reasonably related to such need. In addition, California law provides for the issuance 56 65 of bonds by Community Facilities Districts which can be formed by a variety of local government agencies, including school districts. These districts, known as "Mello-Roos" districts, can have flexible boundaries and the tax imposed to repay the bonds can be based on property use, acreage, population density or other factors. OTHER LEGISLATION California legislation adopted in 1989 provides that school districts which currently lease any building which does not meet the prescribed structural standards must have replaced nonconforming buildings with conforming ones by September 1, 1990. However, any district has the right to request a one-time waiver for a maximum of three years upon presentation of satisfactory evidence to the State Allocation Board that the district is proceeding in a timely fashion with a program that will eliminate the need for the nonconforming facilities within that time period. The State has authorized districts to renew these waivers through 2000. Modtech understands that a number of school districts have requested and been granted such waivers. Based upon information received by the State Allocation Board from school districts and provided to Modtech, it is believed that there are more than 4,500 trailers currently being used as classrooms by school districts throughout California that eventually must be replaced with conforming facilities by these school districts. California has taken steps to encourage local school districts to adopt year-round school programs to help increase the use of existing school facilities and reduce the need for additional school facilities. School districts requesting state funding under the School Building Lease-Purchase Law of 1976 or the Emergency Classroom Law of 1979 discussed above must submit a study examining the feasibility of implementing in the district a year-round educational program that is designed to increase pupil capacity in the district or in overcrowded high school attendance areas. The feasibility study requirement is waived, however, if the district demonstrates that emergency or urgent conditions exist in the district that necessitate the immediate need for relocatable buildings. The demand for new school facilities, including relocatable classrooms, will be adversely affected if a significant number of California school districts implement year-round school programs. In addition, a significant increase in the level of voluntary or mandatory busing of students from overcrowded schools to schools with excess capacity could adversely affect demand for new school facilities. LITIGATION Modtech from time to time is involved in various lawsuits related to its ongoing business operations, primarily collection actions or vendor disputes. In the opinion of management, no pending lawsuit will result in any material adverse effect upon Modtech. ENVIRONMENTAL MATTERS Modtech is subject to a variety of federal, state and local governmental regulations related to the storage, use and disposal of any hazardous materials used by Modtech in connection with the manufacture of its products. Both the governmental regulations and the costs associated with complying with such regulations are subject to change in the future. EMPLOYEES At September 30, 1998, Modtech had 845 employees, including 793 in manufacturing, 6 in sales, 17 in operations and 29 in general management and administration. Modtech's employees are not represented by a labor union, and it has experienced no work stoppages. Modtech believes that its employee relations are good. PROPERTIES Modtech's principal executive and administrative facilities are located in approximately 11,400 square feet of modular buildings at its primary manufacturing facility located in Perris, California. This manufacturing facility occupies 25 acres, with approximately 200,000 square feet of covered production space under roof, pursuant to a lease expiring in 2014. A second facility in Perris 57 66 occupies approximately 30 acres, with approximately 120,000 square feet of covered production space under roof, pursuant to a lease expiring in 2014. This second facility also includes approximately 80,000 square feet under roof used as a metal working facility. Modtech's third plant consists of a 400,000 square foot manufacturing facility on a 30-acre site in Lathrop, California that is leased through 2019. The fourth plant, which was purchased in 1997, consists of approximately 50,000 square feet of manufacturing areas on a four-acre site in Patterson, California. Modtech's fifth plant is approximately 80,000 square feet on a three-acre site in Glendale, Arizona, that is leased through December 1999. Each of Modtech's current facilities, other than the Patterson and Glendale plants, is leased from an affiliate. See "Where You Can Find More Information." 58 67 MODTECH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages of net sales represented by certain items in Modtech's statements of operations.
PERCENTAGE OF NET SALES SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, -------------------------------------- ---------------------- 1995 1996 1997 1997 1998 ------ ------ ------ ------ ------ Net sales .......................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales ...................... 84.6 85.5 80.1 81.0 77.3 ------ ------ ------ ------ ------ Gross profit ....................... 15.4 14.5 19.9 19.0 22.7 Selling, general & administrative expenses ......... 8.3 4.7 3.8 3.7 3.6 ------ ------ ------ ------ ------ Income from operations ............. 7.1 9.8 16.1 15.3 19.1 Interest income (expense), net ..... (2.0) (0.8) (0.7) (0.9) 0.5 Other income ....................... -- -- -- 0.1 -- ------ ------ ------ ------ ------ Income before income taxes ......... 5.1 9.0 15.4 14.5 19.6 Provision for income taxes ......... 0.1 0.4 5.7 5.7 7.5 ------ ------ ------ ------ ------ Net income ......................... 5.0% 8.6% 9.7% 8.8% 12.1% ====== ====== ====== ====== ======
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997 Net sales for the six months ended June 30, 1998 increased to $75.9 million, an increase of $17.0 million, or approximately 28.8%, from $58.9 million for the six months ended June 30, 1997. The increase is attributable to the growth in the school population, the Class Size Reduction Program, and product line diversification. Gross profit was $17.2 million for the six months ended June 30, 1998, an increase of about $6 million, or 54%, over gross profit of $11.2 million for the same period in 1997. Gross profit as a percentage of net sales increased to 22.7% for the six months ended June 30, 1998, compared to 19.0% for the same period in 1997. The increase was due principally to the fuller utilization of manufacturing efficiencies. Selling, general and administrative expenses totaled $2.7 million for the six months ended June 30, 1998, representing an increase of $559,000 in selling, general and administrative expenses incurred for the six months ended June 30, 1997. The increase is primarily due to the increase in sales expense, as well as the increase in the number of employees. As a percentage of sales, selling, general, and administrative expenses for the six months ended June 30, 1998 was 3.6%. The percentage was 3.7% for the same period in 1997. Due to a higher cash balance and reduced line of credit borrowing, the six months ended June 30, 1998 reflects net interest income of $389,000, compared to net interest expense of $549,000 for the same period in 1997, a favorable increase of $938,000, or 170.9%. 59 68 On March 20, 1998, Modtech purchased an 80% interest in Trac Modular Manufacturing, Inc. ("Trac"). The purchase price approximated the fair value of net assets on the purchase date. Trac is based in Glendale, Arizona. The financial activity for this subsidiary has been included in Modtech's financial statements for the second quarter of 1998. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Net sales for the year ended December 31, 1997 increased to $134.0 million, an increase of $84.1 million, or approximately 169%, from $49.9 million in 1996. The increase in 1997 was due principally to the continuing amelioration of the State of California budget deficit and the implementation during the year of the Class Size Reduction Program for kindergarten through third grade classes in California's public elementary schools. For the year ended December 31, 1997, gross profit was $26.7 million, an increase of $19.4 million, or approximately 266%, over 1996 gross profit of $7.3 million. Gross profit percentage of net sales increased to 19.9% in 1997 from 14.5% in 1996. The increase in gross profit as a percentage of net sales was primarily attributable to the increased volume, utilization of a previously idle facility, and the realization of manufacturing efficiencies. In 1997, selling, general and administrative expenses increased to $5.2 million from $2.3 million, due to increases in the number of employees and an increase in selling costs. However, as a percentage of net sales, selling, general and administrative expenses decreased to 3.8% in 1997 from 4.7% in 1996. Due to increased volume and average borrowings outstanding, net interest expense increased from $422,000 in 1996 to $909,000 for 1997. Income tax expense was $7.7 million for the year ended December 31, 1997, compared to $208,000 for 1996. Modtech's effective tax rate increased to 37.2% for the year ended December 31, 1997 from 4.6% for the year ended December 31, 1996. The effective tax rate in both periods was positively impacted by the utilization for federal income tax purposes of net operating loss carryforwards generated in prior years. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Net sales for the year ended December 31, 1996 increased to $49.9 million, an increase of $30.5 million, or approximately 157% from $19.4 million in 1995. The increase in 1996 was due principally to the amelioration of the State of California budget deficit and the implementation during the year of the Class Size Reduction Program for kindergarten through third grade classes in California's public elementary schools. For the year ended December 31, 1996, gross profit was $7.3 million, an increase of $4.3 million, or approximately 143%, over 1995 gross profit of 3.0 million. However, as a percentage of net sales, gross profit declined to 14.5% in 1996, from 15.4% in 1995. The decline of gross profit as a percentage of net sales was primarily attributable to a change in product mix as Modtech focused its resources on manufacturing more standardized classrooms which could be sold in greater numbers. In 1996, selling, general and administrative expenses increased to $2.3 million from $1.6 million, due to increases in the number of employees and an increase in selling costs. However, because net sales increased substantially during the year, selling, general and administrative expenses as a percentage of net sales decreased to 4.7% in 1996 from 8.3% in 1995. For the year ended December 31, 1996, net interest expense increased by $35,000, from $387,000 in 1995 to $422,000 in 1996, due to slightly higher borrowings to finance growing levels of accounts receivables and work-in-progress inventories attributable to the large 1996 increase in net sales. 60 69 The provision for income taxes was $208,000 for the year ended December 31, 1996, compared to $19,000 for the year ended December 31, 1995. Modtech's effective tax rate increased to 4.6% for the year ended December 31, 1996, from 1.9% for the year ended December 31, 1995, due to differences between financial and tax accounting treatment of certain items, primarily accrued liabilities. The effective tax rate in both periods was positively impacted by the utilization for federal income tax purposes of net operating loss carryforwards generated in prior years. INFLATION Modtech does not believe that inflation had a material effect on its result of operations during the past two years. However, there can be no assurance that Modtech's business will not be affected by inflation in the future. LIQUIDITY AND CAPITAL RESOURCES To date, Modtech has generated cash to meet its needs from operations, bank borrowings and public offerings. At June 30, 1998, Modtech had $25,426,000 in cash. Most of Modtech's cash reserves will be used to partially pay the cash portion of the Merger Consideration. During the six months ended June 30, 1998, Modtech provided about $17,000,000 in cash from operating activities. Modtech has a revolving loan facility that expires in September 2000. Modtech is entitled to borrow from time to time up to $20,000,000, with actual borrowings limited to specified percentages of eligible accounts receivables, equipment and inventories. On June 30, 1998, no amounts were outstanding under this loan. Holdings is currently in negotiations for a new credit facility to be effective upon the closing of the Mergers. Modtech and SPI will be co-borrowers under the credit facility, which will replace both companies' existing credit facilities. The borrowings from the new credit facility will be used to pay the balance of the cash portion of the Merger, transaction expenses of the Mergers, and fund working capital needs. Management believes Modtech's existing product lines and manufacturing capacity will enable it to generate sufficient cash through operations, supplemented by periodic use of Holdings anticipated bank line of credit, to finance its business at current levels over the next 12 months. Additional cash resources may be required, if Modtech is able to expand its business beyond current levels. For example, it will be necessary for Modtech to construct or acquire additional manufacturing facilities in order for it to compete effectively in new market areas or states which are beyond a 300-mile radius from one of its production facilities. The construction or acquisition of new facilities would require significant additional capital. For these reasons, among others, Modtech may need additional debt or equity financing in the future. There can be, however, no assurance that Modtech will be successful in obtaining such additional financing, or that any such financing will be available on terms acceptable to it. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS 130 requires all items that are required to be recognized under accounting standards as components of comprehensive income to be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period covered by that financial statement. SFAS 130 requires an enterprise to (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital 61 70 in the equity section of a statement of financial position. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Management has determined the adoption of SFAS 130 will not have a material impact on Modtech's combined financial position or results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirement to report information about major customers. It amends FASB Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove the special disclosure requirements for previously unconsolidated subsidiaries. SFAS 131 requires, among other items, that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets, information about the revenues derived from the enterprise's products or services, and major customers. SFAS 131 also requires that the enterprise report descriptive information about the way that the operating segments were determined and the products and services provided by the operating segments. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. SFAS 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. Management has not determined whether the adoption of SFAS 131 will have a material impact on Modtech's segment reporting. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. SFAS 132 is effective for fiscal years beginning after December 15, 1997. SFAS 132, requiring only additional information disclosures, is effective for Modtech's fiscal year ending December 31, 1998. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Application of SFAS 133 is not expected to have a material impact on the Company's financial position, results of operations or liquidity. YEAR 2000 The "year 2000" issue concerns the potential exposures related to the automated generation of business and financial misinformation resulting from the application of computer programs which have been written using two digits, rather than four, to define the applicable year of business transactions. Modtech is in the process of correcting this defect in its program, and it expects the defect will be corrected without material cost before the year 2000. Modtech's customers, suppliers and service providers may use computer programs which are not "year 2000" compliant. To the extent this defect is not corrected, it could adversely affect Modtech's operations, such as the receipt of supplies, services, purchase orders and payments of account receivable. 62 71 MODTECH COMMON STOCK PRICES AND DIVIDENDS Modtech's Common Stock is currently traded on the Nasdaq National Market under the symbol "MODT." The following table sets forth on a per share basis the high and low closing sales prices per share for Modtech's Common Stock on the Nasdaq National Market for the periods indicated.
1996 HIGH LOW ---- ------ ------ First Quarter ............................... 3.625 2.250 Second Quarter .............................. 6.250 2.875 Third Quarter ............................... 9.625 3.500 Fourth Quarter .............................. 9.500 6.875 1997 First Quarter ............................... 13.875 7.875 Second Quarter .............................. 13.000 10.625 Third Quarter ............................... 25.250 11.625 Fourth Quarter .............................. 29.750 17.500 1998 First Quarter ............................... 29.125 19.125 Second Quarter .............................. 23.688 18.500 Third Quarter ............................... 20.500 16.000 Fourth Quarter (through October 23) ......... 17.250 13.000
On September 28, 1998, the last full day prior to Modtech's announcement of the signing of the Merger Agreement, the closing price on the Nasdaq National Market for Modtech's Common Stock was $20.125 per share. On _________, 1998, the last trading day for which information was available prior to the date of the first mailing of this Joint Proxy Statement/Prospectus, the closing price on the Nasdaq National Market for a share of Modtech's Common Stock was $______. On the Record Date, there were approximately ________ holders of record of Modtech Common Stock. DIVIDEND POLICY Modtech has not paid cash dividends on its Common Stock since 1990. Modtech's Board of Directors has no present intention of changing this policy. Holdings' Board of Directors intends to follow Modtech's dividend policy. 63 72 THE BUSINESS OF SPI GENERAL SPI is a leading designer, manufacturer and wholesaler of commercial and light industrial modular buildings in the United States. Through its four manufacturing plants, SPI designs and builds modular buildings to customer specifications for a wide array of uses, including governmental, healthcare, educational, airport and correctional facilities; office and retail space; daycare centers; libraries; churches; construction trailers; golf clubhouses; police stations; convenience stores; fast food restaurants; and sales offices. SPI's single-unit modular buildings are typically 720 square feet in size, while multi-unit modular buildings range in size from 1,440 square feet to 50,000 square feet and may consist of multiple stories. The price at which SPI's modular buildings are sold to dealers ranges from $10,000 to $25,000 per module. SPI's modular buildings serve as temporary, semi-permanent and permanent facilities and can function as free standing buildings or additions to existing structures. SPI conducts its business through three operating subsidiaries, SPI Manufacturing, Inc., Rosewood Enterprises, Inc. and Office Master of Texas, Inc. INDUSTRY OVERVIEW According to data compiled by Automated Builder, a leading industry trade publication, the nonresidential modular construction market, including SPI, had approximately $350 million in annual revenues in 1997, and an 8% growth rate is expected for 1998. Automated Builder estimates that the five largest nonresidential modular building manufacturers, which includes SPI, accounted for sales of approximately $177 million during 1997, while the remaining 22 manufacturers reported by Automated Builder generated approximately $173 million of sales during the same period. SPI's pro forma consolidated net sales for the year ended December 31, 1997 were $80.5 million. Much of the growth in the nonresidential modular market has resulted from the widespread acceptance of modular structures as an alternative to traditional site construction and the increasing number of applications for modular buildings across a broad spectrum of industries. Because modular buildings are constructed in a factory using an assembly line process, construction is typically not subject to the delays caused by weather and site conditions. Modular buildings can, therefore, generally be built faster than conventional buildings, at a lower cost and with more consistent quality. Modular buildings can generally be relocated more easily to meet the changing needs of end users and be quickly joined to other modular buildings to meet increased space requirements. DISTRIBUTION AND MARKETING SPI sells its modular buildings to users through a network of sales and leasing companies to a wide range of end users. SPI's dealers include national dealers such as GE Capital Modular Space and Williams Scotsman, and multiple regional and local dealers. Management believes that larger dealers are becoming increasingly more inclined to do business with fewer manufacturers and to place their orders with manufacturers who have a history of consistent performance. Certain dealers, such as GE Capital Modular Space, have developed stringent quality control programs for the modular buildings they distribute. Management believes SPI's products currently meet or exceed existing dealer quality control standards. Certain states require SPI's dealers to be licensed to sell or lease SPI's products. Historically, these dealers have had sufficient capital resources to support the purchase of modular structures and the maintenance of the structures retained in their lease fleets. Typically, dealers arrange for, and bear the cost of, transporting and installing structures purchased from SPI. 64 73 Because of its strong dealer relationships, SPI does not maintain an extensive internal sales force. Instead, SPI maintains an internal marketing and estimating staff whose primary responsibility is to maintain contact with the dealer community and to respond to requests from dealers for price quotations ("RFQs") for production of modular buildings for end-users. As a preferred supplier to many of its dealers, it is common for SPI to receive RFQs from a number of dealers for the same end-user. SPI does not intend to change its distribution methods as a result of the Mergers. In the past, the majority of SPI's business has been in California and Nevada, with some distribution in Arizona, New Mexico, Utah and Colorado. The February 1998 acquisition of Office Master expanded SPI's markets to include Texas and contiguous states in the South and Southwest. The April 1998 acquisition of Rosewood further strengthened SPI's markets and increased SPI's market share in Arizona, Utah, Colorado, Nevada and New Mexico. Typically, SPI does not seek to distribute its product beyond a radius of approximately 400 miles from each manufacturing facility due to increased transportation costs. DESIGN AND ENGINEERING The modular buildings manufactured by SPI are typically planned and designed by company engineers using computer aided design technology. This allows SPI to produce complete cost data and renderings for most of the modular buildings manufactured by SPI. SPI uses a relational database system which compiles pricing information, thereby eliminating the time-consuming process of pricing modular buildings on a component-by-component basis. The system also enables SPI to rapidly design modular buildings and to respond quickly to dealer RFQs, while pricing projects in a manner that helps SPI achieve desired profit margins. SPI employs a staff of engineers and draftsmen to enable SPI to respond quickly to dealer and end-user needs at each of its manufacturing facilities. SPI's engineering department develops engineering design and construction drawings to fulfill dealer and end-user order requirements. The engineering department ensures that the order, the drawings and the RFQ are in conformity. Change orders are developed to correct any discrepancies and to address any changes after the order is received. The project is then engineered to meet applicable building code requirements, job specific characteristics and customer specifications. The construction drawings are forwarded to the manufacturing plant and become the basis for the manufacture of each modular building. MANUFACTURING AND PRODUCTION SPI operates four manufacturing facilities, two in Southern California (Rancho Cucamonga and Ontario), one in Glen Rose, Texas, which is located outside the Dallas-Fort Worth metropolitan area, and one in Phoenix, Arizona. Each of SPI's manufacturing facilities is designed to allow for the production of either single or multi-unit modular buildings. SPI's modular buildings are produced by a continuous flow assembly line process. In each of SPI's manufacturing facilities, multiple structures are assembled simultaneously at various stations along the assembly line. Depending upon the complexity of the design for a particular modular building, the average construction time from receipt of the order to shipment ranges from 30 to 45 days. Once construction of a typical modular building commences, the building can be completed in as few as seven to nine days. BACKLOG SPI manufactures modular structures for sale to dealers only after an order has been received. As of December 31, 1997, SPI's backlog, including backlog for the Office Master and Rosewood operations, was approximately $7.0 million. As of June 30, 1998, SPI's backlog was approximately $13.7 million. The increase in backlog at June 30, 1998 is primarily a function of the seasonality of SPI's business. Only contracts which are accompanied by customer purchase orders are included in SPI's backlog calculations. Due to the 65 74 short order to completion cycle which is required by SPI's customers and which is prevalent in the commercial modular building industry, the backlog as of any particular date may not be representative of actual sales for any succeeding period. WARRANTIES The standard contractual warranty for SPI's modular buildings is a limited one year warranty from the date of manufacture which covers workmanship and materials. In addition, certain components included in SPI's modular buildings carry additional warranty protection offered by the manufacturer of those components. Occasionally, SPI contracts with third parties to provide warranty service when the modular building is located a significant distance from any of SPI's manufacturing facilities. Management believes SPI's warranty costs have historically been lower than industry averages. Warranty costs have not been material in the past. SUPPLIERS SPI believes that the materials and key components used in the manufacturing of its modular buildings are readily available at competitive prices from multiple sources, including local, regional and national suppliers. SPI has supply contracts with a number of these suppliers. In the past, SPI has been able to pass along to its customers all or a portion of the effects of price increases by increasing the selling prices of its modular buildings. COMPETITION The nonresidential modular building industry is highly competitive. With respect to highly customized modular buildings, the main competitive factor is the ability to meet end user requirements in a timely manner, while price is the main competitive factor for less customized structures. Because the cost of transporting completed modular buildings is substantial, most manufacturers limit their distribution to dealers located within a 400-mile radius of their manufacturing facility. As a result, the nonresidential modular building industry is highly fragmented and is composed primarily of small, regionally-based private companies maintaining a single manufacturing facility. SPI's main competitors include Modular Structures International, Pace Setter, Walden Structures, International Structures, Miller Building Systems, Indicom Building Systems and several other regional manufacturers. REGULATORY MATTERS SPI's modular buildings are manufactured and installed in accordance with state building codes or building codes of local regulatory agencies. Many states have adopted additional codes that apply specifically to the design and manufacture of factory-built buildings, such as those manufactured by SPI. These regulations, which vary from state to state, apply for the state that the factory-built structure is installed regardless of where it was manufactured. Obtaining state approvals for the structural portions of a manufactured building is the responsibility of the manufacturer. SPI works closely with various regulatory agencies in order to facilitate the approval process and reduce the chance of regulatory delays. To expedite the state approval process, SPI has on file with regulatory agencies in various states pre-approved engineering and structural drawings, as well as plans for electrical, plumbing and lighting systems. Most states require dealers to be licensed in order to sell or lease factory-built buildings. The dealer or the owner is responsible for all on-site required approvals and permits. Additionally, certain states require a contractor's license from entities involved in the manufacture of modular buildings, the construction of the foundation, building installation, and other on-site work. PROPERTIES SPI's principal executive and administrative facilities are located in approximately 3,000 square feet of office space at its manufacturing facility in Rancho Cucamonga, California. This manufacturing facility occupies six acres, with approximately 60,000 square feet of manufacturing space. A second facility in Ontario, California occupies approximately 66 75 seven acres, with approximately 3,300 square feet of office space and approximately 50,000 square feet of manufacturing space. SPI's third facility consists of approximately 80,000 square feet of manufacturing space and approximately 2,880 square feet of office space on a 20-acre site in Glen Rose, Texas. The fourth facility consists of approximately 80,000 square feet of manufacturing space and approximately 6,600 square feet of office space on a 20-acre site in Phoenix, Arizona. SPI presently leases all of its operating facilities. The lease for the Rancho Cucamonga facility expires March 31, 2002, and provides for two five-year extensions thereafter; the lease for the Ontario facility expires January 31, 2002, and provides for one five-year extension thereafter; the lease for the Glen Rose facility expires January 31, 2008; and the lease for the Phoenix facility expires August 28, 2002, and provides for one five-year extension thereafter. In addition to the operating facilities described above, SPI also leases, under short-term leases, approximately two acres of land on properties adjacent to the Phoenix facility. SPI believes that its existing facilities are well-maintained and in good operating condition and will meet the requirements for its immediately foreseeable business needs. The Phoenix facility leased by SPI is located within a 25-square-mile area listed by the Arizona Department of Environmental Quality on the state priority list for contaminated sites. According to a recent environmental site assessment report pertaining to the Phoenix facility and commissioned by SPI, neither SPI nor the prior operators or owners of the property have been identified as potentially responsible parties at this site. Additionally, the environmental site assessment report identifies no historical activity on the property leased by SPI that was likely to have been a source of the contaminants at the site. EMPLOYEES As of October 1, 1998, SPI had approximately 550 employees, consisting of approximately 190 in California and 360 at its other facilities. Of SPI's total employees, approximately 9 are management level employees, 475 are manufacturing employees, 17 are employed in design and engineering positions and 49 are employed in administrative, sales and clerical positions. SPI's employees are not represented by a labor union or other collective bargaining unit. SPI considers its relations with its employees to be satisfactory. LITIGATION SPI is, from time to time, a party to litigation arising in the normal course of its business. SPI is not involved in any pending or threatened legal proceeding which SPI believes could reasonably be expected to have a material adverse effect on SPI's financial position, results of operations and business prospects. 67 76 SPI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth various items as a percentage of net sales of SPI for the fiscal years ended January 31, 1996 and 1997, the fiscal year ended March 31, 1998 and the three months ended June 30, 1997 and 1998:
FISCAL YEAR FISCAL YEAR ENDED ENDED THREE MONTHS ENDED JANUARY 31, MARCH 31, JUNE 30, ---------------------- ----------- ---------------------- 1996 1997 1998(A) 1997 1998 ------ ------ ------- ------ ------ Net sales ............................... 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit(B) ......................... 21.5 21.1 23.0 23.0 20.7 Selling, general and administrative expenses ............................. 19.4 6.8 6.3 5.0 5.6 Management and monitoring fees .......... -- -- 0.5 0.6 0.4 Depreciation and amortization ........... 0.4 0.3 4.2 3.1 3.2 Interest income (expense), net .......... 0.6 0.3 (3.4) (3.9) (4.0) Other income (expense) .................. 0.3 0.0 0.1 0.0 -- Income tax provision .................... 1.1 5.8 3.8 4.5 2.6 ------ ------ ------ ------ ------ Net income .............................. 1.5% 8.5% 4.9% 5.9% 4.9% ====== ====== ====== ====== ======
- ---------- (A) The results of operations of SPI for the fiscal year ended March 31, 1998 and thereafter are not comparable to those of prior periods due to the application of purchase accounting upon the acquisition of SPI by management and an investor group in March 1997. (B) SPI's historical presentation and allocation of expenses is not consistent with the presentation of Modtech's gross profit. As such, SPI has adjusted its pro forma gross profit calculation elsewhere in this Joint Proxy Statement/Prospectus to conform with Modtech's presentation. As adjusted to give effect to Modtech's presentation, the gross profit would be 20.5% for the fiscal year ended March 31, 1998. THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1997 Net Sales. Net sales increased $11.1 million, or 112.7%, to $20.9 million for the three-month period ended June 30, 1998 from $9.8 million for the three-month period ended June 30, 1997. The growth in net sales for the 1998 period was the result of the inclusion of sales from Office Master, acquired in the previous quarter, and of sales from Rosewood, acquired near the end of April 1998, for the last two months of the 1998 period. 68 77 Gross Profit. Gross profit increased $2.0 million, or 91.8%, to $4.3 million for the three-month period ended June 30, 1998 from $2.3 million for the three-month period ended June 30, 1997. The increase in gross profit was a result of the increased net sales. The gross profit margin for the three months ended June 30, 1998 was 20.7%, compared to 23.0% in the three months ended June 30, 1997. The decrease in gross profit margin for SPI was a result of lower margins due to the higher direct labor costs of Office Master and Rosewood. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $684,000, or 137.1%, to $1.2 million in the quarter ended June 30, 1998 from $499,000 in the quarter ended June 30, 1997. Selling and administrative expenses as a percentage of net sales for the three months ended June 30, 1998 increased to 5.6%, as compared to 5.1% for the three months ended June 30, 1997. The increase in selling and administrative expenses was primarily due to increased senior management and administrative staff to accommodate growth and acquisitions, and to the inclusion of selling and administrative expenses of the acquired companies. Management and Monitoring Fees. Pursuant to the management agreement with KRG, SPI paid a management fee of $75,000 for the three months ended June 30, 1998, as compared with $50,000 for the three months ended June 30, 1997. An additional $9,000 in monitoring fees were paid pursuant to an agreement with the fund managers of certain of SPI's equity investors for the three months ended June 30, 1998, as compared to $6,000 for the three months ended June 30, 1997. Depreciation and Amortization. Depreciation and amortization increased $361,000, or 117.6%, to $667,000 for the three months ended June 30, 1998 from $306,000 for the three months ended June 30, 1997. The increase was primarily attributable to the amortization of goodwill, and consulting and non-compete agreements arising from the acquisitions. Interest Income (Expense), Net. Net interest expense increased $453,000, or 118.6%, to $835,000 for the three months ended June 30, 1998 from $382,000 for the three months ended June 30, 1997. The increase in interest expense was principally the result of the use of senior and subordinated debt to fund the Office Master and Rosewood acquisitions during 1998. Interest income was immaterial in both periods. Net Income. Net income increased $438,000, or 75.4%, to $1.0 million for the three months ended June 30, 1998 from $581,000 for the three months ended June 30, 1997. Net income, as a percentage of net sales was 4.9%, as compared to 5.9% for the three-month period ended June 30, 1997. The increase in net income was primarily related to the increased net sales. The decrease in net income as a percentage of net sales reflects the effect of lower gross profit margins for the acquisitions. FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO THE FISCAL YEAR ENDED JANUARY 31, 1997 Following the acquisition of SPI by management and an investor group in March 1997, SPI adopted a March 31, fiscal year end, which first ended March 31, 1998. The Office Master acquisition was completed in February 1998. Net Sales. Net sales increased to $42.2 million in the year ended March 31, 1998 from $24.1 million in the year ended January 31, 1997, an increase of $18.1 million, or 74.9%. Net sales increased as a result of the increase in product demand from SPI's dealers. The addition of production capacity in California in August 1997 contributed $8.3 million, or 45.7% of the increase and the inclusion of Office Master for the last month of 1998 contributed $1.1 million, or 6.1% of the increase. See "The Business of SPI." Gross Profit. The major components of cost of sales are materials and to a lesser extent, direct labor and overhead costs. SPI's gross profit increased to $9.7 million in the year ended March 31, 1998 from $5.1 million in the year ended January 31, 1997, an increase of $4.6 million, or 90.2%. As a percentage 69 78 of net sales, gross profit increased to 23.0% in the year ended March 31, 1998 from 21.1% in the year ended January 31, 1997. The increase in gross profit is primarily the result of a reduction in raw material costs as a percent of net sales, as SPI benefitted from volume purchasing discounts, partially offset by an increase in overhead costs associated with the addition of the new Office Master manufacturing facility. Selling, General and Administrative Expenses. Selling, general and administrative expenses include executive salaries, group insurance premiums, legal and accounting fees and various other overhead costs. Selling and administrative expenses increased to $2.7 million in the year ended March 31, 1998 from $1.6 million in the year ended January 31, 1997, an increase of $1.1 million, or 68.8%. The addition of senior management and administrative staff to accommodate growth, the completed Office Master acquisition, and the Rosewood acquisition in progress, contributed to an increase of $568,000 in salaries and wages, or 45.5% of the increase. As a percent of net sales, selling and administrative expenses decreased to 6.3% in the year ended March 31, 1998 from 6.8% in the year ended January 31, 1997. This decrease was primarily due to the significant growth in net sales. Management and Monitoring Fees. Management and monitoring fees were incurred in connection with the financing of the management buyout of SPI and SPI's acquisition of Office Master following the buyout. Pursuant to the management agreement with KRG, SPI paid a management fee of $200,000 in the fiscal year ended March 31, 1998. An additional $25,000 in monitoring fees were paid pursuant to an agreement with the fund managers of certain of SPI's equity investors. During the fiscal year ended March 31, 1998, SPI capitalized a total of $350,000 in transaction closing fees in conjunction with the SPI management buyout and the subsequent acquisition of Office Master. Depreciation and Amortization. Depreciation and amortization increased to $1.8 million in the year ended March 31, 1998 from $78,000 in the year ended January 31, 1997, an increase of $1.7 million, or 2,144.9%. The increase was primarily attributable to the amortization of goodwill, and consulting and non-compete agreements arising from the management buyout of SPI and subsequent acquisition of Office Master by SPI. Depreciation expense increased primarily due to the addition of fixed assets as a result of these acquisitions which both occurred during the fiscal year ended March 31, 1998. Interest Income (Expense), Net. Net interest expense increased to a net interest expense of $1.4 million in the year ended March 31, 1998 from a net interest income of $0.1 million for the year ended January 31, 1997. The increase in interest expense was principally the result of the use of senior and subordinated debt to fund the management buyout of SPI in March 1997 and SPI's subsequent acquisition of Office Master during the fiscal year ended March 31, 1998. Other Income and Expense. Other income and expense increased to a net income of $36,000 in the fiscal year ended March 31, 1998 from a net other expense of $6,000 in the fiscal year ended January 31, 1997. The net other income in fiscal 1998 was entirely due to miscellaneous income. In the prior fiscal year, the net other expense was due to penalties and interest on income taxes payable by the former owners of SPI prior to the management buyout in the amount of $117,000, partially offset by miscellaneous income totaling $111,000 primarily from a gain on sale of fixed assets. Net Income. Net income increased $77,000, or 3.8%, to $2.1 million for the fiscal year ended March 31, 1998 from $2.0 million for the fiscal year ended January 31, 1997. Net income as a percentage of net sales was 4.9%, as compared to 8.5% for the fiscal year ended January 31, 1997. The increase in net income reflects the increase in gross profit, offset by the increase in operating expenses and provision for income taxes and the increase in net interest expense. 70 79 FISCAL YEAR ENDED JANUARY 31, 1997 COMPARED TO THE FISCAL YEAR ENDED JANUARY 31, 1996 Net Sales. Net sales increased to $24.1 million in the year ended January 31, 1997 from $13.4 million in the year ended January 31, 1996, an increase of $10.7 million, or 79.6%. Net sales increased as a result of an increase in product demand by SPI's dealers. In order to meet the increasing product demands, SPI moved to its current facility in Rancho Cucamonga, California in late 1995. Gross Profit. The major components of cost of sales are materials and, to a lesser extent, direct labor and overhead costs. SPI's gross profit increased to $5.1 million in the year ended January 31, 1997 from $2.9 million in the year ended January 31, 1996, an increase of $2.2 million, or 75.9%. Gross profit as a percentage of net sales decreased to 21.1% in the fiscal year ended January 31, 1997 from 21.5% in the fiscal year ended January 31, 1996. This decrease was primarily the result of higher direct labor and overhead costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses include executive salaries, group insurance premiums, legal and accounting fees and various other overhead costs. Selling and administrative expenses decreased to $1.6 million in the year ended January 31, 1997, from $2.6 million in the year ended January 31, 1996, a decrease of $1.0 million, or 62.5%. Selling and administrative expenses decreased as a percent of net sales to 6.8% from 19.4% in the year ended January 31, 1996. Selling and administrative expenses decreased primarily due to lower bonuses paid to executive management of SPI in the year ended January 31, 1997. Other selling and administrative expenses also decreased in the year ended January 31, 1997, including sales salaries, automobile and travel expenses, outside services and legal and accounting fees. Depreciation and Amortization. Depreciation and amortization increased to $78,000 in the year ended January 31, 1997 from $49,000 in the year ended January 31, 1996, an increase of $29,000, or 59.2%. Depreciation and amortization increased as a result of a full year of depreciation in fiscal 1997 from fixed assets acquired late in fiscal 1996 in connection with the move to the Rancho Cucamonga facility. As a percentage of net sales, depreciation and amortization decreased to 0.3% in the year ended January 31, 1997 from 0.4% in the in the year ended January 31, 1996, primarily due to the increase in net sales. Interest Income (Expense), Net. Net interest income decreased to $78,000 in the year ended January 31, 1997 from $80,000 in the year ended January 31, 1996. The decrease in net interest income was a result of the substantial growth in the business requiring the use of available cash. Other Income and Expense. Other income of $34,000 in the fiscal year ended January 31, 1996 was replaced by a net expense of $6,000 in the fiscal year ended January 31, 1997. The net expense in fiscal 1997 resulted primarily from penalties and interest on income taxes payable by the former owners of SPI in the amount of $117,000, partially offset by miscellaneous income totaling $111,000 primarily from a gain on sale of fixed assets. Net Income. Net income increased $1.8 million to $2.0 million for the fiscal year ended January 31, 1997 from $203,000 for the fiscal year ended January 31, 1996. Net income as a percentage of net sales was 8.5%, as compared to 1.5% for the fiscal year ended January 31, 1996. The increase in net income reflects the increase in gross profit and decrease in operating expenses, offset by the increase in the provision for income taxes. LIQUIDITY AND CAPITAL RESOURCES SPI's primary capital needs have historically been to fund (i) the working capital requirements necessitated by its sales growth, and (ii) the acquisition and operation of acquired companies. SPI's primary sources of financing have been senior and subordinated debt, cash from operations and the sale of preferred equity. SPI anticipates that its cash flows from operations and available lines of credit to be obtained by Holdings in connection with the 71 80 Mergers will be adequate to support its operations for at least the next 12 months. SPI's existing credit facility will be retired upon completion of the Mergers. A new credit facility will be entered into by Holdings upon completion of the Mergers. The terms of the existing credit facility are described below. Under the terms of the existing credit facility, SPI has available the following: (i) a secured revolving loan of up to $2.3 million; (ii) a secured term loan of $21.9 million; and (iii) an unsecured term loan of $8.6 million. Revolving loans under the existing credit facility bear interest at 4.00% over the agent bank's commercial paper rate. Secured term loans under the existing credit facility bear interest at 4.25% over the agent bank's commercial paper rate, and unsecured term loans under the existing credit facility bear interest at 6.25% over the agent bank's commercial paper rate. The interest rate was 9.525% on the revolving loan, 9.775% on the secured term loan and 11.775% on the unsecured term loan at September 30, 1998. The existing credit facility also contains certain financial covenants which require SPI to maintain a minimum debt coverage ratio and positive net income, to refrain from capital expenditures in excess of certain amounts and to limit the payment of dividends. SPI is in compliance with these financial covenants and expects to continue to be in compliance with these covenants until completion of the Mergers. A portion of the proceeds from the new line of credit to be obtained by Holdings pursuant to the Mergers will be used to repay and terminate the above described credit facility. SPI provided net cash from operating activities of $1.4 million for the fiscal year ended March 31, 1998, compared to net cash provided from operating activities of $0.8 million and $0.9 million for the fiscal years ended January 31, 1997 and January 31, 1996, respectively. During the fiscal year ended March 31, 1998, net cash from operating activities resulted from adjustments to reconcile net income to net cash, primarily depreciation and amortization, partially offset by the decrease in income taxes payable. SPI invested approximately $4.1 million, $1.6 million and $0.4 million in the fiscal years ended March 31, 1998, January 31, 1997 and January 31, 1996, respectively. The cash used in investing activities during the fiscal year ended March 31, 1998 was utilized primarily for capital expenditures, including the purchase of a leasehold interest in a manufacturing facility and certain assets from a mobile home manufacturer and the acquisition of Office Master. Capital expenditures other than for acquisitions were approximately $200,000, $200,000 and $400,000 in the fiscal years ended March 31, 1998, January 31, 1997 and January 31, 1996, respectively. SPI expects to spend approximately $700,000 on capital expenditures for its existing operations, primarily for the purchase of manufacturing equipment, during the fiscal year ending March 31, 1999. SPI's external sources of liquidity include debt and, if required, equity financing. During the fiscal year ended March 31, 1998, approximately $2.2 million in net borrowings was provided from SPI's existing credit facility and $700,000 resulted from the issuance of SPI's capital stock and warrants in connection with the asset purchase and the transactions discussed above. YEAR 2000 COMPLIANCE The "year 2000" issue concerns the potential exposures related to the automated generation of business and financial misinformation resulting from the application of computer programs which have been written using two digits, rather than four, to define the applicable year of business transactions. SPI has upgraded its information system capabilities such that it does not believe that its systems will encounter any material "year 2000" problems. SPI's customers, suppliers and service providers may use computer programs which are not "year 2000" compliant. To the extent this defect is not corrected, it could adversely affect SPI's operations, such as the receipt of supplies, services, purchase orders and payments of accounts receivable. 72 81 RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS Nos. 130 and 131 "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 and No. 131 are effective for fiscal years beginning after December 15, 1997, with earlier adoption permitted. SPI does not believe that adoption of these standards will have a material effect on SPI. SPI has, to date, reflected no items of comprehensive income in its statement of stockholders' equity. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SPI does not currently have any financial instruments addressed by SFAS No. 133. 73 82 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS The following unaudited pro forma combined condensed financial statements are based on the historical consolidated financial statements of Modtech and SPI, combined, and are adjusted to give effect to the Mergers. In addition, pro forma adjustments have been made, as discussed below, for the acquisitions consummated by SPI prior to the Mergers (the "Pre-Mergers Acquisitions"). Certain reclassifications have been made to the historical financial statements to conform with this pro forma presentation. These statements should be read in conjunction with such historical financial statements and notes thereto, which are included elsewhere in this Joint Proxy Statement/Prospectus. See "Where You Can Find More Information". The unaudited pro forma combined condensed statements of income for the year ended December 31, 1997 and for the six months ended June 30, 1998 present the results for Modtech and SPI as if the Mergers and Pre-Mergers Acquisitions had occurred at the beginning of each period presented. The accompanying unaudited pro forma combined condensed balance sheet as of June 30, 1998 gives effect to the Mergers as of that date. The pro forma adjustments are based upon preliminary estimates, information currently available and certain assumptions that management believes are reasonable under the circumstances. Holdings' actual consolidated financial statements will reflect the effects of the Mergers on and after the Closing Date rather than the dates indicated above. The unaudited pro forma combined condensed financial statements neither purport to represent what the combined results of operations or financial condition actually would have been had the Mergers, in fact, occurred on the assumed dates, nor to project the combined results of operations and financial position for any future period. The SPI Merger will be accounted for by the purchase method and, therefore, assets and liabilities of SPI will be recorded at their fair values. The excess of the purchase cost over the fair value of net assets acquired on the Closing Date will be recorded as goodwill. Allocations included in the pro forma statements are based on analysis which is not yet completed. Accordingly, the final value of the purchase price and its allocation may differ, perhaps significantly, from the amounts included in these pro forma statements. The conversion of Modtech Common Stock into Holdings Common Stock and Series A Preferred Stock will be treated as a reorganization with no change in the recorded amount of Modtech's assets and liabilities. At the Closing Date, each issued and outstanding share of SPI Capital Stock will be converted into the right to receive 1.8785 shares of Holdings Common Stock. Each SPI stockholder may elect to receive $49.4097 per share of SPI Capital Stock instead of shares of Holdings Common Stock and elections will be adjusted, if necessary, to ensure that 164,735 shares of SPI Capital Stock are converted into $8,076,133 in cash. At the Closing Date, each issued and outstanding share of Modtech Common Stock will be converted into the right to receive $3.7293 and 0.8508 shares of Holdings Common Stock. The total cash to be received by Modtech stockholders will equal $39,923,472. Modtech stockholders will have the right to elect to receive 388,939 shares of Holdings Series A Preferred Stock in place of Holdings Common Stock at the same 0.8508 exchange ratio for up to 3.94% of their Modtech Common Stock. To the extent Modtech stockholders do not elect to receive 388,939 of Holdings Series A Preferred Stock, two Modtech stockholders, Proactive Partners, L.P. and Lagunitas Partners, will accept such shares pro rata between them. The number of shares of Holdings Series A Preferred Stock may be adjusted upward or downward in order to meet the minimum requirements of Section 351 of the Internal Revenue Code. The total value of the common stock and stock options component of the Merger Consideration to be received by SPI stockholders was determined using the average closing price of Modtech Common Stock on the Nasdaq National Market for the 10-day trading period ended October 15, 1998. The total consideration for the transaction was $81,434,000. 74 83 UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF JUNE 30, 1998 (Amounts in thousands)
Historical ----------------------- Pro Forma Pro Forma Modtech SPI Notes Adjustments Combined --------- --------- --------- ----------- --------- ASSETS Current assets: Cash and cash equivalents ....... $ 25,426 $ 1,524 (B) $ (26,000) $ 950 Contracts receivable, net ....... 24,007 7,028 31,035 Costs in excess of billings ..... 16,818 -- 16,818 Inventories ..................... 1,959 3,792 5,751 Due from affiliates ............. 504 -- 504 Deferred tax asset .............. 2,094 151 2,245 Other current assets ............ 228 458 686 --------- --------- --------- --------- Total current assets ......... 71,036 12,953 (26,000) 57,989 Property and equipment, net ........ 12,266 2.142 14,408 Other assets: Deferred tax asset .............. 99 50 149 Other assets .................... 135 4,041 (C,D) 1,232 5,408 Costs in excess of net assets of business acquired, net .... -- 34,085 (E) 71,545 105,630 --------- --------- --------- --------- $ 83,536 $ 53,271 $ 46,777 $ 183,584 ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities .................. $ 17,094 $ 6,854 (F) $ 750 $ 24,698 Billings in excess of costs ..... 9,469 -- 9,469 Revolving credit facility ....... -- -- (G) 16,510 16,510 Current portion of long-term debt ......................... -- 7,237 (H,I) (1,237) 6,000 --------- --------- --------- --------- Total current liabilities .... 26,563 14,091 16,023 56,677 Long-term debt ..................... -- 26,023 (H,I) 12.977 39,000 --------- --------- --------- --------- Total liabilities ............ 26,563 40,114 29,000 95,677 --------- --------- Stockholders' Equity ............... 56,973 13,157 (A,J,K,) 17,777 87,907 --------- --------- --------- --------- $ 83,536 $ 53,271 $ 46,777 $ 183,584 ========= ========= ========= =========
See the accompanying notes to the unaudited pro forma combined condensed financial statements. 75 84 UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1997 (Amounts in thousands, except per share amounts)
Historical Pro Forma Pro Forma Pro Forma Modtech SPI Notes Adjustments Combined Notes ---------- --------- --------- ----------- ---------- --------- Net sales ........................ $134,050 $80,497 $ $214,547 Cost of goods sold ............... 107,367 65,321 172,688 -------- ------- ------- -------- Gross profit ............... 26,683 15,176 -- 41,859 -------- ------- ------- -------- Selling, general and admin- istrative expenses ............. 5,156 5,238 10,394 Depreciation and amortization .... -- 2,086 (E) 1,789 3,875 -------- ------- ------- -------- Income from operations ..... 21,527 7,852 (1,789) 27,590 Interest expense, net ............ (908) (4,041) (C,D,H,L,M) (847) (5,796) Other income ..................... 92 195 287 -------- ------- ------- -------- Income before income taxes.. 20,711 4,006 (2,636) 22,081 Income tax expense ............... 7,703 1,602 (N) (1,054) 8,251 -------- ------- ------- -------- Net income ................. $ 13,008 $ 2,404 $(1,582) $ 13,830 ======== ======= ======= ======== Basic earnings per share ......... $ 1.47 $ 1.09 (O) ======== ======== Number of shares used in computing basic earnings per share .............. 8,854 12,622 (O) ======== ======== Diluted earnings per share ....... $ 1.31 $ 0.93 (P) ======== ======== Number of shares used in computing diluted earnings per share .............. 9,898 14,845 (P) ======== ========
See the accompanying notes to the unaudited pro forma combined condensed financial statements. 76 85 UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT FOR THE SIX MONTHS ENDED JUNE 30, 1998 (Amounts in thousands, except per share amounts)
Historical Pro Forma Pro Forma Pro Forma Modtech SPI Notes Adjustments Combined Notes ---------- --------- --------- ----------- ---------- --------- Net sales ........................ $75,876 $41,926 $ $117,802 Cost of goods sold ............... 58,675 34,359 93,034 ------- ------- ------- -------- Gross profit ............... 17,201 7,567 -- 24,768 ------- ------- ------- --------- Selling, general and admin- istrative expenses .............. 2,741 2,512 5,253 Depreciation and amortization .... -- 1,326 (E) 894 2,220 ------- ------- ------- -------- Income from operations ..... 14,460 3,729 (894) 17,295 Interest income (expense), net ... 389 (1,980) (C,D,H,L,M) (665) (2,256) Other income ..................... 15 36 51 ------- ------- ------- -------- Income before income taxes.. 14,864 1,785 (1,559) 15,090 Income taxes ..................... 5,649 714 (N) (624) 5,739 ------- ------- ------- -------- Net income ................. $ 9,215 $ 1,071 $ (935) $ 9,351 ======= ======= ======= ======== Basic earnings per share ......... $ 0.93 $ 0.74 (O) ======= ======== Number of shares used in computing basic earnings per share .............. 9,856 12,622 (O) ======= ======== Diluted earnings per share ....... $ 0.83 $ 0.63 (P) ======= ======== Number of shares used in computing diluted earnings per share .............. 11,100 14,845 (P) ======= ========
See the accompanying notes to the unaudited pro forma combined condensed financial statements. 77 86 NOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS A. The unaudited pro forma combined condensed balance sheet has been prepared to reflect the SPI Merger for an aggregate estimated merger consideration of $81,434,000 which is subject to adjustment and expected to be incurred as follows: Holdings Common Stock and stock options offered hereby .............. $ 70,858,000 Cash paid to SPI stockholders ....................................... 8,076,000 Modtech Merger Costs ................................................ 2,500,000 ------------ Total ..................................................... $ 81,434,000 ============
B. To record net cash distribution resulting from the following transactions: Gross proceeds from New Term Loan ................................... $ 45,000,000 Gross proceeds from New Revolving Credit facility ................... 16,510,000 Cash paid to SPI Stockholders ....................................... (8,076,000) Cash distribution to Modtech Stockholders ........................... (39,924,000) Retirement of SPI Indebtedness ...................................... (33,260,000) Payment of Costs of Mergers and Debt Issuance Costs ................. (6,250,000) ------------ Net cash distribution ..................................... $(26,000,000) ============
C. To eliminate unamortized SPI debt issuance costs of $1,018,000 and related amortization of debt issuance costs of $170,000 and $85,000 for the year ended December 31, 1997 and the six months ended June 30, 1998, respectively, associated with the retirement of SPI indebtedness. D. To record (i) estimated debt issuance costs of $2,250,000 to be amortized over the term of the New Term Loan and (ii) amortization of debt issuance costs of $450,000 and $225,000 for the year ended December 31, 1997 and the six months ended June 30, 1998, respectively. E. To record (i) $71,545,000 for the excess of the consideration paid over the preliminary estimate for the fair value of SPI net assets acquired, including $2,500,000 of estimated Modtech Merger costs, to be amortized over 40 years, and (ii) amortization of $1,789,000 and $894,000 for the year ended December 31, 1997 and the six months ended June 30, 1998, respectively. F. To record the recognition of liabilities related to certain merger costs. G. To record the assumed incurrence of $16,510,000 of indebtedness under a New Revolving Credit Facility, with an assumed effective interest rate of 7.5% utilized to partially finance the cash portion of the Merger Consideration and pay certain related transaction costs. H. To eliminate the $33,260,000 of SPI indebtedness, including $7,237,000 classified as current, which will be retired by Modtech, and to eliminate the related interest expense of $4,046,000 and $1,782,000 for the year ended December 31, 1997 and the six months ended June 30, 1998. I. To record the assumed incurrence of $45,000,000 of indebtedness, including $6,000,000 classified as current, under a New Term Loan, with an assumed effective interest rate of 7.5% utilized to partially finance the cash portion of the Merger Consideration, retire SPI indebtedness and to pay certain related transaction costs. J. To eliminate the stockholders' equity of SPI of $13,157,000. K. To record the repurchase of Modtech common stock for $39,924,000 cash in connection with the Modtech Merger. 78 87 L. To record interest expense on borrowings under the New Term Loan of $3,375,000 and $1,688,000 for the year ended December 31, 1997 and the six months ended June 30, 1998, respectively, using an assumed effective interest rate of 7.5%. A 0.125% increase/decrease in the estimated interest rate incrementally increases/decreases income before income taxes by $56,000 and $28,000 for the year ended December 31, 1997 and the six months ended June 30, 1998, respectively. M. To record interest expense on borrowings under the New Revolving Credit Facility of $1,238,000 and $619,000 for the year ended December 31, 1997 and the six months ended June 30, 1998, respectively, using an assumed effective interest rate of 7.5%. A 0.125% increase/decrease in the estimated interest rate incrementally increases/decreases income before income taxes by $21,000 and $10,000 for the year ended December 31, 1997 and the six months ended June 30, 1998, respectively. N. To record the income tax effects of the pro forma adjustments at a pro forma effective tax rate of 40%. O. Basic shares include 8,034,334 common shares assumed issued to former Modtech stockholders and 4,587,824 common shares assumed issued to former SPI stockholders. Net income is reduced by preferred dividends of $104,000 and $52,000 for the year ended December 31, 1997 and the six months ended June 30, 1998, respectively. P. Diluted shares include basic shares, preferred shares converted into common shares on a one-to-one basis and exercise of stock options reduced by number of shares purchased with proceeds. RECONCILIATION OF CERTAIN ADJUSTMENTS TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENT ADJUSTMENTS BALANCE SHEET: (1) Other assets: (C) $(1,018,000); (D) $2,250,000 = $1,232,000 (2) Costs in excess of net assets of business acquired, net: common stock and stock options component of Merger Consideration of (A) $70,858,000 plus estimated Modtech Merger costs of (A) $2,500,000 and cash paid to SPI stockholders of (A) $8,076,000 less net assets of SPI acquired of (J) $(9,889,000), which includes estimated SPI Merger costs of $2,250,000 and the elimination of unamortized debt issuance costs of (C) $1,018,000 = $71,545,000. (3) Current portion of long-term debt: (H) $(7,237,000); (I) $6,000,000 = $(1,237,000) (4) Long-term debt, less current portion: (H) $(26,023,000); (I) $39,000,000 = $12,977,000 (5) Stockholders' equity: (A) $70,858,000; (J) $(13,157,000); (K) $(39,924,000) = $18,235,000 INCOME STATEMENT (YEAR ENDED DECEMBER 31, 1997): (1) Interest expense, net: (C) $170,000; (D) $450,000; (H) $4,046,000; (L) $(3,375,000); (M) $(1,238,000) = $(847,000) INCOME STATEMENT (SIX MONTHS ENDED JUNE 30, 1998): (1) Interest income (expense), net: (C) $85,000; (D) $225,000; (H) $1,782,000; (L) $(1,688,000); (M) $(619,000) = $(665,000) 79 88 SPI HOLDINGS, INC. UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1997 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Historical ------------------------------------------------------ SPI Acquisition Predecessor SPI and Notes Pro Forma 1/1-3/27/97 3/28-12/31/97 Office Master Rosewood Consolidation (A,I) Consolidated ----------- ------------- ------------- -------- ------------- ----- ------------ Net sales .................... $ 9,039 $ 31,255 $ 8,328 $ 31,875 $ -- $ 80.497 Cost of goods sold ........... 6,490 23,792 7,466 26,482 1,091 (G) 65,321 -------- -------- -------- -------- -------- -------- Gross profit ............. 2,549 7,463 862 5,393 (1,091) 15,176 Selling, general and admin- istrative expenses ......... 611 1,837 819 2,704 (901) (G, H) 5,070 Management and monitoring fees ....................... -- 168 -- -- -- 168 Depreciation and amorti- zation ..................... 19 1,230 17 98 722 (B, G) 2,086 -------- -------- -------- -------- -------- -------- Income (loss) from operations ........... 1,919 4,228 26 2,591 (912) 7,852 Interest income (expense), net 42 (1,051) (40) (35) (2,957) (C) (4,041) Other income ................. 34 5 4 152 -- 195 -------- -------- -------- -------- -------- -------- Income (loss) before pro- vision for income taxes 1,995 3,182 (10) 2,708 (3,869) 4,006 Provision (benefit) for income taxes ............... 851 1,424 (3) 1,077 (1,747) (F) 1,602 -------- -------- -------- -------- -------- -------- Net income (loss) ...... $ 1,144 $ 1,758 $ (7) $ 1,631 $ (2,122) $ 2,404 ======== ======== ======== ======== ======== ======== Basic earnings per share ..... (D) $ 1.05 ======== Number of shares used in computing basic earnings per share ................... (E) 2,296 ======== Diluted earnings per share ... (D) $ 0.91 ======== Number of shares used in computing diluted earnings per share ................... (E) 2,643 ========
- ---------- See notes on following page 80 89 Notes: (A) Acquisition adjustments assume the acquisitions occurred as of the beginning of the period presented and the application of purchase accounting to each of the acquisitions. (B) Represents the purchase accounting impact of approximately $56,000, $75,000 and $556,000 for SPI, Office Master and Rosewood, respectively, primarily for goodwill amortization, as well as approximately $118,000, $20,000, and $100,000, for SPI, Office Master and Rosewood, respectively, for amortization of covenants not to compete which were entered into in connection with the acquisition. (C) Represents interest on the increased borrowings that financed a portion of the purchase price of the acquisitions, and assumes payment of interest only on indebtedness, with no reduction in principal during the period. (D) Pro forma earnings per share is computed in accordance with SFAS No. 128. See Note 2 to the SPI Consolidated Financial Statements. (E) The weighted average number of shares includes actual weighted average number of shares outstanding as well as common stock equivalents resulting from options and warrants outstanding (applicable to diluted amounts only). (F) Represents an adjustment made to income tax provision as a result of the pro forma adjustments in order to provide income tax expense at the effective tax rate. (G) Represents reclassification of certain salaries and production-related depreciation expense totaling $888,000 and $203,000, respectively, from operating expenses to cost of goods sold in order to conform with Modtech's presentation. (H) Represents elimination of non-recurring transaction-related expenses related to the acquisition of SPI by management and an investor group. (I) The pro forma adjustments do not reflect other anticipated reductions in costs and expenses expected to result from the Mergers. Such anticipated savings would include, but not be limited to, approximately $555,000 in non-recurring compensation expense paid to former owners of acquired entities. 81 90 SPI HOLDINGS, INC. UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT FOR THE SIX MONTHS ENDED JUNE 30, 1998 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Historical --------------------------------------------- Acquisition SPI Office Master Rosewood and Notes Pro Forma Consolidated 1/1-2/24/98 1/1-4/17/98 Consolidation (A,I) Consolidated ------------ ------------ ----------- ------------- ----- ------------ Net sales ....................... $ 31,850 $ 1,206 $ 8,870 $ -- $ 41,926 Cost of goods sold .............. 25,255 1,039 7,532 533 (G) 34,359 -------- -------- -------- -------- -------- Gross profit .............. 6,595 167 1,338 (533) 7,567 -------- -------- -------- -------- -------- Selling, general and admin- istrative expenses ............. 2,013 155 1,098 (894) (G,H) 2,372 Management and monitoring fees .. 140 -- -- -- 140 Depreciation and amortization ... 1,188 -- 26 112 (B,G) 1,326 -------- -------- -------- -------- -------- Income from operations .... 3,254 12 214 249 3,729 Interest income (expense), net .. (1,223) 5 (61) (701) (C) (1,980) Other income .................... 33 -- 3 -- 36 -------- -------- -------- -------- -------- Income before income taxes ... 2,064 17 156 (452) 1,785 Income taxes .................... 876 (5) 64 (221) (F) 714 -------- -------- -------- -------- -------- Net income ................ $ 1,188 $ 22 $ 92 $ (231) $ 1,071 ======== ======== ======== ======== ======== Pro forma earnings per share ... (D) $ 0.47 ======== Pro forma number of shares used in computing earnings per share ..................... (E) 2,296 ======== Pro forma diluted earnings per share ......................... (D) $ 0.40 ======== Pro forma number of shares used in computing diluted net earnings per share ............. (E) 2,645 ========
See notes on following page 82 91 Notes: (A) Acquisition adjustments assume the acquisitions occurred as of the beginning of the period presented and the application of purchase accounting to each of the acquisitions. The SPI historical consolidated amounts include the operations of Office Master and Rosewood from the date of acquisition. (B) Represents the purchase accounting impact of approximately $11,000 and $161,000 for Office Master and Rosewood, respectively, primarily for goodwill amortization, as well as approximately $3,000 and $29,000 for Office Master and Rosewood, respectively, for amortization of covenants not to compete which were entered into in connection with the acquisitions. (C) Represents interest on the increased borrowings that financed a portion of the purchase price of the acquisitions, and assumes payment of interest only on indebtedness, with no reduction in principal during the period. (D) Pro forma earnings per share is computed in accordance with SFAS No. 128.--See Note 2 to the Consolidated Financial Statements. (E) The weighted average number of shares includes actual weighted average number of shares outstanding, as well as common stock equivalents resulting from options and warrants outstanding (applicable to diluted amounts only). (F) Represents an adjustment made to income tax provision as a result of the pro forma adjustments in order to provide income tax expense at the effective tax rate. (G) Represents reclassification of certain salaries and production-related depreciation expense, totaling $441,000 and $92,000, respectively, from operating expense to cost of goods sold in order to conform with Modtech's presentation of these items. (H) Represents elimination of non-recurring transaction related expenses related to the acquisition of Office Master and Rosewood by SPI. (I) The pro forma adjustments do not reflect other anticipated reductions in costs and expenses expected to result from the Office Master and Rosewood acquisitions. Such anticipated savings would include, but not be limited to, approximately $135,000 in non-recurring compensation expense paid to former owners of acquired entities. 83 92 DIRECTORS AND EXECUTIVE OFFICERS OF HOLDINGS FOLLOWING THE MERGERS DIRECTORS The following table sets forth information as to the persons who are expected to serve as directors of Holdings following the Mergers. Holdings' management currently intends, and will use its best efforts, to nominate these individuals for election as directors at Holdings' next three Annual Meetings of Stockholders.
BUSINESS EXPERIENCE NAME AND YEAR FIRST BECAME DURING THE PAST FIVE YEARS A DIRECTOR OF MODTECH AGE AND OTHER INFORMATION -------------------------- --- -------------------------- Evan M. Gruber (1990) 45 Chief Executive Officer of Modtech since 1990. Mr. Gruber joined Modtech as Chief Financial Officer in 1989. Prior to joining Modtech, Mr. Gruber worked at his own public accounting firm, which he founded in 1978. Charles C. McGettigan (1994) 53 Mr. McGettigan was elected to the Board of Directors of Modtech in June of 1994 in connection with the sale of preferred stock to several private investors in May 1994, including Proactive Partners, L.P. Mr. McGettigan is a co-founder and managing director of the investment banking firm of McGettigan, Wick & Co., Inc., and a co-founder and general partner of Proactive Investment Managers, L.P., the general partner of Proactive Partners, L.P., a merchant banking fund formed in 1991. Prior to founding McGettigan, Wick & Co., Inc., he was a Principal, Corporate Finance of Hambrecht & Quist and a senior vice president of Dillon, Read & Co. Mr. McGettigan is a director of Onsite Energy; PMR Corporation; Sonex Research, Inc.; Cuisine Solutions, Inc.; Tanknology-NDE and Wray-Tech Instruments, Inc. Myron A. Wick III (1994) 54 Mr. Wick joined Modtech's Board of Directors in June 1994 in connection with the sale of preferred stock to several private investors in May 1994, including Proactive Partners, L.P. Mr. Wick is currently a managing director and founder of McGettigan, Wick & Co., Inc., an investment banking firm formed in 1988, and a general partner of Proactive Investment Managers, L.P., the general partner of Proactive Partners, L.P., a merchant banking fund formed in 1991. Mr. Wick is a director of Story First Communications, Inc.; Tanknology-NDE; Sonex Research, Inc. and Wray-Tech Instruments, Inc.
84 93 Daniel J. Donahoe III (1998) 64 Mr. Donahoe was elected to Modtech's Board of Directors in 1998. He is a co-founder and the President of Red Rock Resorts, which operates special, unique boutique resorts in the Western United States. He also serves as Chairman of Daybreak Investments, a privately-held investment company. Mr. Donahoe has been actively involved in the commercial and residential real estate market in the southwest over the past 25 years.
85 94
BUSINESS EXPERIENCE NAME AND YEAR FIRST BECAME DURING THE PAST FIVE YEARS A DIRECTOR OF MODTECH AGE AND OTHER INFORMATION -------------------------- --- -------------------------- Patrick Van Den Bossche (1997) 37 Mr. Van Den Bossche has served as Chief Executive Officer, President and a director of SPI since February 1997. Mr. Van Den Bossche joined SPI in 1991 and was appointed to Vice President of Operations in 1993. In such capacity, he managed the day-to- day operations of SPI for its part-time owners/managers. Mr. Van Den Bossche also serves a director of Modular Building Institute ("MBI"), a national trade organization for the modular building industry, and is a member of MBI's statistics committee. Charles A. Hamilton (1997) 50 Mr. Hamilton has been a director of SPI since February 1997. Mr. Hamilton has over 27 years of investment experience in the fields of securities analysis, corporate finance and venture capital. He is currently a principal in the private equity group at Robertson, Stephens Funds, which has been a wholly- owned subsidiary of BancAmerica since October 1997. He had previously served as managing director of Robertson, Stephens & Company since 1981. Mr. Hamilton has served as a director of numerous venture-financed companies in recent years and he is presently on the board of White Cap Industries, Inc., a public company, and ten private companies. Charles R. Gwirtsman (1997) 44 Mr. Gwirtsman has been a director of SPI since March 1997. Mr. Gwirtsman is a Managing Director of KRG Capital Partners, LLC. Prior to joining KRG Capital in 1996, Mr. Gwirtsman served as Senior Vice President of FCM Fiduciary Capital Management Company from January 1994 to June 1996. Prior to this, Mr. Gwirtsman was employed as a Corporate Vice President at PaineWebber, Incorporated from 1988 to 1993 as a member of the Private Finance Group. Mr. Gwirtsman serves on the Board of Directors of a number of privately held companies. From September 1995 through January 1996, at the request of his then employer, FCM Fiduciary Capital Management Company, Mr. Gwirtsman served as a director of Canadian's Corp., a women's speciality clothing retailer. This company filed for bankruptcy protection in February 1996 and was liquidated under Chapter 7 of the federal bankruptcy code in December 1997.
The Merger Agreement provides that, at each of the first three stockholders' meetings of Holdings, the Board of Directors will, subject to the exercise of its fiduciary duties, use its best efforts to nominate the following persons for election to the Board of Directors for one-year terms: (1) Evan Gruber; (2) Patrick Van den Bossche; (3) two designees of Proactive Partners, L.P., (4) two designees of KRG; and (5) three joint designees of Proactive Partners, L.P. and KRG, all three of whom will be independent directors. COMPENSATION OF HOLDINGS' DIRECTORS AND COMMITTEES OF THE BOARD OF DIRECTORS Each non-employee director will be paid an annual retainer of $4,000, plus $1,000 for each board and board committee meeting attended, and will be granted an option to purchase 5,000 shares of Holdings' Common Stock at the end of each year of service on the Board of Directors. Holdings will pay the expenses of its non-employee directors in attending Board meetings. No additional compensation will be paid to any employee director for serving on Holdings' Board of Directors. 86 95 HOLDINGS' EXECUTIVE OFFICERS Set forth below are the names and titles of certain of the persons who are expected to serve as executive officers of Holdings following the Mergers.
