-----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, JnFOLbbvtURc0fYw3QsJ9JWVa/dC6Vb+uhN1K0WwA2P4hr+BdgMq+V0LkGB5FtMS lGOoFf+dG+wsbKXTkId6wA== 0000892569-99-000999.txt : 19990416 0000892569-99-000999.hdr.sgml : 19990416 ACCESSION NUMBER: 0000892569-99-000999 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 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: 10-K SEC ACT: SEC FILE NUMBER: 000-25161 FILM NUMBER: 99594099 BUSINESS ADDRESS: STREET 1: 2830 BARRETT AVE STREET 2: PO BOX 1240 CITY: PERRIS STATE: CA ZIP: 92571 BUSINESS PHONE: 9099434014 MAIL ADDRESS: STREET 1: 4675 MACARTHUR CT., STREET 2: SUITE 710 CITY: NEWPORT STATE: CA ZIP: 92660 10-K 1 FORM 10-K FOR FISCAL YEAR ENDED 12/31/1998 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended DECEMBER 31, 1998 [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from N/A to N/A ----- ----- Commission File No. 0-25161 MODTECH HOLDINGS, INC. Successor Registrant to Modtech, Inc. (Exact name of registrant as specified in its charter) DELAWARE 33-0825386 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2830 BARRETT AVENUE, PERRIS, CALIFORNIA 92572 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (909) 943-4014 ------------------------ Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 31, 1999 was $60,999,696. As of March 31, 1999, shares entitled to cast an aggregate of 12,622,158 votes were outstanding, including 12,622,158 shares of registrant's Common Stock. Certain portions of the registrant's definitive proxy statement to be filed not later than 120 days after the end of the fiscal year covered hereby are incorporated by reference in Part III of this Form 10-K report. 2 PART I Item 1. BUSINESS GENERAL The Company designs, manufactures, markets and installs modular relocatable classrooms and other modular buildings for commercial use. Based upon 1997 net sales, the Company believes that it is the largest manufacturer of modular relocatable classrooms in California. The Company's classrooms are sold primarily to California school districts and to third parties and the State of California principally for lease to California's school districts. The Company's products include standardized classrooms, as well as customized structures for use as libraries, gymnasiums, computer rooms and bathroom facilities. The Company believes that its modular structures can be substituted for virtually any part of a school. The Company's products are engineered and constructed in accordance with structural and seismic safety specifications adopted by the California Department of State Architects which regulates all school construction on public land, standards which are more rigorous than the requirements for other portable units. As a result of net enrollment increases in California schools and budgetary constraints experienced by the State of California which limited the availability of funds for the addition of new classrooms over the last few years prior to 1996, California's schools are reported to be among the most crowded in the nation. As the State budget deficit has ameliorated, the legislature has increased funding for new classrooms in an effort to reduce the average number of students per class. State funding initiatives include funds from both (i) the State's operating budget, such as the $200 million allocated for construction or addition of classrooms out of the total of $822 million spent under the Class Size Reduction Program for the 1996-1997 school year and the $1.5 billion allocated for the 1997-1998 school year for both general operations and school facilities, and (ii) the sale of statewide bond issues, such as the $9.2 billion bond issue for school construction, including the addition of classrooms which was approved in November 1998. See "Business -- Legislation and Funding." These factors have combined to increase the demand for modular relocatable classrooms, which cost significantly less and take much less time to construct and install than conventional school facilities, and which permit a school district to relocate the units as student enrollments shift. In addition, the Company's products provide added flexibility to school districts in financing the costs of adding classroom space, since modular relocatable classrooms are considered personal property which can be financed out of a district's operating budget in addition to its capital budget. In recognition of these advantages, California legislation currently requires, with certain exceptions, that 20% of all classroom space in the district, not just new space added, consists of relocatable classrooms. See "Business -- Legislation and Funding." SPI MERGER. On February 16, 1999, Modtech, Inc. ("Modtech" or the "Company") and SPI Holdings, Inc., a Colorado corporation ("SPI") merged pursuant to the Agreement and Plan of Reorganization and Merger, dated as of September 28, 1998 (the "Merger Agreement"), between Modtech and SPI. SPI is a designer, manufacturer and wholesaler of commercial and light industrial modular buildings. Pursuant to the Merger Agreement, SPI merged with a subsidiary of Modtech Holdings, Inc. ("Holdings"), a newly formed Delaware corporation (the "SPI Merger"). Concurrently, Modtech merged with a separate subsidiary of Holdings (the "Modtech Merger"). Pursuant to the mergers, both SPI and Modtech became wholly owned subsidiaries of Holdings. The SPI Merger will be accounted for by the purchase method of accounting. In connection with the SPI Merger, SPI stockholders received approximately $8 million in cash and approximately 4.3 million shares of Holdings Common Stock. Holdings refinanced approximately $32 million of SPI debt. In connection with the Modtech Merger, Modtech stockholders received approximately $40 million in cash, approximately 8.3 million shares of Holdings Common Stock and 388,939 shares of Holdings Series A Preferred Stock. In connection with both mergers, Holdings incurred a total of approximately $51 million of debt. See "Selected Financial Data -- Unaudited Pro Forma Combined Financial Statements." COASTAL ACQUISITION. On