NAME AGE POSITION WITH REGISTRANT - ---- --- ------------------------ Evan M. Gruber 44 Chief Executive Officer and Director Patrick Van Den Bossche 37 President Michael G. Rhodes 36 Chief Operating Officer and Chief Financial Officer
Each executive officer will serve, in accordance with the bylaws of Holdings, until the first meeting of the Board of Directors following the next annual meeting of stockholders and until his respective successor is chosen and qualified. COMPENSATION OF HOLDINGS' EXECUTIVE OFFICERS Holdings has not yet paid any compensation to any of its executive officers, but will enter into employment agreements, effective on the Closing Date, with Mr. Gruber, Mr. Van Den Bossche and Mr. Rhodes. These agreements are for five years, provide for early severance payments of between one and two years and include, among other provisions, base annual salary of $300,000 for Mr. Gruber, $250,000 for Mr. Van Den Bossche, and $200,000 for Mr. Rhodes. The base salaries are subject to annual percentage increases and each individual is entitled to earn bonuses of up to 100% of annual base salary. The bonuses are based on performance and include a cash component and a stock option component based on performance. Concurrently with the closing of the Mergers, Mr. Gruber will receive an option to purchase 50,000 shares of Holdings Common Stock at the closing price of Modtech's Common Stock on the day prior to the Closing Date. The option will be immediately vested for 10,000 shares and will continue to vest at the rate of 10,000 shares per year. The option will be credited against the stock option component of any bonuses earned by Mr. Gruber in the first year of the employment agreement. Mr. Gruber's new employment agreement also includes a buy-out of his existing employment agreement with Modtech. COMPENSATION OF MODTECH'S DIRECTORS AND EXECUTIVE OFFICERS For information concerning the compensation paid to the directors and executive officers of Modtech for the 1997 fiscal year, see the 1998 Proxy Statements for Modtech, the relevant portions of which are incorporated by reference into the Modtech's Annual Report on Form 10-K for the Year Ended December 31, 1997. See "Where You Can Find More Information." COMPENSATION OF SPI'S DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the cash compensation of the Chief Executive Officer and the Senior Vice President --Manufacturing, the most highly compensated executive officers of SPI for the fiscal year ended March 31, 1998 (the "SPI Named Executives"). No other person who served as an executive officer of SPI during the fiscal year ended March 31, 1998 received compensation which exceeded $100,000 for such year. 87 96 SPI SUMMARY COMPENSATION TABLE
Cash Compensation (A) ----------------------------- All Other Officers Capacities in Which Served Salary Bonus (B) Compensation (C) -------- -------------------------- ------ --------- ---------------- Patrick Van Den Bossche President, Chief Executive $150,020 $275,000 $9,600 Officer and Director Ronald West Senior Vice President-- 150,020 275,000 9,600 Manufacturing
- ---------- (A) Amounts shown include compensation for services rendered in all capacities to SPI during the year ended March 31, 1998. (B) Includes all cash bonuses earned during the year ended March 31, 1998 and paid during the year ended March 31, 1998 or subsequent thereto. (C) Amounts shown include SPI's contribution to the named individual's profit sharing plan. SPI STOCK OPTION GRANTS OPTION/SAR GRANTS IN LAST FISCAL YEAR The following discloses options granted during the fiscal year ended March 31, 1998 for the SPI Named Executives:
POTENTIAL REALIZABLE VALUE AT ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM INDIVIDUAL GRANTS (D) (E) --------------------------------------------------------------------------------------------------------------- NUMBER OF % OF TOTAL SECURITIES OPTIONS/SARS UNDERLYING GRANTED TO OPTION/SARS EMPLOYEES EXERCISE OR GRANTED IN FISCAL BASE PRICE EXPIRATION 5% ANNUAL 10% ANNUAL Name (#) YEAR ($/SH) DATE (C) GROWTH RATE GROWTH RATE ---- ------------ ------------ ------------ ------------ ------------ ------------ ($) ($) Patrick Van Den 5,000 (A) 8.2% $4.725 February 24, $14,858 $37,652 Bossche ....... 2008 2,538 (B) 4.1 $4.725 February 24, 1,859 2,518 ------------ ------------ 2000 ------- ------- 7,538 12.3% $16,717 $40,170 Ronald West ... 5,000 (A) 8.2% $4.725 February 24, $14,858 $37,652 2008
- ---------- (A) Represent options granted under the 1997 Long Term Incentive Stock Option Plan. Such options vest in equal installments over a three-year period. 88 97 (B) Represent warrants granted to Mr. Van Den Bossche. Such warrants are exercisable immediately upon grant. (C) The options and warrants are subject to earlier termination and repurchase upon the occurrence of certain events related to termination of employment. (D) The dollar amounts in these columns represent potential value that might be realized upon exercise of the options and warrants immediately prior to the expiration of their term, assuming that the market price of the SPI Common Stock appreciates in value from the date of the grant at the 5% and 10% annual rates prescribed by regulation, and therefore are not intended to forecast possible future appreciation, if any, of the price of the SPI Common Stock. (E) In calculating the potential realizable value, SPI used an estimated market price of $4.725 per share as of the grant date. SPI OPTION EXERCISES AND HOLDINGS The following table provides certain summary information concerning the shares of SPI Common Stock represented by outstanding warrants and stock options held by each of the SPI Named Executives as of March 31, 1998. None of the SPI Named Executives exercised any options or warrants during the fiscal year ended March 31, 1998.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT MARCH 31, 1998 AT MARCH 31, 1998 (1) -------------------------------- -------------------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- ------------- ----------- ------------- Patrick Van Den Bossche.................. 152,832 30,526 $2,341,206(3) $467,950 Ronald West.............................. 86,157 30,526 $1,320,747(4) $467,950
- ---------- (1) All amounts are calculated to give effect to the transactions contemplated by the Merger Agreement. (2) Value based on the difference between $17.00 (the closing price of Modtech Common Stock on October 23, 1998) and the option or warrant exercise price, multiplied by the number of shares of SPI Capital Stock subject to such option or warrant. (3) Does not include the cash portion of the Merger Consideration (approximately $236,409) to be received upon the conversion of warrants and vested options held by Mr. Van Den Bossche. (4) Does not include the cash portion of the Merger Consideration (approximately $133,494) to be received upon the conversion of vested options held by Mr. West. COMPENSATION OF SPI DIRECTORS Members of SPI's Board of Directors serve without cash compensation. SPI EMPLOYMENT AGREEMENTS Van Den Bossche Employment Agreement. In March 1997, SPI and Mr. Van Den Bossche entered into an employment agreement providing for Mr. Van Den Bossche's employment as Chief Executive Officer and President. The initial employment period expires in March 2002. The employment agreement provides for an initial base salary of $150,000 plus an annual incentive bonus based upon SPI's operating performance. In addition, SPI has taken out a key man life insurance policy on Mr. Van Den Bossche's life payable to SPI but assigned to SPI's lenders. Mr. Van Den Bossche's employment agreement with SPI will be terminated concurrently with the completion of the Mergers. SPI 1997 LONG TERM INCENTIVE STOCK OPTION PLAN In 1997, SPI adopted its 1997 Long Term Incentive Stock Option Plan (the "SPI Plan") designed to provide incentives to present and future officers, employees, directors and consultants of SPI and its subsidiaries as may be selected in the sole discretion of SPI's Board of Directors. The SPI Plan, as amended, provides for aggregate option grants of up to 89 98 254,797 shares. As of March 31, 1998, options to purchase an aggregate of 178,749 shares of SPI Common Stock at an average exercise price of $3.33 per share were outstanding under the SPI Plan. 90 99 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF HOLDINGS The following table sets forth the anticipated beneficial ownership of Holdings Common Stock, after giving effect to the Mergers, as to each person expected to be a Holdings executive officer or director and each person or entity anticipated to be the beneficial owner of more than 5% of Holdings Common Stock. The table assumes each SPI stockholder, including the SPI stockholders listed in the following table, elect to convert 5.9176% of their SPI Capital Stock into cash. The table also assumes that 388,939 shares of Holdings Series A Preferred Stock are issued in the Modtech Merger and that Proactive Partners, L.P. receives 208,567 shares and Lagunitas Partners receives 180,372 shares.
SHARES PERCENT BENEFICIALLY OF NAME OWNED CLASS (A) ---- ------------ --------- Evan M. Gruber (B)....................................... 512,748 3.7% Patrick Van Den Bossche (C).............................. 239,077 1.7 Michael G. Rhodes (D).................................... 202,916 1.5 Daniel J. Donahoe III.................................... 6,381 * Charles R. Gwirtsman (E)................................. 362,183 2.6 Charles A. Hamilton (F).................................. 1,771,090 12.7 Charles C. McGettigan (G)................................ 1,807,668 13.0 Myron A. Wick III (G).................................... 1,807,668 13.0 Jon D. Gruber (H)........................................ 3,528,758 25.3 Gruber & McBaine Capital Management (I).................. 1,667,914 12.0 Infrastructure and Environmental Private Equity Fund III, L.P....................................... 1,401,161 10.0 J. Patterson McBaine (J)................................. 3,478,390 24.9 Proactive Partners, L.P. (K)............................. 1,773,002 12.7 All directors and officers as a group (8 people).......................................... 4,936,729 35.4
- ---------- * Less than one percent. (A) In calculating beneficial and percentage ownership, all shares of Holdings Common Stock which a named stockholder will have the right to acquire within 60 days of the date of this Joint Proxy Statement/Prospectus upon exercise of stock options are deemed to be outstanding for the purpose of computing the ownership of such stockholder, but are not deemed to be outstanding for the purpose of computing the percentage of Holdings Common Stock owned by any other stockholder. Upon the closing of the Mergers, approximately 12,622,158 shares of Holdings Common Stock will be outstanding and options to acquire 1,325,851 shares of Holdings Common Stock exercisable within 60 days of this Joint Proxy Statement/Prospectus will be outstanding. Does not give effect to the potential issuance of 507,571 shares of Holdings Common Stock upon exercise of stock options that have been granted but currently are not, and within 60 days of the date of this Joint Proxy Statement/Prospectus 91 100 will not be, exercisable, or of up to 1,250,000 additional shares issuable upon exercise of options available for the future grant of options under Holdings' stock option plans. (B) Includes 512,748 shares issuable upon exercise of stock options, but does not include 174,667 shares issuable upon exercise of stock options which have been granted but currently are not exercisable. Evan M. Gruber and Jon D. Gruber are not related. (C) Includes 86,158 shares issuable upon exercise of stock options, but does not include 30,525 shares issuable upon exercise of stock options which have been granted but currently are not exercisable. (D) Includes 188,452 shares issuable upon exercise of stock options, but does not include 108,000 shares issuable upon exercise of stock options which have been granted but currently are not exercisable. (E) Includes 182,669 shares held by Capital Resources Growth, Inc., an entity of which Mr. Gwirtsman is the sole stockholder, and 179,514 shares held directly by Mr. Gwirtsman and his wife and trusts formed for the benefit of their children. (F) Includes 19,637 shares held by Mr. Hamilton, 1,401,161 shares held by Infrastructure and Environmental Private Equity Fund III, L.P. ("IEPEF") and 350,292 shares held by Environmental & Information Technology Private Equity Fund III ("EITPEF"). Mr. Hamilton is a principal of one of the members of a limited liability company that serves as general partners of IEPEF and the investment manager of EITPEF. Mr. Hamilton disclaims beneficial ownership of all shares held by IEPEF and the investment manager of EITPEF except to the extent of his pecuniary interest therein. (G) Includes 17,650 shares owned of record directly by each of Messrs. McGettigan and Wick, and 1,773,002 shares owned of record by Proactive Partners, L.P. and affiliates of which Messrs. McGettigan and Wick are general partners. Also includes options to purchase 17,016 shares which have been granted to each of Messrs. McGettigan and Wick for serving on Modtech's Board of Directors. (H) Includes 87,841 shares owned of record directly by Mr. Gruber, all shares owned of record by Proactive Partners, L.P. and affiliates, of which Mr. Gruber is a general partner, and all shares owned of record by Gruber & McBaine Capital Management and affiliates, of which Mr. Gruber is a general partner. Jon D. Gruber and Evan M. Gruber are not related. (I) Includes 93,758 shares owned of record directly by Gruber & McBaine Capital Management, all shares owned of record by Proactive Partners, L.P. and affiliates, and all shares owned of record by Lagunitas Partners, Gruber & McBaine International and GMJ Investments, affiliated entities. (J) Includes 37,473 shares owned of record directly by Mr. McBaine, all shares owned of record by Proactive Partners and affiliates, of which Mr. McBaine is a general partner, and all shares owned of record by Gruber & McBaine Capital Management and affiliates, of which Mr. McBaine is a general partner. (K) Includes 1,773,002 shares owned of record by Proactive Partners, L.P. and all shares owned of record by Fremont Proactive Partners, an affiliated entity. 92 101 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF MODTECH The following table sets forth the beneficial ownership of Modtech Common Stock as of October 20, 1998, by each executive officer or director of Modtech and each person or entity known to Modtech to be the beneficial owner of more than 5% of Modtech's Common Stock. The beneficial ownership information set forth below gives effect to the acceleration of the vesting of the outstanding Modtech Options. See "The Mergers -- Effect on Modtech Stock Plans".
SHARES PERCENTAGE BENEFICIALLY OF NAME OWNED CLASS (A) ---- ------------ --------- Gerald B. Bashaw (B)..................................... 398,849 4.0% Evan M. Gruber (C)....................................... 602,666 5.8 Michael G. Rhodes (D).................................... 238,500 2.4 Robert W. Campbell (E)................................... 19,000 - James D. Goldenetz (F)................................... 129,531 1.3 Charles C. McGettigan (G) (N)............................ 2,369,811 24.0 Daniel J. Donahoe III.................................... 7,500 - Myron A. Wick, III (G) (N)............................... 2,369,811 24.0 Jon D. Gruber (I) (N).................................... 4,604,721 46.6 Gruber & McBaine Capital Management (K) (N).......................... 2,172,410 22.0 Platinum Partners, L.P. (L).............................. 522,000 5.3 Proactive Partners, L.P. (M) (N)......................... 2,329,066 23.6 All directors and officers as a group (9 persons) (B) (C) (D) (E) (F) (G) (H)......................................... 3,806,602 35.0
- ---------- * Less than one percent. (A) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Modtech Common Stock subject to stock options and warrants currently exercisable or exercisable within 60 days are deemed to be outstanding for computing the percentage ownership of the person holding such options and the percentage ownership of any group of which the holder is a member, but are not deemed outstanding for computing the percentage of Modtech Common Stock owned by any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of capital stock shown beneficially owned by them. As of September 30, 1998, an aggregate of 9,871,409 shares of Modtech Common Stock were outstanding. Options to acquire a total of 1,219,244 shares of Modtech Common Stock were exercisable within 60 days. This number does not give effect to the potential issuance of 406,415 shares of Modtech Common Stock upon exercise of stock options that have been granted but currently are not, and within 60 days of the date of this Joint Proxy Statement/Prospectus will not be, exercisable. (B) Includes 20,000 shares issuable upon exercise of stock options. 93 102 (C) Includes 602,666 shares issuable upon exercise of stock options, but does not include 174,667 shares issuable upon exercise of stock options which have been granted but currently are not exercisable. Evan M. Gruber and Jon D. Gruber are not related. (D) Includes 221,500 shares issuable upon exercise of stock options, but does not include 108,000 shares issuable upon exercise of stock options which have been granted but currently are not exercisable. (E) Includes 20,000 shares issuable upon exercise of stock options. (F) Includes 115,000 shares issuable upon exercise of stock options. (G) Includes 20,745 shares owned of record directly by each of Messrs. McGettigan and Wick, and 2,329,066 shares owned of record by Proactive Partners, L.P. and affiliates of which Messrs. McGettigan and Wick are general partners. Also includes options to purchase 20,000 shares which have been granted to each of Messrs. McGettigan and Wick for serving on Modtech's Board of Directors. (H) All of these shares are issuable upon exercise of stock options. (I) Includes 103,245 shares owned of record directly by Mr. Gruber, all shares owned of record by Proactive Partners, L.P. and affiliates, of which Mr. Gruber is a general partner, and all shares owned of record by Gruber & McBaine Capital Management and affiliates, of which Mr. Gruber is a general partner. Jon D. Gruber and Evan M. Gruber are not related. (J) Includes 44,045 shares owned of record directly by Mr. McBaine, all shares owned of record by Proactive Partners and affiliates, of which Mr. McBaine is a general partner, and all shares owned of record by Gruber & McBaine Capital Management and affiliates, of which Mr. McBaine is a general partner. (K) Includes 110,200 shares owned of record directly by Gruber & McBaine Capital Management, all shares owned of record by Proactive Partners, L.P. and affiliates, and all shares owned of record by Lagunitas Partners, Gruber & McBaine International and GMJ Investments, affiliated entities. (L) These shares are owned of record by Platinum Partners, L.P., a Massachusetts limited partnership (the "Partnership"), and also are deemed to be beneficially owned by Hori Capital Management, Inc., the sole general partner of the Partnership, and by Calvin G. Hori, the sole shareholder, director and President of Hori Capital Management, Inc., the address of each of which is One Washington Mall, 7th Floor, Boston, Massachusetts 02108. (M) Includes 2,329,066 shares owned of record by Proactive Partners, L.P. and all shares owned of record by Fremont Proactive Partners, an affiliated entity. (N) The address of each of Charles C. McGettigan, Myron A. Wick, III, Jon D. Gruber, J. Patterson McBaine, Gruber & McBaine Capital Management and Proactive Partners, L.P. is 50 Osgood Place, San Francisco, CA 94133. 94 103 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF SPI The table below sets forth certain information regarding beneficial ownership of the SPI Capital Stock as of October 20, 1998, by each executive officer or director of SPI and each person or entity who owns of record or beneficially 5% or more of the Capital Stock. The beneficial ownership information set forth below gives effect to the acceleration of the vesting of outstanding SPI Options (see "The Mergers -- Effect on SPI Stock Plans"), but does not give effect to the ability of SPI stockholders to elect cash for a portion of their SPI Capital Stock in connection with the SPI Merger. See "The Mergers -- Merger Consideration-SPI."
SHARES PERCENTAGE Beneficially of Name (A) Owned (B) Class --------- ----- Patrick Van Den Bossche (C) ............... 135,275 4.87% Ronald West (D) ........................... 90,165 3.24 Ronald R. Procunier (E) ................... 46,185 1.66 Charles A. Hamilton (F) ................... 1,002,123 36.06 Bret R. Maxwell (G) ....................... 991,012 35.66 Mark M. King (H) (I) ...................... 1,031,997 37.13 Bruce L. Rogers (H) (J) ................... 1,031,997 37.13 Charles R. Gwirtsman (H) (K) .............. 1,031,997 37.13 KRG Capital Partners, L.L.C. (H) .......... 1,031,997 37.13 Infrastructure and Environmental Private Equity Fund III, L.P. ........ 792,809 28.53 Environmental & Information Technology Private Equity Fund III (L) .......... 198,203 7.13 Argentum Capital Partners II, L.P. ........ 198,203 7.13 NationsCredit Commercial Corporation (M) ...................... 332,158 11.95 All Officers and Directors as a Group ..... 2,305,745 82.96 (8 people)
- --------------------- (A) Unless otherwise indicated, the address of the beneficial owner is c/o SPI Manufacturing, Inc., 9550 Hermosa Avenue, Rancho Cucamonga, California 91730. (B) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of SPI Preferred Stock subject to stock options and warrants currently exercisable or exercisable within 60 days of the date of this Joint Proxy Statement/Prospectus are deemed to be outstanding for computing the percentage ownership of the person holding such options and the percentage ownership of any group of which the holder is a member, but are not deemed outstanding for computing the percentage of SPI Capital Stock owned by any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of capital stock shown beneficially owned by them. At October 20, 1998, a total of 2,295,667 shares of SPI Capital Stock were issued and outstanding, options to acquire a total of 162,814 shares of SPI Preferred Stock were exercisable within 60 days and warrants to acquire a total of 320,829 shares of SPI Preferred Stock were exercisable within 60 days. 95 104 (C) Includes 48,750 shares issuable upon the exercise of immediately exercisable options and 37,471 shares issuable upon the exercise of immediately exercisable warrants. Does not include 16,250 shares issuable upon the exercise of stock options which have been granted but currently are not exercisable. (D) Includes 48,750 shares issuable upon the exercise of immediately exercisable options. Does not include 16,250 shares issuable upon the exercise of stock options which have been granted but currently are not exercisable. (E) Includes 21,252 shares issuable upon the exercise of immediately exercisable options. Does not include 7,084 shares issuable upon the exercise of stock options which have been granted but currently are not exercisable. (F) Includes 11,111 shares held by Mr. Hamilton, 792,809 shares held by Infrastructure and Environmental Private Equity Fund III, L.P. ("IEPEF") and 198,203 shares held by Environmental & Information Technology Private Equity Fund III ("EITPEF"). Mr. Hamilton is a principal of one of the members of a limited liability company that serves as general partner of IEPEF and the investment manager of EITPEF. Mr. Hamilton disclaims beneficial ownership of all shares held by IEPEF and EITPEF, except to the extent of his pecuniary interest therein. (G) Includes 792,809 shares held by IEPEF and 198,203 shares held by EITPEF. Mr. Maxwell is a Vice Chairman of First Analysis Corporation which is the majority member of a limited liability company that serves as the general partner of IEPEF and the investment manager of EITPEF. Mr. Maxwell disclaims beneficial ownership of all shares held by IEPEF and EITPEF except to the extent of his pecuniary interest therein. (H) Includes 1,031,997 shares held by members of KRG Capital Investments III, L.L.C., an investment limited liability company ("KRG III") of which KRG is the manager. The managing directors of KRG Capital are Mark M. King, Bruce L. Rogers and Charles R. Gwirtsman. All the shares held by members of KRG III are subject to a voting agreement providing KRG the right to vote all of such shares (the "KRG Voting Agreement"). The KRG Voting Agreement will terminate upon the closing of the Mergers. (I) Mr. King is a Managing Director of KRG Capital and as a result may be deemed to share beneficial ownership of all shares covered by the KRG Voting Agreement. See Note (H) above. Mr. King disclaims beneficial ownership of all shares covered by the KRG Voting Agreement, other than 153,954 shares held directly by Mr. King, his wife, trusts formed for the benefit of Mr. King and his wife, and a trust formed for the benefit of their children. (J) Mr. Rogers is a Managing Director of KRG Capital and as a result may be deemed to share beneficial ownership of all shares covered by the KRG Voting Agreement. See Note (H) above. Mr. Rogers disclaims beneficial ownership of all shares covered by the KRG Voting Agreement, other than 163,864 shares held directly by Mr. Rogers and his wife, a trust formed for the benefit Mr. Rogers' wife and a trust formed for the benefit of their children. (K) Mr. Gwirtsman is a Managing Director of KRG Capital and as a result may be deemed to share beneficial ownership of all shares covered by the KRG Voting Agreement. See Note (H) above. Mr. Gwirtsman disclaims beneficial ownership of all shares covered by the KRG Voting Agreement, other than 103,358 shares held by Capital Resources Growth, Inc., an entity of which Mr. Gwirtsman is the sole stockholder, and 101,573 shares held directly by Mr. Gwirtsman and his wife and trusts formed for the benefit of their children. (L) All references to Environmental & Information Technology Private Equity Fund III in this Joint Proxy Statement/Prospectus refer to Environmental & Information Technology Private Equity Fund III, Gesellschaft Burgarlichen Rechts (mit Haftungsbeschankung), a civil partnership with limitation of liability established under the laws of the Federal Republic of Germany. (M) Includes 283,358 shares issuable upon the exercise of immediately exercisable warrants. 96 105 DESCRIPTION OF HOLDINGS CAPITAL STOCK The authorized capital stock of Holdings consists of 25,000,000 shares of common stock, par value $.01 per share ("Holdings Common Stock") and 5,000,000 shares of preferred stock, par value $.01 per share ("Holdings Preferred Stock"), of which 585,000 have been designed Series A Preferred Stock ("Holdings Series A Preferred Stock"). The following summary of certain provisions of the Holdings Common Stock and Holdings Series A Preferred Stock does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of applicable law and Holdings' Certificate of Incorporation. VOTING RIGHTS -- COMMON STOCK The holders of outstanding shares of Holdings Common Stock are entitled to one vote on all matters submitted to a vote of stockholders. DIVIDENDS -- COMMON STOCK Holders of Holdings Common Stock are entitled to receive ratably such dividends as may be declared by the Holdings Board out of funds legally available therefor. Holdings will continue Modtech's dividend policy. Modtech has not declared a cash dividend on Modtech Common Stock since 1990 and has no present intention to pay a dividend. LIQUIDATION -- COMMON STOCK In the event of the liquidation, dissolution or winding-up of Holdings, holders of Holdings Common Stock are entitled to share ratably in all assets remaining after the payment of all liabilities and the liquidation preference of any outstanding Holdings Series A Preferred Stock. PREFERRED STOCK No shares of Holdings Series A Preferred Stock are presently outstanding. The Holdings Series A Preferred Stock will be issued as part of the Modtech Merger Consideration. The terms of the Holdings Series A Preferred are as follows: Voting Rights. The Holdings Series A Preferred Stock has no voting rights, including, without limitation, the right to vote on the election of directors, mergers, reorganization or a sale of all or substantially all of Holdings assets. Dividend Rights. Dividends will accrue on each share of Holdings Series A Preferred Stock at the rate of $0.40 per annum. Dividends may not be paid on Holdings Common Stock until all accrued dividends on Holdings Series A Preferred Stock are paid or declared and set aside for payment. Liquidation Preference. If Holdings is liquidated, the holders of Holdings Series A Preferred Stock will have the right to a liquidation preference over the holders of Holdings Common Stock in the amount of $5 per share, plus all accrued but unpaid dividends, before any payment is made to holders of Holdings Common Stock. Conversion. Subject to proportional adjustments due to stock splits, reverse stock splits and similar transactions, each share of Holdings Series A Preferred Stock is convertible into one share of Holdings Common Stock. Shares of Holdings Series A Preferred Stock may be converted into Holdings Common Stock at any time following two years after their date of issuance. Each outstanding share of Holdings Series A Preferred Stock will automatically be converted into Holdings Common Stock upon the fourth anniversary date of its issuance or upon a "change in control," whichever occurs first. A "change in control" is defined as (i) the acquisition of Holdings by another entity by means of any 97 106 transaction or series of related transactions; (ii) a sale of all or substantially all of the assets of Holdings; (iii) the sale of capital stock constituting 50% or more of Holdings' outstanding capital stock at the time of sale; or (iv) any transaction or series of related transactions in which more than 50% of the voting power of the corporation is disposed of. In the future, Holdings may issue one or more additional series of Holdings Preferred Stock. The Holdings Board is authorized to determine, with respect to each series of Holdings Preferred Stock which may be issued, the powers, designations, preferences, and rights of the shares of such series and the qualifications, limitations, or restrictions thereof, including any dividend rate, redemption rights, liquidation preferences, sinking fund terms, conversion rights, voting rights and any other preferences or special rights and qualifications. The effect of any issuance of the additional series of Holdings Preferred Stock upon the rights of holders of the Holdings Common Stock depends upon the respective powers, designations, preferences, rights, qualifications, limitations and restrictions of the shares of the additional series of Holdings Preferred Stock as determined by the Holdings Board. Such effects might include: - - dilution of the voting power of the Holdings Common Stock; - - the further subordination of the rights of holders of Holdings Common Stock to share in Holdings' assets upon liquidation; and - - a further reduction in the amount otherwise available for payment of dividends on Holdings Common Stock. ISSUANCE All shares of Holdings Common Stock and Holdings Series A Preferred Stock outstanding upon completion of the Mergers will be fully paid and nonassessable. 98 107 COMPARISON OF RIGHTS OF STOCKHOLDERS At the Effective Time, the stockholders of Modtech and SPI will become stockholders of Holdings. As stockholders of Holdings, their rights will be governed by the Delaware General Corporation Law ("Delaware Corporation Code") and Holdings' Certificate of Incorporation and Bylaws. Following are summaries of certain differences between (i) the rights of Modtech stockholders and Holdings stockholders and (ii) the rights of SPI stockholders and Holdings stockholders. The summaries do not purport to be complete and are qualified in their entirety by reference to the Holdings Certificate of Incorporation and Bylaws, Delaware law, California law and Colorado law governing corporations, the Modtech Articles of Incorporation and Bylaws, and the SPI Articles of Incorporation and Bylaws, as applicable. Holdings is organized as a corporation under Delaware state law, Modtech is organized under California state law, and SPI is organized under Colorado state law. Each corporation is subject to the corporations code of its state of incorporation which deals with a variety of matters, including: - - election of directors - - duties and liabilities of officers and directors - - dividends and other distributions - - meetings of stockholders - - amendments to the articles or certificates of incorporation - - mergers and sales of all or substantially all of the corporation's assets - - dissolution. Each corporation is also subject to the provisions of its Articles or Certificate of Incorporation and Bylaws. COMPARISON OF STOCKHOLDERS' RIGHTS WITH RESPECT TO HOLDINGS AND MODTECH Authorized Capital. The total number of authorized shares of capital stock of Modtech is 25,000,000 shares, consisting of 20,000,000 shares of Common Stock, and 5,000,000 shares of Preferred Stock. The authorized capital of Holdings is 30,000,000 shares, consisting of 25,000,000 shares of Holdings Common Stock and 5,000,000 shares of Holdings Preferred Stock, of which 585,000 have been designated Series A Preferred Stock. Standard of Conduct for Directors. Under Delaware law, the standards of conduct for directors have developed through written opinions of the Delaware courts in cases decided by them. Generally, directors of Delaware corporations are subject to a duty of loyalty, a duty of care and a duty of full disclosure. The duty of loyalty has been said to require directors to refrain from self-dealing. According to the Delaware Supreme Court, the duty of care requires "directors . . . in managing the corporate affairs . . . to use that amount of care which ordinarily careful and prudent men would use in similar circumstances." Later case law has established "gross negligence" as the standard for the duty of care or liability in the process of decision-making by directors of Delaware corporations. In addition, the duty of full disclosure requires the full disclosure of all material facts when seeking stockholder action. Under California law, the standards of conduct for directors are governed by statute. Section 309 of the California General Corporations Law ("California Corporations Code") requires that a director of a California corporation perform his duties in "good faith," in a manner he believes is "in the best interests of the corporation and its stockholders" and with the care of an "ordinarily prudent person in a like position . . . under similar circumstances." 99 108 Number of Directors. Under the Modtech Bylaws, the Modtech Board is comprised of between five and nine directors, the exact number to be fixed by the Modtech Board or stockholders. The Modtech Board now consists of eight directors. The Holdings Board will initially consist of seven directors. The Holdings Bylaws provide that the Holdings Board will consist of nine directors, which number may be increased or decreased pursuant to the Holdings Bylaws. Removal of Directors. Under Section 303 of the California Corporations Code and Modtech's charter documents, Modtech's directors may be removed without cause by the affirmative vote of a majority of the outstanding shares entitled to vote; provided, however, that unless the entire board is removed, no director may be removed if the votes cast against removal would be sufficient to elect the director if voted cumulatively at an election at which the same total number of votes were cast. Under Holdings' charter documents, Holdings stockholders may remove directors only for cause. Voting Rights. Modtech stockholders have cumulative voting rights which allows each stockholder voting at any election of directors to cast votes equal to the number of directors to be elected multiplied by the number of shares held by the stockholder. The ability to cumulate votes may enable minority shareholders to elect one or more directors in situations where, absent cumulative voting rights, they could not elect any directors. Holdings stockholders will not have cumulative voting rights. Vacancy on the Board of Directors. Except for a vacancy created by the removal of a director, vacancies on the Modtech Board may be filled by approval of a majority of the Board. If the number of directors then in office is less than a quorum, the vacancy may be filled by (i) the unanimous written consent of the directors then in office, (ii) the affirmative vote of a majority of the directors then in office, or (iii) by a sole remaining director. Vacancies on the Modtech Board created by removal of directors may be filled only by the affirmative vote of a majority of the shares of Modtech Common Stock. The Holdings Bylaws provide that vacancies and any newly created directorships resulting from any increase in the number of directors may be filled by vote of the holders of the particular class or series of stock entitled to elect such director at a meeting called for the purpose, or by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, in each case elected by the particular class or series of stock entitled to elect such directors. Limitation of Liability and Indemnification. Pursuant to the Delaware Corporation Code and the Holdings Certificate of Incorporation, the liability of directors of Holdings to Holdings or to any stockholder of Holdings for money damages for breach of fiduciary duty has been eliminated except for: - - breach of the directors' duty of loyalty to Holdings or its stockholders; - - acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - - unlawful dividends or redemptions or purchases of stock; or - - any transaction from which the director derived an improper personal benefit. In general, the liability of officers may not be eliminated or limited under Delaware law. The Holdings Certificate of Incorporation provides that Holdings will indemnify its officer and directors in any proceeding, except those in which such individual was adjudicated as liable for negligence or misconduct in the performance of his or her duty. The Holdings Bylaws also provide for indemnification of officers and directors of Holdings, but only to the extent that such officer or director (a) acted in good faith and in a manner he reasonably believed to be in or not opposed 100 109 to the best interests of Holdings (or, with respect to a criminal matter, had no reason to believe his conduct was unlawful) and (b) was not adjudged liable to Holdings. Under the Holdings Bylaws, the right to indemnification is subject to a finding that the same is proper with respect to a specific proceeding, because the officer or director involved has met the applicable standard of conduct (described in the preceding sentence), by any of (i) a majority vote of a quorum (consisting of directors not involved in the proceeding) of the Holdings Board, (ii) independent legal counsel in a written opinion, or (iii) the stockholders. The Merger Agreement also provides for the indemnification of officers and directors. See "The Merger Agreement -- Indemnification." As allowed by the California Corporations Code, Modtech's Articles of Incorporation provide that the liability of the directors of Modtech for monetary damages shall be eliminated to the fullest extent permissible under California law. This is intended to eliminate the personal liability of a director for monetary damages in an action brought by or in the right of Modtech for breach of a director's duties to Modtech or its stockholders except for liability for acts or omissions that involve intentional misconduct or knowing and culpable violation of law, for acts or omissions that a director believes to be contrary to the best interests of Modtech or its stockholders or that involve the absence of good faith on the part of the director, for any transaction from which a director derived an improper personal benefit, for acts or omissions that show a reckless disregard for the director's duty to Modtech or its stockholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, or a risk of serious injury to Modtech or its stockholders, for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to Modtech or its stockholders, with respect to certain contracts in which a director has a material financial interest, and for approval of certain improper distributions to stockholders or certain loans or guarantees. This provision does not limit or eliminate the rights of Modtech or any shareholder to seek non-monetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. Modtech's Bylaws require Modtech to indemnify its officers, directors, employees and other agents to the full extent permitted by law, including those circumstances in which indemnification would otherwise be discretionary. In addition, Modtech's Articles of Incorporation expressly authorize the use of indemnification agreements and, with the approval of its stockholders, Modtech has entered into separate indemnification agreements with each of its directors. Modtech's Board of Directors has authorized similar indemnification agreements for Modtech's officers. These agreements may require Modtech, among other things, to indemnify directors and officers against certain liabilities that may arise by reason of their status or service as directors and officers, and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. Annual Stockholder Meetings. The Modtech Bylaws provide that the annual meeting of the stockholders will be held on such dates and at such times as shall be designated by the Modtech Board. The Holdings Bylaws provide that the annual meeting of stockholders shall be held at such place, on such date, and at such time as the Board of Directors shall each year fix, which date shall be within 13 months subsequent to the later of the organization of the corporation or the last annual meeting of stockholders. Special Stockholder Meetings. The Modtech Bylaws provide that a special meeting of the stockholders may be called at any time by the Chairman of the Board or president, or by the Board of Directors, or by one or more stockholders holding at least 10% of the shares entitled to vote at the meeting. The Holdings Bylaws provide that a special meeting of the stockholders may be called at any time by the chairman of the Board, if any, or a majority of 101 110 the Board of Directors. The Holdings Bylaws do not permit the stockholders to call a special meeting. Actions by Written Consent of Stockholders. Since the Modtech Articles of Incorporation do not provide otherwise, any action that may be taken at a stockholder's meeting of Modtech may be taken without a meeting, without prior notice and without a vote, upon the written consent of the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a stockholder meeting at which all shares entitled to vote were present and voted. The California Corporations Code requires any action taken by written consent to elect Modtech directors to be unanimous. Pursuant to Holdings' Certificate of Incorporation, any action required or permitted to be taken by the stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing in lieu of a meeting of such stockholders. Dividends and Other Distributions. Under the Delaware Corporations Code, dividends may be paid out of the surplus of the corporation or, if there is no surplus, out of net profits for the year in which the dividend is declared and/or the preceding fiscal year. The California Corporations Code allows the payment of dividends and other distributions (including redemptions) only if (1) the amount of retained earnings immediately before the distribution equals or exceeds the distribution, or (2) immediately after the distribution: - - the sum of the assets of the corporation (including goodwill, capitalized research and development expenses, and deferred charges) is at least equal to 1-1/4 times its liabilities (not including deferred taxes, deferred income and other credits); and - - the current assets of the corporation are at least equal to its current liabilities, or the average earnings of the corporation before taxes on income and before interest expense for the two preceding fiscal years was less than the average of the interest expense of the corporation for those fiscal years at least 1-1/4 times its current liabilities. COMPARISON OF STOCKHOLDERS' RIGHTS WITH RESPECT TO HOLDINGS AND SPI Authorized Capital. The total number of shares of capital stock of SPI is 9,262,000, consisting of 6,000,000 shares of SPI Common Stock, 1,100,000 shares of Series A-1 Preferred Stock, 1,000,000 shares of Series A-2 Preferred Stock, 400,000 shares of Series A-3 Preferred Stock, 155,000 shares of Series A-4 Preferred Stock, 540,000 shares of Series A-5 Preferred Stock and 67,000 shares of Series A-6 Preferred Stock. Standard of Conduct for Directors. Under Colorado law, the standards of conduct for directors have developed through written opinions of the Colorado courts. Generally, directors of Colorado corporations are subject to a duty of loyalty, a duty of care and a duty of full disclosure. The duty of loyalty has been said to require directors to refrain from self-dealing. According to the Colorado Supreme Court, the duty of care requires "directors . . . in managing the corporate affairs . . . to use that amount of care which ordinarily careful and prudent men would use in similar circumstances." Later case law has established "gross negligence" as the standard for the duty of care or liability in the process of decision-making by directors of Colorado corporations. In addition, the duty of full disclosure requires the full disclosure of all material facts when seeking stockholder action. Number of Directors. Under the SPI Bylaws, the SPI Board is comprised of no less than one or more than nine directors, the exact number as fixed by resolution of the SPI Board. The SPI Board now consists of six directors. The Holdings Bylaws provide that the Holdings Board will consist of nine directors. 102 111 Removal of Directors. Under the SPI Bylaws and Colorado law, since the SPI Articles of Incorporation are silent, the SPI stockholders may remove one or more directors with or without cause at any meeting of the SPI stockholders called for that purpose. Under Holdings' charter documents, the Holdings stockholders may remove any director from office at any time, but only for cause. Vacancies on the Board of Directors. The SPI Bylaws provide that any vacancy on the Board of Directors may be filled by the affirmative vote of a majority of the stockholders or by the affirmative vote of a majority of the directors remaining in office. The Holdings Bylaws provide that vacancies and any newly created directorships resulting from any increase in the number of directors may be filled by vote of the holders of the particular class or series of stock entitled to elect such director at a meeting called for the purpose, or by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, in each case elected by the particular class or series of stock entitled to elect such directors. Annual Stockholder Meetings. The SPI Bylaws provide that the annual meeting of the stockholders shall be held at a date and time fixed by resolution of the Board of Directors or by the president in the absence of action by the Board of Directors. The Holdings Bylaws provide that the annual meeting of stockholders shall be held at such place, on such date, and at such time as the Board of Directors shall each year fix, which date shall be within 13 months subsequent to the later of the organization of the corporation or the last annual meeting of stockholders. Special Stockholder Meetings. The SPI Bylaws provide that a special meeting of the stockholders may be called at any time by the chairman of the Board of Directors, by the president, or by resolution of the Board of Directors. A special meeting may also be called by the holders of at least 10% of all votes entitled to be cast on any issue proposed to be considered at the meeting. The Holdings Bylaws provide that a special meeting of the stockholders may be called at any time by the chairman of the Board, if any, or a majority of the Board of Directors. The Holdings Bylaws do not permit the stockholders to call a special meeting. Action by Written Consent. Under the SPI Bylaws and Colorado law, since the SPI Articles of Incorporation are silent, any action required or permitted to be taken at a stockholders' meeting may be taken without a meeting if all of the stockholders entitled to vote on the action consent to such action in writing. Pursuant to Holdings' Certificate of Incorporation, any action required or permitted to be taken by the stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing in lieu of a meeting of such stockholders. Dividends and Other Distributions. The Colorado Business Corporation Act allows the payment of dividends and other distributions (including redemptions) only if, after giving it effect: (i) the corporation will be able to pay its debts as they become due in the usual course of business; or (ii) the corporation's total assets will be equal to or more than the sum of its total liabilities, plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution. 103 112 EXPERTS The consolidated financial statements of Modtech as of December 31, 1997 and 1996, and for each of the years in the three-year period ended December 31, 1997, included in this Joint Proxy Statement/Prospectus, have been audited by KPMG Peat Marwick LLP, independent certified public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving such reports. The consolidated balance sheets of SPI as of March 31, 1998, March 27, 1997 and January 31, 1997; the consolidated statements of operations, consolidated statements of cash flows and consolidated statements of stockholders' equity of SPI for the fiscal year ended March 31, 1998 and the fiscal years ended January 31, 1997, January 31, 1996 and for the two months ended March 27, 1997; the financial statements of Office Master of Texas, Inc. as of and for the year ended December 31, 1997; and the financial statements of Rosewood Enterprises, Inc., as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, included in this Joint Proxy Statement/Prospectus, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving such reports. LEGAL MATTERS Certain legal matters with respect to the validity of the Holdings Common Stock and Series A Preferred Stock to be issued pursuant to the Mergers will be passed upon by Haddan & Zepfel LLP, and certain federal income tax consequences of the Mergers will be passed upon by Gibson, Dunn & Crutcher LLP for Modtech. Certain legal matters with respect to the Mergers and certain federal income tax consequences of the Mergers will be passed upon by Dorsey & Whitney LLP for SPI. Certain members of Dorsey & Whitney LLP, as of the date of this Joint Proxy Statement/Prospectus, own in the aggregate 10,399 shares of SPI Capital Stock. OTHER MATTERS As of the date of this Joint Proxy Statement/ Prospectus, the Modtech Board and the SPI Board know of no matters that will be presented for consideration at the Modtech Special Meeting or the SPI Special Meeting other than as described in this Joint Proxy Statement/Prospectus. If any other matters shall properly come before the Modtech Special Meeting or the SPI Special Meeting or any adjournments or postponements thereof and be voted upon, the enclosed proxies will be deemed to confer discretionary authority on the individuals named as proxies therein to vote the shares represented by such proxies as to any such matters. The persons named as proxies intend to vote or not to vote in accordance with the recommendation of the respective managements of Modtech and SPI. WHERE YOU CAN FIND MORE INFORMATION Modtech files annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information that Modtech files at the SEC's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Modtech public filings are also available to the public from commercial document retrieval services and at the Internet World Wide Web site maintained by the SEC at "http://www.sec.gov." Holdings has filed a Registration Statement to register with the SEC the shares of Holdings Common Stock and Holdings Series A Preferred Stock to be issued in the Mergers. This Joint Proxy Statement/Prospectus is 104 113 a part of the Registration Statement and constitutes a prospectus of Holdings, a proxy statement of Modtech for the Modtech Special Meeting and a proxy statement of SPI for the SPI Special Meeting. As allowed by SEC rules, this Joint Proxy Statement/ Prospectus does not contain all the information that stockholders can find in the Registration Statement or the exhibits to the Registration Statement. The SEC allows us to "incorporate by reference" information into this Joint Proxy Statement/Prospectus, which means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is deemed to be part of this Joint Proxy Statement/Prospectus, except for any information superseded by information contained directly in the Joint Proxy Statement/Prospectus. This Joint Proxy Statement/Prospectus incorporates by reference the documents set forth below that Modtech has previously filed with the SEC. These documents contain important information about Modtech and its financial condition. Because SPI is a private company, it has not previously filed any documents with the SEC.
MODTECH SEC FILINGS PERIOD - ------------------- ------ Annual Report on Form 10-K....... Year ended December 31, 1997 Quarterly Reports on Form 10-Q... Quarters ended March 31, 1998 and June 30, 1998
We are also incorporating by reference additional documents that we may file with the SEC between the date of this Joint Proxy Statement/Prospectus and the date of the Special Meetings. Modtech has supplied all information contained or incorporated by reference in this Joint Proxy Statement/Prospectus relating to Modtech and Holdings, and SPI has supplied all such information relating to SPI. If you are a stockholder of either company, we may have sent you some of the documents incorporated by reference, but you can obtain any of them through us or the SEC. Documents incorporated by reference are available from us without charge, excluding all exhibits unless specifically incorporated by reference as an exhibit to this Joint Proxy Statement/Prospectus. Stockholders may obtain documents incorporated by reference in this Joint Proxy Statement/Prospectus by requesting them in writing or by telephone from the appropriate company at the following addresses and phone numbers: Modtech, Inc. 2830 Barrett Avenue Perris, CA 92571 Attention: Evan M. Gruber (909) 943-4014 SPI Holdings, Inc. 9550 Hermosa Avenue Rancho Cucamonga, CA 91730 Attn: Patrick Van Den Bossche (909) 484-4280 105 114 If you would like to request documents from either company, please do so by ___________, 1998 to receive them before the Modtech Special Meeting and by __________________, 1998 to receive them before the SPI Special Meeting. If you request any incorporated documents from us we will mail them to you by first-class mail, or other equally prompt means, within one business day of our receipt of your request. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY STATEMENT/ PROSPECTUS TO VOTE YOUR SHARES AT THE MODTECH SPECIAL MEETING OR SPI SPECIAL MEETING. MODTECH AND SPI HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED ______________, 1998. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THE JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, AND NEITHER THE MAILING OF THIS JOINT PROXY STATEMENT/PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF HOLDINGS' SECURITIES IN THE MERGERS WILL CREATE ANY IMPLICATION TO THE CONTRARY. 106 115 INDEX TO FINANCIAL STATEMENTS MODTECH, INC.
Page ---- Independent Auditors' Report ................................................................. F-2 Balance Sheets as of December 31, 1996 and 1997 .............................................. F-3 Statements of Income for the Years ended December 31, 1995, 1996 and 1997 .................... F-5 Statements of Shareholders' Equity for the Years ended December 31, 1995, 1996 and 1997 ............................................................................ F-6 Statements of Cash Flows for the Years ended December 31, 1995, 1996 and 1997 ....................................................................... F-7 Notes to Financial Statements ................................................................ F-9 Schedule II -- Valuation and Qualifying Accounts ............................................. F-23 Condensed Consolidated Balance Sheets as of December 31, 1997 (audited) and June 30, 1998 (unaudited) ....................................................... F-24 Condensed Consolidated Statements of Income for the three months ended and six months ended June 30, 1997 and 1998 (unaudited) ..................................... F-25 Condensed Consolidated Statements of Cash Flows for the three months ended and six months ended June 30, 1997 and 1998 (unaudited) ................................. F-26 Notes to Condensed Financial Statements ...................................................... F-27 SPI HOLDINGS, INC. Report of Independent Public Accountants ..................................................... F-31 Consolidated Balance Sheets as of January 31, 1997, March 27, 1997 and March 31,1998 ......... F-32 Consolidated Statements of Income for the years ended January 31, 1996 and 1997, the two-month period ended March 31, 1997 and the year ended March 31, 1998 ................................................... F-34 Consolidated Statements of Stockholders' Equity for the years ended January 31, 1996 and 1997, the two-month period ended March 31, 1997 and the year ended March 31, 1998 ................................................................ F-35 Consolidated Statements of Cash Flows for the years ended January 31, 1996 and 1997, the two-month period ended March 31, 1997 and the year ended March 31, 1998 ...................................................................... F-36 Notes to Consolidated Financial Statements ................................................... F-38 Condensed Consolidated Balance Sheet as of September 30, 1998 (unaudited) .................... F-51 Condensed Consolidated Statements of Income for six months ended June 30, 1997 and 1998 (unaudited) ................................................................ F-53 Condensed Consolidated Cash Flows for the three months ended June 30, 1997 and 1998 (unaudited) .................................................................... F-54 Notes to Condensed Consolidated Financial Statements ......................................... F-55 OFFICE MASTER OF TEXAS, INC. Report of Independent Public Accountants ..................................................... F-58 Balance Sheet as of December 31, 1997 ........................................................ F-59 Statement of Income and Retained Earnings for the year ended December 31, 1997 ............... F-60 Statement of Cash Flows for the year ended December 31, 1997 ................................. F-61 Notes to Financial Statements ................................................................ F-62 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING Report of Independent Public Accountants ..................................................... F-65 Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 (unaudited) ............... F-66 Statements of Operations for the years ended December 31, 1995, 1996, 1997 and for the quarters ended March 31, 1997 and 1998 (unaudited) ...................... F-67 Statements of Stockholders' Equity for the years ended December 31, 1995, 1996, 1997 and for the quarters ended March 31, 1997 and 1998 (unaudited) ................. F-68 Statements of Cash Flows for the years ended December 31, 1995, 1996, 1997 and for the quarters ended March 31, 1997 and 1998 (unaudited) .......................... F-69 Notes to Financial Statements ................................................................ F-71
F-1 116 INDEPENDENT AUDITORS' REPORT The Board of Directors Modtech, Inc.: We have audited the accompanying balance sheets of Modtech, Inc. as of December 31, 1996 and 1997 and the related statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. In connection with our audits of the financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Modtech, Inc. as of December 31, 1996 and 1997 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Orange County, California March 18, 1998 F-2 117 MODTECH, INC. Balance Sheets December 31, 1996 and 1997
ASSETS (NOTE 5) 1996 1997 ----------- ----------- Current assets: Cash $ 404,981 $11,628,851 Contracts receivable, less allowance for contract adjustments of $413,373 in 1996 and $410,119 in 1997 10,309,861 21,510,146 (note 2) Costs and estimated earnings in excess of billings on contracts (notes 3 and 8) 9,102,733 16,020,986 Inventories 4,166,700 3,931,505 Due from affiliates (note 8) 754,067 1,052,634 Note receivable from affiliates (note 8) 45,212 45,212 Prepaid assets 136,960 268,295 Deferred tax asset (note 7) -- 2,094,059 Other current assets 20,305 42,274 ----------- ----------- Total current assets 24,940,819 56,593,962 ----------- ----------- Property and equipment, net (notes 4 and 6) 8,552,720 11,229,163 Other assets 535,235 298,258 Deferred tax asset (note 7) -- 98,874 ----------- ----------- $34,028,774 $68,220,257 =========== ===========
See accompanying notes to financial statements. F-3 118 MODTECH, INC. Balance Sheets December 31, 1996 and 1997
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1997 ------------ ------------ Current liabilities: Accounts payable $ 6,409,422 $ 2,421,346 Accrued compensation 1,369,441 3,616,498 Accrued insurance expense 551,580 1,470,725 Other accrued liabilities 1,089,439 3,237,255 Income tax payable 204,017 1,017,027 Billings in excess of costs and estimated earnings on contracts (notes 3 and 8) 1,148,050 6,997,350 Current note payable (note 5) -- 42,185 Current maturities of long-term debt (notes 6 and 8) 100,000 1,374,952 ------------ ------------ Total current liabilities 10,871,949 20,177,338 Note payable (note 5) 5,943,853 -- Long-term debt, less current maturities (notes 6 and 8) 1,899,952 -- ------------ ------------ Total liabilities 18,715,754 20,177,338 ------------ ------------ Shareholders' equity: Common stock, $.01 par. Authorized 20,000,000 shares; issued and outstanding 8,649,436 and 9,819,959 in 1996 and 1997 (notes 10 and 11) 86,494 98,200 Additional paid-in capital 19,620,994 39,330,902 (Accumulated deficit) retained earnings (4,394,468) 8,613,817 ------------ ------------ Total shareholders' equity 15,313,020 48,042,919 ------------ ------------ Commitments and contingencies (notes 3, 5, 8, and 14) ------------ ------------ $ 34,028,774 $ 68,220,257 ============ ============
See accompanying notes to financial statements. F-4 119 MODTECH, INC. Statements of Income Years ended December 31, 1995, 1996 and 1997
1995 1996 1997 ------------- ------------- ------------- Net sales (notes 8 and 12) $ 19,386,027 $ 49,885,858 $ 134,050,485 Cost of goods sold (note 8) 16,400,588 42,628,970 107,367,035 ------------- ------------- ------------- Gross profit 2,985,439 7,256,888 26,683,450 Selling, general, and administrative expenses 1,612,792 2,345,182 5,155,987 ------------- ------------- ------------- Income from operations 1,372,647 4,911,706 21,527,463 ------------- ------------- ------------- Other income (expense): Interest expense (486,323) (445,631) (1,004,198) Interest income (note 8) 98,510 23,704 95,551 Other - net (937) (13,116) 92,103 ------------- ------------- ------------- (388,750) (435,043) (816,544) ------------- ------------- ------------- Income before income taxes 983,897 4,476,663 20,710,919 Income taxes (note 7) (19,098) (207,631) (7,702,634) ------------- ------------- ------------- Net income $ 964,799 $ 4,269,032 $ 13,008,285 ------------- ------------- ------------- 5% Convertible preferred stock dividend (note 11) (166,320) (47,500) -- Net income available for common stock $ 798,479 $ 4,221,532 $ 13,008,285 ============= ============= ============= Basic earnings per share $ 0.25 $ 0.77 $ 1.47 ============= ============= ============= Weighted-average shares outstanding 3,169,593 5,461,007 8,853,786 ============= ============= ============= Diluted earnings per share $ 0.14 $ 0.47 $ 1.31 ============= ============= ============= Weighted-average shares outstanding 6,712,155 9,041,084 9,897,935 ============= ============= =============
See accompanying notes to financial statements. F-5 120 MODTECH, INC. Statements of Shareholders' Equity Years ended December 31, 1995, 1996 And 1997
5% CONVERTIBLE STOCK (ACCUMULATED PREFERRED STOCK COMMON STOCK PURCHASE ADDITIONAL DEFICIT) ---------------------- ------------------------- NOTES PAID-IN RETAINED SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL EARNINGS ---------- ----------- ------------- ---------- ------------- ------------ ------------ Balance, December 31, 1994 2,850,000 2,685,000 3,209,338 $ 32,094 $ (273,594) $ 14,989,919 $ (9,414,479) Adjustment of stock purchase notes -- -- (155,988) (1,560) 273,594 (346,292) -- receivable Dividend (note 11) -- -- -- -- -- -- (166,320) Net income -- -- -- -- -- -- 964,799 ---------- ----------- ------------ ----------- ------------ ------------ ------------ Balance, December 31, 1995 2,850,000 2,685,000 3,053,350 30,534 -- 14,643,627 (8,616,000) Conversion of preferred stock (2,850,000) (2,685,000) 2,850,000 28,500 -- 2,656,500 -- (note 11) Exercise of options and warrants -- -- 2,746,086 27,460 -- 2,320,867 -- Dividend (note 11) -- -- -- -- -- -- (47,500) Net income -- -- -- -- -- -- 4,269,032 ---------- ----------- ------------ ----------- ------------ ------------ ------------ Balance, December 31, 1996 -- -- 8,649,436 86,494 -- 19,620,994 (4,394,468) Exercise of options, including tax benefit of -- -- 170,523 1,706 -- 1,119,890 -- $753,874 (notes 7, 10 and 11) Secondary offering - Net (note 15) -- -- 1,000,000 10,000 -- 18,590,018 Net income -- -- -- -- -- -- 13,008,285 ---------- ----------- ------------ ----------- ------------ ------------ ------------ Balance, December 31, 1997 -- -- 9,819,959 $ 98,200 $ -- $ 39,330,902 $ 8,613,817 ========== =========== ============ ========== ============ ============ ============
See accompanying notes to financial statements. F-6 121 MODTECH, INC. Statements of Cash Flows Years ended December 31, 1995, 1996 and 1997
1995 1996 1997 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 964,799 $ 4,269,032 $ 13,008,285 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 563,104 540,421 1,344,098 Decrease in allowance for contract adjustments (17,300) (5,283) 0 Loss (gain) on sale of equipment (20,084) 17,265 (9,177) (Increase) decrease in assets: Contracts receivable (65,105) (7,135,702) (11,200,285) Costs and estimated earnings in excess of billings 329,641 (7,648,812) (6,918,253) Inventories 337,697 (3,520,404) 235,195 Amounts due from affiliates (255,607) 686,774 (298,567) Prepaids and other assets 54,088 (12,947) 83,673 Deferred tax asset -- -- (2,192,933) Increase (decrease) in liabilities: Accounts payable (436,234) 5,304,183 (3,988,076) Accrued compensation 64,255 1,081,171 2,247,057 Accrued insurance expense (214,004) 526,813 919,145 Other accrued liabilities 166,102 465,766 2,147,816 Income tax payable 19,098 184,919 813,010 Billings in excess of costs and estimated earnings (276,306) 388,448 5,849,300 ------------ ------------ ------------ Net cash provided by (used in) operating activities 1,214,144 (4,858,356) 2,040,288 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from sale of equipment 46,416 5,550 60,604 Purchase of property and equipment (481,533) (1,958,303) (4,071,968) ------------ ------------ ------------ Net cash used in investing activities (435,117) (1,952,753) (4,011,364) ------------ ------------ ------------
(Continued) F-7 122 MODTECH, INC. Statements of Cash Flows, Continued
1995 1996 1997 ------------ ------------ ------------ Cash flows from financing activities: Net principal borrowings (payments) under revolving credit lines $ (309,990) $ 4,353,843 $ (5,901,668) Principal payments on long-term debt (502,735) -- (625,000) (Adjustment of) stock purchase note receivable by exchange of common (74,258) -- -- stock Net proceeds from issuance of common -- 2,348,327 19,721,614 stock Declared dividends (note 11) (166,320) (47,500) -- ------------ ------------ ------------ Net cash provided by (used in) financing activities (1,053,303) 6,654,670 13,194,946 ------------ ------------ ------------ Net increase (decrease) in cash (274,276) (156,439) 11,223,870 Cash at beginning of year 835,696 561,420 404,981 ------------ ------------ ------------ Cash at end of year $ 561,420 $ 404,981 $ 11,628,851 ============ ============ ============
See accompanying notes to financial statements. F-8 123 MODTECH, INC. Notes to Financial Statements December 31, 1995, 1996 and 1997 (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Modtech, Inc. (the Company) designs, manufactures, markets and installs modular relocatable classrooms. The Company's classrooms are sold primarily to California school districts. The Company also sells classrooms to the State of California and to leasing companies, who lease the classrooms principally to California school districts. Effective October 1, 1996, the Company acquired substantially all of the operating assets and assumed certain liabilities of Miller Structure, Inc. - California. The Company leased the manufacturing facility from Miller Structure (note 18). USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash, contracts receivable and notes receivable, costs and estimated earnings in excess of billings on contracts, prepaid and other assets, accounts payable, accrued liabilities, billings in excess of estimated earnings on contracts and notes payable are measured at cost which approximates their fair value. CONSTRUCTION CONTRACTS The accompanying financial statements have been prepared using the percentage-of-completion method of accounting and, therefore, take into account the costs, estimated earnings and revenue to date on contracts not yet completed. Revenue recognized is that percentage of the total contract price that cost expended to date bears to anticipated final total cost, based on current estimates of costs to complete. Most contracts are completed within one year. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling, general, and administrative costs are charged to expense as incurred. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is recognized in the financial statements. F-9 124 MODTECH, INC. Notes to Financial Statements, Continued The current asset, "Costs and Estimated Earnings in Excess of Billings on Contracts," represents revenues recognized in excess of amounts billed. The current liability, "Billings in Excess of Costs and Estimated Earnings on Contracts," represents billings in excess of revenues recognized. The current contra asset, "Allowance for Contract Adjustments," is management's estimated adjustments to contract amounts due to disputes and or litigation. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Inventories, generally include only raw materials, as any work-in-process or finished goods are accounted for in percentage of completion allocations. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization is provided using the straight-line and accelerated methods over the following estimated useful lives:
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
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of Statement of Financial Accounting Standard No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount of fair value less costs to sell. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity. STOCK OPTION PLAN Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standard No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company F-10 125 MODTECH, INC. Notes to Financial Statements, Continued has elected to continue to apply the provision of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. EARNINGS PER SHARE Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). This statement replaces the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts have been restated to conform to the SFAS No. 128 requirements. TAXES ON INCOME Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. RECLASSIFICATION Certain amounts in the 1995 and 1996 financial statements have been reclassified to conform to the 1997 presentation. (2) CONTRACTS RECEIVABLE Contracts receivable consisted of customer billings for:
1996 1997 ------------ ------------ Completed contracts $ 7,722,927 $ 9,226,114 Contracts in progress 2,102,766 9,444,794 Retentions 897,541 3,249,357 ------------ ------------ 10,723,234 21,920,265 Less allowance for contract adjustments (413,373) (410,119) ------------ ------------ $ 10,309,861 $ 21,510,146 ============ ============
F-11 126 MODTECH, INC. Notes to Financial Statements, Continued (3) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON CONTRACTS Net costs and estimated earnings in excess of billings on contracts consisted of:
1996 1997 ------------- ------------- Net costs and estimated earnings on uncompleted contracts $ 39,093,050 $ 105,465,154 Billings to date (31,173,406) (96,144,454) ------------- ------------- 7,919,644 9,320,700 Net under (over) billed receivables from completed contracts 35,039 (297,064) ------------- ------------- $ 7,954,683 $ 9,023,636 ============= =============
These amounts are shown in the accompanying balance sheets under the following captions:
1996 1997 ------------ ------------ Costs and estimated earnings in excess of billings on uncompleted contracts $ 8,971,196 $ 15,832,818 Costs and estimated earnings in excess of billings on completed contracts 131,537 188,168 ------------ ------------ Costs and estimated earnings in excess of billings 9,102,733 16,020,986 ------------ ------------ Billings in excess of costs and estimated earnings on uncompleted contracts (1,051,552) (6,512,121) Billings in excess of costs and estimated earnings on completed contracts (96,498) (485,229) ------------ ------------ Billings in excess of costs and estimated earnings (1,148,050) (6,997,350) ------------ ------------ $ 7,954,683 $ 9,023,636 ============ ============
F-12 127 MODTECH, INC. Notes to Financial Statements, Continued (4) PROPERTY AND EQUIPMENT, NET Property and equipment, net consists of:
1996 1997 ------------ ------------ Leasehold improvements $ 7,580,830 $ 10,764,783 Machinery and equipment 3,535,623 4,347,692 Trucks and automobiles 107,024 181,001 Office equipment 222,123 364,510 Construction in progress 567,137 354,826 ------------ ------------ 12,012,737 16,012,812 Less accumulated depreciation and amortization (3,460,017) (4,783,649) ------------ ------------ $ 8,552,720 $ 11,229,163 ============ ============
(5) NOTE PAYABLE - REVOLVING CREDIT AGREEMENT In 1995 the Company entered into a revolving loan commitment that expires in September 1998. The Company is entitled to borrow, from time to time, up to $20,000,000 with actual borrowings limited to specific percentages of eligible contracts receivable, equipment and inventories. Actual outstanding borrowings were $5,943,853 and $42,185 at December 31, 1996 and 1997, respectively. The interest rate is calculated at the prime lending rate (8.5% at December 31, 1997) plus three quarters of a percent (.75%) per annum. The loan is secured by substantially all of the Company's assets. (6) LONG-TERM DEBT Long-term debt consists of:
1996 1997 ----------- ----------- Industrial development bonds $ 1,999,952 $ 1,374,952 Less current portion of long-term debt (100,000) (1,374,952) ----------- ----------- $ 1,899,952 $ -- =========== ===========
In June 1990, the Industrial Development Authority of the County of San Joaquin, California issued $4,200,000 of Industrial Development Bonds. The net proceeds of approximately $4,000,000 were used to fund the construction of a manufacturing facility on leased property located in Lathrop, California. The Company fully utilized the bonds at December 31, 1991. The Company has executed financing statements covering the plant and equipment financed, as security for repayment of the bonds. The bonds are secured by a $1,299,275 letter of credit, and bear interest at an initial rate of 6.75% and fluctuate weekly. The interest rate was 3.65% at December 31, 1997. The bond agreement was amended in 1997 requiring repayment of the balance by December 31, 1998. F-13 128 MODTECH, INC. Notes to Financial Statements, Continued (7) INCOME TAXES The components of the 1995, 1996 and 1997 provision for Federal and state income tax (expense) benefit computed in accordance with Financial Accounting Standard No. 109 are summarized below:
1995 1996 1997 ----------- ----------- ----------- Current: Federal $ (14,210) $ (90,483) $(7,874,257) State (4,888) (117,148) (2,021,309) ----------- ----------- ----------- (19,098) (207,631) (9,895,566) Deferred: Federal -- -- 1,634,085 State -- -- 558,847 ----------- ----------- ----------- $ (19,098) $ (207,631) $(7,702,634) =========== =========== ===========
Income tax (expense) benefit attributable to income from operations differed from the amounts computed by applying the U.S. Federal income tax rate to pretax income from operations as a result of the following:
1995 1996 1997 ------ ------ ------ Taxes, U.S. statutory rates (34.0%) (34.0%) (35.0%) State taxes, less Federal benefit -- -- (4.5) Utilization of income tax benefit relating to loss carryover 34.0 34.0 3.8 Other (1.9) (4.6) (1.5) ----- ----- ----- Total taxes on income (1.9%) (4.6%) (37.2%) ===== ===== =====
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1996 and 1997 are as follows: F-14 129 MODTECH, INC. Notes to Financial Statements, Continued
1996 1997 ----------- ----------- Deferred tax assets: Reserves and accruals not recognized for income tax purposes $ 1,114,987 $ 2,490,821 Net operating loss carryforwards 209,100 -- State taxes 75,065 474,653 Other 29,117 368,579 ----------- ----------- Total gross deferred tax assets 1,428,269 3,334,053 Less valuation allowance (1,158,714) (1,059,576) ----------- ----------- Net deferred tax assets $ 269,555 $ 2,274,477 =========== =========== Deferred tax liabilities: Revenue recognition $ (171,360) $ (73,589) Prepaids (98,195) (7,955) ----------- ----------- Totals gross deferred tax liabilities (269,555) (81,544) ----------- ----------- Net deferred tax assets $ -- $ 2,192,933 =========== ===========
These amounts have been presented in the balance sheet as follows:
1996 1997 --------------- ---------- Current deferred tax asset $ -- $2,094,059 Noncurrent deferred tax asset -- 98,874 --------------- ---------- Total deferred tax assets $ -- $2,192,933 =============== ==========
The net change in the total valuation allowance for the year ended December 31, 1997 was a decrease of $99,138. The Company's net operating loss carryforward amounted to $615,000 and $0 for the years ended December 31, 1996 and 1997, respectively. F-15 130 MODTECH, INC. Notes to Financial Statements, Continued (8) TRANSACTIONS WITH RELATED PARTIES SALES The Company sells modular classrooms to certain companies and partnerships, where shareholders and partners are either shareholders or an officer of the Company. The buildings are then leased to various school districts by the related companies and partnerships. The table below summarizes the classroom sales to related parties:
1995 1996 1997 ---------- ---------- ----------- Sales $ 600,228 $1,452,868 $2,942,313 Cost of goods sold 531,152 1,239,425 2,530,803 Gross profit percentage 11.51% 14.69% 13.99% ========== ========== ==========
The related party purchases modular relocatable classrooms from the Company, upon standard terms and at standard wholesale prices. Due from affiliates includes a portion of unpaid invoices as a result of the above transactions. As of December 31, 1996 and 1997 these amounts totaled $431,755 and $825,963, respectively. Additional amounts arising from these transactions are included in the following captions:
1996 1997 ----------- ----------- Costs and estimated earnings in excess of billings on uncompleted contracts $ 417,780 $ 1,406,897 Billings in excess of costs and estimated earnings on uncompleted contracts (12,572) (65,405) =========== ===========
NOTE RECEIVABLE At December 31, 1996 and 1997, the Company had one note receivable from a related party partnership in the amount of $45,212. The partnership is composed of an officer and shareholders of the Company. The note bears interest at 10% and is payable upon demand. Unpaid interest related to this note, and two other related party notes with principal repayment in 1996, totaled $322,312 at December 31, 1996 and $226,671 at December 31, 1997 and is included in due from affiliates. The Company has negotiated payment terms on the accrued interest and is receiving regular interest payments. OPERATING LEASES The Company leases various land at its manufacturing facilities. The present manufacturing facility leases are with the Company's Chairman and partnerships composed of an officer and shareholders. All related party leases require monthly payments which aggregate $37,000. In connection with the lease at the Lathrop facility, the Company made an $83,000 security deposit during 1990. In 1994, due to declines in real estate values, the Company's Chairman and partnerships reduced the monthly lease rates for the manufacturing facilities to an aggregate of $37,000. The reduced rents will continue for as long as real estate values remain depressed. F-16 131 MODTECH, INC. Notes to Financial Statements, Continued Future minimum lease payments under these leases are discussed in note 14. Included in cost of sales is $435,000, $447,000 and $444,000 in rent expense paid to related parties for the years ended December 31, 1995, 1996, and 1997, respectively. (9) 401(k) PLAN The Company has a tax deferred savings plan under Section 401(k) of the Internal Revenue Code. Eligible employees can contribute up to 12% of gross annual earnings. Company contributions, made on a 50% matching basis, are determined annually. The Company's contributions were $36,937, $53,031 and $77,016 in 1995, 1996, and 1997, respectively. (10) STOCK OPTIONS In 1989, the Company's shareholders approved a stock option plan (the 1989 Plan). The 1989 Plan provides for the grant of both incentive and non-qualified options to purchase up to 400,000 shares of the Company's common stock. The incentive stock options can be granted only to employees, including officers of the Company, while non-qualified stock options can be granted to employees, non-employee officers and directors, consultants, vendors, customers and others expected to provide significant services to the Company. The exercise price of the stock options cannot be less than the fair market at the date of the grant (110% if granted to an employee who owns 10% or more of the common stock). Stock options outstanding under the 1989 Plan are summarized as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE -------- --------- December 31, 1994 400,000 $ 1.92 Granted 45,000 2.125 Terminated (45,000) 3.00 -------- --------- December 31, 1995 400,000 1.82 Exercised (114,500) 1.87 -------- --------- December 31, 1996 285,500 1.82 Terminated (1,000) 1.50 Exercised (78,450) 2.12 -------- --------- December 31, 1997 206,050 $ 1.70 ======== =========
As of December 31, 1997, 142,450 options are vested and exercisable at prices ranging from $.625 to $10.00 per share under the 1989 Plan. With respect to options issued pursuant to the Del-Tec acquisition, 50,000 options were exercised during 1997 and 75,000 options remained outstanding as of December 31, 1997. F-17 132 MODTECH, INC. Notes to Financial Statements, Continued In March of 1994, pursuant to a vote of the Board of Directors, a nonqualified option plan was approved (the March 1994 Plan). The March 1994 Plan provides for the grant of 200,000 options to purchase shares of the Company's common stock. The exercise price of the stock options cannot be less than the fair market at the date of the grant. All of these options were granted during 1994. Stock options outstanding at December 31, 1996, under the March 1994 Plan are summarized as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE -------- -------------- December 31, 1994 200,000 $ 1.22 Exercised -- -- -------- -------- December 31, 1995 200,000 1.22 Exercised (15,000) 1.19 -------- -------- December 31, 1996 185,000 1.22 Exercised (15,900) 1.40 -------- -------- December 31, 1997 169,100 $ 1.21 ======== ========
As of December 31, 1997, 126,600 options are vested and exercisable at prices ranging from $1.19 to $1.50 per share under the March 1994 Plan. In May of 1994, in conjunction with the offering of preferred stock (note 11) the Board of Directors voted and approved an additional stock option plan (the May 1994 Plan). The May 1994 Plan provides for the grant of both incentive and non-qualified options to purchase up to 500,000 shares of the Company's common stock. The incentive stock options can be granted only to employees, including officers of the Company, while non-qualified stock options can be granted to employees, non-employee officers and directors, consultants, vendors, customers and others expected to provide significant services to the Company. The exercise price of the stock options cannot be less than the fair market at the date of the grant (110% if granted to an employee who owns 10% or more of the common stock). Stock options outstanding under the May 1994 Plan, are summarized as follows:
WEIGHTED AVERAGE EXERCISE SHARES PRICE -------- ------------ December 31, 1994 285,000 $ 1.50 Granted 35,000 2.125 Terminated (35,000) 1.50 -------- ------------ December 31, 1995 285,000 1.60 Granted 205,000 2.59 Terminated (37,500) 1.50 Exercised (12,500) 1.50 ======== ============
F-18 133 MODTECH, INC. Notes to Financial Statements, Continued
December 31, 1996 440,000 2.06 Granted 7,500 19.50 Exercised (9,375) 3.86 -------- ------------ December 31, 1997 438,125 $ 2.32 ======== ============
As of December 31, 1997, 216,675 options are vested and exercisable at prices ranging from $1.50 to $4.50 per share under the May 1994 Plan. In July 1996, the Company's Board of Directors authorized the grant of options to purchase up to 500,000 shares of the Company's common stock. The non-statutory options may be granted to employees, non-employee officers and directors, consultants, vendors, customers and others expected to provide significant service to the Company. The exercise price of the stock options cannot be less than the fair market value at the date of the grant (110% if granted to an employee who owns 10% or more of the common stock). Stock options outstanding under the July 1996 Plan, are summarized as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE -------- -------------- December 31, 1995 -- $ -- Granted 110,000 4.50 -------- -------------- December 31, 1996 110,000 4.50 Granted 263,333 8.75 Terminated (4,202) 12.62 Exercised (16,798) 4.89 -------- -------------- December 31, 1997 352,333 $ 7.56 ======== ==============
As of December 31, 1997, 81,500 options are vested and exercisable at prices ranging from $4.50 to $12.62 per share under the July 1996 Plan. All stock options have a maximum term of ten years and become fully exercisable in accordance with a predetermined vesting schedule which varies. The per share weighted-average fair value of stock options granted during 1996 and 1997 was $1.94 and $9.05, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions; 1995 - expected dividend yield 0%, risk-free interest rate of 7.80%, volatility factor of 72.66%, and expected life of four years; 1996 - expected dividend yield 0%, risk-free interest rate of 7.80%, volatility factor of 72.66%, and an expected life of four years; 1997 - expected dividend yield 0%, risk-free interest rate of 7.80%, volatility factor of 73.06%, and an expected life of four years. The Company applies APB Opinion No. 25 in accounting for its Plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the F-19 134 MODTECH, INC. Notes to Financial Statements, Continued Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
1995 1996 1997 ----------- ------------- -------------- Net Income As Reported $ 964,799 $ 4,269,032 $ 13,008,285 Pro Forma 862,133 3,657,659 12,044,970 =========== ============= ============== Basic earnings per share As Reported $ 0.25 $ 0.77 $ 1.47 Pro forma 0.27 0.67 1.36 =========== ============= ============== Fully diluted earnings per share As Reported $ 0.14 $ 0.47 $ 1.31 Pro Forma 0.13 0.40 1.22 =========== ============= ==============
Pro forma net income reflects only options granted since January 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of four years and compensation cost for options granted prior to January 1, 1995 is not considered. (11) 5% CONVERTIBLE PREFERRED STOCK In May of 1994, in a private transaction without registration under the Securities Act, the Company sold 2,850,000 shares of Series A 5% Convertible Preferred Stock. The Preferred Stock was sold at $1.00 per share resulting in proceeds before costs and expenses of $2,850,000. All of the Series A 5% Convertible Preferred Stock was converted into Common Stock during 1996. In connection with this private placement of the Series A 5% Preferred Stock, the shareholders were granted warrants to purchase an aggregate of 1,385,000 shares of common stock at $1.50 (subject to adjustment in certain events), as well as warrants to purchase an aggregate of 1,375,000 additional shares at $2.00 per share (subject to adjustments in certain events). All warrants were either exercised or expired during 1996. Dividends in the amount of $166,320 and $47,500 were declared for the years ended December 31, 1995 and 1996, respectively. (12) MAJOR CUSTOMER The Company had sales to two major customers which represented the following percentage of net sales:
1995 1996 1997 --------- --------- -------- Customer A 9% 13% 4% Customer B 0% 4% 11% ======== ======== ========
F-20 135 MODTECH, INC. Notes to Financial Statements, Continued (13) SUPPLEMENTAL CASH FLOW DISCLOSURES SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1995 1996 1997 ---------- ---------- ---------- Cash paid during the year for: Interest $ 248,443 $ 470,248 $1,058,256 ========== ========== ========== Income taxes $ -- $ 24,320 $8,400,000 ========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES: During 1995, $273,594 of notes receivable from officer shareholders was repaid by delivery of 155,988 shares of common stock at market value. During 1996, 2,850,000 shares of Series A 5% convertible Preferred Stock were converted into 2,850,000 shares of common stock, in accordance with the private placement (note 11). (14) COMMITMENTS AND CONTINGENCIES LAND LEASES The Company has entered into agreements to lease land at its manufacturing facilities in Perris and Lathrop, California. Minimum lease payments under these noncancelable operating leases for the next five years and thereafter are as follows:
Year ending December 31: 1998 $ 569,000 1999 515,000 2000 513,000 2001 444,000 2002 444,000 Thereafter 6,002,000 ----------- $ 8,487,000 ===========
Of the $8,487,000 in future rental payments, substantially all is to related parties (note 8). Rent expense for the years ended December 31, 1995, 1996 and 1997 was $435,000, $447,000 and $522,000, respectively. The manufacturing facility in Patterson, California was purchased in January 1998 (note 18), and is not included above. F-21 136 MODTECH, INC. Notes to Financial Statements, Continued (15) SECONDARY STOCK OFFERING In November 1997 the Company sold 1,000,000 shares of common stock at $20 per share. The net proceeds to the Company were $18,600,000, after the deduction of underwriting discounts, commissions and offering expenses paid by the Company. The Company used a portion of the proceeds to repay amounts outstanding under the Company's $20,000,000 revolving loan agreement with a bank (note 5). The remaining net proceeds are expected to be used as additions to working capital. (16) WARRANTY The Company provides a one year warranty relating to the workmanship on their modular units. To date, warranty costs incurred on completed contracts have been immaterial. (17) PENDING CLAIMS AND LITIGATION In the normal course of business, the Company has been named in several claims and lawsuits arising out of the failure to pay subcontractors or for alleged breach of assigned security. In the opinion of management, the outcome of the claims will not have a material effect on the Company's financial position or results of operations. (18) SUBSEQUENT EVENTS The manufacturing facility in Patterson, California was leased from Miller Structures, Inc. from October 1996 through December 1997. The lease payments are included in rent expense. The Company purchased the facility in January 1998. On March 2, 1998, the Company announced that it had signed an agreement to purchase a majority interest in Trac Modular Manufacturing, Inc (Trac). Trac is based in Glendale, Arizona. Subsequent to the completion of due diligence, the transaction closed on March 20, 1998. F-22 137 Schedule II MODTECH, INC. Valuation and Qualifying Accounts Years ended December 31, 1995, 1996, and 1997
BALANCE AT BEGINNING CHARGED BALANCE AT DESCRIPTION OF YEAR TO EXPENSE DEDUCTIONS END OF YEAR - ------------------------------------ -------------- -------------- ---------- --------------- Allowance for contract adjustments: Year ended December 31, 1995 $425,390 $ -- $(17,300) $408,090 ======== =============== ======== ======== Year ended December 31, 1996 $408,090 $ 5,866 $ (583) $413,373 ======== =============== ======== ======== Year ended December 31, 1997 $413,373 $ -- $ (3,254) $410,119 ======== =============== ======== ========
F-23 138 MODTECH, INC. Condensed Consolidated Balance Sheets (Unaudited)
December 31, September 30, 1997 1998 - ------------------------------------------------------------------------------------------------- Audited Unaudited - ------------------------------------------------------------------------------------------------- Assets Current assets Cash $11,629,000 $30,450,000 Contracts receivable, net, including costs in excess of billings of $16,021,000 and $13,738,000 in 1997 and 37,531,000 33,565,000 1998, respectively Inventories 3,932,000 2,828,000 Due from affiliates 1,098,000 694,000 Deferred tax asset 2,094,000 2,094,000 Other current assets 310,000 402,000 ----------- ----------- Total current assets 56,594,000 70,033,000 ----------- ----------- Property and equipment, net 11,229,000 12,221,000 Other Assets Deferred tax asset 99,000 99,000 Other assets 298,000 134,000 ----------- ----------- $68,220,000 $82,487,000 =========== =========== Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued liabilities $11,763,000 $13,834,000 Billings in excess of costs 6,997,000 6,402,000 Current portion of long-term debt 1,417,000 -- ----------- ----------- Total current liabilities 20,177,000 20,236,000 Stockholders Equity Common stock, shares authorized, $.01 par. Authorized 20,000,000 shares; issued and outstanding 9,856,000 and 9,871,000 in 1997 and 1998, respectively 98,000 100,000 Additional paid-in capital 39,331,000 39,573,000 Retained earnings 8,614,000 22,578,000 ----------- ----------- Total shareholders' equity 48,043,000 62,251,000 ----------- ----------- $68,220,000 $82,487,000 =========== ===========
The accompanying notes are an integral part of these financial statements. F-24 139 MODTECH, INC. Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, - -------------------------------------------------------------------------------------------------------------- 1997 1998 1997 1998 - -------------------------------------------------------------------------------------------------------------- Net sales $ 39,805,000 $ 37,243,000 $ 98,711,000 $ 113,119,000 Cost of goods sold 31,235,000 28,408,000 78,923,000 87,083,000 ------------- ------------- ------------- ------------- Gross profit 8,570,000 8,835,000 19,788,000 26,036,000 Selling, general, and administrative expenses 1,362,000 1,102,000 3,544,000 3,843,000 ------------- ------------- ------------- ------------- Income from operations 7,208,000 7,733,000 16,244,000 22,193,000 ------------- ------------- ------------- ------------- Other income (expense): Interest income (expense), net (274,000) 305,000 (823,000) 694,000 Other - net 8,000 3,000 72,000 18,000 ------------- ------------- ------------- ------------- (266,000) 308,000 (751,000) 712,000 ------------- ------------- ------------- ------------- Income before income taxes 6,942,000 8,041,000 15,493,000 22,905,000 Income taxes (2,456,000) (2,862,000) (5,812,000) (8,511,000) ------------- ------------- ------------- ------------- Net income $ 4,486,000 $ 5,179,000 $ 9,681,000 $ 14,394,000 ============= ============= ============= ============= Basic earnings per share $ 0.47 $ 0.52 $ 1.01 $ 1.46 ============= ============= ============= ============= Weighted-average shares outstanding 9,611,000 9,871,000 9,611,000 9,871,000 ============= ============= ============= ============= Diluted earnings per share $ 0.47 $ 0.48 $ 1.00 $ 1.33 ============= ============= ============= ============= Weighted-average shares outstanding 9,647,000 10,800,000 9,647,000 11,000,000 ============= ============= ============= =============
The accompanying notes are an integral part of these financial statements F-25 140 MODTECH, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, - ------------------------------------------------------------------------------------------- 1997 1998 - ------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 9,681,000 $ 14,394,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 866,000 890,000 (Increase) decrease in operating assets and liabilities: Contracts receivable (21,779,000) 3,966,000 Inventories (1,394,000) 1,104,000 Due from affiliates (490,000) 404,000 Other assets (35,000) 72,000 Deferred tax asset -- -- Accounts payable and accrued liabilities 3,255,000 2,071,000 Billings in excess of costs 4,827,000 (595,000) ------------ ------------ Net cash provided by (used in) operating activities (5,069,000) 22,306,000 ------------ ------------ Cash flows from investing activities: Proceeds from sale of equipment -- -- Purchase of property and equipment (981,000) (1,882,000) ------------ ------------ Net cash used in investing activities (981,000) (1,882,000) ------------ ------------ Cash flows from financing activities: Net principal borrowings (payments) under revolving credit lines 6,064,000 -- Principal payments on long-term debt -- (1,417,000) Investment in affiliate -- (250,000) Conversion of stock options 96,000 64,000 ------------ ------------ Net cash provided by (used in) financing activities 6,160,000 (1,603,000) ------------ ------------ Net increase in cash 110,000 18,821,000 Cash at beginning of period 405,000 11,629,000 ------------ ------------ Cash at end of period $ 515,000 $ 30,450,000 ============ ============
The accompanying notes are an integral part of these financial statements F-26 141 MODTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS September 30, 1998 (1) Management Opinion In the opinion of management, the condensed financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations as of and for the periods presented. The results of operations for the nine months ended September 30, 1998 are not necessarily indicative of the results to be expected for the full fiscal year. Certain statements in this report constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward - looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements, expressed or implied by such forward - looking statements. (2) Taxes on Income Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (3) Earnings Per Share Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). This statement replaces the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike Primary earnings per share, basic earnings per share excludes any dilutive effects of options and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been restated to conform to the SFAS No. 128 requirement. F-27 142 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following table sets forth certain items in the Condensed Statements of Income as a percent of net sales.
Percent of Net Sales Percent of Net Sales Three Months Ended Nine Months Ended September 30, September 30, -------------------- --------------------- 1997 1998 1997 1998 -------------------- --------------------- Net sales 100.0% 100.0% 100.0% 100.0% Gross profit 21.5 23.7 20.0 23.0 Selling, general and administrative 3.4 3.0 3.6 3.4 Income from operations 18.1 20.8 16.5 19.6 Interest income (expense), net (0.7) 0.8 (0.8) 0.6 Income before taxes on income 17.4 21.6 15.7 20.2
Net sales decreased by $2,562,000 or 6.4% for the three months and increased by $14,408,000 or 14.6% for the nine months ended September 30, 1998. The overall increase in revenue is attributable to the growth in the school population, the Class Size Reduction program and a diversification of our product line. The three month decrease was primarily due to the delay by the California Legislature in the adoption of the California state fiscal budget for 1998/1999. Gross profit as a percentage of net sales for the three and nine months ended September 30, 1998 increased to 23.7% and 23.0% from 21.5% and 20.0% for the same period in 1997. The increase was due principally to the utilization of the manufacturing facilities and the realization of manufacturing efficiencies and product mix. Selling, general and administrative expenses decreased for the three months ended September 30, 1998 by $260,000 and increased for the nine months ended September 30, 1998 by $299,000, a change of 19.1% and 8.4% respectively. The increase is primarily due to the increase in sales expense as well as the increase in the number of employees. As a percentage of sales, selling, general, and administrative expenses for the three and nine months ended September 30, are 3.0% and 3.4% for 1998. The percentages were 3.4% and 3.6% for the same period in 1997. Due to a higher cash balance and reduced line of credit borrowing, the nine months ended September 30, 1998 reflects net interest income of $712,000 compared to net interest expense of $751,000 for the same period in 1997, a favorable increase of $1,463,000 or 194.8%. On March 20, 1998, the Company purchased an 80% interest in Trac Modular Manufacturing, Inc (Trac). The purchase price approximated the fair value of net assets on the purchase date. Trac is based in Glendale, Arizona. The financial activity for this subsidiary has been included in the Company's financial statements for the second and third quarter of 1998. F-28 143 Modtech, Inc. has announced that it has entered into a definitive agreement to purchase 100% of the equity of SPI Manufacturing, Inc. ("SPI"), a privately held company. SPI is a leading designer, manufacturer and wholesaler of commercial and light industrial modular buildings. The transaction is scheduled to close in December 1998 and is subject to shareholder and regulatory approval. The acquisition will be structured as a merger transaction whereby each of Modtech, Inc. and SPI will become wholly owned subsidiaries of a newly formed public holding company, Modtech Holdings. Modtech holdings will acquire SPI for consideration consisting of approximately $8 million in cash and approximately 5 million shares of holding company common stock. Modtech Holdings will also refinance approximately $32 million of SPI debt. The merger agreement also provides that Modtech, Inc. shareholders will receive approximately $3.66 per share (in the aggregate, approximately $40 million) and that all of the outstanding Modtech, Inc. shares will be converted into Modtech Holdings common stock (approximately 10 million shares) at an effective ratio of approximately 1 Modtech, Inc. share to 0.85 shares of Modtech Holdings. Modtech Holdings shares will be traded on NASDAQ in replacement of the existing Modtech, Inc. shares. SPI had pro forma consolidated net sales of approximately $80 million for the fiscal year ended March 31, 1998, which include the results of its California operations, the Texas operation which was acquired in February 1998 and the Arizona operation which was acquired in April 1998. INFLATION In the past, the Company has not been adversely affected by inflation, because it has been generally able to pass along to its customers increases in the costs of labor and materials. LIQUIDITY AND CAPITAL RESOURCES To date, the Company has generated cash to meet its needs from operations, bank borrowings and public offerings. At September 30, 1998, the Company had $30,450,000 in cash. During the nine months ended September 30, 1998, the Company provided cash in it's operating activities. The Company has a revolving loan commitment that will expire in the year 2000. The Company is entitled to borrow, from time to time up to $20,000,000 with actual borrowings limited to specified percentages of eligible accounts receivables, equipment and inventories. On September 30, 1998, no amounts were outstanding under this loan. During the three and nine months ended September 30, 1998,certain directors, officers or employees exercised 14,575 and 49,575 common stock options for a total of $41,688 and $63,738, respectively. Management believes that the Company's existing product lines and manufacturing capacity will enable the Company to generate sufficient cash through operations, supplemented by periodic use of its existing bank line of credit, to finance the Company's business at current levels over the next 12 months. Additional cash resources may be required if the Company is able to expand its business beyond current levels. For example, it will be necessary for the Company to construct or acquire additional manufacturing facilities in order for the Company to compete effectively in new market areas or states which are beyond a 300 mile radius from one of its production facilities. The construction or acquisition of new facilities would require significant additional capital. For these reasons, among others, the Company may need additional debt or equity financing in the future. There can be, however, no assurance that the Company will be successful in obtaining such additional financing, or that any such financing will be available on terms acceptable to the Company. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS 130 requires all items that are required to be F-29 144 recognized under accounting standards as components of comprehensive income to be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period covered by that financial statement. SFAS 130 requires an enterprise to (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Management has determined the adoption of SFAS 130 will not have a material impact on the Company's combined financial statement or results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise", but retains the requirement to report information about major customers. It amends FASB Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries", to remove the special disclosure requirements for previously unconsolidated subsidiaries. SFAS 131 requires, among other items, that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets, information about the revenues derived from the enterprise's products or services, and major customers. SFAS 131 also requires that the enterprise report descriptive information about the way that the operating segments were determined and the products and services provided by the operating segments. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. SFAS 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. Management has not determined whether the adoption of SFAS 131 will have a material impact on the Company's segment reporting. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. SFAS 132 is effective for fiscal years beginning after December 15, 1997. SFAS 132, requiring only additional information disclosures, is effective for the Company's fiscal year ending December 31, 1998. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Application of SFAS 133 is not expected to have a material impact on the Company's financial position, results of operations or liquidity. YEAR 2000 The Company is currently working to resolve the potential impact of the Year 2000 on the processing of date-sensitive information by the Company's computerized information systems. The Year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. The Company has investigated the impact of the Year 2000 problem on its business, including the Company's operational, information and financial systems. Based on this investigation, the Company does not expect the Year 2000 problem, including the cost of making the Company's computerized information systems Year 2000 compliant, to have a material adverse impact on the Company's financial position or results of operations in future periods. However, the inability of the Company to resolve all potential Year 2000 problems in a timely manner could have a material adverse impact on the Company. The Company has also initiated communications with significant suppliers and vendors on which the Company relies in an effort to determine the extent to which the Company's business is vulnerable to the failure by these third parties' to remediate their Year 2000 problems. While the Company had not been informed of any material risks associated with the Year 2000 problem on these entities, there can be no assurance that the computerized information systems of these third parties will be Year 2000 compliant on a timely basis. The inability of these third parties to remediate their Year 2000 problems could have a material adverse impact on the Company. To the extent possible, the Company will be developing and executing contingency plans designed to allow continued operation in the event of failure of the Company's or third parties' F-30 145 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of SPI Holdings, Inc.: We have audited the accompanying consolidated balance sheets of SPI HOLDINGS, INC. (a Colorado corporation) as of January 31, 1997, March 27, 1997 and March 31, 1998, and the related consolidated statements of income, shareholders' equity and cash flows for the years ended January 31, 1996 and 1997, the period from February 1, 1997 to March 27, 1997, and the year ended March 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SPI Holdings, Inc. as of January 31, 1997, March 27, 1997 and March 31, 1998 and the results of its operations and its cash flows for the years ended January 31, 1996 and 1997, the period from February 1, 1997 to March 27, 1997 and the year ended March 31, 1998 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Orange County, California May 22, 1998 F-31 146 SPI HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS ($ In Thousands) ASSETS
Predecessor(1) Company ----------------------------- ---------- January 31, March 27, March 31, 1997 1997 1998 ---------- ---------- ---------- CURRENT ASSETS: Cash $ 1,243 $ 1,991 $ 1,119 Accounts receivable, net of allowance for doubtful accounts of $26 at January 31, 1997 and March 31, 1997 and $122 at March 31, 1998, respectively 2,819 3,320 4,034 Accounts receivable from former officers 1,380 1,433 -- Inventories 918 1,215 2,761 Notes receivable from related parties 470 540 -- Interest receivable 48 -- -- Income tax receivable -- -- 166 Deferred tax asset 25 25 152 Prepaid expenses 2 14 380 ---------- ---------- ---------- Total current assets 6,905 8,538 8,612 ---------- ---------- ---------- EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost: Furniture, fixtures and equipment 338 338 1,194 Vehicles 239 215 49 Leasehold improvements 375 380 390 Lease assignment and interest -- -- 566 ---------- ---------- ---------- 952 933 2,199 Less--Accumulated depreciation (219) (231) (330) ---------- ---------- ---------- 733 702 1,869 ---------- ---------- ---------- OTHER ASSETS: Deposits 10 10 40 Deferred tax asset -- -- 50 Goodwill, net of accumulated amortization of $239 at March 31, 1998 -- -- 11,934 Deferred loan fees, net of accumulated amortization of $123 at March 31, 1998 -- -- 638 Covenants not to compete, net of accumulated amortization of $575 at March 31, 1998 -- -- 2,625 ---------- ---------- ---------- Total assets $ 7,648 $ 9,250 $ 25,768 ========== ========== ==========
(1) Effective March 28, 1997, SPI Holdings, Inc. acquired Standard Pacific Industries, Inc. ("the Predecessor"). Because the acquisition was accounted for as a purchase, the post-acquisition period is not comparable to the pre-acquisition periods. The accompanying notes are an integral part of these consolidated balance sheets. F-32 147 SPI HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS ($ In Thousands) LIABILITIES AND SHAREHOLDERS' EQUITY
Predecessor(1) Company Pro forma ---------------------------- --------- shareholders' equity at January 31, March 27, March 31, at March 1997 1997 1998 31, 1998 ----------- --------- --------- -------- CURRENT LIABILITIES: (unaudited) Accounts payable $ 1,869 $ 2,021 $ 2,973 Accrued liabilities 264 533 1,537 Revolving line of credit -- -- 600 Current portion of long-term debt 10 -- 2,332 Income taxes payable 1,091 1,437 -- -------- -------- -------- Total current liabilities 3,234 3,991 7,442 -------- -------- -------- LONG-TERM LIABILITIES: Deferred tax liability 21 21 -- Long-term debt, net of current portion 13 -- 11,624 -------- -------- -------- Total long-term liabilities 34 21 11,624 -------- -------- -------- Total liabilities 3,268 4,012 19,066 -------- -------- -------- COMMITMENTS AND CONTINGENCIES (Note 11) SHAREHOLDERS' EQUITY: Convertible preferred stock- Class A-1, stated value $2.715 per share: 1,500,000 shares authorized, 994,335 shares issued and outstanding at March 31, 1998 -- -- 2,628 $ -- Class A-2, stated value $2.863 per share: 1,000,000 shares authorized, 272,051 shares issued and outstanding at March 31, 1998 -- -- 725 -- Class A-3 warrants, no par value: 400,000 shares authorized, no shares issued at March 31, 1998 -- -- 647 -- Class A-4, stated value $4.500 per share: 155,000 shares authorized, 133,331 shares issued and outstanding at March 31, 1998 -- -- 600 -- Common stock of Predecessor, stated value $1 per share: 3,600 shares authorized, issued and outstanding at January 31, 1997 and March 27, 1997 4 4 -- -- Common stock of Company, par value $0.017 per share: 5,000,000 shares authorized, 333,614 shares issued and outstanding at March 31, 1998, 1,733,331 pro forma shares at March 31, 1998 -- -- 6 4,606 Retained earnings 4,376 5,234 2,096 1,396 -------- -------- -------- -------- Total shareholders' equity 4,380 5,238 6,702 $ 6,002 -------- -------- -------- -------- $ 7,648 $ 9,250 $ 25,768 ======== ======== ========
(1) Effective March 28, 1997, SPI Holdings, Inc. acquired Standard Pacific Industries, Inc. ("the Predecessor"). Because the acquisition was accounted for as a purchase, the post-acquisition period is not comparable to the pre-acquisition periods. The accompanying notes are an integral part of these consolidated balance sheets. F-33 148 SPI HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME ($ In Thousands, except per share data)
Predecessor(1) Company ---------------------------------------------- -------- Year ended Period from January 31, February 1, 1997 Year ended --------------------------- to March 27, March 31, 1996 1997 1997 1998 -------- -------- -------- -------- NET SALES $ 13,429 $ 24,113 $ 6,033 $ 42,180 COST OF SALES 10,541 19,035 4,106 32,458 -------- -------- -------- -------- Gross profit 2,888 5,078 1,927 9,722 -------- -------- -------- -------- OPERATING EXPENSES: Selling and administrative 2,609 1,644 507 2,667 Management and monitoring fees -- -- -- 225 Depreciation 49 78 13 263 Amortization -- -- -- 1,488 -------- -------- -------- -------- 2,658 1,722 520 4,643 -------- -------- -------- -------- Income from operations 230 3,356 1,407 5,079 -------- -------- -------- -------- OTHER INCOME/(EXPENSE): Interest expense (5) (1) -- (1,477) Interest income 85 79 21 38 Miscellaneous income 34 111 90 36 Penalties and interest on income taxes -- (117) -- -- -------- -------- -------- -------- 114 72 111 (1,403) -------- -------- -------- -------- Income before provision for income taxes 344 3,428 1,518 3,676 PROVISION FOR INCOME TAXES 141 1,409 660 1,580 -------- -------- -------- -------- Net income $ 203 $ 2,019 $ 858 $ 2,096 ======== ======== ======== ======== EARNINGS PER SHARE: Basic $ 1.30 ======== Diluted $ 1.12 ========
(1) Effective March 28, 1997, SPI Holdings, Inc. acquired the Predecessor entity. Because the acquisition was accounted for as a purchase, the post-acquisition period is not comparable to the pre-acquisition periods. The accompanying notes are an integral part of these consolidated statements. F-34 149 SPI HOLDINGS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in Thousands)
Total Common Stock Preferred Stock Share- --------------------- --------------------- Retained holders' Shares Amount Shares Amount Earnings Equity ------ ------ ------ ------ ------ ------ PREDECESSOR(1): BALANCE, January 31, 1995 4 $ 4 -- $ -- $2,154 $2,158 Net Income -- -- -- -- 203 203 ------ ------ ------ ------ ------ ------ BALANCE, January 31, 1996 4 4 -- -- 2,357 2,361 Net Income -- -- -- -- 2,019 2,019 ------ ------ ------ ------ ------ ------ BALANCE, January 31, 1997 4 4 -- -- 4,376 4,380 Net Income -- -- -- -- 858 858 ------ ------ ------ ------ ------ ------ BALANCE, March 27, 1997 4 $ 4 -- $ -- $5,234 $5,238 ====== ====== ====== ====== ====== ====== COMPANY: BALANCE, March 27, 1997 -- $ -- -- $ -- $ -- $ -- Common stock issuance 334 6 -- -- -- 6 Series A-1 issuance -- -- 994 2,628 -- 2,628 Series A-2 issuance -- -- 272 725 -- 725 Series A-3 warrants issuance -- -- -- 647 -- 647 Series A-4 issuance -- -- 133 600 -- 600 Net Income -- -- -- -- 2,096 2,096 ------ ------ ------ ------ ------ ------ BALANCE, March 31, 1998 334 $ 6 1,399 $4,600 $2,096 $6,702 ====== ====== ====== ====== ====== ======
(1) Effective March 28, 1997, SPI Holdings, Inc. acquired the Predecessor entity. Because the acquisition was accounted for as a purchase, the post-acquisition period is not comparable to the pre-acquisition periods. The accompanying notes are an integral part of these consolidated statements. F-35 150 SPI HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS ($ In Thousands)
Predecessor (1) Company ----------------------------------------------- ---------- Year ended Period from January 31, February 1, 1997 Year ended ------------------------ to March 27, March 31, 1996 1997 1997 1998 ------- ------- ---------------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 203 $ 2,019 $ 858 $ 2,096 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 49 78 13 1,203 Net gain on disposition of equipment -- (12) -- -- Provision for deferred income taxes -- (25) -- (134) Changes in assets and liabilities, net of assets acquired and liabilities assumed: Accounts receivable 271 (1,907) (501) (142) Inventories (5) (391) (297) (623) Notes receivable from related parties (395) (74) (71) -- Interest receivable (7) (41) 48 -- Prepaid expenses (20) 18 (12) (367) Other assets (23) 23 -- (30) Accounts payable (74) 1,271 153 403 Accrued liabilities 727 (671) 269 666 Deferred tax liability -- 21 -- (25) Income taxes payable 218 504 346 (1,603) ------- ------- ------- ------- Net cash provided by operating activities 944 813 806 1,444 ------- ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements (411) (193) (7) (1,260) Insurance proceeds from theft of equipment -- 21 -- -- (Increase) decrease in accounts receivable from officers -- (1,380) (53) 1,600 Investment in Office Master, net of cash received -- -- -- (3,893) Payments under non-compete agreements -- -- -- (600) ------- ------- ------- ------- Net cash used in investing activities (411) (1,552) (60) (4,153) ------- ------- ------- -------
(continued) F-36 151
Year ended Period from January 31, February 1, 1997 Year ended ------------------------ to March 27, March 31, 1996 1997 1997 1998 ------- ------- ---------------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable -- (33) 2 (6,442) Proceeds from notes payable -- 25 -- -- Additions to notes payable -- -- -- 8,604 Issuance of common stock -- -- -- 600 Issuance of warrants -- -- -- 75 ------- ------- ------- ------- Net cash provided by (used in) financing activities -- (8) 2 2,837 ------- ------- ------- ------- NET INCREASE (DECREASE) IN CASH 533 (747) 748 128 CASH, beginning of period 1,457 1,990 1,243 991 ------- ------- ------- ------- CASH, end of period $ 1,990 $ 1,243 $ 1,991 $ 1,119 ======= ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 5 $ 1 $ -- $ 1,303 ======= ======= ======= ======= Cash paid during the period for income taxes $ 201 $ 520 $ 314 $ 2,851 ======= ======= ======= =======
(1) Effective March 28, 1997, SPI Holdings, Inc. acquired the Predecessor entity. Because the acquisition was accounted for as a purchase, the post-acquisition period is not comparable to the pre-acquisition periods. The accompanying notes are an integral part of these consolidated statements. F-37 152 SPI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 1. Company Background and Business SPI Holdings, Inc. dba SPI Manufacturing, Inc. (the Company), was incorporated in the state of Colorado in 1996. On March 27, 1997 the Company completed a transaction to acquire all of the then outstanding shares of Ronfran Inc., doing business as Standard Pacific Industries, Inc. (the Predecessor) The acquisition by the Company was accounted for as a purchase. Accordingly, the assets and liabilities were revalued based on relative fair market values as follows: (in thousands) Assets acquired: Cash $ 991 Accounts receivable, net 3,320 Inventory 1,215 Property, plant and equipment, net 662 Covenant not to compete 2,500 Goodwill 9,190 Other 49 ------- 17,927 ------- Liabilities assumed: Accounts payable and accrued liabilities 4,034 Long-term liabilities 21 ------- 4,055 ------- Net purchase price $13,872 =======
The purchase price above includes related transaction costs of $228,000 and the subsequent payment by the sellers of $1,600,000 for post-closing adjustments to the purchase price pursuant to the purchase agreement. The Company has consummated the following acquisitions: - Leasehold interest in a manufacturing facility and certain assets of a former mobile home manufacturer located in Ontario, California (August, 1997) - Office Master of Texas, Inc. ("Office Master"), a manufacturer of modular buildings located in the Dallas, Texas area (February, 1998) - Rosewood Enterprises, Inc. Modular Manufacturing ("Rosewood"), a Phoenix-based manufacturer of modular buildings (April, 1998 - see Note 16) The acquisitions of Office Master and Rosewood, which consisted of the acquisition of all outstanding shares of common stock, have or will be accounted for under the purchase method. The Company manufactures modular buildings at its four production facilities in Southern California, Texas and Arizona, and distributes to customers throughout the western United States, primarily in California. The Company's customers include dealers and leasing companies who then sell or lease the buildings to third-party end users operating in various industries. F-38 153 2. Summary of Significant Accounting Policies a. Basis of Presentation These consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Office Master. The Company acquired Office Master on February 24, 1998, and the accompanying consolidated financial statements include the period from acquisition through March 31, 1998 for Office Master operations. The effects of operations for the four-day period March 28, 1997 to March 31, 1997 have been included in the year ended March 31, 1998. The Company had sales of approximately $400,000, costs of sales of approximately $251,000 and incurred payroll expenses of approximately $47,000 during the period. There were no other material activities during this four-day period. Because of the effects of purchase accounting, the accounts of the Predecessor are not comparable to those of the Company. b. Office Master Purchase Price Allocation The assets and liabilities were revalued based on relative fair market values as follows: (in thousands) Assets acquired: Cash $ 89 Accounts receivable, net 571 Inventory 923 Property, plant and equipment, net 213 Goodwill 2,984 Non-compete covenant 100 ------ 4,880 ------ Liabilities assumed: Accounts payable and accrued liabilities 898 ------ 898 ------ Net purchase price $3,982 ======
Included in the purchase price above are related transaction costs of $148,000, including fees to KRG Capital of $50,000. F-39 154 c. Inventories Inventories are stated at the lower of cost or market. The following is a summary of inventory by component as of January 31, 1997, March 27, 1997 and March 31, 1998 (in thousands):
January 31, March 27, March 31, 1997 1997 1998 ------- ------- ------- Raw materials $ 828 $ 1,138 $ 2,184 Work-in-process 90 77 167 Finished goods -- -- 550 ------- ------- ------- 918 1,215 2,901 Inventory reserve -- -- (140) ------- ------- ------- $ 918 $ 1,215 $ 2,761 ======= ======= =======
Work-in-process consists of raw materials and labor. Overhead costs are not capitalized due to the short construction period, and in the opinion of management, are not material. Finished goods typically consist of structures manufactured for customers based upon a verbal or preliminary order but for which a signed purchase order was not received as of the balance sheet date. d. Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost. Depreciation is computed using straight-line and accelerated methods over the following estimated useful lives: Furniture and fixtures Seven years Vehicles and equipment One to seven years Leasehold improvements Useful life or life of the lease, whichever is shorter Upon retirement or disposal of depreciable assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operations. Major renewals or betterments are capitalized while maintenance costs and repairs are expensed in the period incurred. e. Revenue Recognition The Company recognizes revenue under the completed-contract method. In accounting for such contracts, income is recognized when performance is substantially completed and accepted. f. Goodwill The purchase price in excess of the fair market value of net assets acquired for each acquisition is recorded as goodwill and amortized using the straight-line method over a period of 40 years. Accumulated amortization related to goodwill was $239,000 at March 31, 1998. F-40 155 g. Covenants not to Compete Covenants not to compete entered into as part of purchase agreements are amortized over the term of the covenant on a straight-line basis. Accumulated amortization related to the covenants not to compete was $575,000 at March 31, 1998. h. Accounting for Equity-based Compensation Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" establishes financial accounting and reporting standards for stock-based employee compensation plans and transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. The adoption of the accounting methodology of SFAS No. 123 related to employees is optional, and as permitted under SFAS No. 123, the Company intends to continue to account for employee stock options using the intrinsic value methodology in accordance with the Accounting Principles Board Opinion No. 25; however, pro forma disclosures as if the Company adopted the accounting methodology of SFAS No. 123 are required to be presented. (see Note 13) i. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. j. Reclassifications Certain reclassifications have been made to the prior year financial statements in order to conform with the current year's presentation. k. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS Nos. 130 and 131 "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 and No. 131 are effective for fiscal years beginning after December 15, 1997, with earlier adoption permitted. The Company does not believe that adoption of these standards will have a material effect on the Company's financial statements. The Company has to date reflected no items of comprehensive income in its statement of shareholders' equity. l. Earnings Per Share The Company accounts for earnings per share in accordance with SFAS No. 128, "Earnings per Share." This Statement requires the presentation of both basic and diluted net income per share for financial statement purposes. Basic net income per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted net income per share includes the effect of the potential shares outstanding, including dilutive stock options using the treasury stock method. F-41 156 Concurrent with the proposed merger, all outstanding shares of preferred stock will convert into common stock of the acquiring Company or redeemed for cash. (See Note 16 c.) Earnings per share is calculated using the weighted average number of common shares outstanding that would have resulted from the preferred stock conversion to common shares. The following table reconciles the components of the pro forma basic net income per share calculation to pro forma diluted net income per share.
Income Per share (in Thousands) Shares Amount -------------- --------- -------- Basic Net Income per Share $ 2,096 1,612,785 $ 1.30 Effect of Dilutive Securities -- 265,143 (0.18) --------- --------- -------- Diluted Net Loss per share $ 2,096 1,877,928 $ 1.12 ========= ========= ========
500,000 shares of convertible Series A-5 Preferred stock, 10,000 convertible Series A-6 Preferred stock options, and 63,346 convertible Series A-3 Preferred stock warrants were issued subsequent to year end. Additionally, 62,333 shares of convertible Series A-6 Preferred stock and 28,416 convertible Series A-5 preferred stock options, which are subject to further adjustment based on the final purchase price calculation for Rosewood, were issued subsequent to year end. These subsequent equity issuances are not included in the fiscal 1998 earnings per common share calculation above. 3. Receivables From Related Parties and Former Officers Notes receivable from related parties and accounts receivable from former officers represent advances to the former shareholders of the Predecessor during the years ended January 31, 1996 and 1997. Interest accrued monthly on the receivables at 6.5 percent. Pursuant to the acquisition of the Predecessor described in Note 1, these receivables were paid following the close of the transaction. 4. Employee Benefit Plan The Company sponsors a defined contribution plan (the Plan) under which all employees who have completed one year of service are eligible to participate. Company contributions, if any, are determined annually by the board of directors from net profits or accumulated earnings and may not exceed 15 percent of each employee's eligible compensation, as defined. Vesting under the Plan is at a rate of 20 percent per year beginning after the second year of participation. During the year ended January 31, 1997, the Company made contributions to the Plan totaling $64,000. The Company did not make contributions to the plan during the year ended January 31, 1996 or the period from February 1, 1997 to March 27, 1997. The Company accrued a contribution of $131,000 at March 31, 1998, which was paid after year end. One of the former shareholders was the trustee of the Plan through March 27, 1997. The President of the Company and a member of the Board of Directors are currently the trustees. F-42 157 5. Revolving Line of Credit The Company maintains a working capital note with a bank which matures on the earlier of May 1, 2004 or whenever the Long-Term Debt is paid in full. As of March 31, 1998, borrowings against the line of credit totaled $600,000. The unused amount available under this line of credit was $2,751,000 as of March 31, 1998. Interest accrues at the Commercial Paper Rate, plus 4 percent. The weighted average interest rate for the year ended March 31, 1998 was 9.62 percent. The weighted average amount of borrowings outstanding during the year ended March 31, 1998 was $988,000. This line of credit is secured by a security interest which covers substantially all assets of the Company. This line of credit contains certain restrictive covenants, which, among other things, require the maintenance of certain financial ratios and place limits on other indebtedness. As of March 31, 1998, the Company was in compliance with all of the financial covenants in the credit agreement. 6. Long-Term Debt Long-term debt consists of (in thousands):
January 31, March 27, March 31, 1997 1997 1998 ------- ------- ------- Secured note payable to NationsCredit, interest accrues at the Commercial Paper Rate, plus 4.25 percent (9.77 percent at March 31, 1998,) payable in quarterly installments $ - $ -- $10,396 Secured note payable to NationsCredit, interest accrues at the Commercial Paper Rate, plus 6.25 percent (11.77 percent at March 31, 1998) payable in quarterly installments -- -- 4,150 Debt discount -- -- (590) Secured note payable to Bank 23 -- -- ------- ------- ------- 23 -- 13,956 Less--Current portion 10 -- 2,332 ------- ------- ------- Long-term portion $ 13 $ -- $11,624 ======= ======= =======
The debt discount represents the value of warrants which were issued in conjunction with the notes payable. The debt is being accreted to face value using the effective interest method. The credit agreements also contain anti-dilution provisions, which require the issuance of additional warrants upon triggering events, such as the issuance of certain equity securities at issuance or exercise prices below specified amounts. Upon the occurrence of those triggering events, the Company records additional debt costs, which are amortized over the remaining life of the debt. F-43 158 Principal amounts due on notes payable as of March 31, 1998 are as follows(in thousands):
Year ending March 31, 1999 $ 2,332 2000 2,414 2001 2,441 2002 2,551 2003 2,215 Thereafter 2,593 ------- $14,546 =======
All of the notes are collateralized by a security interest, which covers substantially all assets of the Company. These credit agreements contain certain restrictive covenants, which, among other things, require the maintenance of certain financial ratios and place limits on other indebtedness. As of March 31, 1998, the Company was in compliance with all of the financial ratio covenants listed in the credit agreement. 7. Employment, Consulting, and Non-compete Agreements The Company has entered into a five-year employment agreement with its Chief Executive Officer. The agreement provides for an annual base salary of $150,000, all normal employee benefits, and an annual bonus based on earnings before interest, taxes, depreciation and amortization. The Board may, in its sole discretion, grant an additional bonus in cash or stock options in any fiscal year. The agreement also entitles the officer to purchase shares of the Company's Class A-2 convertible preferred stock. Additionally, the agreement granted options to purchase additional shares of such stock pursuant to the Company's 1997 Long Term Incentive Stock Option Plan, and granted warrants to purchase additional shares of such stock. The Company has also entered into a five-year employment agreement with its Senior Vice President Manufacturing. The agreement provides for an annual base salary of $150,000; all normal employee benefits and annual bonuses based on net sales and gross margin. The Board may, in its sole discretion, grant an additional bonus in cash or stock options in any fiscal year. The agreement also entitles the executive to purchase shares of the Company's common stock. Additionally, the agreement granted options to purchase shares of the Company's Class A-2 convertible preferred stock pursuant to the Company's 1997 Long Term Incentive Stock Option Plan. At March 27, 1997, the Company entered into a consulting agreement with a former shareholder for a period of one year. The agreement calls for the payment of $100,000 to the former shareholder over a twelve-month period. Additionally, the Company entered into non-compete agreements with the former shareholders for a period of five years. The Company allocated $2,500,000 of the purchase price to the covenant as determined in the agreement. The asset is recorded in the accompanying consolidated balance sheet in other assets. The covenant is being amortized over the term of the agreement and as of March 31, 1998 accumulated amortization was $500,000. F-44 159 As of August 1997, the Company entered into one-year consulting agreements with certain individuals from whom the Company purchased certain assets and a leasehold interest in a manufacturing facility. The Company paid $600,000 in accordance with these agreements. As of March 31, 1998, accumulated amortization was $400,000. The asset is recorded in the prepaid assets in the accompanying consolidated balance sheet. Additionally, the Company entered into non-compete agreements with these individuals for a period of five years. The Company paid $600,000 for these agreements. The asset is recorded in other assets in the accompanying consolidated balance sheet. The covenant is being amortized over the term of the agreement and as of March 31, 1998 accumulated amortization was $75,000. In February 1998, the Company entered into a non-compete agreement with the former owners of Office Master for a five year period. The Company paid $100,000 for this agreement. The asset is recorded in other assets in the accompanying consolidated balance sheet. This agreement is being amortized over the term of the agreement. As of March 31, 1998, the accumulated amortization was nominal. 8. Related Party Transactions The Predecessor previously sold inventory at normal margins, and provided accounting and management services at no cost to another company, which was also owned by the former shareholders. Sales to this company during the years ended January 31, 1996 and 1997 were $185,000 and $231,000. There were no sales to this company for the period from February 1, 1997 to March 27, 1997 or for the year ended March 31, 1998. Receivables due to this company were $85,000 and 151,000 at January 31, 1996 and 1997, respectively. Accrued interest related to the above receivables were $2,000 and $12,000 at January 31, 1996 and 1997, respectively. Those amounts were subsequently repaid prior to the date of acquisition. As of the date of acquisition, the Company paid $300,000 to one of its shareholders for obtaining debt financing and locating the equity investors for the transaction. The portion related to obtaining debt financing is included in deferred loan fees and the portion relating to locating equity investors is recorded as a reduction to equity on the consolidated balance sheets. Pursuant to certain management agreements, the Company pays monitoring fees to certain of its shareholders. During the year ended March 31, 1998, the Company paid $200,000 and $25,000 to two groups of shareholders in accordance with the management agreement; such amounts are included in operating expenses on the consolidated statements of income. Additionally, the Company maintains a line of credit and all outstanding notes payable with a shareholder of the Company. This lender also received a management fee of $25,000 during the year ended March 31, 1998, which is included in interest expense on the consolidated statements of income. F-45 160 9. Income Taxes The components of the provision for income taxes for the years ended January 31, 1996 and 1997, the period from February 1, 1997 to March 27, 1997 and the year ended March 31, 1998 consist of the following (in thousands):
January 31, January 31, March 27, March 31, 1996 1997 1997 1998 ------- ------- ------- ------- Current: Federal $ 117 $1,166 $ 505 $1,377 State 24 248 155 401 ----- ------ ----- ------ 141 1,414 660 1,778 ----- ------ ----- ------ Deferred: Federal -- 1 -- (162) State -- (6) -- (36) ----- ------ ----- ------ -- (5) -- (198) ----- ------ ----- ------ $ 141 $1,409 $ 660 $1,580 ===== ====== ===== ======
Deferred income taxes arise as a result of temporary differences in the methods used to determine income for financial reporting versus income tax reporting purposes. Significant components of the Company's net deferred tax asset and liability at January 31, 1997, March 27, 1997 and March 31, 1998 are as follows: (in thousands)
January 31, March 27, March 31, 1997 1997 1998 ---- ---- ---- Depreciation and Amortization $(21) $(21) $ 50 ---- ---- ---- Long-term deferred tax asset (liability) (21) (21) 50 ==== ==== ==== Inventory costs capitalized -- -- 12 Provision for bad debt 12 12 52 Warranty accrual 13 13 88 ---- ---- ---- Current deferred tax asset 25 25 152 ==== ==== ==== Net deferred tax asset $ 4 $ 4 $202 ==== ==== ====
F-46 161 The effective tax rate differs from the Federal statutory rate of 34 percent due to the following:
Period from Years ended February 1, Year -------------------------------- 1997 to ended January 31, January 31, March 27, March 31, 1996 1997 1997 1998 ----------- ----------- --------- --------- Provision for income taxes at statutory rate 34.0% 34.0% 34.0% 34.0% Increases in tax resulting from: State income taxes, net 7.0 7.1 6.7 7.2 Other -- -- 2.8 1.8 ---- ---- ---- ---- Provision for income taxes 41.0% 41.1% 43.5% 43.0% ==== ==== ==== ====
10. Commitments and Contingencies a. Leases The Company leases facilities under noncancelable operating leases. Future minimum lease payments on operating leases as of March 31, 1998 are as follows (in thousands):
Year ending March 31: 1999 $ 830 2000 807 2001 805 2002 771 2003 356 Thereafter 1,718 ------ Total future minimum lease payments $5,287 ======
Rent expense for the years ended January 31, 1996 and 1997, the period from February 1, 1997 to March 27, 1997, and the year ended March 31, 1998, were $136,000, $209,000, $40,000 and $391,000, respectively. b. Litigation The Company is, from time to time, a party to litigation arising in the normal course of its business. The Company is not involved in any pending or threatened legal proceeding which the Company believes could reasonably be expected to have a material effect on the Company's financial condition or results of operations. F-47 162 11. Accrued Liabilities The components of accrued liabilities at January 31, 1997, March 27, 1997 and March 31, 1998 consist of the following (in thousands):
January 31, March 27, March 31, 1997 1997 1998 ------ ------ ------ Warranty reserve $ 30 $ 30 $ 206 Income tax penalties 62 113 -- Interest on income taxes 55 59 -- Payroll and related 96 212 777 Professional fees -- 49 136 Interest payable -- -- 149 Other 21 70 269 ------ ------ ------ $ 264 $ 533 $1,537 ====== ====== ======
12. Shareholders' Equity As of March 31, 1998, the Company had four classes of convertible preferred stock, Class A-1, A-2, A-3, and A-4. The holders of Class A-1, A-2 and A-4 convertible preferred stock are entitled to one vote for each share of common stock issuable upon conversion of the preferred stock at the time the vote is taken. Class A-3 stock has no voting privileges, except where mandated by law. All classes of preferred stock share ratably with the common stockholders in dividends and upon liquidation. Shares of convertible preferred stock are convertible to common stock on a one-to-one basis. Preferred stock may be converted to common stock at any time, and the Board of Directors may require conversion of all outstanding preferred shares upon the closing of a Qualified Public Offering. All classes of preferred stock contain anti-dilution privileges whereby the conversion price will be reduced if any shares of common stock are sold for a lower price than the stated conversion price. Prior to March 28, 1997, the Company had 3,600 shares of common stock authorized, issued and outstanding which were owned equally by the former shareholders. As of March 28, 1997 these common stock shares were cancelled and new common stock shares were issued. The new common stock shares have a par value of $0.017 per share. 13. Stock Option Plan The Company has elected to follow APB 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123 "Accounting for Stock-Based Compensation" requires use of option valuation models that were not developed for use in valuing employee stock options. F-48 163 The 1997 Long Term Incentive Stock Plan, as amended (the Plan), allows grants of options to purchase up to 200,000 shares of Series A-2 Preferred Stock and 16,667 shares of Series A-4 Preferred Stock. The preferred stock is convertible into common stock at any time. Stock options granted under the Plan are exercisable over a period of ten years and vest over a period of three to five years. As of March 31, 1998, 178,749 stock options have been granted to various employees and approximately 37,918 remained available for grant under the Plan. In addition, an officer of the Company received options to purchase 34,933 shares of Series A-2 Preferred Stock and 2,538 shares of Series A-4 Preferred Stock. These options are in addition to those reserved under the Plan and contain anti-dilution privileges. No options have been exercised. There were no stock options granted, issued or exercised during the years ended January 31, 1996 and 1997, or the period from February 1, 1997 to March 27, 1997. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: (i) no dividend yield, (ii) volatility of effectively zero, (iii) risk-free interest rate of seven percent and (iv) expected life of ten years. The following table summarizes the information regarding stock options as of March 31, 1998: Options Outstanding Average exercise price of options outstanding $ 3.11 Total options granted and outstanding 216,220 Average remaining outstanding life 8 years Aggregate fair value of options granted $307,046 Range of exercise prices $2.8626-$4.725 Options Exercisable Number exercisable 40,000 Exercise price $ 3.0057
Had compensation expense for the Company's 1998 stock-based compensation been recorded under fair market value principles applicable under SFAS 123, the Company would have recorded $62,000 of additional compensation expense, and net income would have been reduced to $2,034,000 for the year ended March 31, 1998. Basic earnings per share and fully diluted earnings would have been reduced to $0.54 and $0.51, respectively, for the year ended March 31, 1998 had the Company recorded the additional compensation expense. 14. Concentration of Credit Risk The Company had several customers which individually account for greater than ten percent of net sales during the periods presented as follows:
Period from Years ended February 1, Year January 31, 1997 to ended ---------------------- March 27, March 31, 1996 1997 1997 1999 ---- ---- ---- ---- GE Capital Modular Space 20% 49% 65% 41% Mobile Modular Management 11 * 12 15 Williams Scotsman 36 15 12 14
*-less than 10% F-49 164 15. Disclosure About the Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate: Cash-The carrying amount is a reasonable estimate of fair value. Thus, the fair value is disclosed on the consolidated balance sheets. Note Receivable-The notes receivable bear interest at a variable rate; therefore fair value is assumed to approximate carrying value. Thus, the fair value is disclosed on the consolidated balance sheets. Long-Term Debt-The notes payable bear interest at a variable rate; therefore fair value is assumed to approximate carrying value. Thus, the fair value is disclosed on the consolidated balance sheets. 16. Subsequent Events a. Rosewood Acquisition In April 1998, the Company consummated the acquisition of all outstanding Rosewood shares. The purchase price consisted of cash payments totaling $21,773,000, a 9% subordinated note in the amount of $1.5 million, and a variable number of shares of the Company's Series A-6 preferred stock with a fixed value of $1.0 million. The purchase price also includes $195,000 of transactional costs. The number of shares issued is subject to adjustment based on additional analysis of the value of the Company. The agreement also provides that, in the event an initial public offering, as defined, is not consummated within five years of the purchase, the seller may elect to have the shares repurchased by the Company at a price equal to the then fair market value. Alternately, the Company may elect to acquire the seller's shares at the fair market value. b. Proposed acquisition (unaudited) In June 1998, the Company signed a letter of intent to acquire a modular building manufacturer located in the southeastern United States. The proposed purchase price consists of a base price of $2.0 million plus additional consideration based on future earnings. c. Proposed merger (unaudited) The Company has entered into a Plan of Reorganization and Merger dated September 28, 1998 with Modtech, Inc. Under terms of the agreement, all equity instruments will be converted into equity instruments of Modtech Holdings, Inc. or redeemed for cash. F-50 165 SPI HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ($ In Thousands) (Unaudited) ASSETS
June 30, 1998 ------- CURRENT ASSETS: Cash $ 1,524 Accounts receivable, net of allowance for doubtful accounts of $117 7,028 Inventories 3,792 Prepaid and other assets 609 ------- Total current assets 12,953 ------- PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation and amortization 2,142 OTHER ASSETS: Goodwill, net 33,996 Deferred loan fees, net 853 Covenants not to compete, net 2,946 Other assets 381 ------- Total assets $53,271 =======
The accompanying notes are an integral part of these consolidated balance sheets. F-51 166 SPI HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ($ In Thousands) (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, 1998 ------- CURRENT LIABILITIES: Accounts payable $ 4,437 Accrued liabilities 2,417 Revolving line of credit 2,324 Current portion of long-term debt 4,913 ------- Total current liabilities 14,091 ------- LONG-TERM LIABILITIES: Long-term debt, net of current portion 26,023 ------- Total liabilities 40,114 ------- SHAREHOLDERS' EQUITY: Convertible preferred stock: Class A-1, stated value $2.715 per share; 1,500,000 shares authorized, 994,335 shares issued and outstanding 2,628 Class A-2, stated value $2.863 per share; 1,000,000 shares authorized, 272,051 shares issued and outstanding 725 Class A-3 warrants, no par value; 400,000 shares authorized, no shares issued 1,153 Class A-4, stated value $4.500 per share; 155,000 shares authorized, 133,331 shares issued and outstanding 600 Class A-5, stated value $ per share; shares authorized, 500,000 shares issued and outstanding 3,930 Class A-6, stated value $ per share; shares authorized, 62,333 shares issued and outstanding 1,000 Common stock of Company, par value $0.017 per share; 5,000,000 shares authorized, 333,614 shares issued and outstanding 6 Retained earnings 3,115 ------- Total shareholders' equity 13,157 ------- $53,271 =======
The accompanying notes are an integral part of these consolidated balance sheets. F-52 167 SPI HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME ($ In Thousands, except per share data) (Unaudited)
For the Three Months ended -------------------------------------- June 30, June 30, 1997 1998 ----------- ----------- NET SALES $ 9,837 $ 20,925 COST OF SALES 7,576 16,588 ----------- ----------- Gross profit 2,261 4,337 ----------- ----------- OPERATING EXPENSES: Selling and administrative 499 1,183 Management and monitoring fees 56 84 Depreciation and amortization 306 667 ----------- ----------- 862 1,934 ----------- ----------- Income from operations 1,400 2,403 ----------- ----------- OTHER INCOME/(EXPENSE): Interest expense, net (382) (835) Miscellaneous income 2 1 ----------- ----------- (380) (834) ----------- ----------- Income before provision for income taxes 1,020 1,569 PROVISION FOR INCOME TAXES 439 550 ----------- ----------- Net income $ 581 $ 1,019 =========== =========== NET INCOME PER SHARE: Basic $ 0.36 $ 0.47 Diluted $ 0.31 $ 0.40 WEIGHTED AVERAGE NUMBER OF SHARES: Basic 1,600,000 2,190,616 Diluted 1,856,931 2,527,088
The accompanying notes are an integral part of these consolidated statements. F-53 168 SPI HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($ In Thousands) (unaudited)
For the Three Months ended --------------------------- June 30, June 30, 1997 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 581 $ 1,019 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 306 667 Loss on sale of assets (50) Changes in assets and liabilities, net of assets acquired and liabilities assumed: Accounts receivable (943) (688) Inventories (10) 342 Prepaid expenses (57) 32 Other assets (976) (340) Accounts payable (391) 189 Accrued liabilities (168) 149 -------- -------- Net cash provided by (used in) operating activities (1,708) 1,370 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements (61) (220) Proceeds from notes receivable from related Party 1,600 Investment in Rosewood, net of cash received -- (24,452) -------- -------- Net cash provided by (used in) investing Activities 1,539 (24,672) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable (1,400) (1,321) Additions to notes payable 1,231 20,097 Proceeds from issuance of common stock -- 4,931 -------- -------- Net cash provided by (used in) financing activities (169) 23,707 -------- -------- NET INCREASE (DECREASE) IN CASH (339) 405 CASH, beginning of period 991 1,119 -------- -------- CASH, end of period $ 652 $ 1,524 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ -- $ -- ======== ======== Cash paid during the period for income taxes $ -- $ -- ======== ========
The accompanying notes are an integral part of these consolidated statements. F-54 169 SPI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1998 (In Thousands) (unaudited) 1. Financial Statements The accompanying consolidated financial statements included herein have been prepared by the Company, without audit, and include all adjustments which are, in the opinion of Management, necessary for a fair presentation of the financial position as of June 30, 1998, the results of operations and cash flows for the three-month period ended June 30, 1997 and June 30, 1998 pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures in such financial statements are adequate to make the information presented not misleading, these consolidated statements should be read in conjunction with the Company's fiscal 1998 audited consolidated financial statements and notes thereto included in this Form S-4. The results of operations for the three-month periods are not necessarily indicative of the results for a full year. The financial statements include the accounts, from the date of acquisition, of Office Master (acquired in February 1998) and Rosewood (acquired in April 1998--see Note 6.) 2. Inventories Inventories consisted of the following:
June 30, 1998 ------- Raw materials $ 3,237 Work-in-process 625 Finished goods 42 ------- 3,904 Inventory reserve (112) ------- 3,792 =======
3. Comprehensive Income In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". This Statement requires that all items that meet the definition of comprehensive income be reported in a financial statement for the period in which they are recognized. This Statement is effective for fiscal years beginning after December 15, 1997 and was adopted by the Company in the quarter ended June 30, 1998. The Company had no comprehensive income adjustments for the period ended June 30, 1998. F-55 170 4. Earnings per Share The Company accounts for earnings per share in accordance with SFAS No. 128, "Earnings per Share." This Statement requires the presentation of both basic and diluted net income per share for financial statement purposes. Basic net income per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted net income per share includes the effect of the potential shares outstanding, including dilutive stock options using the treasury stock method. Concurrent with the proposed merger, all outstanding shares of preferred stock will convert into common stock. Pro forma earnings per share is calculated using the pro forma weighted average number of common shares outstanding that would have resulted from the preferred stock conversion to common shares. The following table reconciles the components of the pro forma basic net income per share calculation to pro forma diluted net income per share.