March 22, 1999, Holdings purchased 100% of the stock of Coastal Modular Buildings, Inc. ("Coastal"). Coastal designs and manufactures modular relocatable classrooms and other modular buildings for commercial use. Coastal is based in St. Petersburg, Florida. The acquisition will be accounted for by the purchase method of accounting. INDUSTRY OVERVIEW In recent years, the growth in population in California, both from births and from immigration, has led to increasing school enrollments. As a result, classrooms in many California school districts currently are reported to be among the most crowded in the nation, with an average of 29 students per class compared to a national average class size of 17. The California Department of Finance has estimated that student enrollment in grades kindergarten through 12 will increase by approximately 18% over the period from 1995 through 2005. Additionally, changes in population demographics have left many existing permanent school facilities in older residential areas with excess capacity due to declining enrollments, while many new residential areas are faced with a continuing shortage of available classrooms. Consequently, it has become necessary to add additional classrooms at many existing facilities, and to build a number of new schools. 2 3 The construction of new schools and the addition of classrooms at existing schools are tied to the sources and levels of funding available to California school districts. The availability of funding for new school and classroom additions, in turn, is determined in large measure by the amount of tax revenue raised by the State, the level of annual allocations for education from the State's budget which is determined by educational policies that are subject to political concerns, and the willingness of the California electorate to approve state and local bond issues to raise money for school facilities. In 1978, California voters approved Proposition 13, which rolled back local property taxes (a traditional source of funding for school districts) and limited the ability of local school districts to raise taxes to finance the construction of school facilities. The passage of Proposition 13, coupled with growing student populations, has increased the need for local school districts to find ways to reduce the cost of adding classrooms. The California legislature has adopted several statutes designed to alleviate some of the problems associated with the shortage of classrooms and lack of local funding alternatives. For example, in 1976, California adopted legislation that through November 1998 required, with certain exceptions, that at least 30% of all new classroom space added using State funds must be relocatable structures. This requirement was satisfied through the purchase or lease of the Company's classrooms. See "Business -Legislation and Funding." Additionally, in 1979 the California legislature adopted legislation that provides for State funding for the purchase of relocatable classrooms that could be leased to local school districts. As the number of students enrolled in California schools continued to increase throughout the 1990's, the State of California and California school districts experienced increasing budget shortfalls. The resulting shortage of funding available at both the State and local level led to declining sales of modular relocatable classrooms, by the Company and on an industry-wide basis. However, as the State budget deficit ameliorated, funding for modular relocatable classrooms began to increase. This growth was accelerated when the California Class Size Reduction Program was implemented in November 1996, the goal of which is to reduce class sizes to 20 students in public elementary schools at the kindergarten through third grade levels. For the 1996-1997 school year, the State spent $822 million under this program, including $200 million specifically for facilities, which may be relocatable classrooms. The total State funding under the Class Size Reduction Program for the 1997-1998 school year was approximately $1.5 billion for both general operations and school facilities. See "Legislation and School Funding." When compared to the construction of a conventionally built classroom, modular classrooms offer a number of advantages, including, among others: Lower Cost -- The cost of the Company's standard classroom may be as low as $29,000 installed, as compared to $80,000 to $100,000 for conventional construction of a comparable classroom; Shorter Construction -- A modular classroom can be built and ready for occupancy in a shorter Time period of time than that required for state approval and construction of a conventional facility; Flexibility of Use -- Modular relocatable classrooms enable a school district to use the units for short or long term needs and to move them if necessary to meet shifts in student populations; and Ease of Financing -- As personal rather than real property, modular classrooms may be leased on a long or short-term basis from manufacturers and leasing companies. This allows school districts to finance modular classrooms out of both their operating and capital budgets. MODULAR RELOCATABLE CLASSROOMS The Company's modular relocatable classrooms are designed, engineered and constructed in accordance with structural and seismic safety specifications adopted by the California Department of State Architects, standards which are more rigorous than the requirements for other portable units. The Department of State Architects, which regulates all school construction on public land, has prescribed extensive regulations regarding the design and construction of school facilities, setting minimum qualifications for the preparation of plans and specifications, and reviews all plans for the construction of material modifications to any school building. Construction authorization is not given unless the school district's architect certifies that a proposed project satisfies construction cost and allowable area standards. The Company subcontracts with structural engineering firms to interface with each school district's architect or engineer to process project specifications through the Department of State Architects. The Company believes that the regulated environment in which the Company's classrooms are manufactured serves as a significant barrier to market entry by prospective competitors. See "Business -- Competition." 