Income Shares Per share Amount ------ ----- -------- Basic Net Income per Share $1,019 2,190 $ 0.47 Effect of Dilutive Securities 341 ------ ----- -------- Diluted Net Loss per share $1,019 2,531 $ 0.40 ====== ===== ========
5. Income Taxes The effective tax rate differs from that computed at the Federal statutory rate of 34 percent principally because of the effect of state income taxes. 6. Rosewood Purchase Price Allocation In April 1998, the Company consummated the acquisition of all outstanding Rosewood shares. The assets and liabilities were recorded based on relative fair market values as follows: Assets acquired: Cash $ 321 Accounts receivable, net 1,666 Prepaid and other assets 60 Notes receivable 475 Inventory 1,373 Property, plant and equipment, net 156 Goodwill 22,228 Non-compete covenant 500 ------- $26,779 ------- Liabilities assumed: Accounts payable and accrued liabilities 2,006 ------- Net purchase price $24,773 =======
F-56 171 Included in the purchase price above are related transaction costs of $262,000, including fees to KRG Capital of $75,000. 7. Stockholders' Equity Stockholders' equity activity consists of the following:
Total Common Stock Preferred Stock Share- ----------------------- ----------------------- Retained holders' Shares Amount Shares Amount Earnings Equity ------- ------- ------- ------- ------- ------- BALANCE, March 31, 1998 334 $ 6 1,399 $ 4,600 $ 2,096 $ 6,702 Series A-5 issuance 500 3,930 3,930 Series A-6 issuance 62 1,000 1,000 Series A-3 warrants issued -- 506 506 Net income 1,019 1,019 BALANCE, June 30, 1998 334 $ 6 1,961 $10,036 $ 3,115 $13,157 ======= ======= ======= ======= ======= =======
8. Proposed acquisition In June 1998, the Company signed a letter of intent to acquire a Florida-based modular building manufacturer. The proposed purchase price consists of a base price of $2.0 million plus additional consideration based on future earnings. No assurance can be provided that the transaction will be consummated. F-57 172 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholder of Office Master of Texas, Inc.: We have audited the accompanying balance sheet of Office Master of Texas, Inc. (a Texas corporation) as of December 31, 1997, and the related statements of income and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Office Master of Texas, Inc. as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed more fully in Note 9 to the financial statements, the Company's shareholder has entered into a letter of intent to sell all shares of common stock currently outstanding. Dallas, Texas, January 16, 1998 F-58 173 OFFICE MASTER OF TEXAS, INC. BALANCE SHEET--DECEMBER 31, 1997 ASSETS CURRENT ASSETS: Cash $ 277,996 Accounts receivable 480,453 Inventories 839,524 Note receivable from shareholder 82,000 ----------- Total current assets 1,679,973 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost: Buildings 10,365 Vehicles and equipment 127,409 Leasehold improvements 79,238 ----------- Less- Accumulated depreciation (62,271) ----------- Total assets $ 1,834,714 =========== LIABILITIES AND SHAREHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable $ 295,796 Accrued liabilities 169,478 Notes payable 310,162 Note payable to shareholder 46,000 Income taxes payable 73,670 ----------- Total current liabilities 895,106 LONG-TERM LIABILITIES: Deferred tax liability 8,573 Notes payable, net of current portion 131,070 ----------- Total long-term liabilities 139,643 Total liabilities 1,034,749 COMMITMENTS AND CONTINGENCIES SHAREHOLDER'S EQUITY: Common stock, par value $1 per share: 1,000 shares authorized, issued and outstanding 1,000 Retained earnings 798,965 ----------- Total liabilities and shareholder's equity $ 1,834,714 ===========
The accompanying notes are an integral part of this balance sheet. F-59 174 OFFICE MASTER OF TEXAS, INC. STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1997 NET SALES $ 8,328,105 COST OF SALES 7,468,292 ----------- Gross profit 859,813 OPERATING EXPENSES: Selling and administrative expenses 867,154 Depreciation and amortization expense 16,866 ----------- Loss from operations (24,207) OTHER INCOME (EXPENSE): Interest income 7,884 Miscellaneous income 4,061 ----------- Loss before benefit from income taxes (12,262) BENEFIT FROM INCOME TAXES (3,924) ----------- Net loss (8,338) RETAINED EARNINGS, beginning of year 807,303 ----------- RETAINED EARNINGS, end of year $ 798,965 ===========
The accompanying notes are an integral part of this financial statement. F-60 175 OFFICE MASTER OF TEXAS, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (8,338) Adjustments to reconcile net loss to net cash provided by operating activities- Depreciation and amortization 16,866 Decrease in accounts receivable 522,324 Increase in inventories (192,165) Decrease in note receivable from related party 11,491 Decrease in other assets 10,020 Increase in accounts payable 1,831 Increase in accrued liabilities 125,326 Increase in deferred tax liability 1,543 Decrease in income taxes payable (195,958) --------- Net cash provided by operating activities 292,940 CASH FLOWS FROM INVESTING ACTIVITIES: Sale of equipment and leasehold improvements 8,843 --------- Net cash provided by investing activities 8,843 CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable (199,585) --------- Net cash used in financing activities (199,585) NET INCREASE IN CASH 102,198 --------- CASH, beginning of year 175,798 CASH, end of year $277,996 ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 37,365 ========= Cash paid during the year for income taxes $ 192,034 =========
The accompanying notes are an integral part of this financial statement. F-61 176 OFFICE MASTER OF TEXAS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 1. COMPANY OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: Organization and Business Office Master of Texas, Inc. (the "Company"), manufactures modular buildings at its production facility in Glen Rose, Texas, and distributes to customers throughout the United States, primarily in the South. The Company's customers include dealers and leasing companies who then sell or lease the buildings to third parties operating in various industries. The Company is 100% owned by Bertrand Taylor (the "shareholder"). Inventories Inventories consist of raw materials, work-in-process, and finished goods and are stated at the lower of cost or market on first-in first-out basis. The following is a summary of inventory by component: Raw materials $458,228 Work-in-process 95,669 Finished goods 285,627
Work-in-process consists of raw materials and overhead. Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost. Depreciation is computed using the straight-line method over the following useful lives: Buildings 31.5 years Vehicles and equipment Five to ten years Leasehold improvements Useful life or life of the lease, whichever is shorter Major renewals or betterments are capitalized while maintenance costs and repairs are expensed in the period incurred. Revenue Recognition The Company recognizes revenue upon completion of the buildings and transfer of title. Buildings are maintained on the Company's property until the customer arranges for delivery. F-62 177 Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. NOTE RECEIVABLE FROM SHAREHOLDER: Note receivable from the shareholder represents advances to the shareholder. Interest accrues monthly on the receivable at 6.5%. Pursuant to the agreement entered into as described in Note 9, this receivable will be paid prior to the close of the transaction described therein. 3. NOTES PAYABLE: Notes payable consists of five secured notes payable to two banks. These notes accrue interest at rates ranging from 9.5% to 10.5%. Amounts due on the note payable in future years are as follows:
Year Ending December 31, 1998 $310,162 1999 53,831 2000 55,012 2001 22,227 -------- $441,232
4. NOTE PAYABLE TO SHAREHOLDER: Note payable to the shareholder represents advances from the shareholder. Interest accrues monthly on the payable at 10.95%. Pursuant to the agreement entered into as described in Note 9, this payable will be paid prior to the close of the transaction described therein. 5. INCOME TAXES: Deferred income taxes arise as a result of temporary difference in the methods used to determine income for financial reporting versus income tax reporting purposes. The components of the Company's net deferred tax liability are as follows: Current $(2,381) Deferred (1,543) ------- Benefit from income taxes $(3,924) =======
The provision for income taxes for the year ended December 31, 1997, is comprised of the following: Deferred tax asset- Warranty provision $ 5,520 Deferred tax liability- Depreciation and amortization (14,093) -------- Net deferred tax liability $ (8,573) ========
F-63 178 6. LEASE COMMITMENTS: The Company conducts its major operations from a building owned by the shareholder and currently pays a monthly rental fee of $3,300 pursuant to an informal agreement. The Company also incurred rental expense during a portion of the year related to a parcel of land adjacent to the Company's facility. Such land was sold to the Company during the year in exchange for an agreement to employ additional county residents. The current year rent expense was $60,906. 7. ACCRUED LIABILITIES: The components of accrued liabilities at December 31, 1997, consist of the following: Sales taxes $83,108 Warranty reserve 17,250 Interest 11,654 Payroll 42,230 Payroll taxes and withheld income taxes 2,785 Property taxes 12,451
8. CONCENTRATION OF CREDIT RISK: The Company had six customers which accounted for approximately 88% of net sales during the year, and approximately 93% of accounts receivable at December 31, 1997. 9. SUBSEQUENT EVENT: On December 10, 1997, the shareholder entered into an agreement to sell all of the outstanding shares of the Company for an amount substantially in excess of the net book value of the Company. Pursuant to this agreement, the shareholders agree to, among other things, (1) repay all related party notes and advances, plus accrued interest, (2) enter into one-year consulting agreements, and (3) enter into five-year noncompete agreements. The transaction is expected to close in February 1998. F-64 179 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Rosewood Enterprises, Inc. Modular Manufacturing: We have audited the accompanying balance sheets of ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING (formerly known as Arizona Millwork, Inc.) as of December 31, 1997 and 1996, and the related statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rosewood Enterprises, Inc. Modular Manufacturing as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Phoenix, Arizona, March 17, 1998. F-65 180 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING DBA ROSEWOOD ENTERPRISES MODULAR MFG. BALANCE SHEETS
Years Ended Three Months Ended December 31, March 31, ---------------------------- ---------------------------- 1997 1996 1998 1997 ----------- ----------- ----------- ----------- ASSETS (Unaudited) (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 108,866 $ 429,692 $ 179,247 $ 864,131 Accounts receivable, net of allowance for doubtful accounts of $20,000 1,383,876 1,283,365 2,264,851 1,720,999 Inventories 1,454,520 1,330,076 1,951,692 1,391,726 Prepaid expenses 45,998 249,397 52,301 43,216 ----------- ----------- ----------- ----------- Total current assets 2,993,260 3,292,530 4,448,091 4,020,072 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 163,722 210,731 139,588 249,340 DEFERRED TAX ASSET 138,774 20,000 157,974 20,000 ----------- ----------- ----------- ----------- Total assets $ 3,295,756 $ 3,523,261 $ 4,745,653 $ 4,289,412 =========== =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable $ 468,813 $ 590,588 $ 1,605,090 $ 813,464 Income taxes payable 63,111 20,000 297,094 107,166 Accrued payroll and related liabilities 473,366 281,997 246,731 273,168 Accrued liabilities 106,511 31,000 329,285 70,389 Current portion of notes payable 200,000 -- 200,000 -- ----------- ----------- ----------- ----------- Total current liabilities 1,311,801 923,585 2,678,200 1,264,187 OTHER LIABILITIES (Note 7) 762,771 -- 566,937 -- NOTES PAYABLE, net of current portion 1,275,437 1,211,260 NOTE PAYABLE TO RELATED PARTY 600,000 600,000 ----------- ----------- ----------- ----------- Total liabilities 3,950,009 923,585 5,056,397 1,264,187 ----------- ----------- ----------- ----------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY (DEFICIT): Nonvoting common stock, $.001 par value, 10,000 shares authorized, 1,011 and 4,049 shares issued and outstanding at December 31, 1997 and 1996, respectively 1 4 1 4 Voting common stock, $.001 par value, 1,000 shares authorized, 101 and 405 shares issued and outstanding at December 31, 1997 and 1996, respectively -- -- -- -- Additional paid-in capital 338,423 338,423 338,423 338,423 Treasury stock (4,884,599) -- (4,884,599) -- Retained earnings 3,891,922 2,261,249 4,235,431 2,686,798 ----------- ----------- ----------- ----------- Total shareholders' equity (deficit) (654,253) 2,599,676 (310,744) 3,025,225 ----------- ----------- ----------- ----------- Total liabilities and shareholders' equity (deficit) $ 3,295,756 $ 3,523,261 $ 4,745,653 $ 4,289,412 =========== =========== =========== ===========
The accompanying notes are an integral part of these balance sheets. F-66 181 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING DBA ROSEWOOD ENTERPRISES MODULAR MFG. STATEMENTS OF OPERATIONS
For the Three Months For the Years Ended December 31, Ended March 31, ----------------------------------------------- ------------------------------ 1997 1996 1995 1998 1997 ------------ ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) NET SALES $ 31,875,003 $ 18,361,747 $ 19,859,641 $ 6,724,383 $ 6,368,789 COST OF SALES 26,482,353 15,965,611 16,573,200 5,632,444 5,258,207 ------------ ------------ ------------ ------------ ------------ Gross profit 5,392,650 2,396,136 3,286,441 1,091,939 1,110,582 OPERATING EXPENSES: General and administrative expenses 2,551,986 1,767,241 1,890,964 478,392 412,364 Professional fees 250,000 300,000 375,000 -- -- ------------ ------------ ------------ ------------ ------------ Income from operations 2,590,664 328,895 1,020,477 613,547 698,218 ------------ ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense (81,482) -- (53) (42,655) -- Interest income 46,980 50,667 47,528 3,503 8,675 Other income 180,650 213 29,404 3,046 -- Loss on sale of assets, net (28,802) -- -- -- -- ------------ ------------ ------------ ------------ ------------ 117,346 50,880 76,879 (36,106) 8,675 ------------ ------------ ------------ ------------ ------------ Income before provision for income taxes 2,708,010 379,775 1,097,356 577,441 706,893 PROVISION FOR INCOME TAXES 1,077,337 143,422 453,647 233,932 281,344 ------------ ------------ ------------ ------------ ------------ Net income $ 1,630,673 $ 236,353 $ 643,709 $ 343,509 $ 425,549 ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. F-67 182 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING DBA ROSEWOOD ENTERPRISES MODULAR MFG. STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Voting Nonvoting Additional Common Stock Common Stock Paid-in Treasury Retained Shares Amount Shares Amount Capital Stock Earnings Total ----------- ----- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1994 405 $ -- 4,049 $ 4 $ 338,423 $ -- $ 1,381,187 $ 1,719,614 Net income -- -- -- -- -- -- 643,709 643,709 ----------- ----- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1995 405 -- 4,049 4 338,423 -- 2,024,896 2,363,323 Net income -- -- -- -- -- -- 236,353 236,353 ----------- ----- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1996 405 -- 4,049 4 338,423 -- 2,261,249 2,599,676 Purchase of common stock (304) -- (3,038) (3) -- (4,884,599) -- (4,884,602) Net income -- -- -- -- -- -- 1,630,673 1,630,673 ----------- ----- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1997 101 -- 1,011 1 338,423 (4,884,599) 3,891,922 (654,253) Net income (unaudited) -- -- -- -- -- -- 343,509 343,509 ----------- ----- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, (unaudited) March 31, 1998 101 $ -- 1,011 $ 1 $ 338,423 $(4,884,599) $ 4,235,431 $ (310,744) =========== ===== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-68 183 ARIZONA MILLWORK, INC. DBA ROSEWOOD ENTERPRISES MODULAR MFG. STATEMENTS OF CASH FLOWS
For the Three Months For the Years Ended December 31, Ended March 31, ----------------------------------------- -------------------------- 1997 1996 1995 1998 1997 ----------- ----------- ----------- ----------- ----------- (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,630,673 $ 236,353 $ 643,709 $ 343,509 $ 425,549 Adjustments to reconcile net income to net cash provided by (used in) operating activities- Depreciation 109,317 92,097 71,284 24,134 24,144 Deferred income taxes (118,774) -- (20,000) (19,200) -- Loss on sale of assets 28,802 -- -- -- -- Changes in assets and liabilities: Increase in accounts receivable (100,511) (384,175) (298,420) (880,975) (437,634) Decrease (increase) in inventories (124,444) (489,682) 422,957 (497,172) (61,650) Decrease (increase) in prepaid expenses 203,399 (150,868) (50,940) (6,303) 206,181 Increase (decrease) in income tax payables 43,111 (432,634) 404,871 233,983 87,166 Increase (decrease) in accounts payable (121,775) 329,942 (599,092) 1,136,277 222,876 Increase in accrued payroll and related liabilities 191,369 75,980 120,781 (226,635) (8,829) Increase (decrease) in accrued liabilities 75,511 (11,887) (126,776) 222,774 39,389 Increase in other liabilities 183,771 -- -- (195,834) -- ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities 2,000,449 (734,874) 568,374 134,558 497,192 ----------- ----------- ----------- ----------- ----------- CASH FLOWS FOR INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements (103,110) (82,965) (111,601) -- (62,753) Proceeds from sale of equipment 12,000 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities (91,110) (82,965) (111,601) -- (62,753) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of common stock (3,305,602) -- -- -- -- Proceeds from notes payable 1,600,000 -- -- -- -- Principal payments on notes payable (524,563) -- -- (64,177) -- ----------- ----------- ----------- ----------- ----------- Net cash used in financing activities (2,230,165) -- -- (64,177) -- ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (320,826) (817,839) 456,773 70,381 434,439 CASH AND CASH EQUIVALENTS, beginning of year 429,692 1,247,531 790,758 108,866 429,692 ----------- ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of year $ 108,866 $ 429,692 $ 1,247,531 $ 179,247 $ 864,131 =========== =========== =========== =========== ===========
(continued) F-69 184
For the Three Months For the Years Ended December 31, Ended March 31, ----------------------------------------- ------------------------ 1997 1996 1995 1998 1997 ---------- ----------- ----------- ----------- ---------- (unaudited) (unaudited) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 94,982 $ -- $ -- $ 42,655 $ -- ========== =========== =========== =========== ========== Cash paid during the year for income taxes $1,153,000 $ 336,000 $ 21,300 $ -- $ -- ========== =========== =========== =========== ========== SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS: Common stock purchased through issuance of a note payable $1,000,000 $ -- $ -- $ -- $ -- ========== =========== =========== =========== ========== Common stock purchased through other long-term liabilities $ 579,000 $ -- $ -- $ -- $ -- ========== =========== =========== =========== ==========
The accompanying notes are an integral part of these financial statements. F-70 185 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING DBA ROSEWOOD ENTERPRISES MODULAR MFG. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 (1) COMPANY OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BUSINESS Rosewood Enterprises, Inc. Modular Manufacturing, formerly known as Arizona Millwork, Inc. (the Company), manufactures modular buildings at its production facility in Phoenix, Arizona, and distributes to customers throughout the western United States. The Company's customers include dealers and leasing companies who sell or lease the buildings to third parties operating in various industries. FINANCIAL STATEMENTS The accompanying consolidated financial statements included herein have been prepared by the Company. Quarterly results have been prepared, without audit, and include all adjustments, which are, in the opinion of Management, necessary for a fair presentation of the financial position as of March 31, 1998, the results of operations and cash flows for the three-month period ended March 31, 1997 and March 31, 1998 pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted for the quarterly results pursuant to such rules and regulations. Although the Company believes that the disclosures in such financial statements are adequate to make the information presented not misleading, these consolidated statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included herein. The results of operations for the three-month periods are not necessarily indicative of the results for a full year. CASH AND CASH EQUIVALENTS The Company considers all cash and highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Cash equivalents consist of investments in a money market account. Cash equivalents are recorded at cost of $17,048 and $363,314 at December 31, 1997 and 1996, respectively, which approximates market value. INVENTORIES Inventories consist of raw materials and work-in-process and are stated at the lower of cost (first-in first-out) or market. Work-in-process consists of raw materials and overhead. Inventories consist of the following:
December 31, December 31, March 31, March 31, 1997 1996 1997 1998 ------------ ------------ ----------- ----------- Raw materials $1,193,530 $ 971,772 $1,053,374 $1,532,992 Insignias -- -- 1,284 -- Work-in-process 260,990 358,304 337,068 418,700 ---------- ---------- ---------- ---------- Total inventories $1,454,520 $1,330,076 $1,391,726 $1,951,692 ========== ========== ========== ==========
EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are stated at cost. Depreciation is computed using the straight-line method over the assets' useful lives or life of the lease, whichever is shorter. Equipment and leasehold improvements at December 31 is comprised of the following:
Useful Life 1997 1996 ---- --------- --------- Automotive equipment 3-5 $ 199,855 $ 164,162 Furniture and fixtures 5-10 208,691 208,691 Leasehold improvements 5-10 33,545 33,545 Warehouse equipment 5-7 202,911 187,205 --------- --------- 645,002 593,603 Less - accumulated depreciation (481,280) (382,872) --------- --------- $ 163,722 $ 210,731 ========= =========
Major renewals or betterments are capitalized while maintenance costs and repairs are expensed in the period incurred. Upon retirement or disposal of depreciable assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operations. Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of, requires that long-lived assets to be held and used be F-71 186 reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on the estimated future cash flows. In management's opinion, no such events or changes in circumstances have occurred. PRODUCT WARRANTY The Company provides a one-year parts and labor warranty on units sold. The Company provides, by a current charge to income, an amount it estimates will be needed to cover future warranty obligations for products sold during the year. The accrued liability for warranty costs of $71,600 and $31,000 at December 31, 1997 and 1996, respectively, is included in accrued liabilities in the accompanying balance sheets. REVENUE RECOGNITION The Company recognizes revenue upon completion of the buildings and transfer of title to the customer. Customer-owned buildings are often maintained on the Company's premises until the customer arranges for pickup and delivery. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. OTHER INCOME Other income for the year ended December 31, 1997 included approximately $130,000 of bad debt recovery and a dividend of approximately $50,000 received from the Company's workers' compensation carrier. (2) NOTES PAYABLE: Notes payable consist of the following:
DECEMBER ---------------------------- 1997 1996 ------------ -------- Note payable to bank, payments of principal and interest due monthly, interest at base rate (9.5.% at December 31, 1997) plus 1% per annum, guaranteed by the Company's president, due August 27, 2002, secured by receivables, inventories, and equipment. $ 475,437 $ -- Note payable to a former shareholder, monthly payments of interest only for the first 24 months, monthly payments of principal and interest thereafter, interest at 11% per annum, guaranteed by the Company's president, due August 28, 2004, secured by all of the Company's assets. $1,000,000 $ -- ------------ -------- $1,475,437 $ -- Less - current portion (200,000) -- ------------ -------- $1,275,437 -- ============ ======== Amounts due on the note payable in future years are as follows:
F-72 187
Year Ending December 31, ------------ 1998 $ 200,000 1999 251,000 2000 240,080 2001 183,700 2002 204,963 Thereafter 395,694 ---------- $1,475,437 ==========
Additionally, the Company has a note payable to the Company's president. Payments of interest are due quarterly at 9%; with principal due August 29, 2006. The note is secured by all the Company's assets. (3) LINE OF CREDIT: In August 1997, the Company obtained a bank revolving line of credit for borrowings in an amount that is the lower of $500,000 or 80% of eligible accounts receivable and 20% of raw materials inventory as defined in the line of credit agreement. Interest accrues at the bank's base rate (9.5% at December 31, 1997) plus 1% on the outstanding balance and is payable monthly. The line of credit is guaranteed by the president and is secured by all of the Company's assets. The line of credit expires May 1998 and contains certain financial covenants. The Company had no borrowings under the line of credit during the year ended December 31, 1997. (4) INCOME TAXES: The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities at the tax rates in effect when these differences are expected to reverse. The deferred provision for income taxes results from timing differences in the recognition of certain revenue and expense items for financial reporting and income tax reporting purposes. The provision for income taxes for the years ended December 31 is comprised of the following:
1997 1996 1995 ----------- ----------- ----------- Current $ 1,196,069 $ 143,422 $ 453,647 Deferred (118,732) -- -- ----------- ----------- ----------- Provision for income taxes $ 1,077,337 $ 143,422 $ 453,647 =========== =========== ===========
The components of the Company's net deferred tax asset are as follows:
1997 1996 -------- -------- Reserves $ 36,774 $ 20,000 Deferred compensation 97,000 -- Depreciation and amortization 5,000 -- -------- -------- Net deferred tax asset $138,774 $ 20,000 ======== ========
A reconciliation of the federal statutory rate to the Company's effective tax rate for the years ended December 31 is as follows:
1997 1996 1995 ---- ---- ---- Statutory federal rate 34% 34% 34% State taxes, net of federal benefit 6 6 6 Other -- (2) 1 --- --- --- 40% 38% 41% === === ===
F-73 188 (5) LEASE COMMITMENTS: OPERATING LEASE The Company conducts its major operations from a facility owned by a former shareholder and currently pays a monthly rental fee of $16,300 plus taxes, maintenance fees and insurance. The Company also incurred month-to-month rental expense for storage during a portion of 1997, 1996 and 1995 related to a parcel of land adjacent to the Company's facility. Rent expense was approximately $245,000, $233,000, and $234,000 for the years ended December 31, 1997, 1996, and 1995, respectively. As of December 31, 1997, future minimum lease payments required under noncancellable operating leases are as follows:
Year Ending December 31, ------------ 1998 $206,148 1999 204,390 2000 195,600 2001 195,600 2002 130,400 -------- $932,138 ========
(6) CONCENTRATION OF CREDIT RISK: The Company is a wholesale manufacturer that sells its products to dealers, who in turn, sell or lease the products to end-users. Financial instruments which potentially expose the Company to concentrations of credit risk, as defined by SFAS No. 105, Disclosure of Information About Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk consist primarily of trade accounts receivable. The Company's trade accounts receivable are not secured. The Company generally does not require collateral upon delivery of its products. The percentage of total sales to customers that in aggregate exceed 10% of total sales are as follows:
For the Years Ended December 31, ---------------------------------- 1997 1996 1995 ---- ---- ---- Customer #1 50% 44% 61% Customer #2 29 11 18 Customer #3 -- 12 --
(7) COMMITMENTS AND CONTINGENCIES: LITIGATION In the normal course of its business, the Company is subject to certain contractual guarantees and litigation. In management's opinion, upon consultation with legal counsel, there is no current, pending, or threatened litigation that will materially affect the Company's financial position or results of operations. DEFERRED COMPENSATION AND CONSULTING AGREEMENTS On August 29, 1997, the Company entered into a deferred compensation agreement with a former shareholder. For services provided from January 1997 to August 1997, the shareholder earned $200,000, payable quarterly over the next twelve years. The Company recorded $200,000 of professional fees for the year ended December 31, 1997 related to the deferred compensation agreement in the accompanying statements of operations. On August 29, 1997, the Company entered into a consulting agreement with the same shareholder to provide consulting services to the Company for three years. Under the consulting agreement, the former shareholder earns $150,000 in year one, $100,000 in year two, and $75,000 in year three for these services. The fees are paid quarterly over twelve years. The Company recognizes the expense straight-line in each of the three years earned and recorded professional fees of $50,000 for the year ended December 31, 1997, in the accompanying statements of operations. F-74 189 Professional fees for 1996 and 1995 of $300,000 and $375,000, respectively, were paid to this same former shareholder for management and consulting services. PROFIT SHARING PLAN AND 401(k) SALARY SAVINGS PLAN In 1987, the Company adopted a profit sharing plan and a 401(k) salary savings plan (the Plan). All of the Company's employees are eligible to participate after completing three months of service with the Company. The Company matches 25% of the employee's contribution up to an annual maximum of 6% of the employee's annual compensation. In addition, the Company, at its discretion, may make a profit sharing contribution. To be eligible for a profit sharing contribution, the employee must work at least 1,000 hours during the Plan year and be employed by the Company on the last day of the Plan year. The Company's matching contributions and profit sharing contributions vest over a seven year period. The Company contributed approximately $141,000, $48,000, and $94,000 to the Plan for the years ended December 31, 1997, 1996, and 1995, respectively. (8) STOCK PURCHASE: On August 29, 1997, the Company entered into an agreement to purchase 303 shares of voting common stock and 3,034 shares of nonvoting common stock (approximately 75% of the Company's outstanding voting and nonvoting common stock) for $1,462 per share from the then, majority shareholder, for $4,879,000. The transaction was financed with cash from operations of $1,700,000, a loan from a bank for $1,000,000, a note from the seller in the amount of $1,000,000 and a note from the Company's president in the amount of $600,000. In connection with this agreement, the Company entered into a non-compete agreement with this shareholder. Under the agreement, the shareholder agreed not to compete with the Company for twelve years in exchange for a total of $579,000, paid quarterly over twelve years. The Company recorded the value of this agreement in the accompanying balance sheets as additional consideration paid to acquire his outstanding common stock. The corresponding liability is recorded in other long-term liabilities in the accompanying balance sheets. In addition, the Company purchased fractional shares from various minority shareholders for approximately $6,000. (9) DESCRIPTION OF SECURITIES: REVERSE STOCK SPLIT Information in the accompanying financial statements and notes to financial statements gives retroactive effect to a reverse stock split effected October 31, 1997. Each holder of record of the Company's common stock received one share of newly created nonvoting common stock and one-tenth of a share of the newly created voting common stock for each 10,000 shares of common stock. COMMON STOCK The Company's capital stock consists of 10,000 shares of $.001 par value nonvoting common stock and 1,000 shares of $.001 par value of voting common stock. No holders of any shares of common stock have preemptive or preferential right to acquire any additional shares. Holders of common stock will be entitled to receive such dividends, if any, as may be declared by the board of directors from time to time out of legally available funds. Holders of the voting common stock are entitled to one vote for each share on all matters submitted to a vote of shareholders. Holders of the nonvoting common stock have no voting rights. Upon any liquidation, dissolution or winding up of the Company, and after paying or adequately providing for the payment of all its obligations, the remainder of the assets of the Company shall be distributed, either in cash or in kind, pro rata to the holders of common stock. (10) SUBSEQUENT EVENT: In February 1998, the shareholders entered into an agreement to sell all of the outstanding shares of the Company for an amount in excess of the net book value of the Company. Pursuant to this agreement, the shareholders agree to, among other things, enter into noncompete, consulting and employment agreements. The transaction is expected to close in April 1998. F-75 190 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law empowers the Registrant to indemnify, subject to the standards therein prescribed, any person in connection with any action, suit or proceeding brought or threatened by reason of the fact that such person is or was a director, officer, employee or agent of the Registrant or is or was serving as such with respect to another corporation or other entity at the request of the Registrant. Article VI of the Registrant's By-Laws provides that such Registrant shall, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, indemnify its directors and officers from and against any and all of the expenses, liabilities or other matters referred to in or covered by said Article. As permitted by Section 102 of the Delaware General Corporation Law, the Registrant's Certificates of Incorporation includes a provision eliminating, to the extent permitted by Delaware law, the personal liability of each director of the Registrant to the Registrant or any of its stockholders for monetary damages resulting from breaches of such director's fiduciary duty of care. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
NUMBER EXHIBIT - ------ ------- 2 Agreement and Plan of Reorganization and Merger, dated as of September 28, 1998, by and between Modtech, Inc. and SPI Holdings, Inc. (included as Annex I to the Joint Proxy Statement/Prospectus) 3.1 Certificate of Incorporation of Modtech Holdings, Inc. 3.2 Bylaws of Modtech Holdings, Inc. 3.3* Articles of Incorporation of Modtech, Inc. 3.4* Bylaws of Modtech, Inc. 3.5 Articles of Incorporation of SPI Holdings, Inc. 3.6 Bylaws of SPI Holdings, Inc. 3.7 Certificate of Designation of Modtech Holdings, Inc. Series A Preferred Stock 3.8 Designation of SPI Holdings, Inc. Series A-1, A-2, A-3, A-4, A-5 and A-6 Convertible Preferred Stock 4 Registration Rights Agreement
II-1 191 5** Opinion of Haddan & Zepfel LLP regarding the validity of securities offered hereby 8.1** Opinion of Gibson, Dunn & Crutcher LLP regarding certain tax matters 8.2** Opinion of Dorsey & Whitney LLP regarding certain tax matters 10.1 Transaction Advisory Agreement 10.2** Employment Agreement-- Evan M. Gruber 10.3** Employment Agreement-- Patrick Van Den Bossche 10.4** Employment Agreement-- Michael G. Rhodes 10.5* Lease between Modtech, Inc. and Pacific Continental Modular Enterprises, relating to the Barrett Street property in Perris, California 10.6* Lease between Modtech, Inc. and Gerald Bashaw, relating to the Morgan Street Property in Perris, California 10.7* Lease between Modtech, Inc. and BMG2, relating to the property in Lathrop, California 10.8* Industrial Development Bond agreements 10.9 Lease between Office Master of Texas, Inc. and Bertgrand L. Taylor, relating to the Gibbs Boulevard property in Glen Rose, Texas 10.10 Lease between Baron Homes, Inc. and David V. Homme and Mary B. Homme, relating to the South Cucamonga Avenue property in Rancho Cucamonga, California, assigned to SPI 10.11 Lease between Ronfran Incorporated d/b/a Standard Pacific Industries and Toth Enterprises, relating to the Hermosa Avenue property in Rancho Cucamonga, California, assigned to SPI 10.12 Lease between Arizona Millwork, Inc. and The Rosenfield Family Trust, relating to the Madison Avenue property in Phoenix, Arizona 23.1 Consent of KPMG Peat Marwick LLP 23.2 Consent of Arthur Andersen LLP 23.3** Consent of Haddan & Zepfel LLP (included in Exhibit 5) 23.4** Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 8.1) 23.5** Consent of Dorsey & Whitney LLP (included in Exhibit 8.2) 24 Powers of attorney (included on Page II-4 hereof) 27 Financial Data Schedule 99.1 Form of Modtech, Inc. proxy
II-2 192 99.2 Form of SPI Holdings, Inc. proxy
- ------------------ * Incorporated by reference from Modtech's Annual Report on Form 10-K for the year ended December 31, 1997 (Commission File No. 0-18680). ** To be filed by amendment. ITEM 22. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (a) to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by section 10(a)(3) of the Securities Act of 1933 (the "Securities Act"); (ii) to reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment hereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement. (b) that, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (d) to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first-class mail or equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (e) to supply by means of a post-effective amendment all information concerning a transaction, and SPI being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. (f) that, for purposes of determining any liability under the Securities Act of 1933, each filing of a Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of any employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (g) insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrants pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the II-3 193 Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-4 194 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Newport Beach, California on October 26, 1998. MODTECH HOLDINGS, INC. By: s/Evan M. Gruber --------------------------------------- Evan M. Gruber, Chief Executive Officer KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint Evan M. Gruber and Michael G. Rhodes, and each of them, with full power to act without the other, his true and lawful attorneys-in-fact and agents to act for him or her in his or her name, place and stead, in any and all capacities, to sign a registration statement on Form S-4 and any or all amendments thereto (including without limitation any post-effective amendments thereto), and to file each of the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully, to all intents and purposes, as they or he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by each of the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- s/Evan M. Gruber Chief Executive Officer October 26, 1998 - ----------------------------- and Director Evan M. Gruber s/Michael G. Rhodes Chief Operating and Chief October 26, 1998 - ----------------------------- Financial Officer (principal financial Michael G. Rhodes and accounting officer) s/Patrick Van Den Bossche President, Director October 26, 1998 - ----------------------------- Patrick Van Den Bossche s/Charles A. Hamilton Director October 26, 1998 - ----------------------------- Charles A. Hamilton s/Charles R. Gwirtsman Director October 26, 1998 - ----------------------------- Charles R. Gwirtsman s/Charles C. McGettigan Director October 26, 1998 - ----------------------------- Charles C. McGettigan s/Myron A. Wick III Director October 26, 1998 - ----------------------------- Myron A. Wick III s/Daniel J. Donahoe III Director October 26, 1998 - ----------------------------- Daniel J. Donahoe III
II-5 195 EXHIBIT INDEX NUMBER NAME OF EXHIBIT - ------ --------------- 2 Agreement and Plan of Reorganization and Merger, dated as of September 28, 1998, by and between Modtech, Inc. and SPI Holdings, Inc. (included as Annex I to the Joint Proxy Statement/Prospectus) 3.1 Certificate of Incorporation of Modtech Holdings, Inc. 3.2 Bylaws of Modtech Holdings, Inc. 3.3* Articles of Incorporation of Modtech, Inc. 3.4* Bylaws of Modtech, Inc. 3.5 Articles of Incorporation of SPI Holdings, Inc. 3.6 Bylaws of SPI Holdings, Inc. 3.7 Certificate of Designation of Modtech Holdings, Inc. Series A Preferred Stock 3.8 Designation of SPI Holdings, Inc. Series A-1, A-2, A-3, A-4, A-5 and A-6 Convertible Preferred Stock 4 Registration Rights Agreement 5** Opinion of Haddan & Zepfel LLP regarding the validity of securities offered hereby 8.1** Opinion of Gibson, Dunn & Crutcher LLP regarding certain tax matters 8.2** Opinion of Dorsey & Whitney LLP regarding certain tax matters 10.1 Transaction Advisory Agreement 10.2** Employment Agreement-- Evan M. Gruber 10.3** Employment Agreement-- Patrick Van Den Bossche 10.4** Employment Agreement-- Michael G. Rhodes 10.5* Lease between Modtech, Inc. and Pacific Continental Modular Enterprises, relating to the Barrett Street property in Perris, California 10.6* Lease between Modtech, Inc. and Gerald Bashaw, relating to the Morgan Street Property in Perris, California 10.7* Lease between Modtech, Inc. and BMG2, relating to the property in Lathrop, California 10.8* Industrial Development Bond agreements 10.9 Lease between Office Master of Texas, Inc. and Bertgrand L. Taylor, relating to the Gibbs Boulevard property in Glen Rose, Texas 10.10 Lease between Baron Homes, Inc. and David V. Homme and Mary B. Homme, relating to the South Cucamonga Avenue property in Rancho Cucamonga, California, assigned to SPI 10.11 Lease between Ronfran Incorporated d/b/a Standard Pacific Industries and Toth Enterprises, relating to the Hermosa Avenue property in Rancho Cucamonga, California, assigned to SPI 10.12 Lease between Arizona Millwork, Inc. and The Rosenfield Family Trust, relating to the Madison Avenue property in Phoenix, Arizona 196 23.1 Consent of KPMG Peat Marwick LLP 23.2 Consent of Arthur Andersen LLP 23.3** Consent of Haddan & Zepfel LLP (included in Exhibit 5) 23.4** Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 8.1) 23.5** Consent of Dorsey & Whitney LLP (included in Exhibit 8.2) 24 Powers of attorney (included on Page II-4 hereof) 27 Financial Data Schedule 99.1 Form of Modtech, Inc. proxy 99.2 Form of SPI Holdings, Inc. proxy
- ------------------ * Incorporated by reference from Modtech's Annual Report on Form 10-K for the year ended December 31, 1997 (Commission File No. 0-18680). ** To be filed by amendment. EX-3.1 2 CERIFICATE OF INCORPORATION OF MODTECH HOLDING,INC 1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF MODTECH HOLDINGS, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE ================================================================================ ARTICLE I NAME The name of the corporation (the "Corporation") is: Modtech Holdings, Inc. ARTICLE II REGISTERED OFFICE The address of the Corporation's registered office in the State of Delaware is Paracorp Incorporated, 15 East North Street, in the City of Dover, County of Kent. The name of the Corporation's registered agent at such address is Paracorp Incorporated. ARTICLE III POWERS The purpose of the Corporation shall be to engage in any lawful act or activity for which corporations may be organized and incorporated under the General Corporation Law of the State of Delaware (the "GCL"). ARTICLE IV CAPITAL STOCK (a) The total number of shares of stock which the Corporation shall have authority to issue is 30,000,000, consisting of 5,000,000 shares of preferred stock, par value $0.01 per share ("Preferred Stock"), and 25,000,000 shares of common stock, par value $0.01 per share ("Common Stock"). (b) The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized to provide for the issuance of shares of Preferred Stock in series and, by filing a certificate pursuant to the applicable law of the State of Delaware ("Preferred Stock Designation"), to establish from time to time the number of shares to be 2 included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (1) The designation of the series, which may be by distinguishing number, letter or title. (2) The number of shares of the series, which number the Board of Directors may thereafter (except where otherwise provided in the Preferred Stock Designation) increase or decrease (but not below the number of shares thereof then outstanding). (3) Whether dividends, if any, shall be cumulative or noncumulative and the dividend rate of the series. (4) The dates on which dividends, if any, shall be payable. (5) The redemption rights and price or prices, if any, for shares of the series. (6) The terms and amount of any sinking fund provided for the purchase or redemption of shares of the series. (7) The amounts payable on, and the preferences, if any, of shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation. (8) Whether the shares of the series shall be convertible into shares of any other class or series, or any other security, of the Corporation or any other corporation, and, if so, the specification of such other class or series of such other security, the conversion price or prices or rate or rates, any adjustments thereof, the date or dates at which such shares shall be convertible and all other terms and conditions upon which such conversion may be made. (9) Restrictions on the issuance of shares of the same series or of any other class or series. (10) The voting rights, if any, of the holders of shares of the series. (c) The Common Stock shall be subject to the express terms of the Preferred Stock and any series thereof. Each share of Common Stock shall be equal to each other share of Common Stock. The holders of shares of Common Stock shall be entitled to one vote for each such share upon all questions presented to the stockholders. Except as may be provided in this Certificate of Incorporation or in a Preferred Stock Designation, or as may be required by law, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, and holders of Preferred Stock shall 2 3 not be entitled to receive notice of any meeting of stockholders at which they are not entitled to vote. (d) The Corporation shall be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Corporation shall have notice thereof, except as expressly provided by applicable law. ARTICLE V BYLAWS In furtherance of, and not in limitation of, the powers conferred by law, the Board of Directors is expressly authorized and empowered: (1) to adopt, amend or repeal the By-laws of the Corporation; provided, however, that the By-laws adopted by the Board of Directors under the powers hereby conferred may be amended or repealed by the Board of Directors or by the stockholders having voting power with respect thereto, and (2) from time to time to determine whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the Corporation, or any of them, shall be open to inspection of stockholders; and, except as so determined or as expressly provided in this Certificate of Incorporation or in any Preferred Stock Designation, no stockholder shall have any right to inspect any account, book or document of the Corporation other than such rights as may be conferred by applicable law. The Corporation may in its By-laws confer powers upon the Board of Directors in addition to the foregoing and in addition to the powers and authorities expressly conferred upon the Board of Directors by applicable law. ARTICLE VI STOCKHOLDER MEETINGS Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in this Certificate of Incorporation to elect additional directors under specific circumstances, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing in lieu of a meeting of such stockholders. 3 4 ARTICLE VII DIRECTORS Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in this Certificate of Incorporation to elect additional directors under specified circumstances, the number of directors of the Corporation shall be fixed, and may be increased or decreased from time to time, in such manner as may be prescribed by the By-laws of the Corporation. Unless and except to the extent that the By-laws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot. Each director shall serve for a term ending on the date of the next annual meeting; provided, that each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in this Certificate of Incorporation to elect additional directors under specified circumstances, any director may be removed from office at any time by the stockholders, but only for cause. ARTICLE VIII INDEMNIFICATION Each person who is or was or has agreed to become a director or officer of the Corporation, or each such person who is or was serving or who has agreed to serve at the request of the Board of Directors or an officer of the Corporation as an employee or agent of the Corporation or as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (including the heirs, executors, administrators or estate of such person), shall be indemnified by the Corporation, in accordance with the By-laws of the Corporation, to the fullest extent permitted from time to time by the GCL as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted prior to such amendment) or any other applicable laws as presently or hereafter in effect. Without limiting the generality or the effect of the foregoing, the Corporation may enter into one or more agreements with any person which provide for indemnification greater than or different from that provided in this Article VIII. Any amendment or repeal of this Article VIII shall not adversely affect any right or protection existing hereunder in respect of any act or omission occurring prior to such amendment or repeal. ARTICLE IX LIMITATION OF DIRECTORS' LIABILITY A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach or alleged breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to the Corporation or its 4 5 stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174 of the GCL, or (4) for any transaction from which the director derived an improper personal benefit. Any amendment or repeal of this Article IX shall not adversely affect any right or protection of a director of the Corporation existing hereunder in respect of any act or omission occurring prior to such amendment or repeal. ARTICLE X AMENDMENT Except as may be expressly provided in this Certificate of Incorporation, the Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Certificate of Incorporation or a Preferred Stock Designation, and any other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed herein or by applicable law, and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the right reserved in this Article X; provided, however, that any amendment or repeal of any provision of this Certificate of Incorporation shall not adversely affect any right or protection existing hereunder in respect of any act or omission occurring prior to such amendment or repeal; and provided further that no Preferred Stock Designation shall be amended after the issuance of any shares of the series of Preferred Stock created thereby, except in accordance with the terms of such Preferred Stock Designation and the requirements of applicable law. ARTICLE XI INCORPORATOR The name and mailing address of the incorporator is Sharon Beirdneau, 4675 MacArthur Court, Suite 710, Newport Beach, CA 92660. IN WITNESS WHEREOF, I, the undersigned, being the incorporator hereinbefore named, do hereby further certify that the facts hereinabove stated are truly set forth and, accordingly, I have hereunto set my hand this 6th day of October, 1998. s/Sharon Beirdneau ------------------------------ Sharon Beirdneau, Incorporator 5 EX-3.2 3 BYLAWS OF MODTECH HOLDINGS, INC 1 EXHIBIT 3.2 BYLAWS OF MODTECH HOLDINGS, INC. ARTICLE I LAW, CERTIFICATE OF INCORPORATION AND BYLAWS Section 1. These Bylaws are subject to the Certificate of Incorporation of Modtech Holdings, Inc., the corporation. In these Bylaws, references to law, the Certificate of Incorporation and Bylaws mean the law, the provisions of the Certificate of Incorporation and the Bylaws as from time to time in effect. ARTICLE II STOCKHOLDERS Section 1. Annual Meetings. The annual meeting of stockholders shall be held at such place, on such date, and at such time as the Board of Directors shall each year fix, which date shall be within thirteen months subsequent to the later of the organization of the corporation or the last annual meeting of stockholders, at which meeting they shall elect a Board of Directors and transact such other business as may be required by law or these Bylaws or as may properly come before the meeting. Section 2. Special Meetings. A special meeting of the stockholders may be called at any time by the Chairman of the Board, if any, or a majority of the Board of Directors. A special meeting of the stockholders shall be called by the Secretary, or in the case of the death, absence, incapacity or refusal of the Secretary, by an Assistant Secretary or some other officer. Any such application shall state the purpose or purposes of the proposed meeting. Any such call shall state the place, date, hour, and purposes of the meeting. Section 3. Place Of Meeting. All meetings of the stockholders for the election of Directors or for any other purpose shall be held at such place within or without the State of Delaware as may be determined from time to time by the Chairman of the Board, if any, the President or the Board of Directors. Any adjourned session of any meeting of the stockholders shall be held at the place designated in the vote of adjournment. Section 4. Notice Of Meetings. Except as otherwise provided by law, a written notice of each meeting of stockholders stating the place, day and hour thereof and, in the case of a special 1 2 meeting, the purposes for which the meeting is called, shall be given not less then ten (10) nor more than sixty (60) days before the meeting, to each stockholder entitled to vote thereat, and to each stockholder who, by law, by the Certificate of Incorporation or by these Bylaws, is entitled to notice, by leaving such notice with him or at his residence or usual place of business, or by depositing it in the United States mail, postage prepaid, and addressed to such stockholder at his address as it appears in the records of the corporation. Such notice shall be given by the Secretary, or by an officer or person designated by the Board of Directors. As to any adjourned session of any meeting of stockholders, notice of the adjourned meeting need not be given if the time and place thereof are announced at the meeting at which the adjournment was taken except that if the adjournment is for more than thirty (30) days or if after the adjournment a new record date is set for the adjourned session, notice of any such adjourned session of the meeting shall be given in the manner heretofore described. No notice of any meeting of stockholders or any adjourned session thereof need be given to a stockholder if a written waiver of notice, executed before or after the meeting or such adjourned session by such stockholder, is filed with the records of the meeting or if the stockholder attends such meeting without objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the stockholders or any adjourned session thereof need be specified in any written waiver of notice. Section 5. Quorum Of Stockholders. At any meeting of the stockholders a quorum as to any matter shall consist of a majority of the votes entitled to be cast on the matter, except where a larger quorum is required by law, by the Certificate of Incorporation or by these Bylaws. Any meeting may be adjourned from time to time by a majority of the votes properly cast upon the question, whether or not a quorum is present. If a quorum is present at an original meeting, a quorum need not be present at an adjourned session of that meeting. Shares of its own stock belonging to the corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of any corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. Section 6. Action By Vote. When a quorum is present at any meeting, a plurality of the votes properly cast for election to any office shall elect to such office and a majority of the votes properly cast upon any question other than an election to an office shall decide the question, except when a larger vote is required by law, by the Certificate of Incorporation or by these Bylaws. No ballot shall be required for any election unless requested by a stockholder present or represented at the meeting and entitled to vote in the election. Section 7. Proxy Representation. Every stockholder may authorize another person or persons to act for him by proxy in all matters in which a stockholder is entitled to participate, whether by waiving notice of any meeting, objecting to or voting or participating at a meeting, or expressing consent or dissent without a meeting. Every proxy must be signed by the stockholder or by his attorney-in-fact. No proxy shall be voted or acted upon after three years from its date unless such proxy provides for a longer period. A duly executed proxy shall be irrevocable if it 2 3 states that it is irrevocable and, if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. The authorization of a proxy may but need not be limited to specified action, provided, however, that if a proxy limits its authorization to a meeting or meetings of stockholders, unless otherwise specifically provided such proxy shall entitle the holder thereof to vote at any adjourned session but shall not be valid after the final adjournment thereof. Section 8. Inspectors. The Directors or the person presiding at the meeting may, and shall if required by applicable law, appoint one or more inspectors of election and any substitute inspectors to act at the meeting or any adjournment thereof. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspectors shall make a report in writing of any challenge, question or matter determined by them and execute a certificate of any fact found by them. Section 9. List Of Stockholders. The Secretary shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in his name. The stock ledger shall be the only evidence as to who are stockholders entitled to examine such list or to vote in person or by proxy at such meeting. Section 10. Stockholder Proposals. At an annual meeting of stockholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before the annual meeting of stockholders (i) by or at the direction of the Board of Directors or (ii) by a stockholder of the corporation who complies with the procedures set forth in this Section 10. For business or a proposal to be properly brought before an annual meeting of stockholders by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 120 days nor more than 150 days prior to the first anniversary of the date of the Company's notice of annual meeting provided with respect to the previous year's annual meeting of stockholders; provided that if no annual meeting of stockholders was held in the previous year or the date of the annual meeting of stockholders has been changed to be more than 30 calendar days earlier than or 60 calendar days after such anniversary, notice by the stockholder, to be timely, must be so received not more than 90 days nor later than the later of (i) 60 days prior to the annual meeting of stockholders or (ii) the close of business on the 10th day following the date on which notice of the date of the meeting is given to stockholders or made public, whichever first occurs. 3 4 A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before an annual meeting of stockholders (i) a description, in 500 words or less, of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as such information appears on the Corporation's books, of the stockholder proposing such business and any other stockholders known by such stockholder to be supporting such proposal, (iii) the class and number of shares of the Corporation that are beneficially owned by such stockholder and each other stockholder known by such stockholder to be supporting such proposal on the date of such stockholder's notice, (iv) a description, in 500 words or less, of any interest of the stockholder in such proposal and (v) a representation that the stockholder is a holder of record of stock of the Corporation and intends to appear in person or by proxy at the meeting to present the proposal specified in the notice. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that any business or proposal was not properly brought before the meeting in accordance with the procedures prescribed by this Section 10, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing, nothing in this Section 10 shall be interpreted or construed to require the inclusion of information about any such proposal in any proxy statement distributed by, at the direction of, or on behalf of, the Board of Directors. Section 11. Nomination for Election. Nominations of persons for election to the Board of Directors may be made at an annual meeting of stockholders or special meeting of stockholders called by the Board of Directors for the purpose of electing directors (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation entitled to vote for the election of directors at such meeting who complies with the notice procedures set forth in this Section 11. Such nomination, other than those made by or at the direction of the Board shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 120 days nor more than 150 days prior to the first anniversary of the date of the Company's notice of annual meeting provided with respect to the previous year's annual meeting of stockholders; provided that if no annual meeting of stockholders was held in the previous year or the date of the annual meeting of stockholders has been changed to be more than 30 calendar days earlier than or 60 calendar days after such anniversary, notice by the stockholder, to be timely, must be so received not more than 90 days nor later than the later of (i) 60 days prior to the annual meeting of stockholders or (ii) the close of business on the 10th day following the date on which notice of the date of the meeting is given to stockholders or made public, whichever first occurs. A stockholder's notice to the Secretary shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director (a) the name, age, business address and residence address of such person, (b) the principal occupation or employment of such person, (c) the class and number of shares of the Corporation which are beneficially owned by such person on the date of such stockholder's notice and (d) any other information relating to such person that is required to be disclosed in solicitations of proxies for 4 5 election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, or any successor statute thereto (including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to the stockholder giving notice (a) the name and address, as such information appears on the Corporation's books, of such stockholder and any other stockholders known by such stockholder to be supporting such nominee(s), (b) the class and number of shares of the Corporation which are beneficially owned by such stockholder and each other stockholder known by such stockholder to be supporting such nominee(s) on the date of such stockholders notice, (c) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; and (iii) a description of all arrangements or understandings between the stockholder and each nominee and other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder. Subject to the rights, if any, of the holders of any series of Preferred Stock then outstanding, no person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 11. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by this Section 11 and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE III BOARD OF DIRECTORS Section 1. Number. The Board of Directors shall be seven (7) in number. The number of directors may be fixed at any time by the affirmative vote of a majority of the directors at a regular or special meeting called for that purpose, provided, however, that no vote to decrease the number of the directors of the Corporation shall shorten the term of any incumbent director. Directors need not be stockholders. Section 2. Tenure. Except as otherwise provided by law, by the Certificate of Incorporation or by these Bylaws, each director shall hold office until the next annual meeting and until his successor is elected and qualified, or until he sooner dies, resigns, is removed or becomes disqualified. Section 3. Powers. The business and affairs of the corporation shall be managed by or under the direction of the Board of Directors who shall have and may exercise all the powers of the corporation and do all such lawful acts and things as are not by law, the Certificate of Incorporation or these Bylaws directed or required to be exercised or done by the stockholders. Section 4. Vacancies. Vacancies and any newly created directorships resulting from any increase in the number of directors may be filled by vote of the holders of the particular class or 5 6 series of stock entitled to elect such director at a meeting called for the purpose, or by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, in each case elected by the particular class or series of stock entitled to elect such directors. When one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have resigned, who were elected by the particular class or series of stock entitled to elect such resigning director or directors shall have power to fill such vacancy or vacancies, the vote or action by writing thereon to take effect when such resignation or resignations shall become effective. The directors shall have and may exercise all their powers notwithstanding the existence of one or more vacancies in their number, subject to the Certificate of Incorporation, and to the other provisions of these Bylaws, as to the number of directors required for a quorum or for any vote or other actions. Section 5. Committees. The Board of Directors may, by vote of a majority of the whole Board, (a) designate, change the membership of or terminate the existence of any committee or committees, each committee to consist of one or more of the directors; (b) designate one or more directors as alternate members of any such committee who may replace any absent or disqualified member at any meeting of the committee; and (c) determine the extent to which each such committee shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the corporation, including the power to authorize the seal of the corporation to be affixed to all papers which require it and the power and authority to declare dividends or to authorize the issuance of stock; excepting, however, such powers which by law, by the Certificate of Incorporation or by these Bylaws they are prohibited from so delegating. In the absence or disqualification of any member of such committee and his alternate, if any, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Except as the Board of Directors may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the board or such rules, its business shall be conducted as nearly as may be in the same manner as is provided by these Bylaws for the conduct of business by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors upon request. Section 6. Regular Meetings. Regular meetings of the Board of Directors may be held without call or notice at such places within or outside of the State of Delaware and at such times as the Board may from time to time determine; provided, however, that notice of the first regular meeting following any such determination shall be given to absent directors. A regular meeting of the directors may be held without call or notice immediately after and at the same place as the annual meeting of stockholders. Section 7. Special Meetings. Special meetings of the Board of Directors may be held at any time and at any place within or outside of the State of Delaware designated in the notice of the meeting, when called by the Chairman of the Board, if any, or by one-third or more in number of the directors, reasonable notice thereof being given to each director by the Secretary or by the Chairman of the Board, if any, or any one of the directors calling the meeting. 6 7 Section 8. Notice. It shall be reasonable and sufficient notice to a director to send notice by mail at least forty-eight (48) hours or by telegram at least twenty-four (24) hours before the meeting addressed to him at his usual or last known business or residence address or to give notice to him in person or by telephone or facsimile at least twenty-four (24) hours before the meeting. Notice of a meeting need not be given to any director if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. Neither notice of a meeting nor a waiver of a notice need specify the purposes of the meeting. Section 9. Quorum. Except as may be otherwise provided by law, by the Certificate of Incorporation or by these Bylaws, at any meeting of the directors a majority of the directors then in office shall constitute a quorum; a quorum shall not in any case be less than one-third of the total number of directors constituting the whole board. Any meeting may be adjourned from time to time by a majority of the votes cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice. Section 10. Action By Vote. Except as may be otherwise provided by law, by the Certificate of Incorporation or by these Bylaws, when a quorum is present at any meeting the vote of a majority of the directors present shall be the act of the Board of Directors. Section 11. Action Without A Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or a committee thereof may be taken without a meeting if all the members of the Board or of such committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the records of the meetings of the Board or of such committee. Such consent shall be treated for all purposes as the act of the Board or of such committee, as the case may be. Section 12. Participation In Meetings By Conference Telephone. Members of the Board of Directors, or any committee designated by such Board, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other or by any other means permitted by law. Such participation shall constitute presence in person at such meeting. Section 13. Compensation. In the discretion of the Board of Directors, each director may be paid such fees for his services as director (including, without limitation, in the form of cash compensation and stock options to purchase common stock of the corporation) and be reimbursed for his reasonable expenses incurred in the performance of his duties as director as the Board of Directors from time to time may determine. Nothing contained in this section shall be construed to preclude any director from serving the corporation in any other capacity and receiving reasonable compensation therefor. 7 8 ARTICLE IV OFFICERS AND AGENTS Section 1. Enumeration; Qualification. The officers of the corporation shall be a President, a Secretary and such other officers, if any, as the Board of Directors from time to time may in its discretion elect or appoint, including, without limitation, a Chairman of the Board and one or more Vice Presidents. The corporation may also have such agents, if any, as the Board of Directors from time to time may in its discretion choose. Any officer may be but none need be a director or stockholder. Any two or more offices may be held by the same person. Any officer may be required by the Board of Directors to secure the faithful performance of his duties to the corporation by giving bond in such amount and with sureties or otherwise as the Board of Directors may determine. Section 2. Powers. Subject to law, to the Certificate of Incorporation and to the other provisions of these Bylaws, each officer shall have, in addition to the duties and powers herein set forth, such duties and powers as are commonly incident to his office and such additional duties and powers as the Board of Directors may from time to time designate. Section 3. Election. The officers may be elected by the Board of Directors at their first meeting following the annual meeting of the stockholders or at any other time. At any time or from time to time the directors may delegate to any officer their power to elect or appoint any other officer or any agents. Section 4. Tenure. Each officer shall hold office at the pleasure of the Board of Directors or other officers of the corporation authorized by the Board of Directors until the first meeting of the Board of Directors following the next annual meeting of the stockholders and until his respective successor is chosen and qualified unless a shorter period shall have been specified by the terms of his election or appointment, or in each case until he sooner dies, resigns, is removed or becomes disqualified. Section 5. Chairman Of The Board Of Directors, Chief Executive Officer And Vice President. The Chairman of the Board, if any, shall have such duties and powers as shall be designated from time to time by the Board of Directors. Unless the Board of Directors otherwise specifies, the Chairman of the Board, or if there is none the Chief Executive Officer, shall preside, or designate the person who shall preside, at all meetings of the stockholders and of the Board of Directors. Unless the Board of Directors otherwise specifies, the Chief Executive Officer, or, in his or her absence, the President, shall be the chief executive officer of the corporation and shall have direct charge of all business operations of the corporation and, subject to the control of the Directors, shall have general charge and supervision of the business of the corporation. 8 9 Any Vice Presidents shall have such duties and powers as shall be set forth in these Bylaws or as shall be designated from time to time by the Board of Directors or by the officer or officers of the corporation authorized by the Board of Directors. Section 6. Chief Financial Officer. Unless the Board of Directors otherwise specifies, the Chief Financial Officer of the corporation shall be in charge of its funds and valuable papers, and shall have such other duties and powers as may be designated from time to time by the Board of Directors or by the Chief Executive Officer. If no Controller is elected, the Chief Financial Officer shall, unless the Board of Directors otherwise specifies, also have the duties and powers of the Controller. Section 7. Controller And Assistant Controllers. If a controller is elected, he shall, unless the Board of Directors otherwise specifies, be the Chief Accounting Officer of the corporation and be in charge of its books of account and accounting records, and of its accounting procedures. He shall have such other duties and powers as may be designated from time to time by the Board of Directors, the President or the Chief Executive Officer. Any Assistant Controller shall have such duties and powers as shall be designated from time to time by the Board of Directors, the President, or the Controller. Section 8. Secretary And Assistant Secretaries. The Secretary shall record all proceedings of the stockholders, of the Board of Directors and of committees of the Board of Directors in a book or series of books to be kept therefor and shall file therein all actions by written consent of stockholders or directors. In the absence of the Secretary from any meeting, an Assistant Secretary, or if there be none or he is absent, a temporary Secretary chosen at the meeting, shall record the proceedings thereof. Unless a transfer agent has been appointed the Secretary shall keep or cause to be kept the stock and transfer records of the corporation, which shall contain the names and record addresses of all stockholders and the number of shares registered in the name of each stockholder. He shall have such other duties and powers as may from time to time be designated by the Board of Directors or the President. Any Assistant Secretaries shall have such duties and powers as shall be designated from time to time by the Board of Directors, the President or the Secretary. ARTICLE V RESIGNATIONS AND REMOVALS Section 1. Any director or officer may resign at any time by delivering his resignation in writing to the Chairman of the Board, if any, the President, or the Secretary or to a meeting of the Board of Directors. Such resignation shall be effective upon receipt unless specified to be effective at some other time, and without in either case the necessity of its being accepted unless the resignation shall so state. Except as may be otherwise provided by law, by the Certificate of Incorporation or by these Bylaws, a director (including persons elected by stockholders or 9 10 directors to fill vacancies) may be removed from office for cause only. The Board of Directors may at any time terminate or modify the authority of any agent. ARTICLE VI INDEMNIFICATION Section 1. Each person who was or is made a party to, or is threatened to be made a party to, or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he or she (or a person of whom he or she is the legal representative), is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the Delaware General Corporation Law, against all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes and penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that the Corporation shall indemnify any such person seeking indemnity in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. Section 2. The Corporation shall pay all expenses (including attorneys' fees) incurred by such a director or officer in defending any such proceeding as they are incurred in advance of its final disposition; provided, however, that if the Delaware General Corporation Law then so requires, the payment of such expenses incurred by such a director or officer in advance of the final disposition of such proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it should be determined ultimately that such director or officer is not entitled to be indemnified under this Article VI or otherwise; and provided, further, that the Corporation shall not be required to advance any expenses to a person against whom the Corporation directly brings a claim, in a proceeding alleging that such person has breached his or her duty of loyalty to the Corporation, committed an act or omission not in good faith or that involves intentional misconduct or a knowing violation of law, or derived an improper personal benefit from a transaction. Section 3. The rights conferred on any person in this Article VI shall not be exclusive of any other right that such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaw, agreement, vote or consent of stockholders or disinterested directors, or otherwise. Additionally, nothing in this Article VI shall limit the ability of the Corporation, in its discretion, to indemnify or advance expenses to persons whom the Corporation is not obligated to indemnify or advance expenses pursuant to this Article VI. 10 11 Section 4. The Board of Directors is authorized to cause the Corporation to enter into indemnification contracts with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing indemnification rights to such person. Such rights may be greater than those provided in this Article VI . Section 5. Any amendment, repeal or modification of any provision of this Article VI shall be prospective only, and shall not adversely affect any right or protection conferred on a person pursuant to this Article VI and existing at the time of such amendment, repeal or modification. ARTICLE VII CAPITAL STOCK Section 1. Stock Certificates. Each stockholder shall be entitled to a certificate stating the number and the class and the designation of the series, if any, of the shares held by him, in such form as shall, in conformity to law, the Certificate of Incorporation and the Bylaws, be prescribed from time to time by the Board of Directors. Such certificate shall be signed by the Chairman or Vice Chairman of the Board, if any, or the President or a Vice President and by the Chief Financial Officer or by the Secretary or an Assistant Secretary. Any of or all the signatures on the certificate may be a facsimile. In case an officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the time of its issue. Section 2. Loss Of Certificates. In the case of the alleged theft, loss, destruction or mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such terms, including receipt of a bond sufficient to indemnify the corporation against any claim on account thereof, as the Board of Directors may prescribe. ARTICLE VIII TRANSFER OF SHARES OF STOCK Section 1. Transfer On Books. Subject to the restrictions, if any, related to such shares of the corporation; shares of stock may be transferred on the books of the corporation by the surrender to the corporation or its transfer agent of the certificate therefor properly endorsed or accompanied by a written assignment and power of attorney properly executed, with necessary transfer stamps affixed, and with such proof of the authenticity of signature as the Board of Directors or the transfer agent of the corporation may reasonably require. Except as may be otherwise required by law, by the Certificate of Incorporation or by these Bylaws, the 11 12 corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to receive notice and to vote or to give any consent with respect thereto and to be held liable for such calls and assessments, if any, as may lawfully be made thereon, regardless of any transfer, pledge or other disposition of such stock until the shares have been properly transferred on the books of the corporation. It shall be the duty of each stockholder to notify the corporation of his post office address. Section 2. Record Date. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no such record date is fixed by the Board of Directors, the record date for determining the stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such payment, exercise or other action. If no such record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. ARTICLE IX CORPORATE SEAL Section 1. Subject to alteration by the Board of Directors, the seal of the corporation shall consist of a flat-faced circular die with the word "Delaware" and the name of the corporation cut or engraved thereon, together with such other words, dates or images as may be approved from time to time by the Board of Directors. 12 13 ARTICLE X EXECUTION OF PAPERS Section 1. Except as the Board of Directors may generally or in particular cases authorize the execution thereof in some other manner, all deeds, leases, transfers, contracts, bonds, notes, checks, drafts or other obligations made, accepted or endorsed by the corporation shall be signed by the Chairman of the Board, if any, the President, or a Vice President. ARTICLE XI FISCAL YEAR Section 1. The fiscal year of the corporation shall end on December 31. ARTICLE XII AMENDMENTS Section 1. These Bylaws may be adopted, amended or repealed by vote of a majority of the directors then in office or by vote of a majority of the voting power of the stock outstanding and entitled to vote. Any Bylaw, whether adopted, amended or repealed by the stockholders or directors, may be amended or reinstated by the stockholders or the directors. 13 EX-3.5 4 ARTICLES OF INCORPORATION OF SPI HOLDINGS, INC 1 EXHIBIT 3.5 ARTICLES OF INCORPORATION OF SPI Holdings, Inc. The undersigned who, if a natural person,, is eighteen (18) years or older, hereby forms a corporation, under and pursuant to the statutes of the State of Colorado, and adopts the following Articles of Incorporation: ARTICLE I The name of the Corporation is SPI Holdings, Inc. ARTICLE II A. The Corporation shall have and may exercise all of the rights, powers and privileges now or hereafter conferred upon corporations organized under the laws of the State of Colorado. In addition, the Corporation may do everything necessary, suitable or proper for the accomplishment of any of its corporate purposes. The Corporation may conduct part or all of its business in any part of Colorado, the United States or the world and may hold, purchase, mortgage, lease and convey real and personal property in any of such places. ARTICLE III This Corporation shall have perpetual existence, which existence shall commence upon the filing of these Articles of Incorporation with the Secretary of State of the State of Colorado. ARTICLE IV A. The aggregate number of shares which the Corporation shall have authority to issue is Five Million (5,000,000) shares of common stock of no par value and Two Million (2,000,000) shares of preferred stock of no par value ("Board Designated Preferred Stock"). The shares of common stock shall have unlimited voting rights and shall constitute the sole voting group of the Corporation, except to the extent any additional voting group or groups may hereafter be established. The Board of Directors of the Corporation may determine, in whole or in part, the preferences, limitations, and relative rights of the Board Designated Preferred Stock, within the limits set forth in Section 7-106-101 of the Colorado Business Corporation Act, of any class of the Board Designated Preferred Stock, before the issuance of any shares of that class, or one or more series within a class of the Board Designated Preferred Stock before the issuance of any shares of that series. The Board of Directors may issue, in one or more classes or series, shares of the Board Designated Preferred Stock with full, limited, multiple, fractional or no voting rights, and with such designations, preferences, qualifications, privileges, limitations, 2 restrictions, options, conversion rights, or other special or relative rights as shall be fixed from time to time by the Board of Directors, except for and subject to, in each case, the limits set forth in Section 7-106-101 of the Colorado Business Corporation Act and in accordance with the provisions and requirements of Section 7-106-102 of the Colorado Business Corporation Act. B. Each shareholder of record shall have one vote for each share of common stock standing in his name on the books of the Corporation and entitled to vote. In the election of directors, cumulative voting shall not be allowed. C. Shareholders shall not have the preemptive right to acquire unissued shares, unless otherwise provided by a written agreement with the Corporation. Such provision shall apply to both shares outstanding and to newly issued shares. D. At. all meetings of the shareholders a majority of the votes entitled to be cast on a matter by a voting group, represented in person or by proxy, shall constitute a quorum of that voting group. ARTICLE V A. The address of the initial registered office of the Corporation is 370 17th Street, Suite 2300, Denver, Colorado 80202. B. The name of the initial registered agent for the Corporation at such address is Bruce L. Rogers. C. The address of the initial principal office of the Corporation is 370 17th Street, Suite 2300, Denver, Colorado 80202. ARTICLE VI A. The personal liability of a director to the Corporation or its shareholders is limited to the fullest extent permitted by the laws of the State of Colorado. Any repeal or modification of this Article VI shall not adversely affect any right or protection of a director hereunder existing at the time of such repeal or modification. B. The Corporation shall indemnify all persons to the extent and in the manner permitted by the provisions of the Colorado Business Corporation Act, as amended from time to time, subject to any expansion or limitation of such indemnification as may be set forth in the bylaws of the Corporation or any shareholders' or directors' resolution or by contract. ARTICLE VII The number of persons constituting the board of directors of the Corporation shall be fixed by the Bylaws of the Corporation. The initial board of directors shall consist of three (3) members, and the names and addresses of such persons who are to serve as directors until the 2 3 first annual meeting of shareholders, or until their successors shall have been elected and qualified, is as follows: Name Address Mark M. King 370 17th Street Suite 2300 Denver, Colorado 80202 Bruce L. Rogers 370 17th Street Suite 2300 Denver, Colorado 80202 Charles R. Gwirtsman 50 S. Steele Suite 777 Denver, CO 80209 ARTICLE VIII The right is expressly reserved to amend, alter, change or repeal any provision or provisions contained in these Articles of Incorporation or any Article herein in any manner or respect now or hereafter permitted or provided by the Colorado Business Corporation Act, and the rights of all officers, directors and shareholders are expressly made subject to such reservation. ARTICLE IX The name and address of the incorporator of this Corporation is Darren R. Hensley, % Ballard Spahr Andrews & Ingersoll, 1225 17th Street, Suite 2300, Denver, Colorado 80202. Executed this 14th day of November, 1996 /S/ Darren R. Hensley --------------------------------- Darren R. Hensley The undersigned hereby consents to the appointment as the initial registered agent for SPI Holdings, Inc. /S/ Bruce L. Rogers --------------------------------- Bruce L. Rogers Initial Registered Agent 3 EX-3.6 5 BYLAWS OF SPI HOLDINGS, INC. 1 EXHIBIT 3.6 BYLAWS OF SPI HOLDINGS, INC. ARTICLE I Offices and Agents 1. Principal Office. The principal office of the Corporation may be located within or without the State of Colorado, as designated by the most recent filing with the Secretary of State of the State of Colorado. The Corporation may have other offices and places of business at such places within or without the State of Colorado as shall be determined by the directors. 2. Registered Office. The registered office of the Corporation required by the Colorado Business Corporation Act must be continually maintained in the State of Colorado, and it may be, but need not be, identical with the principal office, if located in the State of Colorado. The address of the registered office of the Corporation may be changed from time to time as provided by the Colorado Business Corporation Act. 3. Registered Agent. The Corporation shall maintain a registered agent in the State of Colorado as required by the Colorado Business Corporation Act. Such registered agent may be changed from time to time as provided by the Colorado Business Corporation Act. ARTICLE II Shareholders' Meetings 1. Annual Meetings. The annual meeting of the shareholders of the Corporation shall be held at a date and time fixed by resolution of the board of directors or by the president in the absence of action by the board of directors. The annual meeting of the shareholders shall be held for the purpose of electing directors and transacting such other corporate business as may come before the meeting. If the election of directors is not held as provided herein at any annual meeting of the shareholders, or at any adjournment thereof, the board of directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as it may conveniently be held. Notice of an annual meeting need not include a description of the purpose or purposes of the meeting except when the purpose of the meeting is to consider (i) an amendment to the Articles of Incorporation of the Corporation, (ii) a merger or share exchange in which the Corporation is a party and, with respect to a share exchange, in which the Corporation's shares will 2 be acquired, (iii) the sale, lease, exchange or other disposition, other than in the usual and regular course of business, of all or substantially all of the property of the Corporation or of another entity which the Corporation controls, in each case with or without goodwill, (iv) the dissolution of the Corporation or (v) any other purpose for which a statement of purpose is required by the Colorado Business Corporation Act. 2. Special Meetings. Unless otherwise prescribed by the Colorado Business Corporation Act, special meetings of the shareholders of the Corporation may be called at any time by the chairman of the board of directors, by the president, by resolution of the board of directors or upon receipt of one or more written demands for a meeting, stating the purpose or purposes for which it is to be held, signed and dated by the holders of at least ten percent (10%) of all votes entitled to be cast on any issue proposed to be considered at the meeting. Notice of a special meeting shall include a description of the purpose or purposes for which the meeting is called. 3. Place of Meeting. The annual meeting of the shareholders of the Corporation may be held at any place, either within or without the State of Colorado, as may be designated by the board of directors. Except as limited by the following sentence, the person or persons calling any special meeting of the shareholders may designate any place, within or without the State of Colorado, as the place for the meeting. If no designation is made or if a special meeting shall be called other than by the board of directors, the chairman of the board of directors or the president, the place of meeting shall be the principal office of the Corporation. A waiver of notice signed by all shareholders entitled to vote at a meeting may designate any place as the place for holding such meeting. 4. Notice of Meeting. Written notice stating the date, time and place of the meeting shall be given no f ewer than ten (10) and no more than sixty (60) days before the date of the meeting. Notice shall be given personally or by mail, private carrier, telegraph, teletype, electronically transmitted facsimile or other form of wire or wireless communication by or at the direction of the president, the secretary, or the officer or other person calling the meeting to each shareholder of record entitled to vote at such meeting. If mailed and if in a comprehensible form, such notice shall be deemed to be given and effective when deposited in the United States mail, addressed to the shareholder at his or her address as it appears in the Corporation's current record of shareholders, with postage prepaid. If notice is given other than by mail, and provided that the notice is in comprehensible form, the notice is given and effective on the date received by the shareholder. No notice need be sent to any shareholder if three successive notices mailed to the last known address of such shareholder have been returned as undeliverable until such time as another address for such shareholder is made known to the corporation by such shareholder. When a meeting is adjourned to a different date, time or place, notice need not be given of the new date, time or place if the new date, time or place is announced at the meeting before adjournment. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 120 days, or if a new record date is fixed for the adjourned meeting, a new notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting as of the new record date. 2 3 5. Waiver of Notice. A shareholder may waive any notice of a meeting either bef ore or after the time and date of the meeting. The waiver shall be in writing, be signed by the shareholder entitled to the notice and be delivered to the corporation for inclusion in the minutes or filing with the corporate records, but such delivery and filing shall not be conditions for effectiveness. A shareholder's attendance at a meeting waives objection to (i) lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting because of lack of notice or defective notice, and (ii) consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. 6. Fixing of Record. Date. In order to determine shareholders entitled (i) to be given notice of a shareholders meeting, (ii) to vote, or (iii) to take any other action, the board of directors may fix a future date as the record date, such date, in any case, shall not be more than seventy (70) days and not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed, the record date shall be the date on which notice of the meeting is mailed or the date on which a resolution of the board of directors providing for a distribution is adopted, as the case may be. When a determination of shareholders entitled to vote at any meeting of shareholders is made as provided in this Section 6, such determination shall-apply to any adjournment thereof. Notwithstanding the foregoing, the record date for determining the shareholders entitled to take action without a meeting or entitled to be given notice of action so taken shall be the date a writing upon which the action is taken is first received by the Corporation. The record date for determining shareholders entitled to demand a special meeting shall be the date of the earliest of the demands pursuant to which the meeting is called. 7. Voting List. Af ter fixing a record date f or a shareholders' meeting, the Corporation shall prepare a list of names of all its shareholders who are entitled to be given notice of the meeting. The list shall be arranged by voting groups and within each voting group by class or series, and shall show the address of, and the number of shares of each class or series that are held by each shareholder. The list of shareholders shall be available for inspection by any shareholder, beginning the earlier of ten (10) days before the meeting for which the list was prepared or two (2) business days after notice of the meeting is given and continuing through the meeting, and any adjournment thereof, at the Corporation's principal office or at a place identified in the notice of the meeting in the city where the meeting will be held. A shareholder or an agent or attorney of the shareholder may, upon written demand, inspect and copy the list during regular business hours and during the period it is available for inspection, provided (i) the shareholder has been a shareholder for at least three (3) months immediately preceding the demand or holds at least five percent (5%) of all outstanding shares of any class of shares as of the date of the demand, (ii) the demand is made in good faith and for a 3 4 purpose reasonably related to the demanding shareholder's interest as a shareholder, (iii) the shareholder describes with reasonable particularity the purpose and records the shareholder desires to inspect, (iv) the records are directly connected with the described purpose, and (v) the shareholder pays a reasonable charge covering the costs of labor and material for such copies, not to exceed the estimated cost of production and reproduction. 8. Proxies. At all meetings of shareholders, a shareholder may vote by proxy by signing an appointment form either personally or by his or her duly authorized attorney-in-fact. A shareholder may also appoint a proxy by transmitting or authorizing the transmission of a telegram, teletype, or other electronic transmission providing a written statement of the appointment to the proxy, to a proxy solicitor, proxy support service organization or other person duly authorized by the proxy to receive appointments as agent for the proxy, or to the Corporation. The transmitted appointment shall set forth or be transmitted with written evidence from which it can be determined that the shareholder transmitted or authorized the transmission of the appointment. The proxy appointment form shall be filed with the secretary of the Corporation by or at the time of the meeting. The appointment of a proxy is effective when received by the Corporation and is valid for eleven (11) months unless a different period is expressly provided in the appointment form. Any complete copy F including an electronically transmitted facsimile, of an appointment of a proxy may be substituted for or used in lieu of the original appointment f or any purpose for which the original appointment could be used. Revocation of a proxy does not affect the right of the Corporation to accept the proxy's appointment unless (i) the Corporation had notice that the appointment was coupled with an interest and notice that the interest is extinguished is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises his or her authority under the appointment, or (ii) other notice of the revocation of the appointment is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises his or her authority under the appointment. Other notice of revocation may, in the discretion of the Corporation, be deemed to include the appearance at a shareholders' meeting of the shareholder who granted the proxy appointment and his or her voting in person on any matter subject to a vote at such meeting. The death or incapacity of the shareholder appointing a proxy does not affect the right of the Corporation to accept the proxy's authority unless notice of the death or incapacity is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercised his or her authority under the appointment. The Corporation shall not be required to recognize an appointment made irrevocable if it has received a writing revoking the appointment signed by the shareholder either personally or by the shareholder's attorney-in-fact, notwithstanding that the revocation may be a breach of an obligation of the shareholder to another person not to revoke the appointment. A transferee for value of shares subject to an irrevocable appointment may revoke the appointment if the transferee did not know of its existence when he or she acquired the shares and the irrevocable appointment was not noted on the certificate representing the shares. 4 5 Subject to the provisions of Article II, Section 10 below or any express limitation on the proxy's authority appearing on the appointment form, the Corporation is entitled to accept the proxy's vote or other action as that of the shareholder making the appointment. 9. Voting Rights. Each outstanding share, regardless of class, is entitled to one vote and each fractional share is entitled to a corresponding fractional vote, on each matter voted on at a shareholders' meeting except to the extent that the voting rights of the shares of any class or classes are limited or denied by the Articles of Incorporation. Only shares are entitled to vote. Voting on any question or in any election may be by voice vote unless the presiding officer shall order, or any shareholder shall demand, that voting be by ballot. Cumulative voting in the election of directors shall not be permitted. 10. Corporation's Acceptance of Votes. If the name signed on a vote, consent, waiver, proxy appointment, or proxy appointment revocation corresponds to the name of a shareholder, the Corporation, if acting in good faith, is entitled to accept the vote, consent, waiver, proxy appointment, or proxy appointment revocation and to give it effect as the act of the shareholder. If the name signed on a vote, consent, waiver, proxy appointment, or proxy appointment revocation does not correspond to the name of a shareholder, the Corporation, if acting in good faith, is nevertheless entitled to accept the vote, consent, waiver, proxy appointment, or proxy appointment revocation and to give it effect as the act of the shareholder if: (a) The shareholder is an entity and the name signed purports to be that of an officer or agent of the entity; (b) The name signed purports to be that of an administrator, executor, guardian, or conservator representing the shareholder and, if the Corporation requests, evidence of fiduciary status acceptable to the Corporation has been presented with respect to the vote, consent, waiver, proxy appointment, or proxy appointment revocation; (c) The name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the Corporation requests, evidence of this status acceptable to the Corporation has been presented with respect to the vote, consent, waiver, proxy appointment, or proxy appointment revocation; (d) The name signed purports to be that of a pledgee, beneficial owner, or attorney-in-fact of the shareholder and, if the Corporation requests, evidence acceptable to the Corporation of the signatory's authority to sign for the shareholder has been presented with respect to the vote, consent, waiver, proxy appointment, or proxy appointment revocation; (e) Two or more persons are the shareholder as cotenants or fiduciaries and the name signed purports to be the name of at least one of the cotenants or fiduciaries and the person signing appears to be acting on behalf of all the cotenants or fiduciaries; or 5 6 (f) The acceptance of the vote, consent, waiver, proxy appointment, or proxy appointment revocation is otherwise proper under rules established by the Corporation that are not inconsistent with the provisions of this Section 10. The Corporation is entitled to reject a vote, consent, waiver, proxy appointment, or proxy appointment revocation if the secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory's authority to sign for the shareholder. The Corporation and its officer or agent who accepts or rejects a vote, consent, waiver, proxy appointment, or proxy appointment revocation in good faith and in accordance with the standards of this Section 10 are not liable in damages for the consequences of the acceptance or rejection. 11. Quorum and Voting Requirements. A majority of the votes entitled to be cast on a matter by a voting group shall constitute a quorum of that voting group for action on the matter unless a lesser number is authorized by the Articles of Incorporation. Once a share is represented for any purpose at a meeting, including the purpose of determining that a quorum exists, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting, unless otherwise provided in the Articles of Incorporation or unless a new record date is or shall be set for that adjourned meeting. If a quorum exists, action on a matter other than the election of directors by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast within the voting group opposing the action, unless the vote of a greater number or voting by classes is required by law or the Articles of Incorporation. 12. Adjournments. If less than a quorum of shares entitled to vote is represented at any meeting of the shareholders, a majority of the shares so represented may adjourn the meeting from time to time without further notice, for a period not to exceed 120 days at any one adjournment. If a quorum is present at such adjourned meeting, any business may be transacted which might have been transacted at the meeting as originally noticed. Any meeting of the shareholders may adjourn from time to time until its business is completed. 13. Action by Shareholders Without Meeting. Any action required or permitted to be taken at a shareholders' meeting may be taken without a meeting if all of the shareholders entitled to vote on the action consent to such action in writing. Action taken under this Section 13 shall be ef f ective as of the date the Corporation receives writings describing and consenting to the action signed by all of the shareholders entitled to vote with respect to the action, unless all of the writings specify another date as the effective date of the action, in which case such other date shall be the effective date of the action. Any such writings may be received by the Corporation by electronically transmitted facsimile or other form of wire or wireless communication providing the Corporation with a complete copy thereof, including a copy of the signatures thereto. Action taken under this Section 13 has the same effect as action taken at a meeting of shareholders and may be described as such in any document. 6 7 Any shareholder who has signed a writing describing and consenting to action taken pursuant to this Section 13 may revoke such consent by a writing signed and dated by the shareholder describing the action and stating that the shareholder's prior consent thereto is revoked, if such writing is received by the Corporation prior to the date the last writing necessary to effect the action is received by the Corporation. 14. Meetings by Telecommunication. Any or all of the shareholders may participate in an annual or special shareholders' meeting by, or the meeting may be conducted through the use of, any means of communication by which all persons participating in the meeting may hear each other during the meeting. A shareholder participating in a meeting by this means is deemed to be present in person at the meeting. ARTICLE III Board of Directors 1. General Powers. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, the board of directors, except as otherwise provided in the Colorado Business Corporation Act or the Articles of Incorporation. 2. Number, Qualifications and Term of Office. The number of directors of the Corporation shall be fixed from time to time by resolution of the board of directors, within a range of no less than one (1) or more than nine (9). A director shall be a natural person who is eighteen years or older. A director need not be a resident of the State of Colorado or a shareholder of the Corporation. Directors shall be elected at each annual meeting of shareholders and shall hold such office until the next annual meeting of shareholders and until his or her successor is elected and qualifies. A decrease in the number of directors does not shorten an incumbent director's term. 3. Resignation, Vacancies. Any director may resign at any time by giving written notice to the Corporation. A resignation of a director is effective when the notice is received by the Corporation unless the notice specifies a later effective date. Unless otherwise specified in the notice, the acceptance of such resignation by the Corporation shall not be necessary to make it effective. Any vacancy on the board of directors may be filled by the affirmative vote of a majority of the shareholders or by the affirmative vote of a majority of directors then in office, even if less than a quorum is remaining in of f ice. If elected by the directors, the director shall hold office until the next annual shareholders' meeting at which directors are elected. If elected by the shareholders, the director shall hold office for the unexpired term of his or her predecessor in office, except that, if the director's predecessor was elected by the directors to fill a vacancy, the director elected by the shareholders shall hold office for the unexpired term of the last predecessor elected by the shareholders. 4. Removal of Directors bv Shareholders. Unless otherwise provided in the Articles of Incorporation, the shareholders may remove one or more directors with or without cause. A director may be removed by the shareholders only at a meeting called for the purpose of removing 7 8 the director and the meeting notice states that the purpose, or one of the purposes, of the meeting is removal of the director. 5. Removal of Directors by Judicial Proceeding. A director may be removed by the District Court of the Colorado county where the principal office is located or, if the corporation has no principal office in the State of Colorado, by the District court of the Colorado county in which its registered office is located or, if the Corporation has no registered office, by the District Court for the City and County of Denver, upon a finding by the District Court that the director engaged in fraudulent or dishonest conduct or gross abuse of authority or discretion with respect to the Corporation and that removal is in the best interests of the Corporation. The judicial proceeding may be commenced either by the Corporation or by shareholders holding at least ten percent (10%) of the outstanding shares of any class. 6. Compensation. By resolution of the board of directors, any director may be paid any one or more of the following: his or her expenses, if any, of attendance at meetings; a fixed sum for attendance at each meeting; a stated salary as director; or such other compensation as the Corporation and the director may reasonably agree upon. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. ARTICLE IV Meetings of the Board of Directors 1. Place of Meetings. The regular or special meetings of the board of directors shall be held at the principal office of the Corporation unless otherwise designated. 2. Regular Meetings. The board of directors shall meet each year after the annual meeting of the shareholders for the purpose of appointing officers and transacting such other business as may come before the meeting. The board of directors may provide, by resolution, for the holding of additional regular meetings without other notice than such resolution. 3. Special Meetings. Special meetings of the board of directors may be called at any time by the chairman of the board of directors, by the president or by a majority of the members of the board of directors. 4. Notice of Meetings. Notice of the regular meetings of the board of directors need not be given. Except as otherwise provided by these Bylaws or the laws of the State of Colorado, written notice of each special meeting of the board of directors setting forth the time and the place of the meeting shall be given to each director not less than two (2) days prior to the date and time fixed for the meeting. Notice of any special meeting may be either personally delivered or mailed to each director at his or her business address, or by notice transmitted by telegraph, telex, electronically transmitted facsimile or other form of wire or wireless communication. If mailed, such notice shall be deemed to be given and to be effective on the earlier of (i) three (3) days after such notice is deposited in the United States mail properly addressed, with postage prepaid, or (ii) the date shown on the return receipt if mailed by registered or certified mail return receipt 8 9 requested. If notice is given by telex, electronically transmitted facsimile or other similar form of wire or wireless communication, such notice shall be deemed to be given and to be effective when sent with a confirmation of receipt, and with respect to a telegram, such notice shall be deemed to be given and to be effective when the telegram is delivered to the telegraph company. If a director has designated in writing one or more reasonable addresses or facsimile numbers for delivery of notice, notice sent by mail, telegraph, telex, electronically transmitted facsimile or other form of wire or wireless communication shall not be deemed to have been given or to be effective unless sent to such addresses or facsimile numbers, as the case may be. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. 5. Waiver of Notice. A director may, in writing, waive notice of any special meeting of the board of directors either before, at, or after the meeting. Such waiver shall be delivered to the corporation for filing with the corporate records. Attendance or participation of a director at a meeting waives any required notice of that meeting unless at the beginning of the meeting or promptly upon the director's arrival, the director objects to holding the meeting or transacting business at the meeting because of lack of notice or defective notice and does not thereafter vote for or assent to action taken at the meeting. 6. Quorum, Manner of Acting. At meetings of the board of directors a majority of the number of directors fixed by resolution of the board of directors shall constitute a quorum for the transaction of business. If the number of directors is not fixed, then a majority of the number in office immediately before the meeting begins shall constitute a quorum. If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the board of directors unless the vote of a greater number is required by these Bylaws, the Articles of Incorporation or the Colorado Business Corporation Act. 7. Presumption of Assent. A director who is present at a meeting of the board of directors when corporate action is taken is deemed to have assented to the action taken unless: (a) the director objects at the beginning of such meeting or promptly upon his or her arrival, to the holding of the meeting or the transacting of business at the meeting and does not thereafter vote for or assent to any action taken at the meeting; (b) the director contemporaneously requests that his or her dissent or abstention as to any specific action taken be entered in the minutes of such meeting; or (c) the director causes written notice of his or her dissent or abstention as to any specific action to be received by the presiding officer of such meeting before its adjournment or by the Corporation promptly after adjournment of such meeting. The right of dissent or abstention as to a specific action taken in a meeting of the board of directors is not available to a director who votes in favor of the action taken. 8. Committees. The board of directors may, by a resolution adopted by a 9 10 majority of all of the directors in office when the action is taken, designate one of more of its members to constitute an executive committee, and one or more other committees. To the extent provided in the resolution, each committee shall have and may exercise all of the authority of the board of directors, except that no such committee shall have the authority to: (i) authorize distributions; (ii) approve or propose to shareholders action required by the Colorado Business Corporation Act to be approved by shareholders; (iii) fill vacancies on the board of directors or any committee thereof; (iv) amend the Articles of Incorporation; (v) amend or repeal these Bylaws or adopt new Bylaws; (vi) approve a plan of merger not requiring shareholder approval; (vii) authorize or approve the reacquisition of shares except in accordance with a formula or method prescribed by the board of directors; or (viii) authorize or approve the issuance or sale of shares, or a contract for the sale of shares, or determine the designation, relative rights, preferences and limitations of a class or series of shares; except that the board of directors, may authorize a committee or an officer to do so within limits specifically prescribed by the board of directors. The creation of, delegation of authority to, or action by a committee does not alone constitute compliance by a director with the standards of conduct set forth in Article V. 9. Informal Action by Directors. Any action required or permitted be taken at a board of directors meeting may be taken without a meeting if all members of the board of directors consent to such action in writing. Action taken under this Section 9 is effective at the time the last director signs a writing describing the action taken unless the directors establish a different effective date, and unless, bef ore such time, a director has revoked his or her consent by a writing signed by the director and received by the president or secretary. Action taken pursuant to this Section 9 has the same effect as action taken at a meeting of the directors and may be described as such in any document. 10. Telephonic Meetings. Members of the board of directors may participate in a regular or special meeting by, or conduct the meeting through, the use of any means of communication by which all directors participating may hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting. ARTICLE V Standards of Conduct Each director shall perform his or her duties as a director, including his or her duties as a member of any committee, and each officer with discretionary authority shall discharge his or her duties under that authority (i) in good faith, (ii) with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and (iii) in a manner he or she reasonably believes to be in the best interests of the Corporation. In discharging his or her duties, a director or officer is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by (i) one or more officers or employees of the Corporation whom the director or officer reasonably believes to be reliable and competent in the matters presented, (ii) 10 11 legal counsel, a public accountant, or other person as to matters which the director or officer reasonably believes to be within such person's professional or expert competence, or (iii) in the case of a director, a committee of the board of directors of which the director is not a member if the director reasonably believes the committee merits confidence. A director or officer is not acting in good faith if he or she has knowledge concerning the matter in question that makes reliance otherwise permitted under this Article V unwarranted. A director or officer is not liable as such to the Corporation or its shareholders for any action he or she takes or omits to take as a director or officer, as the case may be, if, in connection with such action or omission, he or she performed the duties of the position in compliance with this Article V. ARTICLE VI Officers and Agents 1. General. The officers of the Corporation shall consist of a chairman of the board of directors, a president, a secretary and a treasurer. Each officer shall be a natural years of age or older. The board of directors or officers authorized by the officers, assistant person eighteen or an officer or officers authorized by the board of directors may appoint such other officers, assistant officers, committees and agents, including one or more vice presidents, assistant secretaries and assistant treasurers, as they may consider necessary. The board of directors or the officer or officers authorized by the board of directors shall from time to time determine the procedure for the appointment of officers, their term of office, their authority and duties and their compensation. One person may hold more than one office. In all cases where the duties of any officer, agent, or employee are not prescribed by these Bylaws or by the board of directors, such officer, agent or employee shall follow the orders and instructions of the president of the Corporation. Any officer shall have the power to execute and deliver on behalf of and in the name of the Corporation any instrument requiring the signature of an officer of the Corporation, except as otherwise provided in these Bylaws or where the execution and delivery thereof shall be expressly delegated by the board of directors to some other officer or agent of the Corporation. 2. Appointment and Term of Office. The officers of the Corporation shall be appointed by the board of directors at each annual meeting of the board of directors held after each annual meeting of the shareholders. If the appointment of officers is not made at such meeting or if an officer or officers are to be appointed by another officer or officers of the Corporation, such appointments shall be made as soon thereafter as practicable. 3. Vacancies. A vacancy in any office, however occurring, may be filled by the board of directors, or by the officer or officers authorized by the board of directors, for the unexpired portion of the officer's term. 11 12 4. Resignation. An officer may resign at any time by giving written notice of resignation to the Corporation. A resignation of an officer is effective when the notice is received by the Corporation unless the notice specifies a later effective date. If a resignation is made effective at a later date, the board of directors may permit the officer to remain in of f ice until the effective date and may f ill the pending vacancy bef ore the effective date if the board of directors provides that the successor does not take office until the effective date, or the board of directors may remove the officer at any time before the effective date and may fill the resulting vacancy. 5. Removal. Any officer or agent of this Corporation may be removed with or without cause by the board of directors or an officer or officers authorized by the board of directors. 6. Contract Rights. Appointment of an officer does not itself create contract rights. An officer"s removal does not affect the officer's contract rights, if any, with the Corporation. An officer's resignation does not affect the Corporation's contract rights, if any, with the officer. 7. Chairman of the Board of Directors. The chairman of the board of directors shall preside as chairman at meetings of the shareholders and the board of directors. He or she shall, in addition, have such other duties as the board of directors may prescribe that he or she perform. At the request of the president, the chairman of the board of directors may, in the case of the president's absence or inability to act, temporarily act in his or her place. In the case of death of the president or in the case of his or her absence or inability to act without having designated the chairman of the board of directors to act temporarily in his place, the chairman of the board of directors shall perform the duties of the president, unless the board of directors, by resolution, provides otherwise. If the chairman of the board of directors shall be unable to act in place of the president, the vice presidents may exercise such powers and perform such duties as provided in Section 9 below. 8. President. Subject to the direction and supervision of the board of directors, the president shall be the chief executive officer of the. Corporation and shall have general and active control of its affairs and business and general supervision of its officers, agents and employees. In the event the position of chairman of the board of directors shall not be occupied or the chairman shall be absent or otherwise unable to act, the president shall preside at meetings of the shareholders and the board of directors and shall discharge the duties of the presiding officer. Unless otherwise directed by the board of directors, the president shall attend in person or by substitute appointed by him or her, or shall execute on behalf of the Corporation written instruments appointing a proxy or proxies to represent the Corporation at, all meetings of the shareholders of any other corporation in which the Corporation holds any stock. On behalf of the Corporation, the president may in person or by substitute or proxy execute written waivers of notice and consents with respect to any such meetings. At all such meetings and otherwise, the president, in person or by substitute or proxy, may vote the stock held by the Corporation, execute written-consents and other instruments with respect to such stock and exercise any and all rights and powers incident to the ownership of said stock. 12 13 9. Vice Presidents. Each vice president shall have such powers and perform such duties as the board of directors may from time to time prescribe or as the president may from time to time delegate to him or her. At the request of the president, in the case of the president's absence or inability to act, any vice president may temporarily act in his or her place. In the case of the death of the president, or in the case of his or her absence or inability to act without having designated a vice president or vice presidents to act temporarily in his or her place, the board of directors, by resolution, may designate a vice president or vice presidents, to perform the duties of the president. If no such designation shall be made, the chairman of the board of directors shall exercise such powers and perform such duties, as provided in Section 8 of this Article V, but if the Corporation has no chairman of the board of directors, or if the chairman is unable to act in place of the president, any of the vice presidents may exercise such powers and perform such duties. 10. Secretary. The secretary shall (i) prepare, or cause to be prepared, and maintain as permanent records the minutes of the proceedings of the shareholders and the board of directors or any committee thereof, a record of all actions taken by the shareholders or board of directors or any committee thereof without a meeting and a record of all waivers of notice of meetings of shareholders and of the board of directors or any committee thereof, (ii) see that all notices are duly given in accordance with the provisions of these Bylaws and as required by law, (iii) serve as custodian of the records of the Corporation, (iv) keep at the registered office or principal place of business, a record containing the names and addresses of all shareholders in a form that permits preparation of a list of shareholders arranged by voting group and by class or series of shares within each voting group, that is alphabetical within each class or series and that shows the address of, and the number of shares of each class or series held by, each shareholder, unless such a record shall be kept at the office of the Corporation's transfer agent or registrar, (v) maintain at the Corporation's principal office the originals or copies of the Corporation's Articles of Incorporation, Bylaws, minutes of all shareholders' meeting and records of all action taken by shareholders without meeting, all written communications to shareholders as a group or to the holders of any class or series of shares as a group, a list of the names and business addresses of the current directors and officers, and a copy of the Corporation's most recent corporate report filed with the Secretary of State, (vi) have general charge of the stock transfer books of the Corporation, unless the Corporation has a transfer agent, (vii) authenticate records of the Corporation, and (viii) in general, perform all duties incident to the office of secretary and such other duties as f rom time to time may be assigned to him or her by the president or by the board of directors. Assistant secretaries, if any, shall have the same duties and powers, subject to supervision by the secretary. The directors and/or shareholders may, however, respectively designate a person other than the secretary or assistant secretary to keep the minutes of their respective meetings. 11. Treasurer. The treasurer shall be the chief financial officer of the Corporation, shall have care and custody of all corporate funds, securities, evidences of indebtedness and other personal property of the Corporation and shall deposit the same in accordance with the instructions of the board of directors. The treasurer shall receive and give receipts and acquittances for money paid in on account of the Corporation, and shall pay out of the Corporation's funds on hand all bills, payrolls and other just debts of the Corporation of whatever nature upon maturity. Such power given to the treasurer to deposit and disburse funds shall not, however, preclude any other officer or employee of the Corporation from also depositing and 13 14 disbursing funds when authorized to do so by the board of directors. The treasurer shall, if required by the board of directors, give the Corporation a bond in such amount and with such surety or sureties as may be ordered by the board of directors for the faithful performance of duties of his or her office. The treasurer shall have such other powers and perform such other duties as may be from time to time prescribed by the board of directors or the president. The assistant treasurers, if any, shall have the same powers and duties, subject to the supervision of the treasurer. The treasurer shall also be the principal accounting officer of the Corporation and shall prescribe and maintain the methods and systems of accounting to be followed, keep complete books and records of account as required by the Colorado Business Corporation Act, prepare and file all local, state and federal tax returns, prescribe and maintain an adequate system of internal audit and prepare and furnish the president and the board of directors statements of account showing the financial position of the Corporation and the results of its operations. 12. Assistant Secretaries and Assistant Treasurers. The assistant secretaries and the assistant treasurers (in the order designated by the board of directors or, lacking such designation, by the president), in the absence of the secretary or treasurer respectively, as the case may be, shall perform the duties and exercise the powers of such secretary or treasurer and shall perform such other duties as the board of directors shall prescribe. 13. Delegation of Duties. Whenever an officer is absent or whenever, for any reason, the board of directors may deem it desirable, the board of directors may delegate the powers and duties of an officer to any other officer or officers or to any director or directors. 14. Bond of Officers. The board of directors may require any officer to give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the board of directors for such terms and conditions as the board of directors may specify, including, without limitation, for the faithful performance of his or her duties and for the restoration to the Corporation of all property in his or her possession or under his or her control belonging to the Corporation. ARTICLE VII Share Certificates and the Transfer of Shares 1. Share Certificates. Each share certificate shall state on its face (i) the name of the Corporation and that it is incorporated under the laws of the State of Colorado, (ii) the name of the person to whom the certificate is issued, and (iii) the number and class of shares and the designation of the series, if any, the certificate represents. Each share certificate shall be signed, either manually or in facsimile, by the chairman or vice chairman of the board of directors or by the president or the vice president and by the treasurer or an assistant treasurer or by the secretary or an assistant secretary, or such other officers as the board of directors may designate, by resolution, and may bear such other information as may be deemed necessary or appropriate. If the person who signed a share certificate either manually or in facsimile no longer holds office when the certificate is issued, the certificate is nevertheless valid. If the Corporation is authorized to issue different classes of shares or different series within a class, the certificate shall state conspicuously on its 14 15 front or back that the Corporation will furnish the shareholder information regarding the designations, preferences, limitations and relative rights of each class and for each series, upon written request and without charge. 2. Issuance of Shares. Except as provided in the Articles of Incorporation or the Colorado Business Corporation Act, the board of directors may authorize the issuance of shares for consideration consisting of any tangible property, intangible property or benefit to the Corporation, including cash, promissory notes, services performed and other securities of the Corporation. The board of directors shall determine that the consideration received or to be received for the shares to be issued is adequate. Such determination, in the absence of fraud, is conclusive insofar as the adequacy of such consideration relates to whether the shares are validly issued, fully paid and non-assessable. The promissory note of a subscriber or an affiliate of a subscriber for shares shall not constitute consideration for the shares unless the note is negotiable and is secured by collateral other than the shares, having a fair market value at least equal to the principal amount of the note. For the purposes of this Section 2, "promissory note" means a negotiable instrument on which there is an obligation to pay independent of collateral and does not include a nonrecourse note. Unless otherwise expressly provided in the Articles of Incorporation, shares having a par value may be issued for less than the par value. 3. Lost Certificates. The board of directors may direct a new certificate to be issued in place of a certificate alleged to have been destroyed or lost if the owner makes an affidavit or affirmation of that fact and produces such evidence of loss or destruction as the board of directors may require. The board of directors, in its discretion, may as a condition precedent to the issuance of a new certificate require the owner to give the Corporation a bond as indemnity against any claim that may be made against the Corporation relating to the certificate allegedly destroyed or lost. 4. Transfer of Shares. (a) Shares of the Corporation shall only be transferred on the stock transfer books of the Corporation by the holder of record thereof upon the surrender to the Corporation of the share certificates duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer and such documentary stamps as may be required by law. In that event, the surrendered certificates shall be canceled, new certificates issued to the persons entitled to them, and the transaction recorded on the books of the Corporation. The person in whose name shares stand on the books of the Corporation shall be deemed by the Corporation to be the owner thereof for all purposes. (b) The Articles of Incorporation, these Bylaws, an agreement among shareholders, or an agreement among shareholders and the Corporation may impose restrictions on the transfer or registration of transfer of shares of the Corporation. A restriction does not affect shares issued before the restriction became effective unless the holder of such shares acquired such shares with knowledge of the restriction, is a party to the agreement containing the restriction, or voted in favor of the restriction or otherwise consented to the restriction. (c) A restriction on the transfer or registration of transfer of shares is valid and 15 16 enforceable against the holder or a transferee of the holder if the restriction is authorized by the Colorado Business Corporation Act and its existence is noted conspicuously on the front or back of the certificate. Unless so noted, a restriction is not enforceable against a person without knowledge of the restriction. 5. Registered Shareholders. The Corporation shall be entitled to treat the registered holder of any shares of the Corporation as the owner thereof for all purposes, and the Corporation shall not be bound to recognize any equitable or other claim to, or interest in, such shares or rights deriving from such shares on the part of any person other than the registered holder, including, without limitation, any purchaser, assignee or transferee of such shares or rights deriving from such shares, unless and until such other person becomes the registered holder of such shares, whether or not the Corporation shall have either actual or constructive notice of the claimed interest of such other person. 6. Transfer Agent, Registrars and Paying Agents. The board of directors may at its discretion appoint one or more transfer agents, registrars and agents for making payment upon any class of stock, bond, debenture or other security of the Corporation. Such agents and registrars may be located either within or outside Colorado. They shall have such rights and duties and shall be entitled to such compensation as may be agreed. ARTICLE VIII Insurance By action of the board of directors, notwithstanding any interest of the directors in the action, the Corporation may purchase and maintain insurance, in such scope and amounts as the board of directors deems appropriate, on behalf of any person who is or was a director, officer, employee, fiduciary or agent of the Corporation, or who, while a director, officer, employee, fiduciary or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, fiduciary or agent of any other foreign or domestic corporation or of any partnership, joint venture, trust, profit or nonprofit unincorporated association, limited liability company or other enterprise or employee benefit plan, against any liability asserted against, or incurred by, him or her in that capacity or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of the Colorado Business Corporation Act. Any such insurance may be procured from any insurance company designated by the board of directors of the Corporation, whether such insurance company is formed under the laws of Colorado or is a company in which the Corporation has an equity interest or any other interest, through stock ownership or otherwise. ARTICLE IX Miscellaneous 1. Fiscal Year. The fiscal year of the corporation shall end on January 31 of each year. Said fiscal year may be changed from time to time by the board of directors in its 16 17 discretion. 2. Amendments. The board of directors shall have power to make, amend and repeal these Bylaws at any regular or special meeting of the board of directors unless the shareholders expressly provide that the directors may not amend or repeal such bylaw. The shareholders also shall have the power to make, amend or repeal these Bylaws at any annual meeting or at any special meeting called for that purpose. 3. Gender. Whenever required by the context, the singular shall include the plural, the plural the singular, and one gender shall include all genders. 4. Invalid Provision. The invalidity or unenforceability of any particular provision of these Bylaws shall not affect the other provisions herein, and these Bylaws shall be construed in all respects as if such invalid or unenforceable provision was omitted. 5. Governing Law. These Bylaws shall be governed by and construed in accordance with the laws of the State of Colorado. 6. Definitions. Except as otherwise specifically provided in these Bylaws, all terms used in these Bylaws shall have the definitions ascribed to them in the Colorado Business Corporation Act. 17 EX-3.7 6 CERTIFICATE OF DESIGNATION OF MODTECH HOLDINGS 1 EXHIBIT 3.7 CERTIFICATE OF DESIGNATION PREFERENCES, RELATIVE, PARTICIPATING, OPTIONAL, AND OTHER SPECIAL RIGHTS, QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS OF SERIES A PREFERRED STOCK OF MODTECH HOLDINGS, INC. The undersigned, Evan M. Gruber and Michael Rhodes, certify that: ONE. They are the duly elected Chief Executive Officer and Secretary, respectively, of the above-named corporation. TWO. Pursuant to and in accordance with the provisions of Section 151 of the Delaware General Corporation Law and the Certificate of Incorporation of this corporation, the Board of Directors of this corporation has duly adopted the following recitals and resolutions. WHEREAS, the Certificate of Incorporation of this corporation provides for a class of its authorized shares known as Preferred Stock comprised of 5,000,000 shares issuable from time to time in one or more series; and WHEREAS, the Board of Directors of this corporation is authorized to fix the number of shares of any series of Preferred Stock and to determine the designation of any such series and the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock; and WHEREAS, the Board of Directors of this corporation desires to establish a class of Preferred Stock to be designated as the "Series A Preferred Stock", and to fix the number of shares thereof and the rights, preferences, privileges, restrictions and other matters relating thereto; NOW, THEREFORE, BE IT RESOLVED, that a series consisting of 585,000 shares of Preferred Stock is hereby established and designated as the "Series A Preferred Stock" of this corporation (the "Series A Preferred Stock"), and that the Series A Preferred Stock shall have the rights, preferences and privileges, and shall be subject to the restrictions, as are hereinafter set forth: 1. Dividend Provisions. The holders of outstanding Series A Preferred Stock shall be entitled to receive when, as and if declared by the Board of Directors, out of any assets at the time legally available therefor, dividends in cash at the rate of $0.40 per share of Series A Preferred Stock per annum. Such dividends shall accrue on each share of Series A Preferred Stock from the date of its original issuance and shall accrue from day to day, whether or not earned or declared. Such dividends shall be cumulative so that if such dividends in respect of any previous year at said rate per share per annum shall not have been paid or declared and set apart for all shares of Series A Preferred Stock at the time outstanding, the deficiency shall be fully paid on or declared and set apart for such shares before the corporation pays any dividend (except a dividend in shares of the corporation) on Common Stock. Undeclared or unpaid dividends shall not bear or accrue interest. 1 2 Unless full dividends on the Series A Preferred Stock for all past dividend periods and the then current dividend period shall have been paid or declared and a sum sufficient for the payment thereof set apart, no shares of Common Stock shall be purchased, redeemed, or acquired by the corporation and no funds shall be paid into or set aside or made available for a sinking fund for the purchase, redemption, or acquisition thereof; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock held by employees, officers, directors, consultants or other persons performing services for the corporation or any wholly-owned subsidiary (including, but not by way of limitation, distributors and sales representatives) that are approved by the corporation's Board of Directors. 2. Liquidation Preference. (a) Preference. In the event of any liquidation, dissolution or winding up of this corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock that may from time to time come into existence, the holders of Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to the sum of (i) Five Dollars ($5.00) for each outstanding share of Series A Preferred Stock and (ii) an amount equal to accrued but unpaid dividends on such share. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, subject to the rights of series of Preferred Stock that may from time to time come into existence, the entire assets and funds of the corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock in proportion to the amount of such stock owned by each such holder. If the consideration received to be received in any liquidation, dissolution or winding up of the corporation is other than cash, its value will be deemed its fair market value as reasonably determined by the this corporation's board of directors. (b) Remaining Assets. Upon the completion of the distribution required by subparagraph (a) of this Section 2 and any other distribution that may be required with respect to series of Preferred Stock that may from time to time come into existence, the remaining assets of the corporation available for distribution to stockholders shall be distributed among the holders of Series A Preferred Stock and Common Stock pro rata based on the number of shares of Common Stock held by each (assuming conversion of all such Series A Preferred Stock). 3. No Redemption. The Series A Preferred Stock shall NOT be subject to redemption at the option, election or request of the corporation or any holder or holders of Series A Preferred Stock. 4. Conversion. The holders of the Series A Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Except as provided in Section 4(b) below, no share of Series A Preferred Stock may be converted into Common Stock until two years after the date of its 2 3 original issuance. Thereafter, each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any at the office of this corporation or any transfer agent for such stock, into one share of fully paid and nonassessable shares of Common Stock (the "Conversion Ratio"). The Conversion Ratio for the Series A Preferred Stock shall be subject to adjustment as set forth in subsection 4(d). (b) Automatic Conversion. Each share of Series A Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Ratio at the time in effect for such Series A Preferred Stock upon the earlier of (i) the fourth anniversary date of its original issuance, or (ii) immediately upon a "Change in Control", regardless of when such Change of Control occurs. For purposes of this Section 4, a Change in Control means (i) the acquisition of the corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation but, excluding any merger effected exclusively for the purpose of changing the domicile of the corporation); (ii) a sale of all or substantially all of the assets of the corporation; (iii) the sale of capital stock constituting 50% or more of the Company's outstanding capital stock at the time of sale or, (iv) any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the corporation is disposed of. (c) Mechanics of Conversion. Before any holder of Series A Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for the Series A Preferred Stock, and shall give written notice to this corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with a Change in Control the conversion shall be deemed to have occurred immediately prior to the closing of the transaction which resulted in the Change of Control. (d) Adjustment in Conversion Price. (i) Stock Splits. If the corporation at any time or from time to time after the date of the first issuance of shares of the Series A Preferred Stock ( the "Original Issue Date") declares or pays any dividend on its Common Stock payable in Common Stock or in any right to acquire Common Stock, or effects a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise), or if the outstanding shares of Common Stock is combined or consolidated, by reclassification or otherwise, into 3 4 a lesser number of shares of Common Stock, then the Conversion Ratio in effect immediately prior to such event shall, concurrently with the effectiveness of such event, be proportionately decreased or increased, as appropriate. (ii) Recapitalization. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or Section 2) provision shall be made so that the holders of the Series A Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Preferred Stock the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Series A Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Ratio then in effect and the number of shares purchasable upon conversion of the Series A Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (iii) Issuance of Additional Securities. Except as otherwise provided in this Section 4(d), the Conversion Ratio will not be adjusted upward or downward because of the issuance of additional securities after Original Issue Date without consideration or for a consideration per share less than the price at which the Series A Preferred Stock was originally issued. (e) No Impairment. This corporation will not, by amendment of its Certificate of Incorporation, reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Ratio of the holders of the Series A Preferred Stock against impairment. (f) No Fractional Shares. No fractional shares shall be issued upon the conversion of any share or shares of the Series A Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series A Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (g) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Ratio of Series A Preferred Stock pursuant to this Section 4, this corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such 4 5 adjustment or readjustment is based. This corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (a) such adjustment and readjustment, (b) the Conversion Ratio for such series of Preferred Stock at the time in effect, and (c) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of Series A Preferred Stock. (h) Record Date. In the event of any taking by this corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, this corporation shall mail to each holder of Series A Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (i) Reservation of Stock Issuable Upon Conversion. This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, in addition to such other remedies as shall be available to the holder of such Series A Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to these articles. (j) Notices. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Series A Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this corporation. 5. No Voting Rights. The holder of each share of Series A Preferred Stock shall NOT have the right to vote their shares of Series A Preferred Stock on any matters on which holders of any other class of stock, including Common Stock, have the right to vote. However, holders of Series A Preferred Stock shall be entitled to notice of any shareholders' meeting in accordance with the bylaws of this corporation. 6. Protective Provisions. Subject to the rights of other series of Preferred Stock which may from time to time come into existence, so long as any shares of Series A Preferred Stock are outstanding, this corporation shall not alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock without the consent of the holders of a majority of the shares of Series A Preferred Stock then outstanding. 5 6 7. Status of Converted or Redeemed Stock. In the event any shares of Series A Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so converted shall be canceled and shall not be issuable by the corporation. THREE. The authorized number of shares of Preferred Stock is 5,000,000 and no shares of such class have been issued. The authorized number of shares of Series A Preferred Stock is 585,000, and no shares of such series have been issued. IN WITNESS WHEREOF, the undersigned has executed this certificate. The undersigned declares under penalty of perjury that the matters set forth in the foregoing certificate are true of his own knowledge. Executed at Newport Beach, California on _____________1998. ________________________________________ Evan M. Gruber, Chief Executive Officer ________________________________________ _____________ Secretary EX-3.8 7 DESIGNATION OF SPI HOLDINGS, INC. 1 EXHIBIT 3.8 EXHIBIT A SERIES A-1 CONVERTIBLE PREFERRED STOCK Section 1. Dividends. When and as declared by the Corporation's board of directors and to the extent permitted under the Colorado Business Corporation Act, the holders of the Series A-1 Convertible Preferred Stock (the "Series A-1 Preferred") shall participate ratably with the holders of shares of the Corporation's Common Stock (as hereinafter defined), Series A-2 Convertible Preferred Stock (the "Series A-2 Preferred") and Series A-3 Convertible Preferred Stock (the "Series A-3 Preferred") in any dividends on the Common Stock based upon the number of shares of Common Stock into which each share of Series A-1 Preferred (a "Share") is convertible at the time of such declaration. Section 2. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, the holders of Series A-1 Preferred as a class shall vote to either (A) convert all of the Series A-1 Preferred (including any fraction of a Share) into Conversion Stock (as hereinafter defined) pursuant to the provisions of Section 4 below and share ratably with the holders of Series A-2 Preferred and the Series A-3 Preferred (collectively, the "Preferred Class"), if applicable, and Junior Securities (as hereinafter defined) in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation, or (B) be paid (i) before any distribution or payment is made upon any Junior Securities and concurrently with the holders of the Preferred Class as set forth below, an amount in cash equal to the Liquidation Value (as hereinafter defined) of the Series A-1 Preferred (the "Liquidation Payment"), and (ii) after the payment of the Liquidation Payment and before any distribution or payment is made upon any Junior Securities, an amount equal to the Liquidation Premium (as hereinafter defined) (collectively with the Liquidation Payment, the "Liquidation Amount"). For purposes of this Section 2, the vote of the holders of the majority of the Series A-1 Preferred shall be deemed to be the election of all of the holders of the Series A-1 Preferred. If the holders of the Series A-1 Preferred elect not to convert the Series A-1 Preferred pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders of the Preferred Class elect not to convert their shares of the Preferred Class into Conversion Stock, the holders of the Series A-1 Preferred and the holders of the Preferred Class shall share the Liquidation Payment ratably based upon the aggregate Liquidation Value of the Series A-1 Preferred and the aggregate liquidation value of the Preferred Class held by each such holder pursuant to clause (B)(i) above, after the payment of which the holders of the Series A-1 Preferred shall receive the Liquidation Premium, after the payment of which any remaining assets shall be distributed to the holders of Junior Securities. If the holders of the Series A-1 Preferred elect not to convert the Series A-1 Preferred pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders of the Preferred Class elect to convert their shares of the Preferred Class into Conversion Stock, the holders of the Series A- 1 Preferred shall receive the Liquidation Amount before any distribution or payment is made upon the Preferred Class or any Junior Securities. If the holders of the Series A-1 Preferred elect 2 to convert the Series A-1 Preferred pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Preferred Class elect not to convert their shares of the Preferred Class into Conversion Stock, the holders of the Preferred Class shall receive payment of the Preferred Class liquidation value before any distribution or payment is made upon the Series A-1 Preferred or any Junior Securities and, thereafter, the holders of the Series A-1 Preferred shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. If the holders of the Series A-1 Preferred elect to convert the Series A-1 Preferred pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Preferred Class elect to convert their shares of the Preferred Class into Conversion Stock, the holders of the Series A-1 Preferred and the Preferred Class shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. The Corporation shall mail written notice of such liquidation, dissolution or winding up, not less than sixty (60) days prior to the payment date stated therein (the "Payment Date"), to each record holder of Series A-1 Preferred. Neither the consolidation or merger of the Corporation into or with any other entity or entities, nor the sale or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 2. Section 3. Voting Rights. The holders of the Series A-1 Preferred shall be entitled to notice of all stockholders meetings in accordance with the Corporation's bylaws, and the holders of the Series A-1 Preferred shall be entitled to vote on all matters submitted to the stockholders for a vote together with the holders of the Common Stock and the Series A-2 Preferred voting together as a single class with each share of Common Stock entitled to one vote per share, each Share of Series A-I Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-1 Preferred at the time the vote is taken, and each share of Series A-2 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-2 Preferred at the time the vote is taken. Section 4. Conversion. A. Conversion Procedure. (i) At any time and from time to time, any holder of Series A-1 Preferred may convert all or any portion of the Series A-1 Preferred (including any fraction of a Share) held by such holder into a number of shares of Conversion Stock computed by multiplying the number of Shares to be converted by $2.7154 and dividing the result by the Conversion Price (as hereinafter defined) then in effect. (ii) Each conversion of Series A-1 Preferred shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series A-1 Preferred to be converted have been surrendered at the principal office of the 3 Corporation. At such time as such conversion has been effected, the rights of the holder of such Series A-1 Preferred as such holder shall cease and the Person (as hereinafter defined) or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby; provided, however, that for purposes of Section 2(A) above the conversion of the Series A-1 Preferred shall be deemed to have been effected as of the close of business on the day prior to the Payment Date. (iii) Notwithstanding any other provision hereof, if a conversion of Series A-1 Preferred is to be made in connection with a Qualified Public Offering (as hereinafter defined), the conversion of any Shares of Series A-1 Preferred may, at the election of the holder of such Shares, be conditioned upon the consummation of the Qualified Public Offering in which case such conversion shall not be deemed to be effective until the consummation of the Qualified Public Offering. (iv) As soon as possible after a conversion has been effected (but in any event within five business days in the case of subparagraph (a) below), the Corporation shall deliver to the converting holder: (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; (b) payment of the amount payable under subparagraph (vii) below with respect to such conversion; and (c) a certificate representing any Shares of Series A-1 Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (v) The issuance of certificates for shares of Conversion Stock upon conversion of Series A-1 Preferred shall be made without charge to the holders of such Series A-1 Preferred for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Conversion Stock. Upon conversion of each Share of Series A-1 Preferred, the Corporation shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be validly issued, fully paid and non-assessable. (vi) The Corporation shall not close its books against the transfer of Series A-1 Preferred or of Conversion Stock issued or issuable upon conversion of Series A-1 Preferred in any manner which interferes with the timely conversion of Series A-1 Preferred. The Corporation shall assist and cooperate with any holder of Shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of Shares hereunder (including, without limitation, making any filings required to be made by the Corporation). 4 (vii) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph, be deliverable upon any conversion of the Series A-1 Preferred, the Corporation, in lieu of delivering the fractional share therefor, may pay an amount to the holder thereof equal to the fair market price of such fractional interest as of the date of conversion as determined by the Corporation's board of directors. (viii) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Conversion Stock, solely for the purpose of issuance upon the conversion of the Series A- I Preferred, such number of shares of Conversion Stock issuable upon the conversion of all outstanding Shares of Series A-1 Preferred. All shares of Conversion Stock which are so issuable shall when issued, be duly and validly issued, fully paid and non-assessable and free from all taxes, liens and charges. The Corporation shall 'take. all such actions as may be necessary to assure that all such shares of Conversion Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Conversion Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Corporation upon each such issuance). B. Conversion Price. The initial "Conversion Price" shall be $2.7154 per share. In order to prevent dilution of the conversion rights granted under this subdivision, the Conversion Price shall be subject to adjustment from time to time pursuant to this Section 4. C. Anti-Dilution. If and whenever on or after the original date of issuance of the Series A-1 Preferred the Corporation issues or sells, or in accordance with Section 4(D) hereof is deemed to have issued or sold, any shares of its Common Stock for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale, then forthwith upon such issue or sale the Conversion Price shall be reduced to the Conversion Price determined by dividing (i) the sum of (a) the product derived by multiplying the Conversion Price in effect immediately prior to such issue or sale times the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (b) the consideration, if any, received by the Corporation upon such issue or sale, by (ii) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale; provided that there shall be no adjustment in the Conversion Price as a result of any issuance or sale (or deemed issuance or sale) of (x) options issued pursuant to the Corporation's stock option plan and capital stock issued upon the exercise thereof, (y) capital stock of the Corporation upon the exercise of warrants held by each of Patrick Van Den Bossche and NationsCredit Commercial Corporation and any conversion of such capital stock subsequent to its issuance and (z) the issuance of capital stock of the Corporation upon the conversion of Series A-1 Preferred or the Preferred Class. D. Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Conversion Price under Section 6(C) hereof, the following shall be applicable: 5 (i) Issuance of Rights or Options. If the Corporation in any manner grants any rights or options to subscribe for or to purchase Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such rights or Options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities") and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities is less than the Conversion Price in effect immediately prior to the time of the granting of such Options then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the granting of such Options for such price per share. For purposes of this Section 4(D)(i), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount, if any, received or receivable by the Corporation- as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance of sale or such Convertible Securities and the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No further adjustment of the Conversion Price shall be made when Convertible Securities are actually issued upon the exercise of such Options or when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Corporation in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price in effect immediately prior to the time of such issue or sale then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this Section 4(D)(ii), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Conversion Price shall be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Conversion Price had been or are to be made pursuant to other provisions of this Section 4, no further adjustment of the Conversion Price shall be made by reason of such issue or sale. (iii) Change in Option Price or Conversion Rate. If the purchase price 6 provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock change at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. E. Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of. Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. F. Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Corporation's assets to another Person or other transaction which is effected in such a manner that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an "Organic Change". Prior to the consummation of any Organic Change, the Corporation shall make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A-1 Preferred then outstanding) to insure that each of the holders of Series A-1 Preferred shall thereafter have the right to acquire and receive, in lieu of or in addition to (as the case may be) the shares of Conversion Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Series A-1 Preferred, such shares of stock, securities or assets as such holder would have received in connection with such Organic Change if such holder had converted its Series A-1 Preferred immediately prior to such Organic Change. In each such case, the Corporation shall also make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A-1 Preferred then outstanding) to insure that the provisions of this Section 4 and Section 5 hereof shall thereafter be applicable to the Series A-1 Preferred (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Corporation, an immediate adjustment of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of Conversion Stock acquirable and receivable upon conversion of Series A-1 Preferred, if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation, merger or sale). The Corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation (if other than the Corporation) resulting from consolidation or merger or the corporation purchasing such assets assumes by written instrument (in form reasonably satisfactory to the holders of a majority of the Series A-1 Preferred then outstanding), the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. 7 G. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 4 but not expressly provided for by such provisions, then the Corporation's board of directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Series A-1 Preferred; provided that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Section 4 or decrease the number of shares of Conversion Stock issuable upon conversion of each Share of Series A-1 Preferred. H. Notices. (i) Immediately upon any adjustment of the Conversion Price, the Corporation shall give written notice thereof to all holders of Series A-1 Preferred, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Corporation shall give written notice to all holders of Series A-1 Preferred at least 20 days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata subscription offer to holders of Common Stock, or (c) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. (iii) The Corporation shall also give written notice to the holders of Series A-1 Preferred at least 20 days prior to the date on which any Organic Change shall take place. I. Mandatory Conversion. The Corporation's board of directors may at any time require the conversion of all of the outstanding Series A-1 Preferred upon the occurrence of a Conversion Event (as hereinafter defined). Any such mandatory conversion shall only be effected at the time of and subject to the closing of the transactions contemplated by the Conversion Event and upon written notice of such mandatory conversion delivered to all holders of Series A-1 Preferred at least seven (7) days prior to such closing. Section 5. Purchase Rights. If at any time the Corporation grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then each holder of Series A-1 Preferred shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Conversion Stock acquirable upon conversion of such holder's Series A-1 Preferred immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. Section 6. Registration of Transfer. 8 The Corporation shall keep at its principal office a register for the registration of Series A-1 Preferred. Upon the surrender of any certificate representing Series A-I Preferred at such place, the Corporation shall, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of Shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of Shares as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate. Section 7. Replacement Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing Shares of any class of Series A-1 Preferred, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the holder is a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation, upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of Shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 8. Definitions. "Common Stock" means, collectively, the Corporation's Common Stock, no par value, and any capital stock of any class of the Corporation hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Corporation. "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Section 4(D) hereof whether or not the Options or Convertible Securities are actually exercisable at such time. "Conversion Event" means (i) a Qualified Public Offering, (ii) any sale of all the outstanding capital stock of the Corporation, or (iii) a merger, consolidation, sale of substantially all of the assets of the Corporation or similar transaction involving the Corporation. "Conversion Stock" means shares of Common Stock; provided that if there is a change such that the securities issuable upon conversion of the Series A-1 Preferred are issued by an entity other than the Corporation or there is a change in the class of securities so issuable, then the term "Conversion Stock" shall mean one share of the security issuable upon conversion of the Series A-1 Preferred if such security is issuable in shares, or shall mean the smallest unit in 9 which such security is issuable if such security is not issuable in shares. "Junior Securities" means any of the Corporation's equity securities other than the Series A-1 Preferred and the Preferred Class. "Liquidation Premium" means the amount determined pursuant to the following equation: Liquidation Premium = ((1.2)14 x CP) - DP - Liquidation Value ; where (i) N = the number of years, including any fractional portion thereof, from the date of issuance of the Series A-1 Preferred to the date of payment of the Liquidation Premium (the "Payment Date"), (ii) CP = the Conversion Price, and (iii) DP = the sum of the future values of any distributions or dividends paid per. share of Series A-1 Preferred prior to the Payment Date, assuming such dividend or distribution was reinvested by the holder thereof at an annually compounded rate of 20% from the date of payment to the Payment Date. "Liquidation Value" of any Share as of any particular date shall be equal to $2,7154. "Person" means an individual, a partnership, a limited liability company, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Oualified Public Offering" means any underwritten offering by the Corporation of its equity securities to the public pursuant to an effective registration statement under the Securities Act of 1933, as then in effect, or any comparable statement under any similar federal statute then in force pursuant to which the value of the Corporation prior to receipt of the proceeds of such offering is at least $25,000,000 and the minimum gross proceeds to the Corporation is $15,000,000; provided that for purposes of Section 4(G) hereof, a Qualified Public Offering shall not include an offering made in connection with a business acquisition or combination or an employee benefit plan. Section 9. Amendment and Waiver. No amendment, modification or waiver shall be binding or effective with respect to, any provision of Sections 1 to 10 hereof without the prior written consent of the holders of at least 75% of the Series A-1 Preferred outstanding at the time such action is taken. No change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another corporation or entity unless the Corporation has obtained the prior written consent of the holders of 75% of the Series A-1 Preferred then outstanding. 10 Section 10. Notices. Except as otherwise expressly provided hereunder, all notices referred to herein shall be in writing and shall be delivered by registered or certified mail, return receipt requested and postage prepaid, or by reputable overnight courier service, charges prepaid, and shall be deemed to have been given when so mailed or sent (i) to the Corporation, at its principal executive offices, and (ii) to any stockholder, at such holder's address as it appears in the stock records of the Corporation (unless otherwise indicated by any such holder). 11 EXHIBIT B SERIES A-2 CONVERTIBLE PREFERRED STOCK Section 1. Dividends. When and as declared by the Corporation's board of directors and to the extent permitted under the Colorado Business Corporation Act, the holders of the Series A-2 Convertible Preferred Stock (the "Series A-2 Preferred") shall participate ratably with the holders of shares of the Corporation's Common Stock (as hereinafter defined), Series A-1 Convertible Preferred Stock (the "Series A-1 Preferred") and Series A-3 Convertible Preferred Stock (the "Series A-3 Preferred Stock") in any dividends on the Common Stock based upon the number of shares of Common Stock into which each share of Series A-2 Preferred (a "Share") is convertible at the time of such declaration. Section 2. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, the holders of the Series A-2 Preferred and the Series A-3 Preferred as a class (the "Preferred Class") shall vote to either (A) (i) convert all of the Series A-2 Preferred (including any fraction of a Share) into Conversion Stock (as hereinafter defined) pursuant to the provisions of Section 4 below, (ii) convert all of the Series A-3 Preferred (including any fraction of a share) into Series A-2 Preferred, (iii) convert the Series A-2 Preferred referred to in clause (ii) above into Conversion Stock, and (iv) share ratably with the holders of Series A-1 Preferred, if applicable, and Junior Securities (as hereinafter defined) in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation, or (B) be paid, before any distribution or payment is made upon any Junior Securities and concurrently with the holders of Series A- 1 Preferred as set forth below, an amount in cash equal to the Liquidation Value (as hereinafter defined) of the Series A-2 Preferred and the liquidation value of the Series A-3 Preferred (the "Liquidation Payment"). For purposes of this Section 2, the vote of the holders of the majority of the Preferred Class as a group shall de deemed to be the election of all of the holders of the Preferred Class.' If the holders of the Preferred Class elect not to convert the Preferred Class pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect not to convert their shares of Series A-1 Preferred into Conversion Stock, the holders of the Preferred Class and the holders of the Series A- 1 Preferred shall share the Liquidation Payment ratably based upon the aggregate Liquidation Value of the Series A-2 Preferred and the aggregate liquidation value of the Series A-1 Preferred -and the Series A-3 Preferred held by each such holder pursuant to clause (B) above, after the payment of which the holders of the Series A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation premium, after the payment of which any remaining assets shall be distributed to the holders of Junior Securities. If the holders of the Preferred Class elect to convert the Preferred Class pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Series A- I Preferred elect not to convert their shares of Series A-1 Preferred into Conversion Stock, the holders of the Series A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation amount before any distribution or payment is made upon the 12 Preferred Class or any Junior Securities and, thereafter, the holders of the Preferred Class shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. If the holders of the Preferred Class elect not to convert the Preferred Class pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect to convert their shares of Series A-1 Preferred into Conversion Stock, the holders of the Preferred Class shall receive the Liquidation Payment before any distribution or payment is made upon the Series A- I Preferred or any Junior Securities and, thereafter, the holders of the Series A-1 Preferred shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. If the holders of the Preferred Class elect to convert the Preferred Class pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect to convert their shares of Series A- 1 Preferred into Conversion Stock, the holders of the Preferred Class and the holders of the Series A-1 Preferred shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. The Corporation shall mail written notice of such liquidation, dissolution or winding up, not less than sixty (60) days prior to the payment date stated therein (the "Payment Date"), to each record holder of Series A-2 Preferred. Neither the consolidation or merger of the Corporation into or with any other entity or entities, nor the sale or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 2. Section 3. Voting Rights. The holders of the Series A-2 Prefer-red shall be entitled to notice of all stockholders meetings in accordance with the Corporation's bylaws, and the holders of the Series A-2 Preferred shall be entitled to vote on all matters submitted to the stockholders for a vote together with the holders of the Common Stock and the Series A-1 Preferred voting together as a single class with each share of Common Stock entitled to one vote per shake, each share of Series A-1 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A- I Preferred at the time the vote is. taken, and each Share of Series A-2 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-2 Preferred at the time the vote is taken. Section 4. Conversion. A. Conversion Procedure. (i) At any time and from time to time, any holder of Series A-2 Preferred may convert all or any portion of the Series A-2 Preferred (including any fraction of a Share) held by such holder into a number of shares of Conversion Stock computed by multiplying the number of Shares to be converted by $2.8626 and dividing. the result by the Conversion Price (as hereinafter defined) then in effect. 13 (ii) Each conversion of Series A-2 Preferred shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series A-2 Preferred to be converted have been surrendered at the principal office of the Corporation. At such time as such conversion has been effected, the rights of the holder of such Series A-2 Preferred as such holder shall cease and the Person (as hereinafter defined) or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby; provided, however, that for purposes of Section 2(A) above the conversion of the Series A-2 Preferred shall be deemed to have been effected as of the close of business on the day prior to the Payment Date. (iii) Notwithstanding any other provision hereof, if a conversion of Series A-2 Preferred is to be made in connection with a Qualified Public Offering (as hereinafter defined), the conversion of any Shares of Series A-2 Preferred may, at the election of the holder of such Shares, be conditioned upon the consummation of the Qualified Public Offering in which case such conversion shall not be deemed to be effective until the consummation of the Qualified Public Offering. (iv) As soon as possible after a conversion has been effected (but in any event within five business days in the case of subparagraph (a) below), the Corporation shall deliver to the converting holder: (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; (b) payment of the amount payable under subparagraph (vii) below with respect to such conversion; and (c) a certificate representing any Shares of Series A-2 Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (v) The issuance of certificates for shares of Conversion Stock upon conversion of Series A-2 Preferred shall be made without charge to the holders of such Series A-2 Preferred for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Conversion Stock. Upon conversion of each Share of Series A-2 Preferred, the Corporation shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be Validly issued, fully paid and nonassessable. (vi) The Corporation shall not close its books against the transfer of Series A-2 Preferred or of Conversion Stock issued or issuable upon conversion of Series A-2 Preferred in any manner which interferes with the timely conversion of Series A-2 Preferred. The Corporation shall assist and cooperate with any holder of Shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of Shares 14 hereunder (including, without limitation, making any filings required to be made by the Corporation). (vii) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph, be deliverable upon any conversion of the Series A-2 Preferred, the Corporation, in lieu of delivering the fractional share therefor, may pay an amount to the holder thereof equal to the fair market price of such fractional interest as of the date of conversion as determined by the Corporation's board of directors. (viii) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Conversion Stock, solely for the purpose of issuance upon the conversion of the Series A-2 Preferred, such number of shares of Conversion Stock issuable upon the conversion of all outstanding Shares of Series A-2 Preferred. All shares of Conversion Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Corporation shall take all such actions as may be necessary to assure that all such shares of Conversion Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Conversion Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Corporation upon each such issuance). B. Conversion Price. The initial "Conversion Price" shall be $2.8626 per share. In order to prevent dilution of the conversion right s granted under this subdivision, the Conversion Price shall be subject to adjustment from time to time pursuant to this Section 4. C. Anti-Dilution. If and whenever on or after the original date of issuance of the Series A-2 Preferred the Corporation issues or sells, or in accordance with Section 4(D) hereof is deemed to have issued or sold, any shares of its Common Stock for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale, then forthwith upon such issue or sale the Conversion Price shall be reduced to the Conversion Price determined by dividing (i) the sum of (a) the product derived by multiplying the Conversion Price in effect immediately prior to such issue or sale times the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (b) the consideration, if any, received by the Corporation upon such issue or sale, by (ii) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale; provided that there shall be no adjustment in the Conversion Price as a result of any issuance or sale (or deemed issuance or sale) of (x) options issued pursuant to the Corporation's stock option plan and capital stock issued upon the exercise thereof, (y) capital stock of the Corporation upon the exercise of warrants held by each of Patrick Van Den Bossche and NationsCredit Commercial Corporation and any conversion of such capital stock subsequent to its issuance, and (z) the issuance of capital stock of the Corporation upon the conversion of the Series A-1 Preferred or the Preferred Class. D. Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Conversion Price under Section 6(C) hereof, the following shall be applicable: 15 (i) Issuance of Rights or Options. If the Corporation in any manner grants any rights or options to subscribe for or to purchase Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities") and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities. is less than the Conversion Price in effect immediately prior to the time of the granting of such Options then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the granting of such Options for such price per share. For purposes of this Section 4(D)(i), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance of sale or such Convertible Securities and the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No further adjustment of the Conversion Price shall be made when Convertible Securities are. actually issued upon the exercise of such Options or when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Corporation in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price in effect immediately prior to the time of such issue or sale then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this Section 4(D)(ii), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Conversion Price shall be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Conversion Price had been or are to be made pursuant to other provisions of this Section 4, no further adjustment of the Conversion Price shall be made by reason of such issue or sale. 16 (iii) Change in Option Price or Conversion Rate. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities, or the, rate at which any Convertible Securities are convertible into or exchangeable for Common Stock change at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. E. Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. F. Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Corporation's assets to another Person or other transaction which is effected in such a manner that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an "Organic Change". Prior to the consummation of any Organic Change, the Corporation shall make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A-2 Preferred then outstanding) to insure that each of the holders of Series A-2 Preferred shall thereafter have the right to acquire and receive, in lieu of or in addition to (as the case may be), the shares of Conversion Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Series A-2 Preferred, such shares of stock, securities or assets as such holder would have received in connection with such Organic Change if such holder had converted its Series A-2 Preferred immediately prior to such Organic Change. In each such case, the Corporation shall also make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A-2 Preferred then outstanding) to insure that the provisions of this Section 4 and Section 5 hereof shall thereafter be applicable to the Series A-2 Preferred (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Corporation, an immediate adjustment of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of Conversion Stock acquirable and receivable upon conversion of Series A-2 Preferred, if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation, merger or sale). The Corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation (if other than the Corporation) resulting from consolidation or merger or the corporation purchasing such assets assumes by written instrument (in form reasonably satisfactory to the holders of a majority of the Series A-2 Preferred then outstanding), the obligation to deliver to each such holder such shares 17 of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. G. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 4 but not expressly provided for by such provisions, then the Corporation's board of directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Series A-2 Preferred; provided that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Section 4 or decrease the number of shares of Conversion Stock issuable upon conversion of each Share of Series A-2 Preferred. H. Notices. (i) Immediately upon any adjustment of the Conversion Price, the Corporation shall give written notice thereof to all holders of Series A-2 Preferred, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Corporation shall give written notice to all holders of Series A-2 Preferred at least 20 days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata subscription offer to holders of Common Stock, or (c) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. (iii) The Corporation shall also give written notice to the holders of Series A-2 Preferred at least 20 days prior to the date on which any Organic Change shall take place. I. Mandatory Conversion. The Corporation's board of directors may at any time require the conversion of all of the outstanding Series A-2 Preferred upon the occurrence of a Conversion Event (as hereinafter defined). Any such mandatory conversion shall only be effected at the time of and subject to the closing of the transactions contemplated by the Conversion Event and upon written notice of such mandatory conversion delivered to all holders of Series A-2 Preferred at least seven (7) days prior to such closing. Section 5. Purchase Rights. If at any time the Corporation grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then each holder of Series A-2 Preferred shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Conversion Stock acquirable upon conversion of such holder's Series A-2 Preferred immediately before the date on which a record is taken for the. grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. Section 6. Registration of Transfer. 18 The Corporation shall keep at its principal office a register for the registration of Series A-2 Preferred. Upon the surrender of any certificate representing Series A-2 Preferred at such place, the Corporation shall, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of Shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of Shares as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate. Section 7. Replacement. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing Shares of any class of Series A-2 Preferred, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the holder is a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation, upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of Shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 8. Definitions. "Common Stock" means, collectively, the Corporation's Common Stock, no par value, and any capital stock of any class of the Corporation hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Corporation. "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Section 4(D) hereof whether or not the Options or Convertible Securities are actually exercisable at such time. "Conversion Event" means (i) a Qualified Public Offering, (ii) any sale of all the outstanding capital stock of the Corporation, or (iii) a merger, consolidation, sale, of substantially all of the assets of the Corporation or similar transaction involving the Corporation. "Conversion Stock" means shares of Common Stock; provided that if there is a change such that the securities issuable upon conversion of the Series A-2 Preferred are issued by an entity other than the Corporation or there is a change in the class of securities so issuable, then the term "Conversion Stock" shall mean one share of the security issuable upon conversion of the Series A-2 Preferred if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. 19 "Junior Securities" means any of the Corporation's equity securities other than the Series A-1 Preferred and the Preferred Class. "Liquidation Value" of any Share as of any particular date shall be equal to $2.8626. "Person" means an individual, a partnership, a limited liability company, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Qualified Public Offering" means any underwritten offering by the Corporation of its equity securities to the public pursuant to an effective registration statement under the Securities Act of 1933, as then in effect, or any comparable statement under any similar federal statute then in force pursuant to which the value of the Corporation prior to receipt of the proceeds of such offering is at least $25,000,000 and the minimum gross proceeds to the Corporation is $15,000,000; provided that for purposes of Section 4(G) hereof, a Qualified Public Offering shall not include an offering made in connection with a business acquisition or combination or an employee benefit plan. Section 9. Amendment and Waiver. No amendment, modification or waiver shall be binding or effective with respect to any provision of Sections 1 to 10 hereof without the prior written consent of the holders of at least 75% of the Series A-2 Preferred outstanding at the time such action is taken. No change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another corporation or entity unless the Corporation has obtained the prior written consent of the holders of 75% of the Series A-2 Preferred then outstanding. Section 10. Notices. Except as otherwise expressly provided hereunder, all notices referred to herein shall be in writing and shall be delivered by registered or certified mail, return receipt requested and postage prepaid, or by reputable overnight courier service, charges prepaid, and shall be deemed to have been given when so mailed or sent (i) to the Corporation, at its principal executive offices, and (ii) to any stockholder, at such holder's address as it appears in the stock records of the Corporation (unless otherwise indicated by any such holder). 20 EXHIBIT C SERIES A-3 CONVERTIBLE PREFERRED STOCK Section 1. Dividends. When and as declared by the Corporation's board of directors and to the extent permitted under the Colorado Business Corporation Act, the holders of the Series A-3 Convertible Preferred Stock (the "Series A-3 Preferred") shall participate ratably with the holders of shares of the Corporation's Common Stock (as hereinafter defined), Series A-1 Convertible Preferred Stock (the "Series A-1 Preferred") and Series A-2 Convertible Preferred Stock (the "Series A-2 Preferred") in any dividends on the Common Stock based upon the number of shares of Common Stock into which each share of Series A-2 Preferred issuable upon conversion of each share of the Series A-3 Preferred (a "Share") is convertible at the time of such declaration. Section 2. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, the holders of Series A-2 Preferred and the Series A-3 Preferred as a class (the "Preferred Class") shall vote to either (A) (i) convert all of the Series A-2 Preferred (including any fraction of a share) into Common Stock, (ii) convert all of the Series A-3 Preferred (including any fraction of a Share) into Conversion Stock (as hereinafter defined) pursuant to the provisions of Section 4 below, (iii) convert the Conversion Stock into Common Stock, and (iv) share ratably with the holders of Series A-1 Preferred, if applicable, and Junior Securities (as hereinafter defined) in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation, or (B) be paid, before any distribution or payment is made upon any Junior Securities and concurrently with the holders of Series A-1 Preferred as set forth below, an amount in cash equal to the Liquidation Value (as hereinafter defined) of the Series A-3 Preferred and the liquidation value of the Series A-2 Preferred (the "Liquidation Payment"). For purposes of this Section 2, the vote of the holders of the majority of the Preferred Class as a group shall be deemed to be the election of all of the holders of the Preferred Class. If the holders of the Preferred Class elect not to convert the Preferred Class pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders-of the Series A-1 Preferred elect not to convert their shares of Series A-1 Preferred into Common Stock, the holders of the Series A-1 Preferred and the Preferred Class shall share the Liquidation Payment ratably based upon the aggregate Liquidation Value of the Series A-3 Preferred and the aggregate liquidation value of the Series A-1 Preferred and the Series A-2 Preferred held by each such holder pursuant to clause (B) above, after the payment of which the holders of the Series A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation premium, after the payment of which any remaining assets shall be distributed to the holders of Junior Securities. If the holders of the Preferred Class elect to convert the Preferred Class pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect not to convert their shares of Series A-1 Preferred into Common Stock, the holders of the Series A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation amount before any distribution or payment is made upon the Preferred Class or any Junior Securities and, thereafter, 21 the holders of the Preferred Class shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. If the holders of the Preferred Class elect not to convert the Preferred Class pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect to convert their shares of Series A-1 Preferred into Common Stock, the holders of the Preferred Class shall receive the Liquidation Payment before any distribution or payment is made upon the Series A-1 Preferred or any Junior Securities and, thereafter, the holders of the Series A-1 Preferred shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. If the holders of the Preferred Class elect to convert the Preferred Class pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect to convert their shares of Series A-1 Preferred into Common Stock, the holders of the Series A-1 Preferred and the Preferred Class shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation dissolution or winding up of the Corporation. The Corporation shall mail written notice of such liquidation, dissolution or winding up not less than sixty (60) days prior to the payment date stated therein (the "Payment Date"), to each record holder of Series A-3 Preferred. Neither the consolidation or merger of the Corporation into or with any other entity or entities, nor the sale or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a liquidation, dissolution, or winding up of the Corporation within the meaning of this Section 2. Notwithstanding the foregoing, in no event shall a conversion of the Series A-3 Preferred occur pursuant to this Section 2 if such conversion would result in a violation of Regulation Y under the Bank Holding Company Act of 1956, as amended. Section 3. Voting Right. The holders of the Series A-3 Preferred shall be entitled to notice of all stockholders meetings in accordance with the Corporation's bylaws. The holders of Series A-3 Preferred shall not have any voting rights, except as otherwise required by applicable law, in which case holders of Series A-3 Preferred shall vote (at the rate of one vote per Share of Series A-3 Preferred held) as a single class on such matter unless otherwise required by law. Section 4. Conversion. A. Conversion Procedure. (i) At any time and from time to time, any holder of Series A-3 Preferred may convert all or any portion of the Series A-3 Preferred (including any fraction of a Share) held by such holder into a number of shares of Conversion Stock computed by in multiplying the number of Shares to be converted by $2.8626 and dividing the result by the Conversion Price (as hereinafter defined) then in effect. (ii) Each conversion of Series A-3 Preferred shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series A-3 Preferred to be converted have been surrendered at the principal office of the 22 Corporation. At such time as such conversion has been effected, the rights of the holder of such Series A-3 Preferred as such holder shall cease and the Person (as hereinafter defined) or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby; provided, however, that for purposes of Section 2(A) above the conversion of the Series A-3 Preferred and the conversion of the Conversion Stock issued in connection therewith shall be deemed to have been effected as of the close of business on the day prior to the Payment Date. (iii) Notwithstanding any other provision hereof, if a conversion of Series A-3 Preferred is to be made in connection with a Qualified Public Offering (as hereinafter defined), the conversion of any Shares of Series A-3 Preferred may, at the election of the holder of such Shares, be conditioned upon the consummation of the Qualified Public Offering in which case such conversion shall not be deemed to be effective until the consummation of the Qualified Public Offering. (iv) As soon as possible after a conversion has been effected (but in any event within five business days in the case of subparagraph (a) below), the Corporation shall deliver to the converting holder: (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; (b) payment of the amount payable under subparagraph (vii) below with respect to such conversion; and (c) a certificate representing any Shares of Series A-3 Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (v) The issuance of certificates for shares of Conversion Stock upon conversion of Series A-3 Preferred shall be made without charge io the holders of such Series A-3 Preferred for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Conversion Stock. Upon conversion of each Share of Series A-3 Preferred, the Corporation shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable. (vi) The Corporation shall not close its books against the transfer of Series A-3 Preferred or of Conversion Stock issued or issuable upon conversion of Series A-3 Preferred in any manner which interferes with the timely conversion of Series A-3 Preferred. The Corporation shall assist and cooperate with any holder of Shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of Shares hereunder (including, without limitation, making any filings required to be made by the 23 Corporation). (vii) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph, be deliverable upon any conversion of the Series A-3 Preferred, the Corporation, in lieu of delivering the fractional share therefor, may pay an amount to the holder thereof equal to the fair market price of such fractional interest as of the date of conversion as. determined by the Corporation's board of directors. (viii) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Conversion Stock, solely for the purpose of issuance upon the conversion of the Series A-3 Preferred, such number of shares of Conversion Stock issuable upon the conversion of all outstanding Shares of Series A-3 Preferred. All shares of Conversion Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Corporation shall take all such actions as may be necessary to assure that all such shares of Conversion Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Conversion Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Corporation upon each such issuance). B. Conversion Price. The initial "Conversion Price" shall be $2.8626 per share. In order to prevent dilution of the conversion rights granted under this subdivision, the Conversion Price shall be subject to adjustment from time to time pursuant to this Section 4. C. Anti-Dilution. If and whenever on or. after the original date of issuance of the Series A-3 Preferred the Corporation issues or sells, or in accordance with Section 4(D) hereof is deemed to have issued or sold, any shares of its Common Stock for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale, then forthwith upon such issue or sale the Conversion Price shall be reduced to the Conversion Price determined by dividing (i) the sum of (a) the product derived by multiplying the Conversion Price in effect immediately prior to such issue or sale times the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (b) the consideration, if any, received by the Corporation upon such issue or sale, by (ii) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale; provided that there shall be no adjustment in the Conversion Price as a result of any issuance or sale (or deemed issuance or sale) of (x) options issued pursuant to the Corporation's stock option plan and capital stock issued upon the exercise thereof, (y) capital stock of the Corporation issued upon the exercise of warrants held by each of Patrick Van Den Bossche and NationsCredit Commercial Corporation and any conversion of such capital stock subsequent to its issuance, and (z) the issuance of capital stock of the Corporation upon the conversion of Series A-1 Preferred or the Preferred Class. D. Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Conversion Price under Section 6(C) hereof, the following shall be applicable: 24 (i) Issuance of Rights or Options. If the Corporation in any manner grants any rights or options to subscribe for or to purchase Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities") and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities is less than the Conversion Price in effect immediately prior to the time of the granting of such Options then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the granting of such Options for such price per share. For purposes of this Section 4(D)(i), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance of sale or such Convertible Securities and the conversion or exchange thereof by (b) the, total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No further adjustment of the Conversion Price shall be made when Convertible Securities are actually issued upon the exercise of such Options or when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Corporation in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price in effect immediately prior to the time of such issue or sale then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this Section 4(D)(ii), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Conversion Price shall be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Conversion Price had been or are to be made pursuant to other provisions of this Section 4, no further adjustment of the Conversion Price shall be made by reason of such issue or sale. (iii) Change in Option Price or Conversion Rate. If the purchase price provided 25 for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock change at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. E. Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. F. Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Corporation's assets to another Person or other transaction which is effected in such a manner that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an "Organic Change". Prior to the consummation of any Organic Change, the Corporation shall make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A-3 Preferred then outstanding) to insure that each of the holders of Series A-3 Preferred shall thereafter have the right to acquire and receive, in lieu of or in addition to (as the case may be), the shares of Conversion Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Series A-3 Preferred, such shares of stock, securities or assets as such holder would have received in connection with such Organic Change if such holder had converted its Series A-3 Preferred into Conversion Stock and converted the Conversion Stock immediately prior to such Organic Change. In each such case, the Corporation shall also make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A-3 Preferred then outstanding) to insure that the provisions of this Section 4 and Section 5 hereof shall thereafter be applicable to the Series A-3 Preferred (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Corporation, an immediate adjustment of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of Conversion Stock acquirable and receivable upon conversion of Series A-3 Preferred, if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation, merger or sale). The Corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation (if other than the Corporation) resulting from consolidation or merger or the corporation purchasing such assets assumes by written instrument (in form reasonably satisfactory to the holders of a majority of the Series A-3 Preferred then outstanding), the obligation to deliver to each such holder such shares of stock, securities or 26 assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. G. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 4 but not expressly provided for by such provisions, then the Corporation's board of directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Series A-3 Preferred; provided that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Section 4 or decrease the number of shares of Conversion Stock issuable upon conversion of each Share of Series A-3 Preferred. H. Notices. (i) Immediately upon any adjustment of the Conversion Price, the Corporation shall give written notice thereof to all holders of Series A-3 Preferred, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Corporation shall give written notice to all holders of Series A-3 Preferred at least 20 days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata subscription offer to holders of Common Stock, or (c) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. (iii) The Corporation shall also give written notice to the holders of Series A-3 Preferred at least 20 days prior to the date on which any Organic Change shall take place. I. Mandatory Conversion. The Corporation's board of directors may at any time require the conversion of all of the outstanding Series A-3 Preferred and the conversion of the Conversion Stock received in connection therewith upon the occurrence of a Conversion Event (as hereinafter defined); provided, however, that the board of directors may not require such mandatory conversions if any such conversion would result in a violation of Regulation Y under the Bank Holding Company Act of 1956, as amended. Any such mandatory conversion shall only be effected at the time of and subject to the closing of the transactions contemplated by the Conversion Event and upon written notice of such mandatory conversion delivered to all holders of Series A-3 Preferred at least seven (7) days prior to such closing. Section 5. Purchase Rights. If at any time the Corporation grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then each holder of Series A-3 Preferred shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock issuable upon conversion of the Conversion Stock acquirable upon conversion of such holder's Series A-3 Preferred immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such 27 record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. Section 6. Registration of Transfer. The Corporation shall keep at its principal office a register for the registration of Series A-3 Preferred. Upon the surrender of any certificate representing Series A-3 Preferred at such place, the Corporation shall, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of Shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of Shares as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate. Section 7. Replacement. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing Shares of any class of Series A-3 Preferred, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the holder is a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation, upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of Shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 8. Regulated Stockholders. The Corporation will not convert or directly or indirectly redeem, purchase, acquire or take any other action affecting outstanding shares of capital stock of the Corporation if such action will increase the percentage of outstanding voting securities owned or controlled by any Regulation Y Holder and its Affiliates (other than a Regulation Y Holder which waives in writing its rights under this Section 9), unless the Corporation gives written notice (the "Deferral Notice") of such action to each Regulation Y Holder. The Corporation will defer making any such conversion, redemption, purchase or other acquisition, or taking any such other action, for a period of 20 days (the "Deferral Period") after giving the Deferral Notice in order tp allow each Regulation Y Holder to determine whether it wishes to convert or take any other action with respect to the Series A-3 Preferred it owns, controls or has the power to vote, and if any Regulation Y Holder then elects to convert any Shares of Series A-3 Preferred, it shall notify the Corporation in writing within 10 days of the issuance of the Deferral Notice, in which case the Corporation shall promptly notify from time to time prior to the end of such 20-day period each other Regulation Y Holder of each proposed conversion and effect the conversions requested by all Regulation Y Holders at the end of the Deferral Period. The Corporation will not directly or indirectly redeem, purchase, acquire or take any other action affecting outstanding shares of 28 Common Stock of the Corporation if such action will increase over 24.9% the percentage of outstanding Common Stock owned or controlled by any Regulation Y Holder and its Affiliates (other than a Regulation Y Holder which waives in writing its rights under this Section 9). Section 9. Definitions. "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person. For the purpose of the above definition, the term "control" (including with correlative meaning, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contact or otherwise. "Common Stock" means, collectively, the Corporation's Common Stock, no par value, and any capital stock of any class of the Corporation hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Corporation. "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Section 4(D) hereof whether or not the Options or Convertible Securities are actually exercisable at such time. "Conversion Event" means (i) a Qualified Public Offering, (ii) any sale of all the outstanding capital stock of the Corporation, or (iii) a merger, consolidation, sale of substantially all of the assets of the Corporation or similar transaction involving the Corporation. "Conversion Stock" means shares of Series A-2 Preferred; provided that if there is a change such that the securities issuable upon conversion of the Series A-3 Preferred are issued by an entity other than the Corporation or there is a change in the class of securities so issuable, then the term "Conversion Stock" shall mean one share of the security issuable upon conversion of the Series A-3 Preferred if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. "Junior Securities" means any of the Corporation's equity securities Series A-1 Preferred and the Preferred Class. "Liquidation Value" of any Share as of any particular date shall be equal to $2.8626. "Person" means an individual, a partnership, a limited liability company, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department agency or political subdivision 29 thereof. "Qualified Public Offering" means any underwritten offering by the Corporation of its equity securities to the public pursuant to an effective registration statement under the Securities Act of 1933, as then in effect, or any comparable statement under any similar federal statute then in force pursuant to which the value of the Corporation prior to receipt of the proceeds of such offering is at least $25,000,000 and the minimum gross proceeds to the Corporation is $15,000,000; provided that for purposes of Section 4(G) hereof, a Qualified Public Offering shall not include an offering made in connection. with a business acquisition or combination or an employee benefit plan. "Regulation Y Holder" shall mean any stockholder of the Corporation that is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, or a subsidiary thereof subject to Regulation Y under such Act. Section 10. Amendment and Waiver. No amendment, modification or waiver shall be binding or effective with respect to any provision of Sections 1 to 11 hereof without the prior written consent of the holders of at least 75% of the Series A-3 Preferred outstanding at the time such action is taken. No change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another corporation or entity unless the Corporation has obtained the prior written consent of the holders of 75% of the Series A-3 Preferred then outstanding. Section 11. Notices. Except as otherwise expressly provided hereunder, all notices referred to herein shall be in writing and shall be delivered by registered or certified mail, return receipt requested and postage prepaid, or by reputable overnight courier service, charges prepaid, and shall be deemed to have been given when so mailed or sent (i) to the Corporation, at its principal executive offices, and (ii) to any stockholder, at such holder's address as it appears in the stock records of the Corporation (unless otherwise indicated by any such holder). 30 SERIES A-4 CONVERTIBLE PREFERRED STOCK Section 1. Dividends. When and as declared by the Corporation's board of directors and to the extent permitted under the Colorado Business Corporation Act, the holders of the Series A-4 Convertible Preferred Stock (the "Series A-4 Preferred") shall participate ratably with the holders of shares of the Corporation's Common Stock (as hereinafter defined), Series A-1 Convertible Preferred Stock (the "Series A-1 Preferred"), Series A-2 Convertible Preferred Stock (the "Series A-2 Preferred") and Series A-3 Convertible Preferred Stock (the "Series A-3 Preferred") in any dividends on the Common Stock based upon the number of shares of Common Stock into which each share of Series A-4 Preferred (a "Share") is convertible at the time of such declaration. Section 2. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, the holders of the Series A-2 Preferred, the Series A-3 Preferred and the Series A-4 Preferred as a class (the "Preferred Class") shall vote to either (A) (i) convert all of the Series A-4 Preferred (including any fraction of a Share) into Conversion Stock (as hereinafter defined) pursuant to the provisions of Section 4 below, (ii) convert all of the Series A-2 Preferred (including any fraction of a share) into Conversion Stock, (iii) convert all of the Series A-3 Preferred (including any fraction of a share) into Series A-2 Preferred, (iv) convert the Series A-2 Preferred referred to in clause (iii) above into Conversion Stock, and (v) share ratably with the holders of Series A-1 Preferred, if applicable, and Junior Securities (as hereinafter defined) in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation, or (B) be paid, before any distribution or payment is made upon any Junior Securities and concurrently with the holders of Series A-1 Preferred as set forth below, an amount in cash equal to the Liquidation Value (as hereinafter defined) of the Series A-4 Preferred and the liquidation value of the Series A-2 Preferred and the liquidation value of the Series A-3 Preferred (the "Liquidation Payment"). For purposes of this Section 2, the vote of the holders of the majority of the Preferred Class as a group shall de deemed to be the election of all of the holders of the Preferred Class. If the holders of the Preferred Class elect not to convert the Preferred Class pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect not to convert their shares of Series A-1 Preferred into Conversion Stock, the holders of the Preferred Class and the holders of the Series A-1 Preferred shall share the Liquidation Payment ratably based upon the aggregate Liquidation Value of the Series A-4 Preferred and the aggregate liquidation value of the Series A-1 Preferred, the Series A-2 Preferred and the Series A-3 Preferred held by each such holder pursuant to clause (B) above, after the payment of which the holders of the Series A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation premium, after the payment of which any remaining assets shall be distributed to the holders of Junior Securities. If the holders of the Preferred Class elect to convert the Preferred Class pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect not to convert their 31 shares of Series A-1 Preferred into Conversion Stock, the holders of the Series A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation amount before any distribution or payment is made upon the Preferred Class or any Junior Securities and, thereafter, the holders of the Preferred Class shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. If the holders of the Preferred Class elect not to convert the Preferred Class pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect to convert their shares of Series A-1 Preferred into Conversion Stock, the holders of the Preferred Class shall receive the Liquidation Payment before any distribution or payment is made upon the Series A-1 Preferred or any Junior Securities and, thereafter, the holders of the Series A-1 Preferred shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. If the holders of the Preferred Class elect to convert the Preferred Class pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect to convert their shares of Series A-1 Preferred into Conversion Stock, the holders of the Preferred Class and the holders of the Series A-1 Preferred shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. The Corporation shall mail written notice of such liquidation, dissolution or winding up, not less than sixty (60) days prior to the payment date stated therein (the "Payment Date"), to each record holder of Series A-4 Preferred. Neither the consolidation or merger of the Corporation into or with any other entity or entities, nor the sale or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 2. Section 3. Voting Rights. The holders of the Series A-4 Preferred shall be entitled to notice of all stock-holders meetings in accordance with the Corporation's bylaws, and the holders of the Series A-4 Preferred shall be entitled to vote on all matters submitted to the stockholders for a vote together with the holders of the Common Stock, the Series A-1 Preferred and the Series A-2 Preferred voting together as a single class with each share of Common Stock entitled to one vote per share, each share of Series A-1 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-1 Preferred at the time the vote is taken, each Share of Series A-2 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-2 Preferred at the time the vote is taken, and each Share of Series A-4 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-4 Preferred at the time the vote is taken -2- 32 Section 4. Conversion. A. Conversion Procedure. (i) At any time and from time to time, any holder of Series A-4 Preferred may convert all or any portion of the Series A-4 Preferred (including any fraction of a Share) held by such holder into a number of shares of Conversion Stock computed by multiplying the number of Shares to be converted by $4.50 and dividing the result by the Conversion Price (as hereinafter defined) then in effect. (ii) Each conversion of Series A-4 Preferred shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series A-4 Preferred to be converted have been surrendered at the principal office of the Corporation. At such time as such conversion has been effected, the rights of the holder of such Series A-4 Preferred as such holder shall cease and the Person (as hereinafter defined) or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby; provided, however, that for purposes of Section 2(A) above the conversion of the Series A-4 Preferred shall be deemed to have been effected as of the close of business on the day prior to the Payment Date. (iii) Notwithstanding any other provision hereof, if a conversion of Series A-4 Preferred is to be made in connection with a Qualified Public Offering (as hereinafter defined), the conversion of any Shares of Series A-4 Preferred may, at the election of the holder of such Shares, be conditioned upon the consummation of the Qualified Public Offering in which case such conversion shall not be deemed to be effective until the consummation of the Qualified Public Offering. (iv) As soon as possible after a conversion has been effected (but in any event within five business days in the case of subparagraph (a) below), the Corporation shall deliver to the converting holder: (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; (b) payment of the amount payable under subparagraph (vii) below with respect to such conversion; and (c) a certificate representing any Shares of Series A-4 Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. -3- 33 (v) The issuance of certificates for shares of Conversion Stock upon conversion of Series A-4 Preferred shall be made without charge to the holders of such Series A-4 Preferred for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Conversion Stock. Upon conversion of each Share of Series A-4 Preferred, the Corporation shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable. (vi) The Corporation shall not close its books against the transfer of Series A-4 Preferred or of Conversion Stock issued or issuable upon conversion of Series A-4 Preferred in any manner which interferes with the timely conversion of Series A-4 Preferred. The Corporation shall assist and cooperate with any holder of Shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of Shares hereunder (including, without limitation, making any filings required to be made by the Corporation). (vii) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph, be deliverable upon any conversion of the Series A-4 Preferred, the Corporation, in lieu of delivering the fractional share therefor, may pay an amount to the holder thereof equal to the fair market price of such fractional interest as of the date of conversion as determined by the Corporation's board of directors. (viii) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Conversion Stock, solely for the purpose of issuance upon the conversion of the Series A-4 Preferred, such number of shares of Conversion Stock issuable upon the conversion of all outstanding Shares of Series A-4 Preferred. All shares of Conversion Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Corporation shall take all such actions as may be necessary to assure that all such shares of Conversion Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Conversion Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Corporation upon each such issuance). B. Conversion Price. The initial "Conversion Price" shall be $4.50 per share. In order to prevent dilution of the conversion rights granted under this subdivision, the Conversion Price shall be subject to adjustment from time to time pursuant to this Section 4. C. Anti-Dilution. If and whenever on or after the original date of issuance of the Series A-4 Preferred the Corporation issues or sells, or in accordance with Section 4(D) hereof is deemed to have issued or sold, any shares of its Common Stock for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale, then forthwith upon such issue or sale the Conversion Price shall be reduced to the Conversion -4- 34 Price determined by dividing (i) the sum of (a) the product derived by multiplying the Conversion Price in effect immediately prior to such issue or sale times the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (b) the consideration, if any, received by the Corporation upon such issue or sale, by (ii) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale; provided that there shall be no adjustment in the Conversion Price as a result of any issuance or sale (or deemed issuance or sale) of (x) options issued pursuant to the Corporation's stock option plan and capital stock issued upon the exercise thereof, (y) capital stock of the Corporation upon the exercise of warrants held by each of Patrick Van Den Bossche and NationsCredit Commercial Corporation and any conversion of such capital stock subsequent to its issuance, and (z) the issuance of capital stock of the Corporation upon the conversion of the Series A-1 Preferred or the Preferred Class. D. Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Conversion Price under Section 6(C) hereof, the following shall be applicable: (i) Issuance of Rights or Options. If the Corporation in any manner grants any rights or options to subscribe for or to purchase Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities") and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities is less than the Conversion Price in effect immediately prior to the time of the granting of such Options then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the granting of such Options for such price per share. For purposes of this Section 4(D)(i), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance of sale or such Convertible Securities and the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No further adjustment of the Conversion Price shall be made when Convertible Securities are actually issued upon the exercise of such Options or when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Corporation in any manner -5- 35 issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price in effect immediately prior to the time of such issue or sale then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this Section 4(D)(ii), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Conversion Price shall be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Conversion Price had been or are to be made pursuant to other provisions of this Section 4, no further adjustment of the Conversion Price shall be made by reason of such issue or sale. (iii) Change in Option Price or Conversion Rate. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock change at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. E. Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. F. Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Corporation's assets to another Person or other transaction which is effected in such a manner that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an "Organic Change". Prior to the consummation of any Organic Change, the Corporation shall make appropriate provisions (in form and substance satisfactory to the -6- 36 holders of a majority of the Series A-4 Preferred then outstanding) to insure that each of the holders of Series A-4 Preferred shall thereafter have the right to acquire and receive, in lieu of or in addition to (as the case may be), the shares of Conversion Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Series A-4 Preferred, such shares of stock, securities or assets as such holder would have received in connection with such Organic Change if such holder had converted its Series A-4 Preferred immediately prior to such Organic Change. In each such case, the Corporation shall also make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A-4 Preferred then outstanding) to insure that the provisions of this Section 4 and Section 5 hereof shall thereafter be applicable to the Series A-4 Preferred (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Corporation, an immediate adjustment of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of Conversion Stock acquirable and receivable upon conversion of Series A-4 Preferred, if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation, merger or sale). The Corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation (if other than the Corporation) resulting from consolidation or merger or the corporation purchasing such assets assumes by written instrument (in form reasonably satisfactory to the holders of a majority of the Series A-4 Preferred then outstanding), the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. G. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 4 but not expressly provided for by such provisions, then the Corporation's board of directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Series A-4 Preferred; provided that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Section 4 or decrease the number of shares of Conversion Stock issuable upon conversion of each Share of Series A-4 Preferred. H. Notices. (i) Immediately upon any adjustment of the Conversion Price, the Corporation shall give written notice thereof to all holders of Series A-4 Preferred, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Corporation shall give written notice to all holders of Series A-4 Preferred at least 20 days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata subscription offer to holders of Common Stock, or (c) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. -7- 37 (iii) The Corporation shall also give written notice to the holders of Series A-4 Preferred at least 20 days prior to the date on which any Organic Change shall take place. I. Mandatory Conversion. The Corporation's board of directors may at any time require the conversion of all of the outstanding Series A-4 Preferred upon the occurrence of a Conversion Event (as hereinafter defined). Any such mandatory conversion shall only be effected at the time of and subject to the closing of the transactions contemplated by the Conversion Event and upon written notice of such mandatory conversion delivered to all holders of Series A-4 Preferred at least seven (7) days prior to such closing. Section 5. Purchase Rights. If at any time the Corporation grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then each holder of Series A-4 Preferred shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Conversion Stock acquirable upon conversion of such holder's Series A-4 Preferred immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. Section 6. Registration of Transfer. The Corporation shall keep at its principal office a register for the registration of Series A-4 Preferred. Upon the surrender of any certificate representing Series A-4 Preferred at such place, the Corporation shall, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of Shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of Shares as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate. Section 7. Replacement. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing Shares of any class of Series A-4 Preferred, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the holder is a financial institution or other institutional investor its oven agreement shall be satisfactory), or, in the case of any such mutilation, upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of Shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, -8- 38 stolen, destroyed or mutilated certificate. Section 8. Definitions. "Common Stock" means, collectively, the Corporation's Common Stock, no par value, and any capital stock of any class of the Corporation hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Corporation. "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Section 4(D) hereof whether or not the Options or Convertible Securities are actually exercisable at such time. "Conversion Event" means (i) a Qualified Public Offering, (ii) any sale of all the outstanding capital stock of the Corporation, or (iii) a merger, consolidation, sale of substantially all of the assets of the Corporation or similar transaction involving the Corporation. "Conversion Stock" means shares of Common Stock; provided that if there is a change such that the securities issuable upon conversion of the Series A-4 Preferred are issued by an entity other than the Corporation or there is a change in the class of securities so issuable, then the term "Conversion Stock" shall mean one share of the security issuable upon conversion of the Series A-4 Preferred if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. "Junior Securities" means any of the Corporation's equity securities other than the Series A-l Preferred and the Preferred Class. "Liquidation Value" of any Share as of any particular date shall be equal to $4.50. "Person" means an individual, a partnership, a limited liability company, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Qualified Public Offering" means any underwritten offering by the Corporation of its equity securities to the public pursuant to an effective registration statement under the Securities Act of 1933, as then in effect, or any comparable statement under any similar federal statute then in force pursuant to which the value of the Corporation prior to receipt of the proceeds of such offering is at least $25,000,000 and the minimum gross proceeds to the Corporation is $15,000,000; provided that for purposes of Section 4(G) hereof, a Qualified Public Offering shall not include an offering made in connection with a business acquisition or combination or an employee benefit plan. -9- 39 Section 9. Amendment and Waiver. No amendment, modification or waiver shall be binding or effective with respect to any provision of Sections 1 to 10 hereof without the prior written consent of the holders of at least 75% of the Series A-4 Preferred outstanding at the time such action is taken. No change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another corporation or entity unless the Corporation has obtained the prior written consent of the holders of 75% of the Series A-4 Preferred then outstanding. -10- 40 Section 10. Notices. Except as otherwise expressly provided hereunder, all notices referred to herein shall be in writing and shall be delivered by registered or certified mail, return receipt requested and postage prepaid, or by reputable overnight courier service, charges prepaid, and shall be deemed to have been given when so mailed or sent (i) to the Corporation, at its principal executive offices, and (ii) to any stockholder, at such holder's address as it appears in the stock records of the Corporation (unless otherwise indicated by any such holder). -11- 41 SERIES A-5 CONVERTIBLE PREFERRED STOCK Section 1. Dividends. When and as declared by the Corporation's board of directors and to the extent permitted under the Colorado Business Corporation Act, the holders of the Series A-5 Convertible Preferred Stock (the "Series A-5 Preferred") shall participate ratably with the holders of shares of the Corporation's Common Stock (as hereinafter defined), Series A-1 Convertible Preferred Stock (the "Series A-1 Preferred"), Series A-2 Convertible Preferred Stock (the "Series A-2 Preferred"), Series A-3 Convertible Preferred Stock (the "Series A-3 Preferred") and Series A-4 Convertible Preferred Stock (the "Series A-4 Preferred") in any dividends on the Common Stock based upon the number of shares of Common Stock into which each share of Series A-5 Preferred (a "Share") is convertible at the time of such declaration. Section 2. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, the holders of the Series A-2 Preferred, the Series A-3 Preferred, the Series A-4 Preferred and the Series A-5 Preferred as a class (the "Preferred Class") shall vote to either (A) (i) convert all of the Series A-5 Preferred (including any fraction of a Share) into Conversion Stock (as hereinafter defined) pursuant to the provisions of Section 4 below, (ii) convert all of the Series A-2 Preferred (including any fraction of a share) into Conversion Stock, (iii) convert all of the Series A-3 Preferred (including any fraction of a share) into Series A-2 Preferred, (iv) convert all of the Series A-2 Preferred referred to in clause (iii) above into Conversion Stock, (v) convert all of the Series A-4 Preferred (including any fraction of a share) into Conversion Stock, and (vi) share ratably with the holders of Series A-1 Preferred, if applicable, and Junior Securities (as hereinafter defined) in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation, or (B) be paid, before any distribution or payment is made upon any Junior Securities and concurrently with the holders of Series A-1 Preferred as set forth below, an amount in cash equal to their prorata share of the aggregate amount of the Liquidation Value (as hereinafter defined) of the Series A-5 Preferred and the respective liquidation values of the Series A-2 Preferred, the Series A-3 Preferred and the Series A-4 Preferred (the "Liquidation Payment"). For purposes of this Section 2, the vote of the holders of the majority of the Preferred Class as a group shall be deemed to be the election of all of the holders of the Preferred Class. If the holders of the Preferred Class elect not to convert the Preferred Class pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect not to convert their shares of Series A-1 Preferred into Conversion Stock, the holders of the Preferred Class and the holders of the Series A-1 Preferred shall share the Liquidation Payment ratably based upon the aggregate Liquidation Value of the Series A-5 Preferred and the aggregate liquidation value of the Series A-1 Preferred, the Series A-2 Preferred, the Series A-3 and the Series A-4 Preferred held by each such holder pursuant to clause (B) above, after the payment of which the holders of the Series A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation premium, after the payment of which any 42 remaining assets shall be distributed to the holders of Junior Securities. If the holders of the Preferred Class elect to convert the Preferred Class pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect not to convert their shares of Series A-1 Preferred into Conversion Stock, the holders of the Series A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation amount before any distribution or payment is made upon the Preferred Class or any Junior Securities and, thereafter, the holders of the Preferred Class shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. If the holders of the Preferred Class elect not to convert the Preferred Class pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect to convert their shares of Series A-1 Preferred into Conversion Stock, the holders of the Preferred Class shall receive the Liquidation Payment before any distribution or payment is made upon the Series A-1 Preferred or any Junior Securities and, thereafter, the holders of the Series A-1 Preferred shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. If the holders of the Preferred Class elect to convert the Preferred Class pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect to convert their shares of Series A-1 Preferred into Conversion Stock, the holders of the Preferred Class and the holders of the Series A-1 Preferred shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. The Corporation shall mail written notice of such liquidation, dissolution or winding up, not less than sixty (60) days prior to the payment date stated therein (the "Payment Date"), to each record holder of Series A-5 Preferred. Neither the consolidation or merger of the Corporation into or with any other entity or entities, nor the sale or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 2. Section 3. Voting Rights. The holders of the Series A-5 Preferred shall be entitled to notice of all stockholder meetings in accordance with the Corporation's bylaws, and the holders of the Series A-5 Preferred shall be entitled to vote on all matters submitted to the stockholders for a vote together with the holders of the Common Stock, the Series A-1 Preferred, the Series A-2 Preferred and the Series A-4 Preferred voting together as a single class with each share of Common Stock entitled to one vote per share, each share of Series A-1 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-1 Preferred at the time the vote is taken, each share of Series A-2 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-2 Preferred at the time the vote is taken, each share of Series A-4 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-4 Preferred at the time the vote is taken, and each Share of Series A-5 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-5 Preferred at the time the vote is taken. -2- 43 Section 4. Conversion. A. Conversion Procedure. (i) At any time and from time to time, any holder of Series A-5 Preferred may convert all or any portion of the Series A-5 Preferred (including any fraction of a Share) held by such holder into a number of shares of Conversion Stock computed by multiplying the number of Shares to be converted by $8.00 and dividing the result by the Conversion Price (as hereinafter defined) then in effect. (ii) Each conversion of Series A-5 Preferred shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series A-5 Preferred to be converted have been surrendered at the principal office of the Corporation. At such time as such conversion has been effected, the rights of the holder of such Series A-5 Preferred as such holder shall cease and the Person (as hereinafter defined) or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby; provided, however, that for purposes of Section 2(A) above the conversion of the Series A-5 Preferred shall be deemed to have been effected as of the close of business on the day prior to the Payment Date. (iii) Notwithstanding any other provision hereof, if a conversion of Series A-5 Preferred is to be made in connection with a Qualified Public Offering (as hereinafter defined), the conversion of any Shares of Series A-5 Preferred may, at the election of the holder of such Shares, be conditioned upon the consummation of the Qualified Public Offering in which case such conversion shall not be deemed to be effective until the consummation of the Qualified Public Offering. (iv) As soon as possible after a conversion has been effected (but in any event within five business days in the case of subparagraph (a) below), the Corporation shall deliver to the converting holder: (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; (b) payment of the amount payable under subparagraph (vii) below with respect to such conversion; and (c) a certificate representing any Shares of Series A-5 Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. -3- 44 (v) The issuance of certificates for shares of Conversion Stock upon conversion of Series A-5 Preferred shall be made without charge to the holders of such Series A-5 Preferred for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Conversion Stock. Upon conversion of each Share of Series A-5 Preferred, the Corporation shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable. (vi) The Corporation shall not close its books against the transfer of Series A-5 Preferred or of Conversion Stock issued or issuable upon conversion of Series A-5 Preferred in any manner which interferes with the timely conversion of Series A-5 Preferred. The Corporation shall assist and cooperate with any holder of Shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of Shares hereunder (including, without limitation, making any filings required to be made by the Corporation). (vii) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph, be deliverable upon any conversion of the Series A-5 Preferred, the Corporation, in lieu of delivering the fractional share therefor, may pay an amount to the holder thereof equal to the fair market price of such fractional interest as of the date of conversion as determined by the Corporation's board of directors. (viii) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Conversion Stock, solely for the purpose of issuance upon the conversion of the Series A-5 Preferred, such number of shares of Conversion Stock issuable upon the conversion of all outstanding Shares of Series A-5 Preferred. All shares of Conversion Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Corporation shall take all such actions as may be necessary to assure that all such shares of Conversion Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Conversion Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Corporation upon each such issuance). B. Conversion Price. The initial "Conversion Price" shall be $8.00 per share. In order to prevent dilution of the conversion rights granted under this subdivision, the Conversion Price shall be subject to adjustment from time to time pursuant to this Section 4. C. Anti-Dilution. If and whenever on or after the original date of issuance of the Series A-5 Preferred the Corporation issues or sells, or in accordance with Section 4(D) hereof is deemed to have issued or sold, any shares of its Common Stock for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale, then forthwith upon such issue or sale the Conversion Price shall be reduced to the Conversion -4- 45 Price determined by dividing (i) the sum of (a) the product derived by multiplying the Conversion Price in effect immediately prior to such issue or sale times the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (b) the consideration, if any, received by the Corporation upon such issue or sale, by (ii) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale; provided that there shall be no adjustment in the Conversion Price as a result of any issuance or sale (or deemed issuance or sale) of (x) options issued pursuant to the Corporation's stock option plan and capital stock issued upon the exercise thereof, (y) capital stock of the Corporation upon the exercise of warrants held by each of Patrick Van Den Bossche and NationsCredit Commercial Corporation and any conversion of such capital stock subsequent to its issuance, and (z) the issuance of capital stock of the Corporation upon the conversion of the Series A-1 Preferred or the Preferred Class. D. Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Conversion Price under Section 6(C) hereof, the following shall be applicable: (i) Issuance of Rights or Options. If the Corporation in any manner grants any rights or options to subscribe for or to purchase Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities") and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities is less than the Conversion Price in effect immediately prior to the time of the granting of such Options then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the granting of such Options for such price per share. For purposes of this Section 4(D)(i), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance of sale or such Convertible Securities and the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No further adjustment of the Conversion Price shall be made when Convertible Securities are actually issued upon the exercise of such Options or when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Corporation in any manner -5- 46 issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price in effect immediately prior to the time of such issue or sale then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this Section 4(D)(ii), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Conversion Price shall be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Conversion Price had been or are to be made pursuant to other provisions of this Section 4, no further adjustment of the Conversion Price shall be made by reason of such issue or sale. (iii) Change in Option Price or Conversion Rate. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock change at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. E. Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. F. Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Corporation's assets to another Person or other transaction which is effected in such a manner that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an "Organic Change". Prior to the consummation of any Organic Change, the Corporation shall make appropriate provisions (in form and substance satisfactory to the -6- 47 holders of a majority of the Series A-5 Preferred then outstanding) to insure that each of the holders of Series A-5 Preferred shall thereafter have the right to acquire and receive, in lieu of or in addition to (as the case may be), the shares of Conversion Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Series A-5 Preferred, such shares of stock, securities or assets as such holder would have received in connection with such Organic Change if such holder had converted its Series A-5 Preferred immediately prior to such Organic Change. In each such case, the Corporation shall also make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A-5 Preferred then outstanding) to insure that the provisions of this Section 4 and Section 5 hereof shall thereafter be applicable to the Series A-5 Preferred (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Corporation, an immediate adjustment of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of Conversion Stock acquirable and receivable upon conversion of Series A-5 Preferred, if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation, merger or sale). The Corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation (if other than the Corporation) resulting from consolidation or merger or the corporation purchasing such assets assumes by written instrument (in form reasonably satisfactory to the holders of a majority of the Series A-5 Preferred then outstanding), the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. G. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 4 but not expressly provided for by such provisions, then the Corporation's board of directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Series A-5 Preferred; provided that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Section 4 or decrease the number of shares of Conversion Stock issuable upon conversion of each Share of Series A-5 Preferred. H. Notices. (i) Immediately upon any adjustment of the Conversion Price, the Corporation shall give written notice thereof to all holders of Series A-5 Preferred, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Corporation shall give written notice to all holders of Series A-5 Preferred at least 20 days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata subscription offer to holders of Common Stock, or (c) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. -7- 48 (iii) The Corporation shall also give written notice to the holders of Series A-5 Preferred at least 20 days prior to the date on which any Organic Change shall take place. I. Mandatory Conversion. The Corporation's board of directors may at any time require the conversion of all of the outstanding Series A-5 Preferred upon the occurrence of a Conversion Event (as hereinafter defined). Any such mandatory conversion shall only be effected at the time of and subject to the closing of the transactions contemplated by the Conversion Event and upon written notice of such mandatory conversion delivered to all holders of Series A-5 Preferred at least seven (7) days prior to such closing. Section 5. Purchase Rights. If at any time the Corporation grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then each holder of Series A-5 Preferred shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Conversion Stock acquirable upon conversion of such holder's Series A-5 Preferred immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. Section 6. Registration of Transfer. The Corporation shall keep at its principal office a register for the registration of Series A-5 Preferred. Upon the surrender of any certificate representing Series A-5 Preferred at such place, the Corporation shall, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of Shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of Shares as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate. Section 7. Replacement. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing Shares of any class of Series A-5 Preferred, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the holder is a financial institution or other institutional investor its oven agreement shall be satisfactory), or, in the case of any such mutilation, upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of Shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, -8- 49 stolen, destroyed or mutilated certificate. Section 8. Definitions. "Common Stock" means, collectively, the Corporation's Common Stock, no par value, and any capital stock of any class of the Corporation hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Corporation. "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Section 4(D) hereof whether or not the Options or Convertible Securities are actually exercisable at such time. "Conversion Event" means (i) a Qualified Public Offering, (ii) any sale of all the outstanding capital stock of the Corporation, or (iii) a merger, consolidation, sale of substantially all of the assets of the Corporation or similar transaction involving the Corporation. "Conversion Stock" means shares of Common Stock; provided that if there is a change such that the securities issuable upon conversion of the Series A-5 Preferred are issued by an entity other than the Corporation or there is a change in the class of securities so issuable, then the term "Conversion Stock" shall mean one share of the security issuable upon conversion of the Series A-5 Preferred if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. "Junior Securities" means any of the Corporation's equity securities other than the Series A-l Preferred and the Preferred Class. "Liquidation Value" of any Share as of any particular date shall be equal to $8.00. "Person" means an individual, a partnership, a limited liability company, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Qualified Public Offering" means any underwritten offering by the Corporation of its equity securities to the public pursuant to an effective registration statement under the Securities Act of 1933, as then in effect, or any comparable statement under any similar federal statute then in force pursuant to which the value of the Corporation prior to receipt of the proceeds of such offering is at least $25,000,000 and the minimum gross proceeds to the Corporation is $15,000,000; provided that for purposes of Section 4(G) hereof, a Qualified Public Offering shall not include an offering made in connection with a business acquisition or combination or an employee benefit plan. -9- 50 Section 9. Amendment and Waiver. No amendment, modification or waiver shall be binding or effective with respect to any provision of Sections 1 to 10 hereof without the prior written consent of the holders of at least 75% of the Series A-5 Preferred outstanding at the time such action is taken. No change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another corporation or entity unless the Corporation has obtained the prior written consent of the holders of 75% of the Series A-5 Preferred then outstanding. -10- 51 Section 10. Notices. Except as otherwise expressly provided hereunder, all notices referred to herein shall be in writing and shall be delivered by registered or certified mail, return receipt requested and postage prepaid, or by reputable overnight courier service, charges prepaid, and shall be deemed to have been given when so mailed or sent (i) to the Corporation, at its principal executive offices, and (ii) to any stockholder, at such holder's address as it appears in the stock records of the Corporation (unless otherwise indicated by any such holder). -11- 52 SERIES A-6 CONVERTIBLE PREFERRED STOCK Section 1. Dividends. When and as declared by the Corporation's board of directors and to the extent permitted under the Colorado Business Corporation Act, the holders of the Series A-6 Convertible Preferred Stock (the "Series A-6 Preferred") shall participate ratably with the holders of shares of the Corporation's Common Stock (as hereinafter defined), Series A-1 Convertible Preferred Stock (the "Series A-1 Preferred"), Series A-2 Convertible Preferred Stock (the "Series A-2 Preferred"), Series A-3 Convertible Preferred Stock (the "Series A-3 Preferred"), Series A-4 Convertible Preferred Stock (the "Series A-4 Preferred") and Series A-5 Convertible Preferred Stock (the "Series A-5 Preferred") in any dividends on the Common Stock based upon the number of shares of Common Stock into which each share of Series A-5 Preferred (a "Share") is convertible at the time of such declaration. Section 2. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, the holders of the Series A-2 Preferred, the Series A-3 Preferred, the Series A-4 Preferred, the Series A-5 Preferred and the Series A-6 Preferred as a class (the "Preferred Class") shall vote to either: (A) (i) convert all of the Series A-6 Preferred (including any fraction of a Share) into Conversion Stock (as hereinafter defined) pursuant to the provisions of Section 4 below, (ii) convert all of the Series A-2 Preferred (including any fraction of a share) into Conversion Stock, (iii) convert all of A-3 Preferred (including any fraction of a share) into Series A-2 Preferred, (iv) convert all of the Series A-2 Preferred referred to in clause (iii) above into Conversion Stock, (v) convert all of the Series A-4 Preferred (including any fraction of a share) into Conversion Stock, (vi) convert all of the Series A-5 Preferred (including any fraction of a share) into Conversion Stock, and (vii) share ratably with the holders of Series A-1 Preferred, if applicable, and Junior Securities (as hereinafter defined) in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation, or (B) be paid, before any distribution or payment is made upon any Junior Securities and concurrently with the holders of Series A-1 Preferred as set forth below, an amount in cash equal to their prorata share of the aggregate amount of the Liquidation Value (as hereinafter defined) of the Series A-6 Preferred and the respective liquidation values of the Series A-2 Preferred, the Series A-3 Preferred, the Series A-4 Preferred and the Series A-5 Preferred (the "Liquidation Payment"). For purposes of this Section 2, the vote of the holders of the majority of the Preferred Class as a group shall be deemed to be the election of all of the holders of the Preferred Class. If the holders of the Preferred Class elect not to convert the Preferred Class pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect not to convert their shares of Series A-1 Preferred into Conversion Stock, the holders of the Preferred Class and the holders of the Series A-1 Preferred shall share the Liquidation Payment ratably based upon the aggregate Liquidation Value of the Series A-6 Preferred and the aggregate liquidation value of the Series A-1 Preferred, the Series 53 A-2 Preferred, the Series A-3 Preferred, the Series A-4 Preferred and the Series A-5 Preferred held by each such holder pursuant to clause (B) above, after the payment of which the holders of the Series A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation premium, after the payment of which any remaining assets shall be distributed to the holders of Junior Securities. If the holders of the Preferred Class elect to convert the Preferred Class pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect not to convert their shares of Series A-1 Preferred into Conversion Stock, the holders of the Series A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation amount before any distribution or payment is made upon the Preferred Class or any Junior Securities and, thereafter, the holders of the Preferred Class shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. If the holders of the Preferred Class elect not to convert the Preferred Class pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect to convert their shares of Series A-1 Preferred into Conversion Stock, the holders of the Preferred Class shall receive the Liquidation Payment before any distribution or payment is made upon the Series A-1 Preferred or any Junior Securities and, thereafter, the holders of the Series A-1 Preferred shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. If the holders of the Preferred Class elect to convert the Preferred Class pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect to convert their shares of Series A-1 Preferred into Conversion Stock, the holders of the Preferred Class and the holders of the Series A-1 Preferred shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. The Corporation shall mail written notice of such liquidation, dissolution or winding up, not less than sixty (60) days prior to the payment date stated therein (the "Payment Date"), to each record holder of Series A-6 Preferred. Neither the consolidation or merger of the Corporation into or with any other entity or entities, nor the sale or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 2. Section 3. Voting Rights. The holders of the Series A-6 Preferred shall be entitled to notice of all stockholder meetings in accordance with the Corporation's bylaws, and the holders of the Series A-6 Preferred shall be entitled to vote on all matters submitted to the stockholders for a vote together with the holders of the Common Stock, the Series A-1 Preferred, the Series A-2 Preferred, the Series A-4 Preferred and the Series A-5 Preferred voting together as a single class with each share of Common Stock entitled to one vote per share, each share of Series A-1 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-1 Preferred at the time the vote is taken, each share of Series A-2 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-2 Preferred -2- 54 at the time the vote is taken, each share of Series A-4 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-4 Preferred at the time the vote is taken, each share of Series A-5 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-5 Preferred at the time the vote is taken and each Share of Series A-6 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-6 Preferred at the time the vote is taken. Section 4. Conversion. A. Conversion Procedure. (i) At any time and from time to time, any holder of Series A-6 Preferred may convert all or any portion of the Series A-6 Preferred (including any fraction of a Share) held by such holder into a number of shares of Conversion Stock computed by multiplying the number of Shares to be converted by $15.02 and dividing the result by the Conversion Price (as hereinafter defined) then in effect. (ii) Each conversion of Series A-6 Preferred shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series A-6 Preferred to be converted have been surrendered at the principal office of the Corporation. At such time as such conversion has been effected, the rights of the holder of such Series A-6 Preferred as such holder shall cease and the Person (as hereinafter defined) or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby; provided, however, that for purposes of Section 2(A) above the conversion of the Series A-6 Preferred shall be deemed to have been effected as of the close of business on the day prior to the Payment Date. (iii) Notwithstanding any other provision hereof, if a conversion of Series A-6 Preferred is to be made in connection with a Qualified Public Offering (as hereinafter defined), the conversion of any Shares of Series A-6 Preferred may, at the election of the holder of such Shares, be conditioned upon the consummation of the Qualified Public Offering in which case such conversion shall not be deemed to be effective until the consummation of the Qualified Public Offering. (iv) As soon as possible after a conversion has been effected (but in any event within five business days in the case of subparagraph (a) below), the Corporation shall deliver to the converting holder: (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; -3- 55 (b) payment of the amount payable under subparagraph (vii) below with respect to such conversion; and (c) a certificate representing any Shares of Series A-6 Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (v) The issuance of certificates for shares of Conversion Stock upon conversion of Series A-6 Preferred shall be made without charge to the holders of such Series A-6 Preferred for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Conversion Stock. Upon conversion of each Share of Series A-6 Preferred, the Corporation shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable. (vi) The Corporation shall not close its books against the transfer of Series A-6 Preferred or of Conversion Stock issued or issuable upon conversion of Series A-6 Preferred in any manner which interferes with the timely conversion of Series A-6 Preferred. The Corporation shall assist and cooperate with any holder of Shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of Shares hereunder (including, without limitation, making any filings required to be made by the Corporation). (vii) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph, be deliverable upon any conversion of the Series A-6 Preferred, the Corporation, in lieu of delivering the fractional share therefor, may pay an amount to the holder thereof equal to the fair market price of such fractional interest as of the date of conversion as determined by the Corporation's board of directors. (viii) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Conversion Stock, solely for the purpose of issuance upon the conversion of the Series A-6 Preferred, such number of shares of Conversion Stock issuable upon the conversion of all outstanding Shares of Series A-6 Preferred. All shares of Conversion Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Corporation shall take all such actions as may be necessary to assure that all such shares of Conversion Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Conversion Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Corporation upon each such issuance). B. Conversion Price. The initial "Conversion Price" shall be $15.02 per share. In order to prevent dilution of the conversion rights granted under this subdivision, the Conversion Price shall be subject to adjustment from time to time pursuant to this Section 4. -4- 56 C. Anti-Dilution. If and whenever on or after the original date of issuance of the Series A-6 Preferred the Corporation issues or sells, or in accordance with Section 4(D) hereof is deemed to have issued or sold, any shares of its Common Stock for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale, then forthwith upon such issue or sale the Conversion Price shall be reduced to the Conversion Price determined by dividing (i) the sum of (a) the product derived by multiplying the Conversion Price in effect immediately prior to such issue or sale times the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (b) the consideration, if any, received by the Corporation upon such issue or sale, by (ii) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale; provided that there shall be no adjustment in the Conversion Price as a result of any issuance or sale (or deemed issuance or sale) of (x) options issued pursuant to the Corporation's stock option plan and capital stock issued upon the exercise thereof, (y) capital stock of the Corporation upon the exercise of warrants held by each of Patrick Van Den Bossche and NationsCredit Commercial Corporation and any conversion of such capital stock subsequent to its issuance, and (z) the issuance of capital stock of the Corporation upon the conversion of the Series A-1 Preferred or the Preferred Class. D. Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Conversion Price under Section 6(C) hereof, the following shall be applicable: (i) Issuance of Rights or Options. If the Corporation in any manner grants any rights or options to subscribe for or to purchase Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities") and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities is less than the Conversion Price in effect immediately prior to the time of the granting of such Options then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the granting of such Options for such price per share. For purposes of this Section 4(D)(i), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance of sale or such Convertible Securities and the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible -5- 57 Securities issuable upon the exercise of such Options. No further adjustment of the Conversion Price shall be made when Convertible Securities are actually issued upon the exercise of such Options or when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Corporation in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price in effect immediately prior to the time of such issue or sale then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this Section 4(D)(ii), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Conversion Price shall be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Conversion Price had been or are to be made pursuant to other provisions of this Section 4, no further adjustment of the Conversion Price shall be made by reason of such issue or sale. (iii) Change in Option Price or Conversion Rate. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock change at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. E. Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. F. Reorganization, Reclassification, Consolidation, Merger or Sale. Any -6- 58 recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Corporation's assets to another Person or other transaction which is effected in such a manner that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an "Organic Change". Prior to the consummation of any Organic Change, the Corporation shall make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A-6 Preferred then outstanding) to insure that each of the holders of Series A-6 Preferred shall thereafter have the right to acquire and receive, in lieu of or in addition to (as the case may be), the shares of Conversion Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Series A-6 Preferred, such shares of stock, securities or assets as such holder would have received in connection with such Organic Change if such holder had converted its Series A-6 Preferred immediately prior to such Organic Change. In each such case, the Corporation shall also make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A-6 Preferred then outstanding) to insure that the provisions of this Section 4 and Section 5 hereof shall thereafter be applicable to the Series A-6 Preferred (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Corporation, an immediate adjustment of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of Conversion Stock acquirable and receivable upon conversion of Series A-6 Preferred, if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation, merger or sale). The Corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation (if other than the Corporation) resulting from consolidation or merger or the corporation purchasing such assets assumes by written instrument (in form reasonably satisfactory to the holders of a majority of the Series A-6 Preferred then outstanding), the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. G. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 4 but not expressly provided for by such provisions, then the Corporation's board of directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Series A-6 Preferred; provided that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Section 4 or decrease the number of shares of Conversion Stock issuable upon conversion of each Share of Series A-6 Preferred. H. Notices. (i) Immediately upon any adjustment of the Conversion Price, the Corporation shall give written notice thereof to all holders of Series A-6 Preferred, setting forth in reasonable detail and certifying the calculation of such adjustment. -7- 59 (ii) The Corporation shall give written notice to all holders of Series A-6 Preferred at least 20 days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata subscription offer to holders of Common Stock, or (c) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. (iii) The Corporation shall also give written notice to the holders of Series A-6 Preferred at least 20 days prior to the date on which any Organic Change shall take place. I. Mandatory Conversion. The Corporation's board of directors may at any time require the conversion of all of the outstanding Series A-6 Preferred upon the occurrence of a Conversion Event (as hereinafter defined). Any such mandatory conversion shall only be effected at the time of and subject to the closing of the transactions contemplated by the Conversion Event and upon written notice of such mandatory conversion delivered to all holders of Series A-6 Preferred at least seven (7) days prior to such closing. Section 5. Purchase Rights. If at any time the Corporation grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then each holder of Series A-6 Preferred shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Conversion Stock acquirable upon conversion of such holder's Series A-6 Preferred immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. Section 6. Registration of Transfer. The Corporation shall keep at its principal office a register for the registration of Series A-6 Preferred. Upon the surrender of any certificate representing Series A-6 Preferred at such place, the Corporation shall, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of Shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of Shares as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate. Section 7. Replacement. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or -8- 60 mutilation of any certificate evidencing Shares of any class of Series A-6 Preferred, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the holder is a financial institution or other institutional investor its oven agreement shall be satisfactory), or, in the case of any such mutilation, upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of Shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 8. Definitions. "Common Stock" means, collectively, the Corporation's Common Stock, no par value, and any capital stock of any class of the Corporation hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Corporation. "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Section 4(D) hereof whether or not the Options or Convertible Securities are actually exercisable at such time. "Conversion Event" means (i) a Qualified Public Offering, (ii) any sale of all the outstanding capital stock of the Corporation, or (iii) a merger, consolidation, sale of substantially all of the assets of the Corporation or similar transaction involving the Corporation. "Conversion Stock" means shares of Common Stock; provided that if there is a change such that the securities issuable upon conversion of the Series A-6 Preferred are issued by an entity other than the Corporation or there is a change in the class of securities so issuable, then the term "Conversion Stock" shall mean one share of the security issuable upon conversion of the Series A-6 Preferred if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. "Junior Securities" means any of the Corporation's equity securities other than the Series A-l Preferred and the Preferred Class. "Liquidation Value" of any Share as of any particular date shall be equal to $15.02. "Person" means an individual, a partnership, a limited liability company, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. -9- 61 "Qualified Public Offering" means any underwritten offering by the Corporation of its equity securities to the public pursuant to an effective registration statement under the Securities Act of 1933, as then in effect, or any comparable statement under any similar federal statute then in force pursuant to which the value of the Corporation prior to receipt of the proceeds of such offering is at least $25,000,000 and the minimum gross proceeds to the Corporation is $15,000,000; provided that for purposes of Section 4(G) hereof, a Qualified Public Offering shall not include an offering made in connection with a business acquisition or combination or an employee benefit plan. Section 9. Amendment and Waiver. No amendment, modification or waiver shall be binding or effective with respect to any provision of Sections 1 to 10 hereof without the prior written consent of the holders of at least 75% of the Series A-6 Preferred outstanding at the time such action is taken. No change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another corporation or entity unless the Corporation has obtained the prior written consent of the holders of 75% of the Series A-6 Preferred then outstanding. Section 10. Notices. Except as otherwise expressly provided hereunder, all notices referred to herein shall be in writing and shall be delivered by registered or certified mail, return receipt requested and postage prepaid, or by reputable overnight courier service, charges prepaid, and shall be deemed to have been given when so mailed or sent (i) to the Corporation, at its principal executive offices, and (ii) to any stockholder, at such holder's address as it appears in the stock records of the Corporation (unless otherwise indicated by any such holder). -10- EX-4 8 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 4 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT, dated this _____ day of ________, 1998 (the "Agreement"), by and among those investors set forth on Schedule A (the "Modtech Stockholders"), and on Schedule B (the "SPI Stockholders"), and Modtech Holdings, Inc., a Delaware corporation (the "Company"). The Modtech Stockholders and the SPI Stockholders are sometimes collectively referred to in this Agreement as "Holders" or "Investors". 1. Background. Modtech, Inc. and SPI Holdings, Inc. entered into an Agreement and Plan of Reorganization and Merger dated as of September 28, 1998 (the "Merger Agreement"). The Investors are, or are comprised of, persons who are or may be considered "affiliates" of the parties to the Merger Agreement, as that term is defined in Rule 144. Investors have received certain shares of the Company's common stock ("Registrable Securities") pursuant to the Merger Agreement. The Merger Agreement provided that Investors shall have certain Registration Rights. This Agreement sets forth the Registration Rights granted to the Investors pursuant to the Merger Agreement. 2. Registration under Securities Act 2.1 Company Registration. (a) Subject to the limitations set forth herein, if at any time after the completion of the Mergers (as defined in the Merger Agreement) the Company shall determine to register, pursuant to the Act, any of its equity securities for its own account other than a registration relating solely to employee benefit plans, or a registration on any registration form which does not permit secondary sales or does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities, the Company will: (i) promptly give to each of the Holders a written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws); and (ii) use its best efforts to include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, subject to the limitations of Sections 2.1(b) and 2.1(c) below, all the Registrable Securities specified in a written request or requests (the "Requested Securities"), made by the Holders within [twenty-five (25) days] after receipt of the written notice from the Company described in clause (i) above. Except as otherwise limited, such written request may specify all or a part of the Holders' Registrable Securities. The Company is not required to include the Registrable Securities among the securities covered by H-1 2 the registration statement if (i) the requests of the Holders cover, in the aggregate, less than $1,000,000 in market value determined as of the date of the request; or (ii) the Board of Directors of the Company, or the representative of the underwriters, determines in good faith that including the Registrable Securities held by any Holder among the securities covered by the registration statement would have a materially detrimental effect on the offering and would therefore not be in the best interest of the Company. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise each of the Holders as a part of the written notice given pursuant to Section 2.1(a)(i). In such event, the right of each of the Holders to registration pursuant to this Section 2.1 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. The Holders whose shares are to be included in such registration (other than any Holder that elects not to participate in such underwriting) (together with the Company, and any other stockholders entitled to distribute their securities through such underwriting) shall enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for underwriting by the Company. Notwithstanding any other provision of this Section 2.1, if the representative determines in its reasonable opinion that marketing factors require a limitation on the number of shares to be underwritten, the representative may exclude from such registration and underwriting some or all of the Registrable Securities which would otherwise be underwritten pursuant hereto. The Company shall so advise all Holders of Requested Securities, and the number of the Requested Securities that are entitled to be included in the registration and underwriting shall be allocated in accordance with subsection (c) of this Section 2.1. If any of the Holders disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. (c) Number and Transferability. (A) In each registration statement in which Requested Securities may be included (the "Allocated Shares") until the Modtech Stockholders have sold 2,300,000 shares of Registrable Securities after the date hereof pursuant to an exemption from the registration provisions of the Act or a registration statement, the number of shares to be registered on behalf of the Investors shall be allocated between the SPI Investors as a group and the Modtech Stockholders as a group as follows: (i) The Modtech Stockholders shall be entitled to sell 42.5% of the Allocated Shares; (ii) The SPI Stockholders shall be entitled to sell 7.5% of the Allocated Shares; and (iii) the remaining 50% of the Allocated Shares shall consist of the Requested Securities of both SPI Stockholders and Modtech Stockholders, on a pro rata basis in accordance with their respective ownership of Registrable Securities. (B) In all subsequent registration statements, afer the conditions set forth in Section 2.1 (c) (A) have been met until such time as the SPI Stockholders have sold 750,000 H-2 3 shares of Registrable Securities after the date hereof, the number of shares to be registered on behalf of the Investors shall be allocated between the SPI Stockholders as a group and the Modtech Stockholders as a group as follows: (i) The SPI Stockholders shall be entitled to sell 42.5% of the Allocated Shares; (ii) The Modtech Stockholders shall be entitled to sell 7.5% of the Allocated Shares; and (iii) the remaining 50% of the Allocated Shares shall consist of the Requested Securities of both SPI Stockholders and Modtech Stockholders, on a pro-rata basis. Subject to Section 2.7, each of the Holders shall be entitled to have its Registrable Securities included in one or more registrations on the same basis as and pursuant to this Section 2.1, until such Holder is no longer subject to the terms of Rule 145 promulgated under the Act. (d) The Company shall have priority over any and all of the Holders with respect to the inclusion of shares in each registration that is subject to this Agreement, and in no event shall the Company be required to reduce or limit the number of newly issued shares of its Common Stock to be covered by any registration statement for the purpose of permitting the Registrable Securities of any Holder to be included in the registration. 2.2 Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to this Agreement shall be borne by the Company, and all Selling Expenses shall be borne by the Holders of the securities so registered shall be borne proportionately on the basis of the number of their shares so registered; provided, however, that a Holder shall reimburse the Company for any Registration Expenses attributable to such Holder's Requested Securities if such Holder requests the withdrawal of a request for registration. 2.3 Registration Procedures. In the case of each registration effected by the Company pursuant to this Agreement, the Company will keep the Holders, as applicable, advised in writing as to the initiation of each registration and as to the completion thereof. The Company alone shall determine and control all decisions concerning any registration of the Company's securities which might give rise to the registration rights granted in this Agreement, including any registration in which Shares of any Holders of Registrable Securities are to be included. The Company's exclusive right to make decisions shall include, without limitation, the decision as to whether to use underwriters, the selection of underwriters and arrangements therewith, the size, timing and other terms of any offering, the provisions of the registration statements and prospectuses and all supplements and amendments thereto, the selection of accountants and attorneys for the Company, and the states in which the sale of Shares shall occur and be registered or qualified for sale. At its expense, the Company will: H-3 4 (a) keep such registration effective for a period of ninety (90) days or until the Holders, as applicable, have completed the distribution described in the registration statement relating thereto, whichever first occurs; (b) prepare and file with the Commission such amendments and post-effective amendments to the registration statement as may be necessary to keep each registration statement effective for the applicable period, or such shorter period which will terminate when all Registrable Securities covered by such registration statement have been sold; cause each Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act; and comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement during the applicable period in accordance with the intended method or methods of distribution by the Holders thereof set forth in such registration statement or supplement to the Prospectus; the Company shall be deemed to have used its best efforts to keep a registration statement effective during the applicable period if it voluntarily takes any action that would result in selling holders of the Registrable Securities covered thereby not being able to sell such Registrable Securities during that period if the actions taken by the Company were in good faith and for valid business reasons, including without limitation the acquisition or divestiture of assets, so long as the Company promptly thereafter complies with the requirements of subsection (f) of this Section 2.3, if applicable; (c) notify the selling Holders of Registrable Securities promptly, and (if requested by any such person or entity) confirm such advice in writing, (i) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to the registration statement or any post-effective amendment, when the same has become effective, (ii) of any request by the Commission for amendments or supplements to the registration statement or the Prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for that purpose, and (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (d) furnish to each selling Holder of Registrable Securities, without charge, as many copies of the registration statement, Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such selling Holder of Registrable Securities may reasonably request; (e) prior to any public offering of the Registrable Securities, register or qualify or cooperate with the selling Holders of Registrable Securities and their respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or "blue sky" laws of such jurisdictions as any seller reasonably requests in writing, considering the amount of Registrable Securities proposed to be sold in each such jurisdiction, and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the registration statement; provided that the Company shall not be required to qualify generally to do business in any jurisdiction where it H-4 5 is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject; and (f) upon the occurrence of any event contemplated by subsection (b) of this Section 2.3, prepare a supplement or post-effective amendment to the registration statement or the related Prospectus or any document incorporated therein by reference or file any other required document, if necessary, so that, as thereafter delivered to the purchasers of the Registrable Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. The Company may require each seller of Registrable Securities as to which any Registration is being effected to furnish to the Company such information regarding the proposed distribution of such securities as the Company may from time to time reasonably request in writing. Each Holder of Registrable Securities agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in subsections (c)(ii) through (c)(iv) of this Section 2.3, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to the Registration Statement until such Holder's receipt of copies of the supplemented or amended Prospectus as contemplated by subsection (f) of this Section 2.3, or until it is advised in writing (the "Advice") by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus, and, if so directed by the Company, such Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the time periods referred to in subsection (a) of this Section 2.3, shall be extended by the number of days during the period from and including the date of the giving of such notice to and including the date when each seller of Registrable Securities covered by such Registration Statement shall have received the copies of the supplemented or amended Prospectus contemplated by subsection (f) of this Section 2.3 or the Advice. 2.4 Indemnification. (a) The Company will indemnify each of the Holders, as applicable, each of its officers, directors, partners, members and other constituents, and each person controlling each of the Holders, with respect to each registration which has been effected pursuant to this Agreement, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each of the Holders, each of its officers, directors, partners, H-5 6 members and other constituents and each person controlling each of the Holders for any legal and any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by the Holders and stated to be specifically for use therein. (b) To the extent permitted by law, each of the Holders will, if Registrable Securities held by it are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of the Act and the rules and regulations thereunder, each other stockholder and each of their officers, directors, partners, members and other constituents and each person controlling such other stockholder against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document made by such Holder, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements by such Holder therein not misleading, and will reimburse the Company, other stockholders, directors, officers, partners, persons, underwriters, members and other constituents or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with information furnished to the Company by such Holder. (c) Each party entitled to indemnification under this Section 2.4 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom; provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld) and the Indemnified Party may participate in such defense at such party's expense (unless the Indemnified Party shall have reasonably concluded that there may be a conflict of interest between the Indemnifying Party and the Indemnified Party in such action, in which case the fees and expenses of counsel shall be at the expense of the Indemnifying Party), and provided, further, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement unless the Indemnifying Party is materially prejudiced thereby. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably H-6 7 request in writing and as shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom. (d) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with any underwritten public offering contemplated by this Agreement are in conflict with the foregoing provisions, the provisions in such underwriting agreement shall be controlling. 2.5 Information by the Holders. Each of the Holders holding securities included in any registration shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement. 2.6 "Market Stand-off" Agreement. Each of the Holders agrees, if requested by the Company and an underwriter of Registrable Securities (or other securities) of the Company, not to sell or otherwise transfer or dispose of any Shares (or other securities) of the Company held by such Holder during a period of up to 180 days following the effective date of a registration statement of the Company filed under the Act. If requested by the underwriters, the Holders shall execute a separate agreement to the foregoing effect. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of said 180-day period. The provisions of this Section 2.6 shall be binding upon any transferee who acquires Registrable Securities, whether or not such transferee is entitled to the registration rights provided hereunder and Holder shall cause such transference to be bound by such provisions. 2.7 Termination. The registration rights set forth in this Agreement shall not be available to any Holder if, in the opinion of counsel to the Company, all of the Registrable Securities then owned by such and at such time as Holder could be sold in any one 90-day period pursuant to Rule 145 or Rule 144 under the Act. 3. Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: "Act": The United States Securities Act of 1933, as amended. "Commission": The United States Securities and Exchange Commission or any other federal agency at the time administering the Act. "Company": As defined in the introductory paragraph of this Agreement. "Exchange Act": The United States Securities Exchange Act of 1934, as amended. "Holders": As defined in the introductory paragraph of this Agreement (each a "Holder"). "Indemnified Party": As defined in Section 2.4(c). H-7 8 "Indemnifying Party": As defined in Section 2.4(c). "Person": A corporation, an association, a partnership, a limited liability company, an organization, a business, an individual, a governmental or political subdivision thereof or a governmental agency. "Prospectus": A part of a Registration. "Register," "Registered" and "Registration": A registration effected by preparing and filing a registration statement in compliance with the Act (and any post-effective amendments filed or required to be filed) and the declaration or ordering of effectiveness of such registration statement. "Registrable Securities": (A) the Shares issued to the Investors pursuant to the Merger Agreement, (B) any capital stock of the Company issued as a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares referred to in clause (A). "Registration Expenses": All expenses incurred by the Company in compliance with Sections 2.1 hereof, including, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company). Registration Expenses shall not include any Selling Expenses or other expenses of Holders applicable to such Registrable Securities. "Selling Expenses": All underwriting discounts and selling commissions applicable to the sale of Registrable Securities and all fees and disbursements of counsel and accountants for each of the Holders, filing fees and any transfer or other taxes applicable to such Registrable Securities and any other expenses incurred by the Investors applicable to the sale of Registrable Securities. "Shares": The shares of Common Stock, par value $0.01 per share, of the Company. 4. Amendments. This Agreement may not be amended without the prior written consent of all parties. 5. Notices. All communications provided for hereunder shall be sent by first-class mail and (a) if addressed to a Holder, at the address of such Holder as it appears in the Company's current record of Stockholders or as shall have been furnished in writing to the Company, or (b) if addressed to the Company, at 2830 Barrett Avenue, P.O. Box 1240, Perris, California 92572, attention, Evan M. Gruber or to such other address as the Company shall have furnished to the Holders. 6. Assignment. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns; provided, however, that Holders may only assign this Agreement to members of their respective immediate family, or a trust or such other entity for the benefit of such family member, solely for estate planning purposes. H-8 9 7. Descriptive Headings. The descriptive headings of the several sections of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. 8. Amendment and Waiver. This Agreement may not be amended or waived except in a writing executed by the party against which such amendment or waiver is sought to be enforced. No course of dealing between or among any persons having any interest in this Agreement shall be deemed effective to modify or amend any part of this Agreement or any rights or obligations of any person under or by reason of this Agreement. 9. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 10. Complete Agreement. This Agreement contains the complete agreement between the parties and supersede any prior understandings, agreements or representations by or between the parties, written or oral, which may have related to the subject matter hereof in any way. 11. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Delaware without giving effect to conflicts of law principles thereof. 12. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which counterparts shall together constitute one and the same instrument. H-9 10 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their respective officers hereunto duly authorized as of the date first above written. MODTECH HOLDINGS, INC. THE MODTECH STOCKHOLDERS: By: ________________________________ ____________________________________ Name: Title: ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ THE SPI STOCKHOLDERS: ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ H-10 11 SCHEDULE A SCHEDULE OF MODTECH STOCKHOLDERS Gerald B. Bashaw Evan M. Gruber Michael G. Rhodes Robert W. Campbell James D. Goldenetz Charles C. McGettigan Daniel Donahoe Myron A. Wick, III Jon D. Gruber J. Patterson McBaine Gruber & McBaine Capital Management Platinum Partners, L.P. Proactive Partners, L.P. H-11 12 SCHEDULE B SCHEDULE OF SPI STOCKHOLDERS Infrastructure and Environmental Private Equity Fund III, L.P. Environmental & Information Technology Private Equity Fund III Argentum Capital Partners II, L.P. Patrick Van Den Bossche NationsCredit Commercial Corporation Ronald West Capital Resources Growth, Inc. Charles R. Gwirtsman & Nancy J. Reichman Nancy J. Reichman Nancy J. Reichman, Custodian for Daniel L. Gwirtsman Nancy J. Reichman, Custodian for Andrew J. Gwirtsman Mark M. King Brenda K. King MBK Children's Trust Mark M. King Trust Brenda K. King Trust Bruce L. Rogers and Sally K. Rogers, Ten in Common Sally K. Rogers Trust Rogers Family Trust Christopher J. Lane Lee W. Dines Mathers Associates Skippack Partners CRL, Inc. Chuck Hamilton The DGP Trust The RRP Trust Ron Procunier EX-10.1 9 TRANSACTION ADVISORY AGREEMENT 1 EXHIBIT A SERIES A-1 CONVERTIBLE PREFERRED STOCK Section 1. Dividends. When and as declared by the Corporation's board of directors and to the extent permitted under the Colorado Business Corporation Act, the holders of the Series A-1 Convertible Preferred Stock (the "Series A-1 Preferred") shall participate ratably with the holders of shares of the Corporation's Common Stock (as hereinafter defined), Series A-2 Convertible Preferred Stock (the "Series A-2 Preferred") and Series A-3 Convertible Preferred Stock (the "Series A-3 Preferred") in any dividends on the Common Stock based upon the number of shares of Common Stock into which each share of Series A-1 Preferred (a "Share") is convertible at the time of such declaration. Section 2. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, the holders of Series A-1 Preferred as a class shall vote to either (A) convert all of the Series A-1 Preferred (including any fraction of a Share) into Conversion Stock (as hereinafter defined) pursuant to the provisions of Section 4 below and share ratably with the holders of Series A-2 Preferred and the Series A-3 Preferred (collectively, the "Preferred Class"), if applicable, and Junior Securities (as hereinafter defined) in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation, or (B) be paid (i) before any distribution or payment is made upon any Junior Securities and concurrently with the holders of the Preferred Class as set forth below, an amount in cash equal to the Liquidation Value (as hereinafter defined) of the Series A-1 Preferred (the "Liquidation Payment"), and (ii) after the payment of the Liquidation Payment and before any distribution or payment is made upon any Junior Securities, an amount equal to the Liquidation Premium (as hereinafter defined) (collectively with the Liquidation Payment, the "Liquidation Amount"). For purposes of this Section 2, the vote of the holders of the majority of the Series A-1 Preferred shall be deemed to be the election of all of the holders of the Series A-1 Preferred. If the holders of the Series A-1 Preferred elect not to convert the Series A-1 Preferred pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders of the Preferred Class elect not to convert their shares of the Preferred Class into Conversion Stock, the holders of the Series A-1 Preferred and the holders of the Preferred Class shall share the Liquidation Payment ratably based upon the aggregate Liquidation Value of the Series A-1 Preferred and the aggregate liquidation value of the Preferred Class held by each such holder pursuant to clause (B)(i) above, after the payment of which the holders of the Series A-1 Preferred shall receive the Liquidation Premium, after the payment of which any remaining assets shall be distributed to the holders of Junior Securities. If the holders of the Series A-1 Preferred elect not to convert the Series A-1 Preferred pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders of the Preferred Class elect to convert their shares of the Preferred Class into Conversion Stock, the holders of the Series A- 1 Preferred shall receive the Liquidation Amount before any distribution or payment is made upon the Preferred Class or any Junior Securities. If the holders of the Series A-1 Preferred elect to convert the Series A-1 Preferred pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Preferred Class elect not to convert their shares of the Preferred Class into Conversion Stock, the 2 holders of the Preferred Class shall receive payment of the Preferred Class liquidation value before any distribution or payment is made upon the Series A-1 Preferred or any Junior Securities and, thereafter, the holders of the Series A-1 Preferred shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. If the holders of the Series A-1 Preferred elect to convert the Series A-1 Preferred pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Preferred Class elect to convert their shares of the Preferred Class into Conversion Stock, the holders of the Series A-1 Preferred and the Preferred Class shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. The Corporation shall mail written notice of such liquidation, dissolution or winding up, not less than sixty (60) days prior to the payment date stated therein (the "Payment Date"), to each record holder of Series A-1 Preferred. Neither the consolidation or merger of the Corporation into or with any other entity or entities, nor the sale or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 2. Section 3. Voting Rights. The holders of the Series A-1 Preferred shall be entitled to notice of all stockholders meetings in accordance with the Corporation's bylaws, and the holders of the Series A-1 Preferred shall be entitled to vote on all matters submitted to the stockholders for a vote together with the holders of the Common Stock and the Series A-2 Preferred voting together as a single class with each share of Common Stock entitled to one vote per share, each Share of Series A-I Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-1 Preferred at the time the vote is taken, and each share of Series A-2 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-2 Preferred at the time the vote is taken. Section 4. Conversion. A. Conversion Procedure. (i) At any time and from time to time, any holder of Series A-1 Preferred may convert all or any portion of the Series A-1 Preferred (including any fraction of a Share) held by such holder into a number of shares of Conversion Stock computed by multiplying the number of Shares to be converted by $2.7154 and dividing the result by the Conversion Price (as hereinafter defined) then in effect. (ii) Each conversion of Series A-1 Preferred shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series A-1 Preferred to be converted have been surrendered at the principal office of the Corporation. At such time as such conversion has been effected, the rights of the holder of such Series A-1 Preferred as such holder shall cease and the Person (as hereinafter defined) or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the 3 shares of Conversion Stock represented thereby; provided, however, that for purposes of Section 2(A) above the conversion of the Series A-1 Preferred shall be deemed to have been effected as of the close of business on the day prior to the Payment Date. (iii) Notwithstanding any other provision hereof, if a conversion of Series A-1 Preferred is to be made in connection with a Qualified Public Offering (as hereinafter defined), the conversion of any Shares of Series A-1 Preferred may, at the election of the holder of such Shares, be conditioned upon the consummation of the Qualified Public Offering in which case such conversion shall not be deemed to be effective until the consummation of the Qualified Public Offering. (iv) As soon as possible after a conversion has been effected (but in any event within five business days in the case of subparagraph (a) below), the Corporation shall deliver to the converting holder: (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; (b) payment of the amount payable under subparagraph (vii) below with respect to such conversion; and (c) a certificate representing any Shares of Series A-1 Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (v) The issuance of certificates for shares of Conversion Stock upon conversion of Series A-1 Preferred shall be made without charge to the holders of such Series A-1 Preferred for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Conversion Stock. Upon conversion of each Share of Series A-1 Preferred, the Corporation shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be validly issued, fully paid and non-assessable. (vi) The Corporation shall not close its books against the transfer of Series A-1 Preferred or of Conversion Stock issued or issuable upon conversion of Series A-1 Preferred in any manner which interferes with the timely conversion of Series A-1 Preferred. The Corporation shall assist and cooperate with any holder of Shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of Shares hereunder (including, without limitation, making any filings required to be made by the Corporation). (vii) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph, be deliverable upon any conversion of the Series A-1 Preferred, the Corporation, in lieu of delivering the fractional share therefor, may pay an amount to the holder thereof equal to the fair market price of such fractional interest as of the date of conversion as determined by the Corporation's board of directors. 4 (viii) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Conversion Stock, solely for the purpose of issuance upon the conversion of the Series A- I Preferred, such number of shares of Conversion Stock issuable upon the conversion of all outstanding Shares of Series A-1 Preferred. All shares of Conversion Stock which are so issuable shall when issued, be duly and validly issued, fully paid and non-assessable and free from all taxes, liens and charges. The Corporation shall 'take. all such actions as may be necessary to assure that all such shares of Conversion Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Conversion Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Corporation upon each such issuance). B. Conversion Price. The initial "Conversion Price" shall be $2.7154 per share. In order to prevent dilution of the conversion rights granted under this subdivision, the Conversion Price shall be subject to adjustment from time to time pursuant to this Section 4. C. Anti-Dilution. If and whenever on or after the original date of issuance of the Series A-1 Preferred the Corporation issues or sells, or in accordance with Section 4(D) hereof is deemed to have issued or sold, any shares of its Common Stock for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale, then forthwith upon such issue or sale the Conversion Price shall be reduced to the Conversion Price determined by dividing (i) the sum of (a) the product derived by multiplying the Conversion Price in effect immediately prior to such issue or sale times the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (b) the consideration, if any, received by the Corporation upon such issue or sale, by (ii) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale; provided that there shall be no adjustment in the Conversion Price as a result of any issuance or sale (or deemed issuance or sale) of (x) options issued pursuant to the Corporation's stock option plan and capital stock issued upon the exercise thereof, (y) capital stock of the Corporation upon the exercise of warrants held by each of Patrick Van Den Bossche and NationsCredit Commercial Corporation and any conversion of such capital stock subsequent to its issuance and (z) the issuance of capital stock of the Corporation upon the conversion of Series A-1 Preferred or the Preferred Class. D. Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Conversion Price under Section 6(C) hereof, the following shall be applicable: (i) Issuance of Rights or Options. If the Corporation in any manner grants any rights or options to subscribe for or to purchase Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such rights or Options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities") and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities is less than the Conversion Price in effect immediately prior to the time of the granting of such Options then the total maximum number of shares of Common Stock issuable upon the exercise 5 of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the granting of such Options for such price per share. For purposes of this Section 4(D)(i), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount, if any, received or receivable by the Corporation- as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance of sale or such Convertible Securities and the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No further adjustment of the Conversion Price shall be made when Convertible Securities are actually issued upon the exercise of such Options or when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Corporation in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price in effect immediately prior to the time of such issue or sale then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this Section 4(D)(ii), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Conversion Price shall be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Conversion Price had been or are to be made pursuant to other provisions of this Section 4, no further adjustment of the Conversion Price shall be made by reason of such issue or sale. (iii) Change in Option Price or Conversion Rate. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock change at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. E. Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of. Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its 6 outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. F. Reorganization, Reclassification, Consolidation, Merger or Sale Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Corporation's assets to another Person or other transaction which is effected in such a manner that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an "Organic Change". Prior to the consummation of any Organic Change, the Corporation shall make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A-1 Preferred then outstanding) to insure that each of the holders of Series A-1 Preferred shall thereafter have the right to acquire and receive, in lieu of or in addition to (as the case may be) the shares of Conversion Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Series A-1 Preferred, such shares of stock, securities or assets as such holder would have received in connection with such Organic Change if such holder had converted its Series A-1 Preferred immediately prior to such Organic Change. In each such case, the Corporation shall also make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A-1 Preferred then outstanding) to insure that the provisions of this Section 4 and Section 5 hereof shall thereafter be applicable to the Series A-1 Preferred (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Corporation, an immediate adjustment of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of Conversion Stock acquirable and receivable upon conversion of Series A-1 Preferred, if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation, merger or sale). The Corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation (if other than the Corporation) resulting from consolidation or merger or the corporation purchasing such assets assumes by written instrument (in form reasonably satisfactory to the holders of a majority of the Series A-1 Preferred then outstanding), the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. G. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 4 but not expressly provided for by such provisions, then the Corporation's board of directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Series A-1 Preferred; provided that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Section 4 or decrease the number of shares of Conversion Stock issuable upon conversion of each Share of Series A-1 Preferred. H. Notices. (i) Immediately upon any adjustment of the Conversion Price, the Corporation shall give written notice thereof to all holders of Series A-1 Preferred, setting forth in reasonable detail and certifying the calculation of such adjustment. 7 (ii) The Corporation shall give written notice to all holders of Series A-1 Preferred at least 20 days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata subscription offer to holders of Common Stock, or (c) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. (iii) The Corporation shall also give written notice to the holders of Series A-1 Preferred at least 20 days prior to the date on which any Organic Change shall take place. I. Mandatory Conversion. The Corporation's board of directors may at any time require the conversion of all of the outstanding Series A-1 Preferred upon the occurrence of a Conversion Event (as hereinafter defined). Any such mandatory conversion shall only be effected at the time of and subject to the closing of the transactions contemplated by the Conversion Event and upon written notice of such mandatory conversion delivered to all holders of Series A-1 Preferred at least seven (7) days prior to such closing. Section 5. Purchase Rights. If at any time the Corporation grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then each holder of Series A-1 Preferred shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Conversion Stock acquirable upon conversion of such holder's Series A-1 Preferred immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. Section 6. Registration of Transfer. The Corporation shall keep at its principal office a register for the registration of Series A-1 Preferred. Upon the surrender of any certificate representing Series A-I Preferred at such place, the Corporation shall, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of Shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of Shares as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate. Section 7. Replacement Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing Shares of any class of Series A-1 Preferred, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the holder is a financial institution or other institutional investor its 8 own agreement shall be satisfactory), or, in the case of any such mutilation, upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of Shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 8. Definitions. "Common Stock" means, collectively, the Corporation's Common Stock, no par value, and any capital stock of any class of the Corporation hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Corporation. "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Section 4(D) hereof whether or not the Options or Convertible Securities are actually exercisable at such time. "Conversion Event" means (i) a Qualified Public Offering, (ii) any sale of all the outstanding capital stock of the Corporation, or (iii) a merger, consolidation, sale of substantially all of the assets of the Corporation or similar transaction involving the Corporation. "Conversion Stock" means shares of Common Stock; provided that if there is a change such that the securities issuable upon conversion of the Series A-1 Preferred are issued by an entity other than the Corporation or there is a change in the class of securities so issuable, then the term "Conversion Stock" shall mean one share of the security issuable upon conversion of the Series A-1 Preferred if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. "Junior Securities" means any of the Corporation's equity securities other than the Series A-1 Preferred and the Preferred Class. "Liquidation Premium" means the amount determined pursuant to the following equation: Liquidation Premium = ((1.2)14 x CP) - DP - Liquidation Value ; where (i) N = the number of years, including any fractional portion thereof, from the date of issuance of the Series A-1 Preferred to the date of payment of the Liquidation Premium (the "Payment Date"), (ii) CP = the Conversion Price, and (iii) DP = the sum of the future values of any distributions or dividends paid per. share of Series A-1 Preferred prior to the Payment Date, assuming such dividend or distribution was reinvested by the holder thereof at an annually compounded rate of 20% from the date of payment to the Payment 9 Date. "Liquidation Value" of any Share as of any particular date shall be equal to $2,7154. "Person" means an individual, a partnership, a limited liability company, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Oualified Public Offering" means any underwritten offering by the Corporation of its equity securities to the public pursuant to an effective registration statement under the Securities Act of 1933, as then in effect, or any comparable statement under any similar federal statute then in force pursuant to which the value of the Corporation prior to receipt of the proceeds of such offering is at least $25,000,000 and the minimum gross proceeds to the Corporation is $15,000,000; provided that for purposes of Section 4(G) hereof, a Qualified Public Offering shall not include an offering made in connection with a business acquisition or combination or an employee benefit plan. Section 9. Amendment and Waiver. No amendment, modification or waiver shall be binding or effective with respect to, any provision of Sections 1 to 10 hereof without the prior written consent of the holders of at least 75% of the Series A-1 Preferred outstanding at the time such action is taken. No change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another corporation or entity unless the Corporation has obtained the prior written consent of the holders of 75% of the Series A-1 Preferred then outstanding. Section 10. Notices. Except as otherwise expressly provided hereunder, all notices referred to herein shall be in writing and shall be delivered by registered or certified mail, return receipt requested and postage prepaid, or by reputable overnight courier service, charges prepaid, and shall be deemed to have been given when so mailed or sent (i) to the Corporation, at its principal executive offices, and (ii) to any stockholder, at such holder's address as it appears in the stock records of the Corporation (unless otherwise indicated by any such holder). 10 EXHIBIT B SERIES A-2 CONVERTIBLE PREFERRED STOCK Section 1. Dividends. When and as declared by the Corporation's board of directors and to the extent permitted under the Colorado Business Corporation Act, the holders of the Series A-2 Convertible Preferred Stock (the "Series A-2 Preferred") shall participate ratably with the holders of shares of the Corporation's Common Stock (as hereinafter defined), Series A-1 Convertible Preferred Stock (the "Series A-1 Preferred") and Series A-3 Convertible Preferred Stock (the "Series A-3 Preferred Stock") in any dividends on the Common Stock based upon the number of shares of Common Stock into which each share of Series A-2 Preferred (a "Share") is convertible at the time of such declaration. Section 2. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, the holders of the Series A-2 Preferred and the Series A-3 Preferred as a class (the "Preferred Class") shall vote to either (A) (i) convert all of the Series A-2 Preferred (including any fraction of a Share) into Conversion Stock (as hereinafter defined) pursuant to the provisions of Section 4 below, (ii) convert all of the Series A-3 Preferred (including any fraction of a share) into Series A-2 Preferred, (iii) convert the Series A-2 Preferred referred to in clause (ii) above into Conversion Stock, and (iv) share ratably with the holders of Series A-1 Preferred, if applicable, and Junior Securities (as hereinafter defined) in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation, or (B) be paid, before any distribution or payment is made upon any Junior Securities and concurrently with the holders of Series A-1 Preferred as set forth below, an amount in cash equal to the Liquidation Value (as hereinafter defined) of the Series A-2 Preferred and the liquidation value of the Series A-3 Preferred (the "Liquidation Payment"). For purposes of this Section 2, the vote of the holders of the majority of the Preferred Class as a group shall de deemed to be the election of all of the holders of the Preferred Class.' If the holders of the Preferred Class elect not to convert the Preferred Class pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect not to convert their shares of Series A-1 Preferred into Conversion Stock, the holders of the Preferred Class and the holders of the Series A-1 Preferred shall share the Liquidation Payment ratably based upon the aggregate Liquidation Value of the Series A-2 Preferred and the aggregate liquidation value of the Series A-1 Preferred and the Series A-3 Preferred held by each such holder pursuant to clause (B) above, after the payment of which the holders of the Series A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation premium, after the payment of which any remaining assets shall be distributed to the holders of Junior Securities. If the holders of the Preferred Class elect to convert the Preferred Class pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Series A-I Preferred elect not to convert their shares of Series A-1 Preferred into Conversion Stock, the holders of the Series A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation amount before any distribution or payment is made upon the Preferred Class or any Junior Securities and, thereafter, the holders of the Preferred Class shall 11 share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. If the holders of the Preferred Class elect not to convert the Preferred Class pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect to convert their shares of Series A-1 Preferred into Conversion Stock, the holders of the Preferred Class shall receive the Liquidation Payment before any distribution or payment is made upon the Series A- I Preferred or any Junior Securities and, thereafter, the holders of the Series A-1 Preferred shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. If the holders of the Preferred Class elect to convert the Preferred Class pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect to convert their shares of Series A- 1 Preferred into Conversion Stock, the holders of the Preferred Class and the holders of the Series A-1 Preferred shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. The Corporation shall mail written notice of such liquidation, dissolution or winding up, not less than sixty (60) days prior to the payment date stated therein (the "Payment Date"), to each record holder of Series A-2 Preferred. Neither the consolidation or merger of the Corporation into or with any other entity or entities, nor the sale or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 2. Section 3. Voting Rights. The holders of the Series A-2 Prefer-red shall be entitled to notice of all stockholders meetings in accordance with the Corporation's bylaws, and the holders of the Series A-2 Preferred shall be entitled to vote on all matters submitted to the stockholders for a vote together with the holders of the Common Stock and the Series A-1 Preferred voting together as a single class with each share of Common Stock entitled to one vote per shake, each share of Series A-1 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A- I Preferred at the time the vote is. taken, and each Share of Series A-2 Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A-2 Preferred at the time the vote is taken. Section 4. Conversion. A. Conversion Procedure. (i) At any time and from time to time, any holder of Series A-2 Preferred may convert all or any portion of the Series A-2 Preferred (including any fraction of a Share) held by such holder into a number of shares of Conversion Stock computed by multiplying the number of Shares to be converted by $2.8626 and dividing the result by the Conversion Price (as hereinafter defined) then in effect. 2 12 (ii) Each conversion of Series A-2 Preferred shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series A-2 Preferred to be converted have been surrendered at the principal office of the Corporation. At such time as such conversion has been effected, the rights of the holder of such Series A-2 Preferred as such holder shall cease and the Person (as hereinafter defined) or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby; provided, however, that for purposes of Section 2(A) above the conversion of the Series A-2 Preferred shall be deemed to have been effected as of the close of business on the day prior to the Payment Date. (iii) Notwithstanding any other provision hereof, if a conversion of Series A-2 Preferred is to be made in connection with a Qualified Public Offering (as hereinafter defined), the conversion of any Shares of Series A-2 Preferred may, at the election of the holder of such Shares, be conditioned upon the consummation of the Qualified Public Offering in which case such conversion shall not be deemed to be effective until the consummation of the Qualified Public Offering. (iv) As soon as possible after a conversion has been effected (but in any event within five business days in the case of subparagraph (a) below), the Corporation shall deliver to the converting holder: (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; (b) payment of the amount payable under subparagraph (vii) below with respect to such conversion; and (c) a certificate representing any Shares of Series A-2 Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (v) The issuance of certificates for shares of Conversion Stock upon conversion of Series A-2 Preferred shall be made without charge to the holders of such Series A-2 Preferred for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Conversion Stock. Upon conversion of each Share of Series A-2 Preferred, the Corporation shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be Validly issued, fully paid and nonassessable. (vi) The Corporation shall not close its books against the transfer of Series A-2 Preferred or of Conversion Stock issued or issuable upon conversion of Series A-2 Preferred in any manner which interferes with the timely conversion of Series A-2 Preferred. The Corporation shall assist and cooperate with any holder of Shares required to make any governmental filings or 3 13 obtain any governmental approval prior to or in connection with any conversion of Shares hereunder (including, without limitation, making any filings required to be made by the Corporation). (vii) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph, be deliverable upon any conversion of the Series A-2 Preferred, the Corporation, in lieu of delivering the fractional share therefor, may pay an amount to the holder thereof equal to the fair market price of such fractional interest as of the date of conversion as determined by the Corporation's board of directors. (viii) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Conversion Stock, solely for the purpose of issuance upon the conversion of the Series A-2 Preferred, such number of shares of Conversion Stock issuable upon the conversion of all outstanding Shares of Series A-2 Preferred. All shares of Conversion Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Corporation shall take all such actions as may be necessary to assure that all such shares of Conversion Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Conversion Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Corporation upon each such issuance). B. Conversion Price. The initial "Conversion Price" shall be $2.8626 per share. In order to prevent dilution of the conversion right s granted under this subdivision, the Conversion Price shall be subject to adjustment from time to time pursuant to this Section 4. C. Anti-Dilution. If and whenever on or after the original date of issuance of the Series A-2 Preferred the Corporation issues or sells, or in accordance with Section 4(D) hereof is deemed to have issued or sold, any shares of its Common Stock for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale, then forthwith upon such issue or sale the Conversion Price shall be reduced to the Conversion Price determined by dividing (i) the sum of (a) the product derived by multiplying the Conversion Price in effect immediately prior to such issue or sale times the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (b) the consideration, if any, received by the Corporation upon such issue or sale, by (ii) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale; provided that there shall be no adjustment in the Conversion Price as a result of any issuance or sale (or deemed issuance or sale) of (x) options issued pursuant to the Corporation's stock option plan and capital stock issued upon the exercise thereof, (y) capital stock of the Corporation upon the exercise of warrants held by each of Patrick Van Den Bossche and NationsCredit Commercial Corporation and any conversion of such capital stock subsequent to its issuance, and (z) the issuance of capital stock of the Corporation upon the conversion of the Series A-1 Preferred or the Preferred Class. 4 14 D. Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Conversion Price under Section 6(C) hereof, the following shall be applicable: (i) Issuance of Rights or Options. If the Corporation in any manner grants any rights or options to subscribe for or to purchase Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities") and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities. is less than the Conversion Price in effect immediately prior to the time of the granting of such Options then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the granting of such Options for such price per share. For purposes of this Section 4(D)(i), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance of sale or such Convertible Securities and the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No further adjustment of the Conversion Price shall be made when Convertible Securities are. actually issued upon the exercise of such Options or when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Corporation in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price in effect immediately prior to the time of such issue or sale then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this Section 4(D)(ii), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Conversion Price shall be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Conversion Price had been or are to be made pursuant 5 15 to other provisions of this Section 4, no further adjustment of the Conversion Price shall be made by reason of such issue or sale. (iii) Change in Option Price or Conversion Rate. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities, or the, rate at which any Convertible Securities are convertible into or exchangeable for Common Stock change at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. E. Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. F. Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Corporation's assets to another Person or other transaction which is effected in such a manner that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an "Organic Change". Prior to the consummation of any Organic Change, the Corporation shall make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A-2 Preferred then outstanding) to insure that each of the holders of Series A-2 Preferred shall thereafter have the right to acquire and receive, in lieu of or in addition to (as the case may be), the shares of Conversion Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Series A-2 Preferred, such shares of stock, securities or assets as such holder would have received in connection with such Organic Change if such holder had converted its Series A-2 Preferred immediately prior to such Organic Change. In each such case, the Corporation shall also make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A-2 Preferred then outstanding) to insure that the provisions of this Section 4 and Section 5 hereof shall thereafter be applicable to the Series A-2 Preferred (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Corporation, an immediate adjustment of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of Conversion Stock acquirable and receivable upon conversion of Series A-2 Preferred, if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation, merger or sale). The Corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation (if other than the 6 16 Corporation) resulting from consolidation or merger or the corporation purchasing such assets assumes by written instrument (in form reasonably satisfactory to the holders of a majority of the Series A-2 Preferred then outstanding), the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. G. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 4 but not expressly provided for by such provisions, then the Corporation's board of directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Series A-2 Preferred; provided that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Section 4 or decrease the number of shares of Conversion Stock issuable upon conversion of each Share of Series A-2 Preferred. H. Notices. (i) Immediately upon any adjustment of the Conversion Price, the Corporation shall give written notice thereof to all holders of Series A-2 Preferred, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Corporation shall give written notice to all holders of Series A-2 Preferred at least 20 days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata subscription offer to holders of Common Stock, or (c) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. (iii) The Corporation shall also give written notice to the holders of Series A-2 Preferred at least 20 days prior to the date on which any Organic Change shall take place. I. Mandatory Conversion. The Corporation's board of directors may at any time require the conversion of all of the outstanding Series A-2 Preferred upon the occurrence of a Conversion Event (as hereinafter defined). Any such mandatory conversion shall only be effected at the time of and subject to the closing of the transactions contemplated by the Conversion Event and upon written notice of such mandatory conversion delivered to all holders of Series A-2 Preferred at least seven (7) days prior to such closing. Section 5. Purchase Rights. If at any time the Corporation grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then each holder of Series A-2 Preferred shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Conversion Stock acquirable upon conversion of such holder's Series A-2 Preferred immediately before the date on which a record is taken for the. grant, issuance or sale 7 17 of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. Section 6. Registration of Transfer. The Corporation shall keep at its principal office a register for the registration of Series A-2 Preferred. Upon the surrender of any certificate representing Series A-2 Preferred at such place, the Corporation shall, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of Shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of Shares as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate. Section 7. Replacement. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing Shares of any class of Series A-2 Preferred, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the holder is a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation, upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of Shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 8. Definitions. "Common Stock" means, collectively, the Corporation's Common Stock, no par value, and any capital stock of any class of the Corporation hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Corporation. "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Section 4(D) hereof whether or not the Options or Convertible Securities are actually exercisable at such time. "Conversion Event" means (i) a Qualified Public Offering, (ii) any sale of all the outstanding capital stock of the Corporation, or (iii) a merger, consolidation, sale, of substantially all of the assets of the Corporation or similar transaction involving the Corporation. 8 18 "Conversion Stock" means shares of Common Stock; provided that if there is a change such that the securities issuable upon conversion of the Series A-2 Preferred are issued by an entity other than the Corporation or there is a change in the class of securities so issuable, then the term "Conversion Stock" shall mean one share of the security issuable upon conversion of the Series A-2 Preferred if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. "Junior Securities" means any of the Corporation's equity securities other than the Series A-1 Preferred and the Preferred Class. "Liquidation Value" of any Share as of any particular date shall be equal to $2.8626. "Person" means an individual, a partnership, a limited liability company, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Qualified Public Offering" means any underwritten offering by the Corporation of its equity securities to the public pursuant to an effective registration statement under the Securities Act of 1933, as then in effect, or any comparable statement under any similar federal statute then in force pursuant to which the value of the Corporation prior to receipt of the proceeds of such offering is at least $25,000,000 and the minimum gross proceeds to the Corporation is $15,000,000; provided that for purposes of Section 4(G) hereof, a Qualified Public Offering shall not include an offering made in connection with a business acquisition or combination or an employee benefit plan. Section 9. Amendment and Waiver. No amendment, modification or waiver shall be binding or effective with respect to any provision of Sections 1 to 10 hereof without the prior written consent of the holders of at least 75% of the Series A-2 Preferred outstanding at the time such action is taken. No change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another corporation or entity unless the Corporation has obtained the prior written consent of the holders of 75% of the Series A-2 Preferred then outstanding. Section 10. Notices. Except as otherwise expressly provided hereunder, all notices referred to herein shall be in writing and shall be delivered by registered or certified mail, return receipt requested and postage prepaid, or by reputable overnight courier service, charges prepaid, and shall be deemed to have been given when so mailed or sent (i) to the Corporation, at its principal executive offices, and (ii) to any stockholder, at such holder's address as it appears in the stock records of the Corporation (unless otherwise indicated by any such holder). 9 19 EXHIBIT C SERIES A-3 CONVERTIBLE PREFERRED STOCK Section 1. Dividends. When and as declared by the Corporation's board of directors and to the extent permitted under the Colorado Business Corporation Act, the holders of the Series A-3 Convertible Preferred Stock (the "Series A-3 Preferred") shall participate ratably with the holders of shares of the Corporation's Common Stock (as hereinafter defined), Series A-1 Convertible Preferred Stock (the "Series A-1 Preferred") and Series A-2 Convertible Preferred Stock (the "Series A-2 Preferred") in any dividends on the Common Stock based upon the number of shares of Common Stock into which each share of Series A-2 Preferred issuable upon conversion of each share of the Series A-3 Preferred (a "Share") is convertible at the time of such declaration. Section 2. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, the holders of Series A-2 Preferred and the Series A-3 Preferred as a class (the "Preferred Class") shall vote to either (A) (i) convert all of the Series A-2 Preferred (including any fraction of a share) into Common Stock, (ii) convert all of the Series A-3 Preferred (including any fraction of a Share) into Conversion Stock (as hereinafter defined) pursuant to the provisions of Section 4 below, (iii) convert the Conversion Stock into Common Stock, and (iv) share ratably with the holders of Series A-1 Preferred, if applicable, and Junior Securities (as hereinafter defined) in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation, or (B) be paid, before any distribution or payment is made upon any Junior Securities and concurrently with the holders of Series A-1 Preferred as set forth below, an amount in cash equal to the Liquidation Value (as hereinafter defined) of the Series A-3 Preferred and the liquidation value of the Series A-2 Preferred (the "Liquidation Payment"). For purposes of this Section 2, the vote of the holders of the majority of the Preferred Class as a group shall be deemed to be the election of all of the holders of the Preferred Class. If the holders of the Preferred Class elect not to convert the Preferred Class pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders-of the Series A-1 Preferred elect not to convert their shares of Series A-1 Preferred into Common Stock, the holders of the Series A-1 Preferred and the Preferred Class shall share the Liquidation Payment ratably based upon the aggregate Liquidation Value of the Series A-3 Preferred and the aggregate liquidation value of the Series A- I Preferred and the Series A-2 Preferred held by each such holder pursuant to clause (B) above, after the payment of which the holders of the Series A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation premium, after the payment of which any remaining assets shall be distributed to the holders of Junior Securities. If the holders of the Preferred Class elect to convert the Preferred Class pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect not to convert their shares of Series A-1 Preferred into Common Stock, the holders of the Series A-1 Preferred shall receive payment of the Series A-1 Preferred liquidation amount before any distribution or payment is made upon the Preferred Class or any Junior Securities and, thereafter, the holders of the Preferred Class shall share ratably with the holders of Junior Securities in any 20 distribution or payment upon such liquidation, dissolution or winding up of the Corporation. If the holders of the Preferred Class elect not to convert the Preferred Class pursuant to clause (A) above and elect to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect to convert their shares of Series A-1 Preferred into Common Stock, the holders of the Preferred Class shall receive the Liquidation Payment before any distribution or payment is made upon the Series A-1 Preferred or any Junior Securities and, thereafter, the holders of the Series A-1 Preferred shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation, dissolution or winding up of the Corporation. If the holders of the Preferred Class elect to convert the Preferred Class pursuant to clause (A) above and elect not to receive a cash payment pursuant to clause (B) above and the holders of the Series A-1 Preferred elect to convert their shares of Series A-1 Preferred into Common Stock, the holders of the Series A-1 Preferred and the Preferred Class shall share ratably with the holders of Junior Securities in any distribution or payment upon such liquidation dissolution or winding up of the Corporation. The Corporation shall mail written notice of such liquidation, dissolution or winding up not less than sixty (60) days prior to the payment date stated therein (the "Payment Date"), to each record holder of Series A-3 Preferred. Neither the consolidation or merger of the Corporation into or with any other entity or entities, nor the sale or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a liquidation, dissolution, or winding up of the Corporation within the meaning of this Section 2. Notwithstanding the foregoing, in no event shall a conversion of the Series A-3 Preferred occur pursuant to this Section 2 if such conversion would result in a violation of Regulation Y under the Bank Holding Company Act of 1956, as amended. Section 3. Voting Right. The holders of the Series A-3 Preferred shall be entitled to notice of all stockholders meetings in accordance with the Corporation's bylaws. The holders of Series A-3 Preferred shall not have any voting rights, except as otherwise required by applicable law, in which case holders of Series A-3 Preferred shall vote (at the rate of one vote per Share of Series A-3 Preferred held) as a single class on such matter unless otherwise required by law. Section 4. Conversion. A. Conversion Procedure. (i) At any time and from time to time, any holder of Series A-3 Preferred may convert all or any portion of the Series A-3 Preferred (including any fraction of a Share) held by such holder into a number of shares of Conversion Stock computed by in multiplying the number of Shares to be converted by $2.8626 and dividing the result by the Conversion Price (as hereinafter defined) then in effect. (ii) Each conversion of Series A-3 Preferred shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series A-3 Preferred to be converted have been surrendered at the principal office of the Corporation. At such time as such conversion has been effected, the rights of the holder of such 2 21 Series A-3 Preferred as such holder shall cease and the Person (as hereinafter defined) or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby; provided, however, that for purposes of Section 2(A) above the conversion of the Series A-3 Preferred and the conversion of the Conversion Stock issued in connection therewith shall be deemed to have been effected as of the close of business on the day prior to the Payment Date. (iii) Notwithstanding any other provision hereof, if a conversion of Series A-3 Preferred is to be made in connection with a Qualified Public Offering (as hereinafter defined), the conversion of any Shares of Series A-3 Preferred may, at the election of the holder of such Shares, be conditioned upon the consummation of the Qualified Public Offering in which case such conversion shall not be deemed to be effective until the consummation of the Qualified Public Offering. (iv) As soon as possible after a conversion has been effected (but in any event within five business days in the case of subparagraph (a) below), the Corporation shall deliver to the converting holder: (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; (b) payment of the amount payable under subparagraph (vii) below with respect to such conversion; and (c) a certificate representing any Shares of Series A-3 Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (v) The issuance of certificates for shares of Conversion Stock upon conversion of Series A-3 Preferred shall be made without charge io the holders of such Series A-3 Preferred for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Conversion Stock. Upon conversion of each Share of Series A-3 Preferred, the Corporation shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable. (vi) The Corporation shall not close its books against the transfer of Series A-3 Preferred or of Conversion Stock issued or issuable upon conversion of Series A-3 Preferred in any manner which interferes with the timely conversion of Series A-3 Preferred. The Corporation shall assist and cooperate with any holder of Shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of Shares hereunder (including, without limitation, making any filings required to be made by the Corporation). 3 22 (vii) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph, be deliverable upon any conversion of the Series A-3 Preferred, the Corporation, in lieu of delivering the fractional share therefor, may pay an amount to the holder thereof equal to the fair market price of such fractional interest as of the date of conversion as. determined by the Corporation's board of directors. (viii) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Conversion Stock, solely for the purpose of issuance upon the conversion of the Series A-3 Preferred, such number of shares of Conversion Stock issuable upon the conversion of all outstanding Shares of Series A-3 Preferred. All shares of Conversion Stock which are so issuable -shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Corporation shall take all such actions as may be necessary to assure that all such shares of Conversion Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Conversion Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Corporation upon each such issuance). B. Conversion Price. The initial "Conversion Price" shall be $2.8626 per share. In order to prevent dilution of the conversion rights granted under this subdivision, the Conversion Price shall be subject to adjustment from time to time pursuant to this Section 4. C. Anti-Dilution. If and whenever on or. after the original date of issuance of the Series A-3 Preferred the Corporation issues or sells, or in accordance with Section 4(D) hereof is deemed to have issued or sold, any shares of its Common Stock for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale, then forthwith upon such issue or sale the Conversion Price shall be reduced to the Conversion Price determined by dividing (i) the sum of (a) the product derived by multiplying the Conversion Price in effect immediately prior to such issue or sale times the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (b) the consideration, if any, received by the Corporation upon such issue or sale, by (ii) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale; provided that there shall be no adjustment in the Conversion Price as a result of any issuance or sale (or deemed issuance or sale) of (x) options issued pursuant to the Corporation's stock option plan and capital stock issued upon the exercise thereof, (y) capital stock of the Corporation issued upon the exercise of warrants held by each of Patrick Van Den Bossche and NationsCredit Commercial Corporation and any conversion of such capital stock subsequent to its issuance, and (z) the issuance of capital stock of the Corporation upon the conversion of Series A-1 Preferred or the Preferred Class. D. Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Conversion Price under Section 6(C) hereof, the following shall be applicable: (i) Issuance of Rights or Options. If the Corporation in any manner grants any rights or options to subscribe for or to purchase Common Stock or any stock or other securities 4 23 convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities") and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities is less than the Conversion Price in effect immediately prior to the time of the granting of such Options then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the granting of such Options for such price per share. For purposes of this Section 4(D)(i), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance of sale or such Convertible Securities and the conversion or exchange thereof by (b) the, total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No further adjustment of the Conversion Price shall be made when Convertible Securities are actually issued upon the exercise of such Options or when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Corporation in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price in effect immediately prior to the time of such issue or sale then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this Section 4(D)(ii), the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Conversion Price shall be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Conversion Price had been or are to be made pursuant to other provisions of this Section 4, no further adjustment of the Conversion Price shall be made by reason of such issue or sale. (iii) Change in Option Price or Conversion Rate. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into 5 24 or exchangeable for Common Stock change at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. E. Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. F. Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Corporation's assets to another Person or other transaction which is effected in such a manner that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an "Organic Change". Prior to the consummation of any Organic Change, the Corporation shall make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A-3 Preferred then outstanding) to insure that each of the holders of Series A-3 Preferred shall thereafter have the right to acquire and receive, in lieu of or in addition to (as the case may be), the shares of Conversion Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Series A-3 Preferred, such shares of stock, securities or assets as such holder would have received in connection with such Organic Change if such holder had converted its Series A-3 Preferred into Conversion Stock and converted the Conversion Stock immediately prior to such Organic Change. In each such case, the Corporation shall also make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A-3 Preferred then outstanding) to insure that the provisions of this Section 4 and Section 5 hereof shall thereafter be applicable to the Series A-3 Preferred (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Corporation, an immediate adjustment of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of Conversion Stock acquirable and receivable upon conversion of Series A-3 Preferred, if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation, merger or sale). The Corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation (if other than the Corporation) resulting from consolidation or merger or the corporation purchasing such assets assumes by written instrument (in form reasonably satisfactory to the holders of a majority of the Series A-3 Preferred then outstanding), the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. 6 25 G. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 4 but not expressly provided for by such provisions, then the Corporation's board of directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Series A-3 Preferred; provided that no such adjustment shall increase the Con-version Price as otherwise determined pursuant to this Section 4 or decrease the number of shares of Conversion Stock issuable upon conversion of each Share of Series A-3 Preferred. H. Notices. (i) Immediately upon any adjustment of the Conversion Price, the Corporation shall give written notice thereof to all holders of Series A-3 Preferred, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Corporation shall give written notice to all holders of Series A-3 Preferred at least 20 days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata subscription offer to holders of Common Stock, or (c) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. (iii) The Corporation shall also give written notice to the holders of Series A-3 Preferred at least 20 days prior to the date on which any Organic Change shall take place. I. Mandatory Conversion. The Corporation's board of directors may at any time require the conversion of all of the outstanding Series A-3 Preferred and the conversion of the Conversion Stock received in connection therewith upon the occurrence of a Conversion Event (as hereinafter defined); provided, however, that the board of directors may not require such mandatory conversions if any such conversion would result in a violation of Regulation Y under the Bank Holding Company Act of 1956, as amended. Any such mandatory conversion shall only be effected at the time of and subject to the closing of the transactions contemplated by the Conversion Event and upon written notice of such mandatory conversion delivered to all holders of Series A-3 Preferred at least seven (7) days prior to such closing. Section 5. Purchase Rights. If at any time the Corporation grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then each holder of Series A-3 Preferred shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock issuable upon conversion of the Conversion Stock acquirable upon conversion of such holder's Series A-3 Preferred immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. 7 26 Section 6. Registration of Transfer. The Corporation shall keep at its principal office a register for the registration of Series A-3 Preferred. Upon the surrender of any certificate representing Series A-3 Preferred at such place, the Corporation shall, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of Shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of Shares as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate. Section 7. Replacement. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing Shares of any class of Series A-3 Preferred, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the holder is a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation, upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of Shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 8. Regulated Stockholders. The Corporation will not convert or directly or indirectly redeem, purchase, acquire or take any other action affecting outstanding shares of capital stock of the Corporation if such action will increase the percentage of outstanding voting securities owned or controlled by any Regulation Y Holder and its Affiliates (other than a Regulation Y Holder which waives in writing its rights under this Section 9), unless the Corporation gives written notice (the "Deferral Notice") of such action to each Regulation Y Holder. The Corporation will defer making any such conversion, redemption, purchase or other acquisition, or taking any such other action, for a period of 20 days (the "Deferral Period") after giving the Deferral Notice in order tp allow each Regulation Y Holder to determine whether it wishes to convert or take any other action with respect to the Series A-3 Preferred it owns, controls or has the power to vote, and if any Regulation Y Holder then elects to convert any Shares of Series A-3 Preferred, it shall notify the Corporation in writing within 10 days of the issuance of the Deferral Notice, in which case the Corporation shall promptly notify from time to time prior to the end of such 20-day period each other Regulation Y Holder of each proposed conversion and effect the conversions requested by all Regulation Y Holders at the end of the Deferral Period. The Corporation will not directly or indirectly redeem, purchase, acquire or take any other action affecting outstanding shares of Common Stock of the Corporation if such action will increase over 24.9% the percentage of outstanding Common Stock owned or controlled by any Regulation Y Holder and its Affiliates (other than a Regulation Y Holder which waives in writing its rights under this Section 9). 8 27 Section 9. Definitions. "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person. For the purpose of the above definition, the term "control" (including with correlative meaning, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contact or otherwise. "Common Stock" means, collectively, the Corporation's Common Stock, no par value, and any capital stock of any class of the Corporation hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Corporation. "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Section 4(D) hereof whether or not the Options or Convertible Securities are actually exercisable at such time. "Conversion Event" means (i) a Qualified Public Offering, (ii) any sale of all the outstanding capital stock of the Corporation, or (iii) a merger, consolidation, sale of substantially all of the assets of the Corporation or similar transaction involving the Corporation. "Conversion Stock" means shares of Series A-2 Preferred; provided that if there is a change such that the securities issuable upon conversion of the Series A-3 Preferred are issued by an entity other than the Corporation or there is a change in the class of securities so issuable, then the term "Conversion Stock" shall mean one share of the security issuable upon conversion of the Series A-3 Preferred if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. "Junior Securities" means any of the Corporation's equity securities Series A-1 Preferred and the Preferred Class. "Liquidation Value" of any Share as of any particular date shall be equal to $2.8626. "Person" means an individual, a partnership, a limited liability company, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department agency or political subdivision thereof. "Qualified Public Offering" means any underwritten offering by the Corporation of its equity securities to the public pursuant to an effective registration statement under the 9 28 Securities Act of 1933, as then in effect, or any comparable statement under any similar federal statute then in force pursuant to which the value of the Corporation prior to receipt of the proceeds of such offering is at least $25,000,000 and the minimum gross proceeds to the Corporation is $15,000,000; provided that for purposes of Section 4(G) hereof, a Qualified Public Offering shall not include an offering made in connection. with a business acquisition or combination or an employee benefit plan. "Regulation Y Holder" shall mean any stockholder of the Corporation that is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, or a subsidiary thereof subject to Regulation Y under such Act. Section 10. Amendment and Waiver. No amendment, modification or waiver shall be binding or effective with respect to any provision of Sections 1 to 11 hereof without the prior written consent of the holders of at least 75% of the Series A-3 Preferred outstanding at the time such action is taken. No change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another corporation or entity unless the Corporation has obtained the prior written consent of the holders of 75% of the Series A-3 Preferred then outstanding. Section 11. Notices. Except as otherwise expressly provided hereunder, all notices referred to herein shall be in writing and shall be delivered by registered or certified mail, return receipt requested and postage prepaid, or by reputable overnight courier service, charges prepaid, and shall be deemed to have been given when so mailed or sent (i) to the Corporation, at its principal executive offices, and (ii) to any stockholder, at such holder's address as it appears in the stock records of the Corporation (unless otherwise indicated by any such holder). 10 EX-10.9 10 LEASE BETWEEN OFFICE MASTER OF TEXAS, INC. 1 EXHIBIT 10.9 LEASE AGREEMENT This Lease Agreement is made and entered into at Columbia, Tennessee, on this, the _____ day of February, 1998, by and between Bertrand L. Taylor, hereinafter referred to as LANDLORD, and Office Master of Texas, Inc., hereinafter referred to as TENANT, both of which expressions shall include the respective successors, heirs, assigns and personal representatives of the parties. W I T N E S S E T H: WHEREAS, LANDLORD desires to lease to TENANT, the premises hereinafter described, and the parties have agreed upon the terms and conditions of the Lease Agreement, which terms and conditions are set forth hereinafter. NOW, THEREFORE, for and in consideration of the mutual advantages to the respective parties, the parties agree as follows: 1. PREMISES: LANDLORD hereby lets and leases to TENANT the premises described on the attached Schedules A and B: 2. TERM: This Lease is for a period of ten (10) years and six (6) days beginning on the 1st day of February, 1998, and ending on the 31st day of January, 2008. 3. RENT: TENANT covenants and agrees to pay, without demand to LANDLORD at 100 Overbrook Court, Columbia, Tennessee, or such other place as LANDLORD may from time to time designate, as rent for the Leased Premises during the term of this Lease the sum of $3,553,930.80 payable at the initial rate of $29,616.09 per month commencing on February 1, 1998, and on the first day of each month thereafter. If not paid within five (5) days after the due date, said rental shall bear interest at the Base Rate of First Farmers & Merchants National Bank plus two (2%) percent. The rent shall be adjusted by LANDLORD on February 1, 1999, and every twelve (12) months thereafter. The lease rate is based upon a valuation of the property and the capitalized value of the equipment listed on Schedule A hereto (an aggregate value of $2,342,936) of $2,342,956.00 amortized over 10 years from the 1 2 effective date of this Lease at an interest rate equal to the Base Rate of First Farmers & Merchants National Bank, Columbia, Tennessee. Said rate is defined as that rate set by First Farmers & Merchants National Bank from time to time as such Bank's Base Rate and is currently 8.95%. The annual rent shall be recalculated on the first day of each new twelve-month period of the term of this Lease using the remaining unamortized value of the property and the capital equipment shown on Schedule A over the remaining term of this Lease using the then effective Base Rate. 4. IMPROVEMENTS AND ALTERATIONS: TENANT shall have the right during the continuance of this Lease to make improvements and alterations on the Leased Premises as may be proper and necessary for the conduct of TENANT'S business; provided, however, that TENANT obtains the written consent of LANDLORD for any alterations or improvements, which consent will not be unreasonably withheld. At the sole option of LANDLORD, any such improvements and alterations shall become the property of LANDLORD at the termination of this Lease. If LANDLORD elects not to take such improvements, TENANT agrees to restore the premises to their condition at the time of the beginning of this Lease. Except as otherwise provided, furnishings and trade fixtures installed on the Leased Premises by TENANT and paid for by TENANT, including, without limitation, any cranes and crane ways and any other fixtures installed by TENANT (other than the capitalized equipment shown on Schedule A which shall deemed to be the property of LANDLORD) shall remain the property of TENANT and may be removed upon the termination of this Lease, provided: a) that any of such as are fixed to the Leased Premises and require severance may be removed only if TENANT shall repair any damage caused by such removal to restore the Leased Premises in substantially the same condition as that when rented; and b) that TENANT shall have fully performed all of the covenants and agreements to be performed under the provisions of this Lease. It is further agreed that TENANT shall return the Leased Premises in as good a condition as that on the initial date of the term of the lease including repainting, repairing and cleaning up of the Leased Premises. 2 3 5. HOLD HARMLESS, PUBLIC LIABILITY AND INSURANCE: TENANT will indemnify LANDLORD and hold LANDLORD harmless against all claims, demands and judgments for loss, damage or injury to property or person, which shall result or occur by reason of the use and/or occupancy of the Leased Premises, other than a loss, damage or injury to property or person which occurred prior to the commencement of the term of this Lease or a loss, damage or injury arising from a condition of the leased premises, or circumstance or event affecting the leased premises prior to the commencement of the Lease, as to which LANDLORD indemnified and holds harmless TENANT to the same extent as TENANT'S indemnification of LANDLORD herein provided. Each such indemnification shall include the costs and attorney's fees incurred by LANDLORD or TENANT, as the case may be, in defending any such claims, demands and judgments. In furtherance of this agreement, but in no way limited thereby, TENANT shall obtain casualty insurance for full value and liability insurance insuring this indemnification in an amount not less than $5,000,000.00 (combined single limit) with LANDLORD being named as an additional insured under said policy. TENANT shall pay the costs of such insurance and provide evidence of such insurance to LANDLORD within ten (10) days from the execution of this Lease. All personal property of any kind that may at any time be used, left or placed on the premises during the term of this Lease shall be at the sole risk of the TENANT. 6. UTILITIES AND TAXES: TENANT shall pay all state and city real property taxes assessed against the premises during the term of this Lease. TENANT shall further pay any charges for electricity, water, gas, sewage, heat, telephone or other utilities which may be used, rendered, or supplied upon or in connection with the Leased Premises. 3 4 7. TOTAL OR PARTIAL DESTRUCTION OF PREMISES: Should the building on which the leased premises are located be totally or substantially destroyed by fire, explosion, tornado, acts of God, or any unforeseen cause over which TENANT has no control, so that such leased premises are unfit for the conduct of TENANT'S business, the LANDLORD may, at his option, repair such damage or LANDLORD shall have the right, by giving notice to TENANT, to terminate this lease, said termination to be effective upon receipt of the notice, and all rents and other charges shall be adjusted to the date of such destruction. If, however, such damage is only partial, and TENANT'S business is only temporarily closed or inconvenienced, then LANDLORD may promptly repair such damage and, during the time from the occurrence of such damage until the premises are restored, TENANT shall be liable only for such as the proportionate part of the premises which are usable shall bear to the whole of the same, and upon restoration of such improvements, the rent herein provided for shall be restored and shall be payable as herein provided. 8. TRANSFER OF LEASE: TENANT may not assign or sublet the Premises, either in whole or in part, without the prior written consent of LANDLORD; provided that (i) TENANT may freely assign or sublet the leased premises to any affiliate of TENANT (Aaffiliate being defined in Rule 405 promulgated under the Securities Act of 1933, as amended), and (ii) TENANT may assign or sublet the leased premises to any person who acquires all or substantially all of the capital stock or assets of TENANT with the prior written consent of LANDLORD, which consent shall not be unreasonably withheld. Unless LANDLORD shall have consented in writing to the release of TENANT from liability for the payment of rent upon an assignment or sublease (which consent shall not be unreasonably withheld), any assignment or sublease shall contain a provision that TENANT is not released from liability and that Assignee or Sublessee shall assume and hold LANDLORD harmless for any liability to Somervell County, Texas, under an agreement between it and LANDLORD dated April, 1997. Consent to one assignment or subletting will not be deemed a consent to any other. In the event of any assignment or subletting, TENANT shall remain fully responsible under this Lease. 4 5 9. USE OF PREMISES: The premises shall be used only for the manufacturing of mobile offices or other modular building structures or components and related purposes. TENANT will not at any time use or occupy the Premises in violation of laws, ordinances, or regulations of any government or agency having jurisdiction or in violation of LANDLORD's insurance contract(s) or in any manner creating a nuisance. 10. RESPONSIBILITY FOR REPAIRS AND MAINTENANCE: TENANT shall be responsible for all repairs to all portions of the leased premises; provided, however, LANDLORD shall be responsible for repairs resulting from defective construction of the building. TENANT has inspected the premises and accepts them in the present condition as is. TENANT shall keep the premises, including without limitation, interior walls, floors, ceilings and light fixtures, clean and in good repair at all times. TENANT will promptly replace all glass broken during the said term with glass of the same quality. 11. RIGHT OF ENTRY: LANDLORD may at reasonable times and with reasonable notice to TENANT enter the Premises to inspect them and make any repairs required by Section 10 that TENANT has failed to make, and during the one hundred eighty (180) days preceding the expiration of this Lease, may show the Premises to persons who may wish to lease same, provided TENANT'S occupancy is not interfered with. If LANDLORD makes any repairs required to be made by TENANT under Section 10, TENANT shall pay LANDLORD as additional rent a sum equal to the amounts expended by LANDLORD plus interest thereon at the Base Rate of First Farmers & Merchants National Bank plus two (2%) percent within ten (10) days after LANDLORD presents TENANT with a statement setting forth the repairs made and the amounts expended. 5 6 12. LANDLORD'S REMEDIES ON DEFAULT: If default is made in the payment of said rent, or any part thereof, or in the observance or performance of any of the terms, conditions or agreements herein contained, LANDLORD shall have the following remedies: a) Within ten (10) days after any due date of the payment of rent or within ten (10) days after LANDLORD gives written notice to TENANT of TENANT'S material default or breach in the observance or performance of the terms, conditions or agreements herein contained, or if such breach cannot be cured reasonably within such ten (10) day period and TENANT fails to commence and diligently proceed to cure such breach within a reasonable time not to exceed thirty (30) days, LANDLORD may sue to collect any and all sums which may accrue to it by virtue of the provisions of this Lease, or for any and all damage that may accrue by virtue of the breach of this Lease or both, TENANT hereby waiving all demand for rent. b) Within ten (10) days after any due date of the payment of rent or within ten (10) days after LANDLORD gives written notice to TENANT of TENANT'S material default or breach in the observance or performance of the terms, conditions or agreements herein contained, or if such breach cannot be cured reasonably within such ten (10) day period and TENANT fails to commence and diligently proceed to cure such breach within a reasonable time not to exceed thirty (30) days, LANDLORD may sue to restrain by injunction any violation or threatened violation of the covenants, conditions, or provisions of this Lease. c) Within thirty (30) days after any due date for the payment of rent or within thirty (30) days after LANDLORD gives written notice to TENANT of TENANT'S material default or breach in the observance or performance of the terms, conditions or agreements herein contained, LANDLORD may, without further notice to TENANT, and without demand for rent due, re-enter said premises and remove all persons and 6 7 property therefrom, with or without process of law. If TENANT shall abandon or vacate, or be removed from said premises before the expiration of the term of this Lease, LANDLORD shall use reasonable efforts to relet for such rent and upon such terms as he may see fit, but such reletting shall not relieve the TENANT from its obligations to pay the rent herein set forth; provided, however, any rents received under the new lease, less the cost in obtaining a new tenant, shall be applied toward the satisfaction of said obligation to pay rent. 13. NO WAIVER: The failure of LANDLORD or TENANT to insist upon a strict performance of any term or condition of this Lease shall not be deemed a waiver of any right or remedy that LANDLORD or TENANT may have and shall not be deemed a waiver of any subsequent breach of such term or condition. 14. TERMINATION: If, at the expiration of the term of this Lease, TENANT shall continue to occupy said premises, such occupancy shall be on a month to month basis. 15. QUIET ENJOYMENT: LANDLORD hereby covenants and agrees that if TENANT shall perform all the covenants and agreements herein stipulated, TENANT shall have at all times during the continuance hereof, the peaceful and quiet enjoyment and possession of the premises without any manner of hindrance from LANDLORD. 16. ATTORNEY'S FEES AND COSTS: In the event TENANT breaches any of the covenants and agreements herein stipulated, TENANT agrees to pay reasonable attorney's fees and all costs incurred by LANDLORD arising out of said breach. In the event LANDLORD breaches any of the covenants and agreements herein stipulated, LANDLORD agrees to pay reasonable attorney=s fees and all costs incurred by TENANT arising out of said breach. 17. WAIVER OF SUBROGATION AGREEMENT: It is agreed that the LANDLORD and the TENANT, each, hereby waive their respective rights of subrogation as to the other party of all liabilities, expenses, losses, and any other damages incurred by 7 8 either party and covered under any fire, extended coverage, or other policy of insurance purchased by either of them on the property or contents located therein, to the extent that such liabilities are covered by insurance. This waiver is made voluntarily and with full knowledge of all rights each party may have to subrogation of the other parties' claims. 18. HAZARDOUS MATERIAL; INDEMNITY: (a) To the best of his knowledge, LANDLORD hereby represents and warrants that the leased premises are in compliance with the laws and regulations governing hazardous substances and other environmental matters relating to the condition of the leased premises and the real property on which the leased premises are located. TENANT shall not cause or permit any Hazardous Material to be brought upon, kept, or used in or about the premises by TENANT, its agents, employees, contractors or invitees, without the prior written consent of LANDLORD (which consent LANDLORD shall not unreasonably withhold as long as TENANT demonstrates to LANDLORD'S reasonable satisfaction that each hazardous material and the quantities of each such hazardous material, brought upon, kept or used in or about the premises by TENANT, are necessary or useful to the permitted uses of the premises as described in Section 9 of this Lease and will be used, kept and stored in a manner that complies with all laws regulating any such hazardous material so brought upon or used or kept in or about the premises). If TENANT breaches the obligations stated in the preceding sentence, or if the presence of hazardous material on the premises caused or permitted by TENANT results in contamination of the premises, or if contamination of the premises by hazardous material otherwise occurs for which TENANT is legally liable to LANDLORD for damage resulting therefrom, then TENANT shall indemnify, defend and hold LANDLORD harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including, without limitation, diminution in value of the premises, damages for loss or restrictions on use of rentable or usable space or of any amenity of the premises, damages arising from any adverse impact on marketing of space, and sums paid in settlement of claims, attorney's fees, consultant fees and expert fees) which arise during or after the lease term as a result of such contamination. 8 9 This indemnification of LANDLORD by TENANT includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal, or restoration work required by any federal, state, or local governmental agency or political subdivision because of hazardous material present in the soil or groundwater on or under the premises. Without limiting the foregoing, if the presence of any hazardous material on the premises caused or permitted by TENANT results in any contamination of the premises, TENANT shall promptly take all actions at its sole expense as are necessary to return the premises to the condition existing prior to the introduction of any such hazardous material to the premises; provided that LANDLORD'S approval of such actions shall first be obtained, which approval shall not be unreasonably withheld so long as such actions would not potentially have any material adverse long-term or short-term effect on the premises. (b) As used herein, the term "hazardous material" means any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the State of Texas or the United States Government. The term "hazardous material" includes, without limitation, any material or substance that is (i) defined as a "hazardous substance" under Texas law, (ii) petroleum, (iii) asbestos, (iv) designated as a "hazardous substance" pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. 1321), (v) defined as a "hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq. (42 U.S.C. 6903), (vi) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601 et seq. (42 U.S.C. 9601), or (vii) defined as a "regulated substance" pursuant to Subchapter IX, Solid Waste Disposal Act (Regulation of Underground Storage Tanks), 42 U.S.C. 6991 et seq. 9 10 19. RIGHT OF FIRST REFUSAL: In the event LANDLORD shall receive a bona fide written offer acceptable to LANDLORD from a third party to purchase the property, then LANDLORD shall by written notice to TENANT enclosing the details (except names) of such written bona fide offer, offer to TENANT the right to enter into a contract for the purchase of the property. TENANT shall have thirty (30) calendar days after mailing of such notice and offer in which to accept in writing such offer upon such terms and conditions specified therein. Upon acceptance of such offer by TENANT, LANDLORD and TENANT shall enter into a contract for the purchase of the property upon the terms and conditions specified in the notice and offer from LANDLORD to TENANT. Mailing of notice shall be by overnight courier service. In the event TENANT shall fail to accept the terms and conditions of sale during such thirty (30) day period, LANDLORD shall thereafter be free to sell the property upon the terms and conditions specified in the bona fide written offer made by such third party, provided that, if the sale of the property upon the terms and conditions specified in such bona fide written offer by such third party is not consummated within sixty (60) days after the mailing of the notice to TENANT provided by this Section 19, the premises may not be sold to any third party unless and until LANDLORD shall recommence the procedure provided by this Section 19 by again giving notice to TENANT as provided herein. 20. SEVERABILITY: The provisions of this Lease are severable in that should any provision be held to be illegal, invalid, or unenforceable by a court of competent jurisdiction, the legality, validity and enforceability of the other provisions herein shall not be affected, but they shall remain in full force and effect. 21. EMINENT DOMAIN: If the whole of the Premises shall be taken or condemned by any competent authority for any public use or purpose or if such portion thereof shall be taken or condemned as shall materially change the character of the Premises so as to prevent TENANT from using them in substantially 10 11 the same manner as theretofore used, the term hereby granted shall cease on the day prior to the taking of possession by such authority or the day prior to vesting of title in such authority, whichever first occurs, and an appropriate pro rata portion of any rent paid in advance by TENANT shall be refunded. If a portion of the Premises shall be condemned or taken, and if such taking does not result in a material alteration in the character of the Premises so as to prevent TENANT from using them in substantially the same manner as theretofore used, then this Lease shall continue in effect, and any damage to the Premises shall be repaired by LANDLORD. After the date taken, TENANT is required to surrender possession of the portion taken and the rental payable hereunder shall be reduced in proportion to the decrease in the fair rental value of the Premises. If all or a portion of the adjoining parking area shall be condemned or taken so as to deprive TENANT of necessary parking or so as to in some other way materially affect the TENANT's ability to conduct its business, then TENANT may at its option cancel and terminate this Lease upon giving LANDLORD notice within thirty (30) days of such taking. In the event TENANT shall elect not to cancel and remain in possession and occupation of the Premises, however, the terms and conditions of this Lease shall remain in full force and effect. The entire award of damages or compensation for a taking of the Premises, whether such taking be in whole or in part, shall belong to and be the property of LANDLORD, except for such compensation as may be made for TENANT's moving or relocation expenses, TENANT's business interruption losses, and for the taking of TENANT's trade fixtures, which compensation shall belong to and be the property of TENANT. If the Premises shall be taken or condemned by any governmental authority for temporary use or occupancy, this Lease shall continue in full force and effect without reduction or abatement of rent, and the rights of the parties shall be 11 12 unaffected by the other provisions of this Section. In the event of such temporary taking, the entire award of damages in respect of the Premises shall belong to TENANT; and LANDLORD assigns TENANT any and all interest it may have in such award. To the extent TENANT is prevented by such temporary taking or occupancy from fulfilling its obligations hereunder, TENANT's failure to do so shall not be deemed a default under this Lease. 22. ESTOPPEL LETTERS: Either party hereto shall, at any time and from time to time upon not less than ten (10) days prior written notice from the other execute, acknowledge and deliver to the requesting party a statement in writing certifying that this Lease is unmodified and in full force and effect (or if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect), and the dates to which the rental and other charges are paid in advance, if any, and acknowledging that there are not, to the certifying party's knowledge, any uncured defaults on the part of the other party hereunder, and that no event has occurred that, by the giving of notice or the passage of time or both, would constitute a default, or specifying such defaults or events if they are claimed. Any such statement requested by either party may be relied upon by any prospective purchaser or encumbrancer of [the building or] the Premises. Failure of a party to deliver such statement within such time shall be conclusive upon such party that this Lease is in full force and effect, without modification, except as may be represented by the requesting party, that there are no uncured defaults in the requesting party's performance, and that not more than one (1) month rental has been paid in advance. 23. LIENS: Nothing herein contained shall be construed as authorizing TENANT to incur any mechanic's lien or liens against the Premises for any work performed, labor, or other material furnished hereunder. If any lien shall be filed against the interests of LANDLORD or of TENANT in the Premises or asserted against any rent payable hereunder by reason of work, 12 13 labor, service or materials supplied or claimed to have been supplied on or to the Premises at the request of, or with the permission of TENANT, or any claiming under TENANT, TENANT shall, within thirty (30) days after notice of the filing thereof, or the assertion thereof, against such rents, cause the same to be discharged of record or effectively prevent the enforcement or foreclosure thereof against the Premises of such rent by contest payment, deposit, bond, order of Court or otherwise. 24. GOVERNING LAW: This Lease is governed by the laws of the State of Tennessee and exclusive jurisdiction for any litigation or arbitration arising out of same is in Maury County, Tennessee. 25. GENDER AND NUMBER/CAPTIONS: The words "LANDLORD" and "TENANT", and the pronouns referring thereto, shall be construed singular or plural, masculine, feminine or neuter as the facts warrant. The captions of the provisions of this Lease are provided for convenience only and shall not limit or extend the meaning or terms of any paragraph or section contained herein. 26. ENTIRE AGREEMENT: This Lease contains the entire agreement between the parties, and any agreement hereafter made shall be ineffective to change, modify or discharge it in whole or in part unless same is in writing and signed by the party against whom enforcement of the change, modification or discharge is sought. This Lease supersedes and voids all prior proposals, letters, and agreements, oral or written. This Lease shall be interpreted and construed in accordance with the laws of the State of Tennessee. IN WITNESS WHEREOF, the parties have set their signatures, in duplicate, on the day and date first above written. ----------------------------------- Bertrand L. Taylor LANDLORD Office Master of Texas, Inc. By_________________________________ 13 14 STATE OF COLORADO COUNTY OF ___________ Personally appeared before me, the undersigned, Bertrand L. Taylor, with whom I am personally acquainted, and who acknowledged that he executed the within instrument for the purposes therein contained. WITNESS my hand, at office, this _____ day of February, 1998. My commission expires: ______________________ ___________________________________ Notary Public STATE OF COLORADO COUNTY OF ____________ Personally appeared before me, the undersigned, ____________________________, with whom I am personally acquainted, and who acknowledged that he executed the within instrument for the purposes therein contained, and who further acknowledged that he is the ___________________ of Office Master of Texas, Inc., and is authorized by the makers to execute this instrument on behalf of the makers. WITNESS my hand, at office, this _____ day of February, 1998. My commission expires: ______________________ ______________________________________ Notary Public 14 EX-10.10 11 LEASE BETWEEN BARON HOMES, INC. & DAVID V. HOMME 1 EXHIBIT 10.10 STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE 1. BASIC PROVISIONS ("BASIC PROVISIONS"). 1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only, May __, 1998, is made by and between David V. Homme and Mary B. Homme, Trustees under Declaration of Trust dated June 17, 1976 ("Lessor") and Baron Homes, Inc., a California corporation ("Lessee"), (collectively the "Parties," or individually a "Party"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 1612 South Cucamonga Avenue, Ontario, located in the County of San Bernardino, State of California and generally described as a concrete tilt-up building containing approximately 54,000 square feet and approximately 7,900 square foot metal clad building on approximately 251, 577 square feet of land and an office building of approximately 4,500 square feet located in the front of the 54,000 square foot building ("Premises"). These buildings are located on Parcels B and C on the attached plot plan marked Exhibit "A". 1.3 TERM: Five years ("Original Term") commencing _______, 1998 ("Commencement Date") and ending January 31, 1997 ("Expiration Date"). (See Paragraph 3 for further provisions.) 1.4 EARLY POSSESSION: Not applicable. 1.5 BASE RENT: $13,500.00 per month payable on the first day of each month commencing on February 1, 1992 and ending on May 31, 1994; and $15,525.00 per month commencing on June 1, 1994 and ending on January 31, 1997 ("Base Rent"). (See Paragraph 4 for further provisions.) 1.6 BASE RENT UPON EXECUTION: $13,500.00 as payment of Base Rent for the period from the Commencement Date through February 29, 1992. 1.7 SECURITY DEPOSIT: $15,000 ("Security Deposit") to be paid at time of execution. (See Paragraph 5 for further provisions.) 1.8 PERMITTED USE: The premises shall be used and occupied by Lessee for sale, service and manufacturing of factory built housing and for no other purpose. (See Paragraph 6 for further provisions.) 1.9 INSURING PARTY: Lessor is the "Insuring Party." (See Paragraph 8 for further provisions.) 2. PREMISES. 2.1 LETTING: Lessor hereby leases to Lessee the premises as is. 2.2 CONDITION: Lessor shall deliver the Premises to Lessee as is on the Commencement Date. 2.3 Lessor does not warrant that any of the following were built to code or a permit taken out for such work: a) metal canopy; b) offices over the toilets; or c) two story offices inside the building. If it is required by any governmental agency that these be demolished or removed the rent payments will remain the same. 2.4 ACCEPTANCE OF PREMISES: Lessee hereby acknowledges: (a) that it has been advised by the Lessor and Lessee's Broker to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, fire sprinkler systems, fire department requirements, building department requirements, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems 2 necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 3. TERM. 3.1 TERM: The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION: If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease, however, (including but not limited to the obligations to pay Real Property taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 DELAY IN POSSESSION: If for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, or shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the Parties shall be discharged from all obligation hereunder; provided, however, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of not further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. RENT. 4.1 BASE RENT: Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall, within ten (10) days after written request therefor, deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Lessor shall not be required to keep all or any part of the -2- 3 Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. 6. USE. 6.1 USE: Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. 6.2 HAZARDOUS SUBSTANCES: (a) REPORTABLE USES REQUIRE CONSENT: The term "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, storage vessel, storage drum or storage container, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) DUTY TO INFORM LESSOR: If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, -3- 4 license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises, including but not limited to, all such documents as may be involved in any Reportable Uses involving the Premises. (c) INDEMNIFICATION: Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees and lenders, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank, storage vessel, storage drum or storage container brought onto the Premises by or for Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultants' and attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, storage vessels, storage drums or storage containers, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 LESSEE'S COMPLIANCE WITH LAW: Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "APPLICABLE LAW," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits and the requirements of any applicable government agencies, fire insurance underwriter or rating bureau, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 INSPECTION; COMPLIANCE: Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Law (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. -4- 5 7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES, FIRE EXTINGUISHERS AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS: (a) Subject to the provisions of Paragraphs 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises (including the structural and non-structural aspects thereof) and every par thereof in good order, condition and repair (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about, or adjacent to the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment and (ii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, and/or hand-held fire extinguishers (with inspections of same at least one time a year or as required; and (iii)roof coverage and drainage maintenance; (vi) asphalt and parking lot maintenance. 7.2 LESSOR'S OBLIGATIONS: Except for the warranties and agreements of Lessor contained in Paragraphs 9 (relating to destruction of the Premises) and 14 (relating to condemnation of the Premises), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, the improvements located thereon, or the equipment therein, whether structural or non-structural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of any needed repairs. 7.3 UTILITY INSTALLATION; TRADE FIXTURES; ALTERATIONS: (a) DEFINITIONS; CONSENT REQUIRED: The term "UTILITY INSTALLATIONS" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under -5- 6 the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof). Lessee is not allowed to cut holes in the walls or roof, put anything on the roof, or install any lift system or hang anything on the roof, roof structures, panelized system, beams, columns or walls without first receiving written permission and approval from one of the following: John A. Alexander Company (General Contractor) or one of these engineering firms: Oldham & Erickson Engineering or Brandow & Johnson, whichever is appropriate. All expenses incurred by the Lessor in reviewing this request for approval shall be paid by Lessee. (b) CONSENT: Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans and specifications, including weights/loads. Each page of these plans and specifications must have the signature and stamp of a California-licensed architect or engineer. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installation s by Lessee during the term of this lease shall be done in a good and workmanlike manner, with good and sufficient materials, using 5/8" drywall, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. (c) INDEMNIFICATION: Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any lien, claim or demand, then Lessee shall, at its sole expense, defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. 7.4 OWNERSHIP; REMOVAL; SURRENDER AND RESTORATION: (a) OWNERSHIP: Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee, to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) REMOVAL: Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have ben consented to by Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. -6- 7 (c) SURRENDER/RESTORATION: Lessee shall surrender the Premises by the end of the last day of the Lease term, option periods, hold-over periods, or extensions, or any earlier termination, date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. INSURANCE; INDEMNITY. 8.1 PAYMENT FOR INSURANCE: The Lessor shall be the Insuring Party, and, notwithstanding the fact that Lessor is the Insuring Party, Lessee shall pay for the cost of all insurance required under this paragraph 8, except Lessee shall not be required to pay for the cost attributable to liability insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the lease term shall be prorated to correspond to the lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. 8.2 LIABILITY INSURANCE: (a) CARRIED BY LESSEE: Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises Endorsement" and contain the "amendment of the Pollution Exclusion: for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of lessee's indemnity obligations under this Lese. The limits of said insurance require by this Lease or as carried by lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR: In the event Lessor is the Insuring Party, Lessor may also maintain liability insurance described in Paragraph 8.2(a) above, in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein and such liability insurance shall be at Lessor's sole cost and expense. 8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE: (a) BUILDING AND IMPROVEMENTS: The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lender(s)"), insuring loss or damages to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations shall be insured by -7- 8 Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $10,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1(c). (b) RENTAL VALUE: The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one (1) full year's loss of rental revenues from the date of such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) ADJACENT PREMISES: If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) TENANT'S IMPROVEMENTS: If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. If Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations. 8.4 LESSEE'S PROPERTY INSURANCE: 8.5 INSURANCE POLICIES: Insurance required hereunder shall be carried with companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least a B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. Lessor shall cause to be delivered to Lessee certified copies of policies of insurance or certificates evidencing the existence and amounts of such insurance required to be carried by Lessor under this Lease. Lessee shall cause to be delivered to Lessor certified copies of policies of insurance or certificates evidencing the existence and amounts of such insurance required to be carried by Lessee under this Lease. If Lessee does not promptly within seven (7) days provide Lessor with certified copies of or certificates evidencing the existence of policies of insurance required hereunder, then Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If Lessor shall fail to procure and maintain the insurance required to be carried by Lessor under this Paragraph 8, then Lessee may, but shall not be required to, procure and maintain the same, but at Lessee's expense. -8- 9 8.6 WAIVER OF SUBROGATION: Without affecting any other rights or remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 INDEMNITY: Except for Lessor's negligence and/or breach of express warranties Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees, or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY: Except as otherwise specifically provided herein, Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS: (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. -9- 10 (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. 9.2 PARTIAL DAMAGE - INSURED LOSS: If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less. 9.3 PARTIAL DAMAGE - UNINSURED LOSS: If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 TOTAL DESTRUCTION: Notwithstanding any other provision hereof, if a Premise's Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate immediately following the date of such Premise's Total Destruction. If the damage or destruction was caused by a negligent or willful act of Lessee this Lease shall terminate in one hundred twenty (120) days. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. 9.5 DAMAGE NEAR END OF TERM: If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("Exercise Period"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If lessee duly exercises such option during said Exercise period and provides lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term of provision in the grant of option to the contrary. -10- 11 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES: (a) In the event of damage described in Paragraph 9.2 (Partial Damage - Insured Loss), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed one year), shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph 9 shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 HAZARDOUS SUBSTANCE CONDITIONS: If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this lese as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right, within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this lese to the same extent s provided in Paragraph 9.6(a) for a period of not to exceed twelve months. 9.8 TERMINATION - ADVANCE PAYMENTS: Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been or is not then required to be, used by Lessor under the terms of this Lease. -11- 12 9.9 WAIVE STATUTES: Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 PAYMENT OF TAXES: (a) Lessee shall reimburse Lessor for all Real Property Taxes (as defined in Paragraph 10.2) which are applicable to the Premises during the term of this Lease. All such payments shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the tern hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. 10.2 DEFINITION OF "REAL PROPERTY TAXES:" As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in Applicable Law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 10.3 JOINT ASSESSMENT: If the Premises are not separately assessed, Lessee's liability shall be a equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. At this time, the Lessee's portion shall be sixty-eight percent (68%) of the Real Property Taxes. 10.4 PERSONAL PROPERTY TAXES: Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement together with a copy of the tax invoice, setting forth the taxes applicable to Lessee's property. Lessee is to pay all personal property taxes. 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. -12- 13 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED: (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of forty-nine percent (49%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of the execution by Lessor of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "NET WORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a noncurable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to fair market value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such breach and market value adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition), or one hundred ten percent (100%) of the price previously in effect, whichever is greater, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. (e) Any mortgage obligation, lien or loan, whether recorded or not, obtained or entered into by Lessee shall take a secondary position to any and all obligations and requirements of this Lease. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. -13- 14 (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent assignments or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to, the intended use and/or required modification of the Premises, if any, together with all necessary documents and accompanied with a nonrefundable deposit of $1,000 or ten percent (10%) of the current monthly Base Rent, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent.. Lessee shall furnish signed balance sheets, income statements, and tax returns for the proposed assignee or sublessee, for the past three (3) years, certified by proposed assignee or sublessee to be true and correct. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING: The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublease, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other -14- 15 charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH: A "Default" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance required under this lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of five (5) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, or (vi) the execution of any document requested under Paragraph 42 (easements), or (vii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor Lessee. -15- 16 (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (d), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. ss.101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any Applicable Law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee hereunder was materially false. 13.2 REMEDIES: If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all -16- 17 or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH: Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, as any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph shall not be deemed a waiver by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 LATE CHARGES: Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by the Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. -17- 18 13.5 BREACH BY LESSOR: Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total floor area of the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power and shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall promptly to the extent of its net severance damage received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. BROKER'S FEE. No Brokers are named in Paragraph 1.10 and there are no procuring causes of this Lease. 16. TENANCY STATEMENT. 16.1 Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "TENANCY STATEMENT" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. -18- 19 17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lese thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as herein above defined. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder, other than late charges, not received within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease and all exhibits and addenda attached hereto contain all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any Default or Breach hereof by either Party. 23. NOTICES. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail or overnight courier, with postage prepaid, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notices sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day. All notices sent must be evidenced by a signed receipt from the recipient. -19- 20 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. HOLDING OVER. If Lessee remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a quarter-to-quarter tenancy upon all of the provisions of this Lease pertaining to the obligations of Lessee, except that the rent payable shall be one hundred fifty percent (150%) of the rent payable immediately preceding the termination date of this Lease, and all options, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said quarter-to-quarter tenancy. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION: This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT: Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior Lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior Lessor, or (iii) be bound by prepayment of more than one (1) month's rent. -20- 21 30.3 NON-DISTURBANCE: With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the Lender that Lessee's possession and this Lease, including any Options granted hereby, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 SELF-EXECUTING: Subject to Paragraph 30.3 above, the agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein, subject to Lessee receiving the non-disturbance agreement as provided in Paragraph 30.3 above. 31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "Prevailing Party" shall include, without limitation, a Party who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party of its claim or defense. The attorney's fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to reasonable attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding, anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business provided that such signs are not larger than four (4) feet in width by eight (8) feet in length. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. -21- 22 36. CONSENTS. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Subject to paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee, require that the cost Lessor will incur shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. GUARANTOR. 37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each said Guarantor shall have the same obligations as Lessee under this Lease, including but not limited to the obligation to provide the Tenancy Statement and information called for by Paragraph 16. 37.2 It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and including in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signatures of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. OPTIONS. 39.1 DEFINITION: As used in this Paragraph 39 the word "Option" has the following meaning: the right or option to extend the term of this Lease or to renew this Lease. 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE: Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the -22- 23 intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 39.3 MULTIPLE OPTIONS: In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options to extend or renew this Lease has been validly exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS: (a) Lessee shall have no right to exercise an Option, notwithstanding any provisions in the grant of Option to the contrary (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). 40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care and cleanliness of the ground, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement, rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. AUTHORITY. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represent and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. -23- 24 46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. This Lease shall become binding upon Lessor and Lessee only after being fully executed by Lessor and Lessee and upon receipt by Lessor of the initial rent, security deposit and other consideration to be paid by Lessee upon execution of this Lease. 47. PROPERTY OWNED BY LESSOR. The following is a listing of property owned by the lessor: Telephone system, two air conditioning units that service the office building, seven bridge cranes with rails, one jib crane, built-in desks, shelves and cabinets in the office building, one spray booth, an one dust collector system. This property is being turned over to Lessee in excellent working condition and it is the responsibility of the Lessee to maintain the property and return the property in excellent condition. 48. AMENDMENTS: This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. The Parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's rights or obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 49. MULTIPLE PARTIES: Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such Multiple Parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. 50. ROOF ACCESS. With the exception of the following contractors, air conditioning contractors, electrical contractors, and roof/skylight maintenance companies employed pursuant to Paragraph 7.1 of this Lease, no one else is allowed to get on the roof of the building without first receiving Lessor's prior written permission. 51. OPTION TO EXTEND. (a) Lessor hereby grants to Lessee the option to extend the term of this Lease for a five (5) year period (the "Option Period") commencing when the prior term expires upon each and all of the following terms and conditions: (i) Lessee gives to Lessor, and Lessor actually receives, on a date which is prior to the date that the Option Period would commence (if exercised) by at least six (6) and not more than nine (9) months, a written notice (in accordance with the provisions of Paragraph 23) of the exercise of this option to extend this Lease for said additional term, time being of the essence. If said notification of the exercise of this option to extend is not so given and received, this option shall automatically expire; (ii) The provisions of Paragraph 39, including the provision relating to default of Lessee set forth in Paragraph 39.4 of this Lease are conditions of this option to extend; (iii) All of the terms and conditions of this Lease except where specifically modified by this option shall apply; (iv) Subject to increases pursuant to Paragraph 52, the monthly Base Rent for each month of the Option Period shall be calculated as follows: (a) As used herein, the term "C.P.I." shall mean the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for Urban Wage Earners and Clerical Workers, Los Angeles-Anaheim-Riverside, California (1982-84=100), "All Items," herein referred to as "C.P.I." -24- 25 (b) The rental amount of $15,525 shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month that is three (3) months prior to the month during which the Option Period commences and the denominator of which shall be the C.P.I. for the calendar month that is three (3) months prior to the month in which the original term commenced. Subject to increases pursuant to Paragraph 52, the sum calculated shall constitute the new monthly Base Rent during the Option Period, but, in no event, shall such new monthly Base Rent be less than the Base Rent payable for the month immediately preceding the commencement of the Option Period. (c) Pending receipt of the required C.P.I. and determination of the actual adjustment, Lessee shall pay an estimated adjusted rental, as reasonably determined by Lessor by reference to the then available C.P.I. information. Upon notification of the actual adjustment after publication of the required C.P.I., any overpayment shall be credited against the next installment of rent due, and any underpayment shall be immediately due and payable by Lessee. Lessor's failure to request payment of an estimated or actual rent adjustment shall not constitute a waiver of the right to any adjustment provided for in the Lease or this addendum. (d) In the event the compilation and/or publication of the C.P.I. shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculation. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said association and the decision of the arbitrators shall be binding upon the Parties. The cost of said arbitrators shall be paid equally by Lessor and Lessee. 52. OPTION. RENT ESCALATION. On the first day of the thirty-first month of the Option Period, the monthly Base Rent calculated pursuant to Paragraph 51 of this Lese shall be adjusted by increasing said rent by six percent (6%). 53. INTENTIONALLY OMITTED. 54. Amendments to Lease re Rent Adjustments 54.1 Upon the adjustment of the Base Rent payable as provided in this Lease, the Parties shall immediately execute an amendment to this Lease stating the new monthly rent payable. Lessor's failure to effectuate a rental adjustment on the date provided for shall not be deemed a waiver of the right to make that adjustment. 55. CONFIDENTIALITY. 55.1 Lessee shall not, without Lessor's prior written consent in each instance, disclose, disseminate or release by any means or methods copies, summaries or other reports concerning this Lease to parties other than legal counsel. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. -25- 26 The Parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. LESSOR: LESSEE: Executed at: Executed at: _____________________________________ ______________________________________ on __________________________________ on ___________________________________ by LESSOR: by LESSEE: DAVID V. HOMME & MARY B. HOMME, BARON HOMES, INC. TRUSTEES under Declaration of Trust dated June 17, 1976 By __________________________________ a _______________________ corporation DAVID V. HOMME By __________________________________ By ___________________________________ MARY B. HOMME Name Printed ______________________ Title______________________________ By ___________________________________ Name Printed ______________________ Title _____________________________ Address: ____________________________ Address: _____________________________ _____________________________________ ______________________________________ Tel. No. ____________________________ Tel. No. _____________________________ Title:_______________________________ Title: President Address:_____________________________ Address: _____________________________ -26- EX-10.11 12 LEASE BETWEEN RONFRAN INCORPORATION 1 EXHIBIT 10.11 AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET (Do not use this form for Multi-Tenant Property) 1. BASIC PROVISIONS ("BASIC PROVISIONS"). 1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only, March 27, 1997, is made by and between TOTH ENTERPRISES, a California general partnership ("LESSOR") and RONFRAN INCORPORATED d/b/a STANDARD PACIFIC INDUSTRIES, ("LESSEE"), (collectively the "PARTIES", or individually a "PARTY"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 9550 Hermosa Avenue, Rancho Cucamonga, located in the County of San Bernardino, State of California and generally described as (describe briefly the nature of the property) N/A ("PREMISES"). (See Paragraph 2 for further provisions.) 1.3 TERM: Five (5) years and 0 months ("ORIGINAL TERM") commencing March 27, 1997 ("COMMENCEMENT DATE") and ending March 31, 2002 ("EXPIRATION DATE"). (See Paragraph 3 for further provisions.) 1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE"). (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 BASE RENT: $20,000.00 per month ("BASE RENT"), payable on the first day of each month commencing March 27, 1997. (See Paragraph 4 for further provisions.) If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 BASE RENT PAID Upon the Commencement Date as Base Rent for the period beginning on the Commencement Date. 1.7 SECURITY DEPOSIT: $24,000 ("SECURITY DEPOSIT"). (See Paragraph 5 for further provisions.) 1.8 PERMITTED USE: Manufacturing of modular buildings and related offices (See Paragraph 6 for further provisions.) 1.9 INSURING PARTY. Lessor is the "INSURING PARTY" unless otherwise stated herein. (See Paragraph 8 for further provisions.) 1.10 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by N/A ("GUARANTOR"). (See Paragraph 37 for further provisions.) 1.11 ADDENDA. Attached hereto is an Addendum or Addenda consisting of Paragraphs 50 through 54 and Exhibits all of which constitute a part of this Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. - 1 - 2 2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning, heating, and loading doors, if any, in the Premises, and all other non-structural portions of the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense, unless such obligation is otherwise the responsibility of Lessor as provided herein, and in such case shall be promptly performed by Lessor at Lessor's sole cost and expense. 2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense, unless such obligation is otherwise the responsibility of Lessor as provided herein, and in such case shall be promptly performed by Lessor at Lessor's sole cost and expense. 2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has been advised to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease, or as otherwise set forth in that certain Stock Purchase Agreement dated as of December 6, 1996 by and among SPI Holdings, Inc., Frank Toth and Ronald Toth, as amended (the "Stock Purchase Agreement"), and the representations and warranties contained within the Stock Purchase Agreement relating to the Premises are hereby incorporated by reference into this Lease. 3. TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 4. RENT. 4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction (except as hereafter provided), on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. - 2 - 3 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall, within ten (10) days after written request therefor, deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. 6. USE. 6.1 USE Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee, Lessee's assignees or subtenants, and by prospective assignees and subtenants of the Lessee, its assignees and subtenants, for a modification of said permitted purpose for which the Premises may be used or occupied, so long as the same will not impair the structural integrity of the improvements on the Premises, the mechanical or electrical systems therein, is not significantly more burdensome to the Premises and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall, within five (5) business days, give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. 6.2 HAZARDOUS SUBSTANCES. (a) USES REQUIRING CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statue or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, - 3 - 4 use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises, including but not limited to, all such documents as may be involved in any Reportable Uses involving the Premises. If any Hazardous Substances in amounts or otherwise in violation of any Applicable Law are discovered on the Premises that were caused by Lessor, its agents, employees, contractors or invitees, Lessor shall promptly cause such Hazardous Substances to be removed in compliance with all Applicable Law at Lessor's sole cost and expense and shall indemnify, defend and hold Lessee harmless in connection therewith. In the event of a contamination not caused by Lessor, its agents, employees, contractors or invitees, the terms of Paragraph 9.7 below shall govern. (c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee, or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultants's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "APPLICABLE LAW" which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, - 4 - 5 easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within twenty (20) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times during normal business hours upon prior written notice for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.), 7.2 (Lessor's obligation to repair), 9 (damage and destruction) and 14 (condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair, and non-structural if such portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises, including, without limitation, the generality of the foregoing, all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior and exterior), non-structural portions of the roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks, and parkways located in, on, about, or adjacent to the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup - 5 - 6 of any contamination of, and for the maintenance, security and/or monitoring of the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment and (ii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection. 7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3 (relating to compliance with covenants, restrictions and building code), 9 (relating to destruction of the Premises) and 14 (relating to condemnation of the Premises), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, the improvements located thereon, or the equipment therein, whether structural or non-structural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of any needed repairs. Notwithstanding anything to the contrary in this Paragraph 7 or elsewhere in the Lease, Lessor shall keep, repair and maintain all structural portions of the buildings and improvements on the Premises, including, without limitation, structural walls and foundations in a good and operative condition at its sole cost and expense, except where these structural elements have been modified by Lessee, or its subtenants, employees or agents. Lessor shall also make all repairs or replacement to any underground utility lines or pipes. Lessor agrees to promptly commence any such necessary repairs, maintenance or replacements to the above-referenced portions of the Premises upon receipt of a written notice from Lessee of the need for such repairs, maintenance or replacements. Notwithstanding the foregoing, any repairs, maintenance or replacements necessitated by the negligence of Lessee, its agents or employees shall be made by Lessor at the expense of Lessee, to the extent not covered by insurance. 7.3 UTILITY INSTALLATION; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior - 6 - 7 of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during the term of this Lease as extended does not exceed Fifty Thousand dollars ($50,000.00). (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law, Lessee shall promptly upon completion thereof furnish Lesor with plans and specifications therefor. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and cost in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 OWNERSHIP; REMOVAL; SURRENDER AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee, to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) REMOVAL. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear and damage from casualty (not caused or otherwise the obligation of Lessee to repair as provided in Paragraph 9 below) and condemnation excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its - 7 - 8 obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good service practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. INSURANCE; INDEMNITY. 8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy periods commencing prior to, or extending beyond, the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage of liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party, Lessor may also maintain liability insurance described in Paragraph 8.2(a) above, in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein and such liability insurance shall be at Lessor's sole cost and expense. 8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lender(s)"), insuring loss or damages to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. If Lessor is the Insuring Party, - 8 - 9 however, Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1(c). (b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one (1) full year's loss of rental revenues from the date of such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. If Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations. 8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5, Lessee at is cost shall either by separate policy, or endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be at least eighty percent (80%) of the full replacement cost coverage. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations except in the event of a termination of this Lease and in such case Lessee shall retain the insurance proceeds and shall not replace such personal property or restore the Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least a B+, V, or other such rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such - 9 - 10 insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancellable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "Insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express warranties or breach of Lessor's obligations hereunder, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees, or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 LESSOR INDEMNITY. Except for Lessee's negligence and/or breach of express warranties or breach of Lessee's obligations hereunder, Lessor shall indemnify, protect, defend and hold harmless Lessee and its assigns, subtenants, agents and employees from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, attorneys' and consultants' fees, expense, and/or liabilities arising out of, involving , or in dealing with any act, omission or neglect of Lessor, its agents, contractors, employees and out of any Default or Breach by Lessor in the performance in a timely manner of any obligation on Lessor's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessee) litigated and/or reduced to judgment, and whether well-founded or not. In case any action or proceeding be brought against Lessee by reason of any of the foregoing matters, Lessor upon notice from Lessee shall defend the same at Lessor's expense by counsel reasonably satisfactory to Lessee and Lessee shall cooperate with Lessor in such defense. Lessee need not have first paid any such claim in order to be indemnified. - 10 - 11 8.9 EXEMPTION OF LESSOR FROM LIABILITY. Except for Lessor's negligence or a breach of its obligations hereunder, Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstance be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on or under the Premises. 9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance - 11 - 12 coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such case Lessor does not so elect, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within twenty (20) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessee's damages from Lessee except as released and waived in Paragraph 8.6. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last twelve (12) months of the initial term of this Lease, or during the last six (6) months of any option term, there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor or Lessee may, at their option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to the other party of such election to do so within thirty (30) days after the date of the occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("Exercise Period"), (i) exercising such option and (ii) providing Lessor with any shortage - 12 - 13 in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with the required funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event of damage described in Paragraph 9.2 (Partial Damage - Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues, shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. Notwithstanding anything contained in this Paragraph 9 to the contrary, in the event that following any damage or casualty to the Premises (except where caused by the negligence of Lessee, its agents or employees), Lessor has not substantially completed the repair, reconstruction or rebuilding of the Premises or if Lessee has not reopened for business within one hundred eighty (180) days from the date of casualty, Lessee may thereafter elect to cancel this Lease upon written notice to Lessor, and thereafter neither Party shall have any further obligation to the other. 9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to - 13 - 14 Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in paragraph 9.6(a) for a period of not to exceed twelve (12) months. 9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. 10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. Notwithstanding the foregoing, Lessee, as the tenant hereunder, shall have no obligation to pay any increase in Real Property Taxes, if any, attributable to a transfer or change in ownership of the Premises during the Lease term or any renewal term. - 14 - 15 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be a equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b). 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent, such consent not to be unreasonably withheld, conditioned or delayed. Notwithstanding anything to the contrary contained in Paragraph 12, Lessee may freely assign or sublet this Lease to Lessee's parent, subsidiary, successor, or any affiliate corporation or entity, to another corporation or entity by reason of a merger or consolidation, in connection with an asset or stock sale (whether it be a public or private sale), to another entity under the management or control of Lessee, or in connection with a public or private offering, without Lessor's prior written consent. (b) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent (unless, pursuant to Paragraph 12.1(a), such assignment or subletting does not require the consent of Lessor) shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c). (c) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and injunctive relief. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. - 15 - 16 (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. Lessee agrees to reimburse Lessor for such actual and reasonable costs paid by Lessor to third parties in connection with reviewing Lessee's requests for consent to assignment or subletting (when such consents are required under this Lease), such reimbursement to be made within thirty (30) days following Lessee's receipt of an itemized statement detailing the nature, payee and amount of such costs. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublease, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a - 16 - 17 written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises, provided, however, that Lessee shall not be in default in the event of such vacation or abandonment if Lessee shall maintain liability insurance (and provide Lessor with a satisfactory certificate of insurance) covering the vacated or abandoned Premises and shall pay any additional premium increase in Lessor's insurance policies required to be maintained hereunder attributable to such vacation or abandonment. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, where such failure continues for a period of ten (10) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (ii) a Tenancy Statement per Paragraphs 16 or 37, (iv) the subordination or non-subordination of this Lease per Paragraph 30, where any such failure continues for a period of twenty (20) days following written notice by or on behalf of Lessor to Lessee. - 17 - 18 (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b), or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. ss.101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee was materially false. 13.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that - 18 - 19 portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by the Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after written notice that such amount is due, provided that the first such late charge in any calendar year shall not be imposed until ten (10) days after written notice that such amount is past due (which ten (10) day period may run concurrently with a notice of default given to Lessee pursuant to Paragraph 13.1(b) above), then Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. - 19 - 20 13.4 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.4, a reasonable time shall in no event be less than thirty (30) days (or such shorter time period in the event of an emergency) after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. If Lessor fails to perform any obligation, after written notice and within the time period, as set forth herein, Lessee shall thereafter have the right to perform such obligation on behalf of Lessor and shall be entitled to deduct all reasonable out-of-pocket actual costs of performing such obligation from Base Rent and additional rent payable by Lessee hereunder; provided, however, that if Lessor has failed to perform any such obligation, such dispute shall be submitted to arbitration in accordance with Paragraph 54 of this Lease prior to Lessee exercising its right to deduct such costs pursuant to this sentence. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "CONDEMNATION"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within twenty (20) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent and all items of additional rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power and shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation awarded for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee may, at its option, participate with Lessor in any condemnation matter affecting the Premises. 15. BROKER'S FEE. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. - 20 - 21 16. TENANCY STATEMENT. 16.1 Each Party (as "RESPONDING PARTY") shall within twenty (20) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "TENANCY STATEMENT" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment the written assumption by such transferee of the Lessor's obligations hereunder (other than obligations or responsibilities related to or otherwise arising from the Stock Purchase Agreement), and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as herein above defined. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due either party hereunder, other than late charges, not received within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.3. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. NO PRIOR OR OTHER AGREEMENTS. Except with respect to the Stock Purchase Agreement, this Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. - 21 - 22 23. NOTICES. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. HOLD OVER BY LESSEE. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all of the provisions of this Lease. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. - 22 - 23 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. Subject to Paragraph 30.3 below, this Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the Lender in form reasonably acceptable to Lessee, that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Within thirty (30)) days after the mutual execution of this Lease, Lessor shall use its best efforts to provide such non-disturbance agreement for any Lender with a Security Device in place as of the date of this Lease. 30.4 SELF-EXECUTING. Subject to Lessee receiving the non-disturbance agreement as provided in Paragraph 30.3 above, the agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein, subject to Lessee receiving the non-disturbance agreement as provided in Paragraph 30.3 above. - 23 - 24 31. ATTORNEY'S FEES. If any Party brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include, without limitation, a Party who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party of its claim or defense. The attorney's fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to reasonable attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times during normal business hours upon prior written notice for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. 34. SIGNS. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Lessee shall not place any signs on the roof of any building on the Premises without Lessor's prior written consent, which consent may be withheld in Lessor's sole and absolute discretion. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. Wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessee agrees to reimburse Lessor for such actual and reasonable costs paid by Lessor to third parties in connection with reviewing Lessee's requests for consent, such reimbursement to be made within thirty (30) days following Lessee's receipt of an itemized statement detailing the nature, payee and amount of such costs. 37. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. - 24 - 25 38. OPTIONS. 38.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises; (c) the right to purchase the Premises or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises. 38.2 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options to extend or renew this Lease has been validly exercised. 38.3 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provisions in the grant of Option to the contrary (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 39.4(a). (c) All rights of lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of Default under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 39. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 40. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement, rights, dedication, map or restrictions. 41. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. - 25 - 26 42. AUTHORITY. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represent and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 43. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions 44. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 45. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. The Parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 46. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such Multiple Parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. - 26 - 27 The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. Executed at ___________________________ Executed at __________________________ on ____________________________________ on ___________________________________ by LESSOR: By LESSEE: SIERRA INVESTMENTS, WHITE CAP INDUSTRIES, CORP., a Nevada general partnership a California corporation By:____________________________________ By:_________________________________ Name:__________________________________ Name: Greg Grosch Title:_________________________________ Title: President Address: Address: 3120 Airway Avenue Costa Mesa, CA 92626 Tel No: (714) 850-0900 Fax No: (714) 850-1634 - 27 - 28 ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET This ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET ("Addendum") is made and entered into by and between TOTH ENTERPRISES, a California general partnership ("Lessor") and RONFRAN INCORPORATED d/b/a STANDARD PACIFIC INDUSTRIES ("Lessee"), as of the date set forth on the first page of that certain Standard Industrial/Commercial Single-Tenant Lease - Net ('Lease") between lessor and Lessee to which this Addendum is attached and incorporated. The terms, covenants and conditions set forth herein are intended to and shall have the same force and effect as if set forth in the Lease. To the extent the provisions of this Addendum are inconsistent with any provisions of the Lease, the Addendum shall supersede and control. 47. RENT INCREASES. Upon the anniversary date of the Commencement Date of the Original Term and every year thereafter (except for the first year of any option term which shall be determined pursuant to the provisions of Paragraph 1.3 of the Lease, or during any subsequent year of an option term if the appraisal provides that the Base rent should be held constant for one (1) or more years) the said monthly rental amount shall be adjusted as hereinafter provided, but in no event shall the monthly rent after the adjustment be less than the monthly rent paid immediately prior to the said adjustment. The adjustment shall be calculated in the following manner: multiply the monthly rent paid immediately prior to the adjustment by a fraction, which is the amount of increase by which the current Consumer Price Index has increased over the prior year's Consumer Price Index. The Consumer Price Index shall be the United States Department of Labor Consumer Price Index, All Items, Los Angeles-Riverside-San Bernardino area (1982-84 = 100). The current Consumer Price Index for the above fraction shall be the Index for the month immediately preceding the month of the rent adjustment. The prior year's Consumer Price Index shall be the Index for the twelfth (12th) month immediately preceding the current Consumer Price Index. If the Consumer Price Index is at any time hereafter no longer published, a comparable index generally accepted and employed by the U.S. Government shall be used. 48. LESSOR'S IMPROVEMENTS. Notwithstanding anything to the contrary set forth in the Lease, all improvements on the Premises as of the Commencement Date are hereby deemed to be the property of Lessor. 49. OPTION TO PURCHASE. Lessee shall have a right of first refusal during the Lease term or renewal term to purchase the Premises and Lessor shall not enter into a purchase contract or similar agreement for the Premises without given written notice to Lessor, as provided herein. At such time as Lessor is ready to sell the Premises, Lessor shall give written notice to Lessee ("Lessor's Notice") of the terms and conditions of the terms and conditions of such proposed purchase along with a photocopy of a bona fide offer and counteroffer, if any, duly executed by the prospective purchase and Lessor. Lessee shall have a period of fifteen (15) business days after receipt of the Lessor's Notice in which to elect to exercise its right of first refusal to purchase on the terms and conditions set forth in the Lessor's Notice. If Lessee does not exercise its right of first refusal, then Lessor may sell the Premises to the purchaser on the proposed terms and conditions set forth in Lessor's Notice. In the event Lessor does not consummate a sale with the proposed purchaser on the terms and conditions provided in Lessor's Notice (or on terms no more favorable to such purchaser) within five (5) months of Lessee's receipt of Lessor's Notice, this right of first refusal shall again apply in the manner set forth herein. Lessee's decision (or its deemed decision) not to exercise its right of first refusal following - 28 - 29 receipt of the Lessor's Notice shall not result in termination of or otherwise affect Lessee's option granted in Paragraph 54 hereunder. Lessor hereby grants to Lessee the exclusive right and option to purchase the Premises (including the existing cranes, crane ways, and other fixtures in the building) at any time after the second anniversary of the Commencement Date and prior to Expiration Date of the Lease, as may be extended. The Option shall be exercised, if at all, by written notice from Lessee to Lessor stating Lessee's unconditional election to acquire the Premises and all improvements (the "Option Notice"). Upon Lessee's delivery of the Option Notice, Lessor will be obligated to sell to Lessee and Lessee will be obligated to purchase from lessor at the Closing within ninety (90) days of the Option Notice, the Premises. The purchase price shall be determined by having the Lessor and Lessee each name one appraiser competent to appraise the value of the Premises and if the two appraisers cannot agree upon a value within (30) days, they shall appoint a third appraiser and the decision of the majority shall be binding upon all parties. The appraisers shall separately appraise the cranes for purposes of determining the Premises' fair market value. 50. CONDITIONS OF PREMISES. Notwithstanding anything to the contrary set forth in the Lease, and as a material inducement to the execution and delivery of the Lease by Lessor and the performance by Lessor of Lessor's duties and obligations thereunder, Lessee does hereby acknowledge, represent, warrant and agree to and with Lessor that Lessee is leasing the Premises in its current "AS-IS / WHERE IS condition "WITH ALL FAULTS" as of the Commencement Date, and neither Lessor nor any agent, or employee of Lessor has made any representation or warranty regarding the Premises (except as expressly set forth in the Lease, if at all), and Lessor (except as provided in Lease) has no obligation to repair or correct any fact, circumstances, conditions or facts regarding the Premises or to compensate Lessee for same. 51. ARBITRATION. Any and all disputes with respect to this Lease, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association by a panel of three arbitrators appointed pursuant to such Rules, and judgment upon the award rendered by such arbitrators may be entered in any court having jurisdiction. Such arbitrators shall not have the authority or power to reform, alter, amend or modify andy of the terms or conditions of this Lease or to enter an award which reforms, alters, amends or modifies such terms or conditions. The decision of such arbitrators shall be in writing, setting forth both findings of fact and of law, and shall be final and conclusive upon the parties; and no suit at law or in equity based on such dispute, controversy or claim shall be instituted by any party hereto, other than to enforce the award of such arbitrators. Such arbitration shall be conducted in Ontario, California, or in such other location as the parties thereto may agree. IN WITNESS WHEREOF, the parties hereto have executed this Addendum the date and year first above written. LESSOR LESSEE TOTH ENTERPRISES, RONFRAN INCORPORATED, a California general partnership a California corporation ___________________________________ ___________________________________ By: By: Its: Its: - 29 - EX-10.12 13 LEASE BETWEEN ARIZONA MILLWORK, INC. 1 EXHIBIT 10.12 AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET (Do not use this form for Multi-Tenant Property) 1. BASIC PROVISIONS ("BASIC PROVISIONS"). 1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only, August 29, 1997, is made by and between THE ROSENFIELD FAMILY TRUST ("LESSOR") and ARIZONA MILLWORK, INC., a Colorado corporation doing business as Rosewood Enterprises ("LESSEE"), (collectively the "PARTIES", or individually a "PARTY"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 5301 West Madison Avenue, located in the County of Maricopa, State of Arizona and generally described as (describe briefly the nature of the property) approximately 10 acres of land improved with a building containing approximately 40,000 square feet ("PREMISES"). (See Paragraph 2 for further provisions.) 1.3 TERM: Five (5) years and 0 months ("ORIGINAL TERM") commencing August 29, 1997 ("COMMENCEMENT DATE") and ending August 28, 2002 ("EXPIRATION DATE"). (See Paragraph 3 for further provisions.) 1.4 EARLY POSSESSION: ("EARLY POSSESSION DATE"). (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 BASE RENT: $16,300.00 per month ("BASE RENT"), payable on the first day of each month commencing March 27, 1997. (See Paragraph 4 for further provisions.) If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 BASE RENT PAID UPON EXECUTION: $ as Base Rent for the period 1.7 SECURITY DEPOSIT: -0- ("SECURITY DEPOSIT"). (See Paragraph 5 for further provisions.) 1.8 PERMITTED USE: Manufacture of modular buildings (See Paragraph 6 for further provisions.) 1.9 INSURING PARTY. Lessee is the "INSURING PARTY" unless otherwise stated herein. (See Paragraph 8 for further provisions.) 1.10 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by Donald Procunier and gail Procunier ("GUARANTOR"). (See Paragraph 35 for further provisions.) 1.11 ADDENDA. Attached hereto is an Addendum or Addenda consisting of Paragraphs N/A through N/A and Exhibits all of which constitute a part of this Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. -1- 2 2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning, heating, and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within thirty (30) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 6.3(a)) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 5.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 3. TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 4. RENT. 4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. -2- 3 5. USE. 5.1 USE Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. 5.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statue or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 5.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, -3- 4 concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises, including but not limited to, all such documents as may be involved in any Reportable Uses involving the Premises. (c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee, or under Lessee's control. Lessee's obligations under this Paragraph 5 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultants's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 5.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "APPLICABLE LAW" which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 5.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in Paragraph 7.3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 5.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. -4- 5 6. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 6.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.), 6.2 (Lessor's obligation to repair), 8 (damage and destruction) and 13 (condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair, and non-structural (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises, including, without limiting the generality of the foregoing, all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior and exterior), non-structural portions of the roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks, and parkways located in, on, about, or adjacent to the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. If Lessee occupies the Premises for seven (7) years or more, Lessor may require Lessee to repaint the exterior of the buildings on the Premises as reasonably required, but not more frequently than once every seven (7) years. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment and (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. 6.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3 (relating to compliance with covenants, restrictions and building code), 8 (relating to destruction of the Premises) and 13 (relating to condemnation of the Premises), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, the improvements located thereon, or the equipment therein, whether structural or non-structural, all of which obligations are intended to be that of the Lessee under Paragraph 6.1 hereof. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of any needed repairs. -5- 6 6.3 UTILITY INSTALLATION; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor as defined in Paragraph 6.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent which shall not be unreasonably withheld or delayed. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during the term of this Lease as extended does not exceed $25,000.00. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 6.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law, Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility installation and/or upon Lessee's posting an additional Security Deposit with lessor under Paragraph 36 hereof. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and cost in participating in such action if Lessor shall decide it is to its best interest to do so. -6- 7 6.4 OWNERSHIP; REMOVAL; SURRENDER AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 6.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee, to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per subparagraph 6.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) REMOVAL. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 7. INSURANCE; INDEMNITY. 7.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 7 except to the extent of the cost attributable to liability insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy periods commencing prior to, or extending beyond, the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. 7.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than -7- 8 $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage of liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. 7.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lender(s)"), insuring loss or damages to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 6.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1(c). (b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. If Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 7.3 shall insure Lessee Owned Alterations and Utility Installations. -8- 9 7.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 7.5, Lessee at is cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 7.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 7.4 and shall provide Lessor with written evidence that such insurance is in force. 7.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least a B+, V, or other such rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 7. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancellable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "Insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 7, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. 7.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 7. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 7.7 INDEMNITY. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees, or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. -9- 10 7.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstance be liable for injury to Lessee's business or for any loss of income or profit therefrom. 8. DAMAGE OR DESTRUCTION. 8.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 6.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 5.2(a), in, on or under the Premises. 8.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is an insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, the shortage in proceeds -10- 11 was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such case Lessor does not so elect, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 8.3 rather than Paragraph 8.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 8.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 12), Lessor may at Lessor's option, either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 8.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 7.6. 8.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of the occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("Exercise Period"), (i) exercising such option and -11- 12 (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 8.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event of damage described in Paragraph 8.2 (Partial Damage - Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b), shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 8 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 8.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 12), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days -12- 13 following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 8.6(a) for a period of not to exceed twelve months. 8.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 8, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 8.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 9. REAL PROPERTY TAXES. 9.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as defined in Paragraph 9.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 9.1(b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) ADVANCE PAYMENT. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option, upon a Default to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, either (i) in a lump sum equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency, if the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of the obligations of Lessee under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, subject to proration as provided in Paragraph 9.1(a), at the option of Lessor, be treated as an additional Security Deposit under Paragraph 5. -13- 14 9.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 9.3 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 9.1(b). 10. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. 11. ASSIGNMENT AND SUBLETTING. 11.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of the execution by Lessor of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to this Lessor may reasonably withhold its consent. "Net Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles consistently applied. -14- 15 (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a noncurable Breach, Lessor shall have the right to either; (i) terminate this Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to fair market rental value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Pending determination of the new fair market rental value, if disputer by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and market value adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition), or one hundred ten percent (110%) of the price previously in effect, whichever is greater, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. 11.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. -15- 16 (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the current monthly Base Rent, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) The occurrence of a transaction described Paragraph 11.1(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased to an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the amount required to establish such Security Deposit a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment structure of the rent payable under this Lease be adjusted to what is then the market value and/or adjustment structure for property similar to the Premises as then constituted. 11.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 12.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublease, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. -16- 17 (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 12. DEFAULT; BREACH; REMEDIES. 12.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $250.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said Default. A "DEFAULT" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 12.2 and/or 12.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with applicable law per Paragraph 5.3, (ii) the inspection, maintenance and service contracts required under Paragraph 6.1(b), (iii) the recission of an unauthorized assignment or subletting per Paragraph 11.1(b), (iv) a Tenancy Statement per Paragraphs 14 or 35, (v) the subordination or non-subordination of this Lease per Paragraph 28 (vi) the guaranty of the performance of Lessee's Default is such that more than thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 35, (vii) the execution of any document requested under Paragraph 39 (easements), or (viii) any other documentation or information which Lessor may reasonably required of Lessee under the terms of this Lease,, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. -17- 18 (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b), or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. ss.101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee was materially false when made. (g) If the performance of Lessee's obligations under this Lease is guaranteed; (i) the death of a guarantor, (ii) the termination of a guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the guarantors that existed at the time of execution of this Lease. 12.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 12.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of -18- 19 the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 12.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 12.1(b), (c) or (d). In such case, the applicable grace period under subparagraphs 12.1(b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 11 and 34 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 12.3 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by the Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to five percent (5%) of such overdue amount. The parties hereby agree that such late charge represents a fair and -19- 20 reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 12.4 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 12.4, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 13. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "CONDEMNATION"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power and shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation awarded for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 14. TENANCY STATEMENT. 14.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "TENANCY STATEMENT" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. -20- 21 14.2 If Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 15. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as herein above defined. 16. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 17. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 12.3. 18. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 19. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 20. NO PRIOR OR OTHER AGREEMENTS. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. 21. NOTICES. 21.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 21. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. -21- 22 21.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or certified mail. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 22. WAIVERs. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 23. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 24. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. 25. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 26. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 27. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 28. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 28.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of -22- 23 Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 28.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 28.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent. 28.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 28.4 SELF-EXECUTING. The agreements contained in this Paragraph 28 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 29. ATTORNEY'S FEES. If any Party brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include, without limitation, a Party who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party of its claim or defense. The attorney's fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to reasonable attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 30. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. -23- 24 31. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 32. SIGNS. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof and the right to install, and all revenues from the installation of, such advertising signs on the Premises, including the roof, as do not unreasonably interfere with the conduct of Lessee's business. 33. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 34. CONSENTS. (a) Except for Paragraph 31 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Subject to Paragraph 11.2(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Except as otherwise provided, any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor. 35. GUARANTOR. 35.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each said Guarantor shall have the same obligations as Lessee under this Lease, including but not limited to the obligation to provide the Tenancy Statement and information called for by Paragraph 16. -24- 25 35.2 It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and including in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signatures of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 36. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 37. OPTIONS. 37.1 DEFINITION. As used in this Paragraph 37 the word "OPTION" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises; (c) the right to purchase the Premises or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 37.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 37.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 37.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 12.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 12.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. -25- 26 (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 37.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three or more notices of Default under Paragraph 12.1 during any twelve month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 38. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 39. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement, rights, dedication, map or restrictions. 40. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 41. AUTHORITY. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represent and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 42. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions 43. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 44. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. The Parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. -26- 27 LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. Executed at _______________________________ Executed at _______________________ on ________________________________________ on ________________________________ by LESSOR: By LESSEE: THE ROSENFIELD FAMILY TRUST, ARIZONA MILLWORK, INC., a Colorado corporation doing business as Rosewood Enterprises By:_________________________________ By:________________________________ Name: Edith Rosenfield Name: Donald Procunier Title: Trustee Title: President Address: 5415 Nagle Avenue Address: 5301 West Madison Avenue Van Nuys, California 91401 Phoenix, Arizona 85043 Tel No: (818) 789-2999 Tel No: (602) 233-1903 (818) 786-6843 Fax No: (602) 233-9458 -27- 28 ADDENDUM TO LEASE The following shall constitute an Addendum (the "Addendum") to that certain Standard Industrial/Commercial Single-Tenant lease-Net (the "Lease") made August 29, 1997 by and between Phillip Rosenfield and Edith Rosenfield, as Trustees of The Rosenfield Family Trust ("Lessor") and Arizona Millwork, Inc., doing business as Rosewood Enterprises ("Lessee") with respect to those certain premises located at 5301 West Madison, Phoenix Arizona 85043 (the "Premises"). 49. INCORPORATION. This Addendum and the terms contained herein shall be incorporated into and constitute a part of the Lease with the same force and effect as if stated therein verbatim. All capitalized terms contained but not defined herein shall have the meanings ascribed to them in the Lease. In the event of a conflict between the Lease and this Addendum, this Addendum shall control. Except otherwise noted, references to "the Lease" contained either in the Lease or in this Addendum shall refer to the Lease and this Addendum. 50. ORIGINAL LEASE. Lessor and Lessee are currently parties to that certain Lease dated August 29, with respect to the Premises (the "Original Lease," and with this Lease, the "Leases"). The parties wish to terminate the Original Lease prior to its stated expiration date and to enter into this Lease in order to revise the terms of Lessee's leasing of the Premises from Lessor, but without affecting their relationship of landlord and tenant with respect to the Premises. The execution and delivery of this Lease is concurrent and simultaneous with the termination of the Original Lease for all purposes so that there is no gap whatsoever in the Lessee's right to possession of, and responsibility for, the Premises pursuant to the terms of the respective Leases. Notwithstanding the termination of the Original Lease, the Lessor retains all of the rights and remedies reserved to it thereunder with respect to any act, omission or circumstance arising during the term of the Original Lease, and nothing contained herein shall be deemed to constitute a release and/or waiver with respect to any such matter. The base rent and other amounts payable under the respective Leases shall be prorated between the Leases based on the length of the respective periods covered by such payments, as reflected on a schedule to be prepare and agreed to by the parties. 51. DELIVERY OF POSSESSION. Given the Lessee's prior and continuing possession and control of the Premises, the Lessor is making absolutely no representations and/or warranties with respect to the condition thereof or its compliance with any covenants, restrictions and building codes. Lessee acknowledges that by virtue of its possession and control thereof, it has had a full, complete and continuing opportunity to assess the condition of the Premises, and accepts it in its "as-is" condition. 52. RENT ESCALATION. Beginning in the fourth year of the Original Term (as defined in Paragraph 1.3 hereof) and continuing in each subsequent year of the Original Term and may Option Term thereafter (each, a "Subsequent Year"), the Base Rent shall be increased by the Initials ____ ____ -28- 29 percentage by which the Consumer Price Index for All Items, All Urban Consumers for the West Region (1982-1984=100) ("CPI") published by the United States Department of Labor, Bureau of Labor Statistics (the "Index") for the Comparison Month, as defined below, increases in comparison to the Index for the calendar month which is four (4) months prior to the first month of the Original Term (the "Base Month"). The Index for the Base Month shall be compared with the Index for the same calendar month for each Subsequent Year ("Comparison Month"). If the Index for any Comparison Month is higher than the Index for the Base Month, then the Base Rent for each Subsequent Year following such Comparison Month shall be increased with the first month of such Subsequent Year, over the Base Rent payable during the first year of the Original Term, by a percentage which shall be calculated by dividing the Index for the Base Month into that number which represents the difference between the Index for the Base Month and the Index for such Comparison Month. In no event shall the Base Rent for any Subsequent Year be less than the Base Rent payable during the previous year of the Original Term. By way of illustration only, the Base Rent payable for the first year of the Original Term shall be $16,300. If the Original Term begins on August 1, 1997, the Base Month shall be April 1997. For purposes of illustration, this example will assume the Index for such month is 161.1. In calculating the Base Rent for the second year of the Original Term, the Index for the Base Month will then be compared with the Index for the Comparison Month of April 1998. This illustration will assume that Index to be 169. Since the Index for the Comparison Month is four and nine-tenths percent (4.9%) higher than the Index of the Base Month, the Base Rent commencing on August 1, 1998 would be four and nine-tenths percent (4.9%) higher than the Base Rent Index, or publish the same less frequently, or alter the same in some other manner, then Lessor shall adopt a substitute index or substitute procedure which reasonably reflects and monitors consumer prices. 53. OPTION TO EXTEND TERM. Lessor hereby grants to Lessee an option (the "Option") to extend the term of this Lease for a period of five (5) years from the Expiration Date ("Option Term"). In addition to the terms and conditions set out in the Lease (including specifically, but without limitation, Section 37 thereof) exercise of the Option is subject to the following conditions: a. The Option must be exercised, if at all, by written notice (the "Option Notice") delivered by Lessee to Lessor not later than nine (9) months prior to the end of the Original Term. b. Provided Lessee has properly and timely exercised the Option, the term of the Lease shall be extended by the Option Term, and all terms, covenants and conditions of the Lease shall remain unmodified and in full force and effect (other than paragraph 37 relating to the granting of Options and paragraph 1.6 relating to Base Rent). The Base Rent for the Option Term shall be calculated in accordance with the rent escalation provisions set forth in paragraph 52 hereof. Initials ___ ___ -29- 30 54. RIGHT TO TERMINATE. Provided the following conditions are satisfied, the Lessee shall have the right to terminate this Lease on at least six (6) months prior written notice to the Lessor: a. The Lessee shall have paid to the Lessor all principal, interest and other charges due under the Note, as hereinafter defined; b. Any such exercise shall be conditioned upon an absence of any Default, in the manner described in Paragraph 37.4; and c. The Lessee shall not have exercised its Option, as hereinafter defined, to extend the term of the Lease. 55. RIGHT OF FIRST REFUSAL. In the event that the Lessor shall wish to sell the Premises or any interest therein to any third party (other than a transaction to a person or persons or to an entity related to the Lessor), the Lessee shall have a right of first refusal to purchase the Premises on the same terms and conditions. Within ten (10) days following its acceptance of a written offer to purchase the Premises, the Lessor shall transmit a complete copy of said offer to the Lessee. The Lessee shall have ten (10) days following its receipt of said offer to notify the Lessee of its intention to complete the acquisition of the Premises on the same terms and conditions, and sixty (60) days thereafter to complete the acquisition. 56. LESSOR'S SALE OF PREMISES. Subject to the right of first refusal granted to Lessee pursuant to Section 55 hereof, the Lessor shall have the right to sell, exchange or transfer the Premises and all or any part of its interest therein (collectively, a "Transfer") at any time. In the event of a Transfer, Tenant agrees to recognize and attorn to the transferee, as lessor hereunder, and Lessor shall be and is hereby entirely freed and relieved of all liability under any and all of its covenants and obligations contained in or derived from this Lease, provided that (a) the interest of the Lessor in any funds then in the hands of the Lessor in which Lessee has an interest shall be turned over, subject to such interest, to the then transferee, and (b) notice of such Transfer shall be given to Lessee as required by law. A holder of a mortgage, deed of trust or other encumbrance to which this Lease is or may be subordinate shall only be responsible for the Security Deposit to the extent that such holder shall have actually received the Security Deposit or a portion thereof. 57. GUARANTEE. Donald Procunier and Gail Procunier ("Guarantors") are guaranteeing performance of all of the obligations of the Lessee under this Lease. To evidence that obligation, the Guarantors are concurrently delivering to the Lessor its guarantee of even date herewith (the "Guarantee"). Pursuant to the Guarantee, the Guarantors are also guaranteeing the obligations of the Lessee as Maker under that certain Secured Promissory Note of even date herewith in favor of Lessor as Holder in the original principal amount of $1,000,000 (the "Note"). 58. CROSS DEFAULT. In addition to (but not in limitation of) all of the rights and remedies of the Lessor hereunder, at the option of the Lessor, a Default under the terms of this Lease shall constitute an Event of Default under one or more of the Transaction Documents, as hereinafter Initials ___ ___ -30- 31 defined, enabling the Lessor, at its option, to exercise all of its rights and remedies thereunder. Additionally, at the option of Lessor, an Event of Default under any of the Transaction Documents, as hereinafter defined, shall constitute a Default under this Lease, enabling the Lessor, at its option, to exercise all of its rights and remedies hereunder. The term "Transaction Documents" shall mean the Note, the Guarantee, that certain Security Agreement of even date herewith by and between the Lessor as Secured Party and the Lessee as Debtor. 59. INSURANCE REQUIREMENTS. The Lessor and Lessee may modify the insurance requirements of the Lease from time to time in a writing executed by both parties. "Lessor" THE ROSENFIELD FAMILY TRUST By: ________________________________ Phillip Rosenfield, Trustee THE ROSENFIELD FAMILY TRUST By: ________________________________ Edith Rosenfield, Trustee "Lessee" ARIZONA MILLWORK, INC. a Colorado corporation doing business as Rosewood Enterprises By: ________________________________ Donald Procunier, President Initials ___ ___ -31- 32 SEE AMENDMENTS TO LEASE CONTAINED IN SECTIONS 4, 5 AND 6. CONSENT OF LANDLORD TO CHANGE OF CONTROL OF ROSEWOOD This CONSENT OF LANDLORD TO CHANGE OF CONTROL OF ROSEWOOD (this "Agreement") effective as of the 17" day of April, 1998, by and between ROSEWOOD ENTERPRISES, INC., an Arizona corporation formerly known as ARIZONA MILLWORK, INC. ("Rosewood") and THE ROSENFIELD FAMILY TRUST (the "Lessor") (Rosewood and Lessor are sometimes hereinafter referred to collectively as the "Parties"). RECITALS WHEREAS, on the date of this Agreement the shareholders of Rosewood are selling their shares of Rosewood stock to SPI Manufacturing, Inc., a California corporation (the "SPI"); WHEREAS, following such sale, SPI intends to operate Rosewood as a wholly owned subsidiary of SPI, and intends to continue the operations conducted on the premises located at 5301 West Madison Avenue, Phoenix, Arizona (the "Premises") leased by Rosewood under that certain Standard Industrial/Commercial Single-Tenant Lease-Net, dated August 29, 1997 (the "Lease"), by and between the Lessor and Rosewood; and WHEREAS, pursuant to Section 11. 1 (b), a transfer of twenty-five percent (25%) or more of the voting control of Rosewood constitutes an assignment under the Lease requiring the consent of Lessor. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: 1. Lessor hereby consents to the assignment of the Lease resulting from the change in control of Rosewood described in the recitals to this Agreement. 2. Lessor hereby certifies for the benefit of SPI and Rosewood: (a) Lessor is the fee owner of the Premises, which are leased to Rosewood; (b) The Premises are occupied by Rosewood pursuant to the Lease, with lease terms and provision for rental payments, including any rental increases and deferred rent, as indicated on Exhibit A; (c) Rosewood took possession of the Premises covered by the Lease on the date shown on Exhibit A; -32- 33 (d) To Lessor's knowledge, as of the date of this Agreement, Rosewood has fully performed its obligations under the Lease, including payment of all rent which has come due; there are no remaining conditions to Lessor's obligations under the Lease; to Lessor's knowledge, no default or event of default has occurred in Rosewood's obligations under the Lease; Lessor claims no offsets or charges against Rosewood or defenses to enforcement of the Lease; and Rosewood has not prepaid rentals more than one month in advance; (e) To Lessor's knowledge, as of the date of this Agreement, the existing a plumbing, roofing, fire sprinkler system, lighting, heating, and air conditioning in the Premises are in good operating condition. (f) To Lessor's knowledge, as of the date of this Agreement, all improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Effective Date. (g) As used in this Agreement, the following terms shall have the following meanings: (1) "Hazardous Materials" means any dangerous, toxic or hazardous pollutant, contaminant, chemical, waste, material or substance, including but not limited to gasoline, diesel fuels, waste oils or other petroleum products, as defined in or governed by any federal, state or local law, statute, code, ordinance, regulation, rule or other requirement relating to such substance or otherwise relating to the environment or human health or safety. including, without limitation, any waste, material, substance, pollutant or contaminant (including but not limited to gasoline, diesel fuels, waste oils or other petroleum products) that might cause any injury to human health or safety or to the environment or might subject the Company to any imposition of costs or liability under any Environmental Law. (2) "Environmental Laws" means all applicable federal, state, local and foreign laws, rules, regulations, codes, ordinances, orders, decrees, directives, permits, licenses and judgments relating to pollution, contamination or protection of the environment (including. without limitation, all applicable federal, state, local and foreign laws, rules, regulations, codes, ordinances, orders, decrees, directives, permits, licenses and judgments relating to Hazardous Materials in effect as of the date of this Agreement). (3) "Release" shall mean the spilling, leaking, disposing, discharging, emitting, depositing, ejecting, leaching, escaping or any other release or threatened release, however defined, whether intentional or unintentional, of any Hazardous Material. (h) Lessor has reviewed the Phase I Environmental Site Assessment Report dated April 1998 pertaining to the Premises. (i) To Lessor's knowledge, as of the date of this Agreement, the Premises are in compliance with all applicable Environmental Laws. -33- 34 (j) The Lessor has obtained, and maintained in full force and effect, all environmental permits, licenses, certificates of compliance, approvals and other authorizations necessary to own the Premises ("Environmental Permits"). To Lessor's knowledge, activities conducted on the Premises have been in compliance with all terms and conditions of the Environmental Permits and Lessor has filed all reports and notifications required to be filed under and pursuant to all applicable Environmental Laws. (k) To Lessor's knowledge, no Hazardous Materials are located on the Premises, or have been generated, treated, contained, handled, located, used, manufactured, processed, buried, incinerated, deposited, stored, or released on, under or about any part of the Premises or the Ancillary Properties, (ii) the Premises and any improvements thereon, contain no asbestos, urea formaldehyde, radon at levels above natural background, polychlorinated biphenyls (PCBs) or pesticides, and (iii) no aboveground or underground storage tanks are located on, under or about the Premises or have been located on, under or about the Premises and then subsequently been removed or filled. If any such storage tanks exist on, under or about the Premises, such storage tanks have been duly registered with all appropriate governmental entities and are otherwise in compliance with all applicable Environmental Laws. (l) Lessor has not received, nor to Lessor's knowledge is there proposed, threatened or anticipated with respect to the Premises, any notice, demand, request for information, complaint, summons, investigation, order, agreement or litigation alleging in any manner that the Lessor is, or might be potentially responsible for, any Release of Hazardous Materials, or any costs arising under or violation of Environmental Laws. There is no condition on the Premises which is in violation of any applicable governmental requirements relating to Hazardous Materials. (m) The Premises are not and have not been listed on the United States Environmental Protection Agency National Priorities List of Superfund Sites, or any other list, schedule, law, inventory or record of hazardous or solid waste sites maintained by any federal, state or local agency, and Lessor is not and has not been designated as a "potentially responsible party" with respect to any such sites, to Lessors knowledge. (n) To Lessor's knowledge, no part of the Premises has been used as a landfill, dump or other disposal, storage, transfer, handling or treatment area for Hazardous Materials, or as a gasoline service station or a facility for selling, dispensing, storing, transferring, disposing or handling petroleum and/or petroleum products. (o) To Lessor's knowledge, there are no wells of any nature currently located, or previously located. on or in the Premises and no water or soil sampling, testing or analysis has been conducted on or for the benefit of the Premises. 3. The foregoing representations are made by Lessor with the knowledge and understanding that Rosewood and SPI will rely upon the accuracy and completeness thereof, and Lessor acknowledges that it will be bound by these representations. 4. The Lease is hereby amended by deleting the last sentence of Section 8.8. -34- 35 5. The Lease is hereby amended to provide that any consent required under Section 12 shall not be unreasonably withheld by Lessor. 6. The Lease is hereby amended by deleting Section 54. 7. This Agreement shall be binding on and inure to the benefit of the Parties hereto, their respective heirs, executors, administrators, beneficiaries, successors in interest and assigns. 8. This Agreement may be executed in one or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together will constitute one and the same instrument. 9. This Agreement shall be governed by the substantive laws of the State of California. IN WITNESS WHEREOF, the Parties have executed this Agreement on the day and year first above written. ROSEWOOD ENTERPRISES, INC. formerly known as ARIZONA MILLWORK, INC. By: __________________________________ Name: Ronald R. Procunier Title: President THE ROSENFIELD FAMILY TRUST By: __________________________________ Name: Phillip Rosenfield Title: Trustee By: __________________________________ Name: Edith Rosenfield Title: Trustee -35- EX-23.1 14 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 The Board of Directors Modtech, Inc.: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the Joint Proxy Statement/Prospectus. KPMG Peat Marwick LLP Orange County, California October 26, 1998 EX-23.2 15 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Orange County, California October 26, 1998 EX-27 16 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1997 DEC-31-1997 11,628,851 0 37,531,132 0 3,931,505 56,593,962 16,012,812 4,783,649 68,220,257 20,177,338 0 0 0 48,042,919 0 68,220,257 134,050,485 134,050,485 107,367,035 107,367,035 5,155,987 0 1,004,198 20,710,919 7,702,634 13,008,285 0 0 0 13,008,285 1.47 1.31
EX-99.1 17 FORM OF MODTECH, INC PROXY 1 EXHIBIT 99.1 MODTECH, INC. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned stockholder of Modtech, Inc. ("Modtech") hereby appoints Evan M. Gruber and Michael G. Rhodes as attorneys, agents, and proxies of the undersigned, with full power of substitution in each of them, to vote, in the name and on behalf of the undersigned at the Special Meeting of Stockholders (the "Special Meeting") of Modtech to be held on December __, 1998 at 10:00 a.m., at the Sheraton Newport Hotel, 4545 MacArthur Boulevard, Newport Beach, California 92660, and at all adjournments thereof, all of the shares of Common Stock of Modtech which the undersigned would be entitled to vote if personally present, with all powers the undersigned would possess if personally present. PROPOSAL: To approve and adopt the Agreement and Plan of Reorganization and Merger, dated September 28, 1998 (the "Merger Agreement"), by and between Modtech and SPI Holdings, Inc., a Colorado corporation, and to approve the transactions contemplated thereby, including the merger of Modtech with Modtech Sub, Inc., a Delaware corporation. [ ] FOR [ ] AGAINST [ ] ABSTAIN The undersigned hereby acknowledge receipt of the Notice of Special Meeting and the Joint Proxy Statement/Prospectus (the "Proxy Statement") dated ___________, 1998 relating to the Special Meeting. ALL SHARES WILL BE VOTED AS SPECIFIED. IF THE PROXY IS SIGNED AND SENT BUT NO CHOICE IS SPECIFIED, THE SHARES WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. SHARES WILL BE VOTED AT THE DISCRETION OF THE PROXY HOLDERS AS TO ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE MEETING FOR WHICH DISCRETIONARY AUTHORITY MAY BE GRANTED. PROXIES NOT RECEIVED OR VOTES TO ABSTAIN WILL BE TREATED AS VOTES AGAINST THE PROPOSALS. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER HEREIN SPECIFIED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR APPROVAL OF THE PROPOSED MERGER AND IN ACCORDANCE WITH THE DISCRETION OF THE PROXIES ON ANY OTHER MATTERS TO COME BEFORE THE ANNUAL MEETING. Please sign exactly as your name appears below, date and return this card promptly using the enclosed envelope. Executors, administrators, guardians, officers of corporations, and others signing in a fiduciary capacity should state their full titles as such. Dated _______________________, 1998 ___________________________________ Signature ___________________________________ Signature (if held jointly) WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE URGED TO MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY, USING THE ENCLOSED ENVELOPE. EX-99.2 18 FORM OF SPI, HOLDINGS, INC. PROXY 1 EXHIBIT 99.2 SPI HOLDINGS, INC. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned stockholder of SPI Holdings, Inc. ("SPI") hereby appoints Patrick Van Den Bossche and Ronald West as attorneys, agents, and proxies of the undersigned, with full power of substitution in each of them, to vote, in the name and on behalf of the undersigned at the Special Meeting of Stockholders (the "Special Meeting") of SPI to be held on December __, 1998 at 10:00 a.m., at 9550 Hermosa Avenue, Rancho Cucamonga, California 91730, and at all adjournments thereof, all of the shares of Common Stock and Preferred Stock of SPI which the undersigned would be entitled to vote if personally present, with all powers the undersigned would possess if personally present. PROPOSAL: To approve and adopt the Agreement and Plan of Reorganization and Merger, dated September 28, 1998 (the "Merger Agreement") by and between SPI and Modtech, Inc., a California corporation, and to approve the transactions contemplated thereby, including the merger of SPI with SPI Sub, Inc., a Delaware corporation. [ ] FOR [ ] AGAINST [ ] ABSTAIN The undersigned hereby acknowledge receipt of the Notice of Special Meeting and the Joint Proxy Statement/Prospectus (the "Proxy Statement") dated ___________, 1998 relating to the Special Meeting. ALL SHARES WILL BE VOTED AS SPECIFIED. IF THE PROXY IS SIGNED AND SENT BUT NO CHOICE IS SPECIFIED, THE SHARES WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. SHARES WILL BE VOTED AT THE DISCRETION OF THE PROXY HOLDERS AS TO ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE MEETING FOR WHICH DISCRETIONARY AUTHORITY MAY BE GRANTED. PROXIES NOT RECEIVED OR VOTES TO ABSTAIN WILL BE TREATED AS VOTES AGAINST THE PROPOSALS. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER HEREIN SPECIFIED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR APPROVAL OF THE PROPOSED MERGER AND IN ACCORDANCE WITH THE DISCRETION OF THE PROXIES ON ANY OTHER MATTERS TO COME BEFORE THE ANNUAL MEETING. Please sign exactly as your name appears below, date and return this card promptly using the enclosed envelope. Executors, administrators, guardians, officers of corporations, and others signing in a fiduciary capacity should state their full titles as such. Dated _______________________, 1998 ___________________________________ Signature ___________________________________ Signature (if held jointly) WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE URGED TO MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY, USING THE ENCLOSED ENVELOPE. -----END PRIVACY-ENHANCED MESSAGE-----