3 4 Conventional school facilities constructed by school districts using funds from the State Office of Public School Construction typically require two to three years for approval and funding. By contrast, factory-built school buildings like the Company's standard classrooms may be pre-approved by the State for use in school construction. Once plans and specifications for a given classroom have been pre-approved, school districts can thereafter include in their application to obtain State funds for new facilities a notification that they intend to use pre-approved, standardized factory-built classrooms. This procedure reduces the time required in the State's approval process to as little as 90 days, thereby providing an additional incentive to use factory-built relocatable classrooms. In all cases, continuous on-site inspection by a licensed architect or structural engineer is required during actual manufacture of the classrooms, with the school district obligated to reimburse the Department for the costs of such inspection. The Company's classrooms are manufactured and installed in accordance with the applicable Department of State Architects building code, which supersedes all local building codes for purposes of school construction. The classrooms must comply with accessibility requirements for the handicapped, seismic and fire code requirements. The Company manufactures and installs standard, largely pre-fabricated modular relocatable classrooms, as well as customized classrooms, which are modular in design, but assembled on-site using components manufactured by the Company together with components purchased from third party suppliers. The Company's classrooms vary in size from two modular units containing a total of 960 square feet to 20 units that can be joined together to produce a facility comprising 9,600 square feet. Larger configurations are also possible. Typical prices for the Company's standard classrooms range from $29,000 to $34,000, while prices for a custom classroom generally exceed $50,000, depending upon the extent of customization required. The two basic structural designs for standard and custom modular classrooms are a rigid frame structure and a shear wall structure. The rigid frame structure uses a steel floor and roof system, supported at each corner with square steel tubing. These buildings have curtain walls to enclose the interior from the outside, and have the advantage of unlimited width and length. Rigid frame structures may be used for multipurpose rooms and physical education buildings as well as standard classrooms. Shear wall classrooms have a maximum width of 48 feet (four 12 foot modules) and a maximum length of 60 feet. These classrooms use the exterior and interior walls to produce the required structural strength and can be built at lower costs than rigid frame structures. The Company's most popular factory-built classroom is a rigid frame design, with two modules connected side by side to complete a 24 by 40 foot classroom. Custom built classrooms, libraries and gymnasiums contain design variations and dimensions such as ceiling height, pitch, overall size and interior configuration. These units typically are not assembled at the factory but instead are shipped in pieces, including floors, walls and roofs, and assembled on-site. Contracts for custom built units may include the design, engineering and layout for an entire school or an addition to a school, and involve site preparation, grading, concrete and asphalt work and landscaping. Customized classrooms are generally more expensive and take longer to complete than the Company's standard classrooms. The interior and exterior of all of the Company's modular classrooms can be customized by employing different materials, design features and floor plans. Most classrooms are open, but the interior of the buildings can be divided into individual rooms by permanent or relocatable partitions. The floor covering is usually carpet but may be linoleum or wood depending upon the intended use of the classroom. Interior wall material is usually vinyl covered firtex over gypsum board, while other finishes such as porcelain enamel or painted hardboard may be used in such places as restrooms and laboratories. Electrical wiring, air conditioning, windows, doors, fire sprinklers and plumbing are installed during the manufacturing process. The exterior of the units is typically plywood siding, painted to the customer's specifications, but other common siding material may also be applied. CLASSROOM CUSTOMERS The Company markets and sells its modular classrooms primarily to California school districts. The Company also sells its classrooms to the State of California and leasing companies, both of which lease the classrooms principally to California school districts. Sales of classrooms accounted for 94.2%, 98.1% and 97.7% of the Company's total net sales for the years ended December 31, 1996, 1997 and 1998. The Company's customers typically pay cash from general operating funds or the proceeds of local bond issues, or lease classrooms through banks, leasing companies and other private funding sources. See "Legislation and Funding." Sales of classrooms to individual California school districts accounted for approximately 74.5%, 71.1% and 72.5%, respectively, of the Company's net sales during the years ended December 31, 1996, 1997 and 1998, with sales of classrooms to third party lessors to California school districts during these periods accounting for approximately 7.2%, 19.1% and 13.9%, respectively, of the Company's net sales. The mix of school districts to which the Company sells its products varies somewhat from year to year. Sales of classrooms directly to the State of California during 1998 represented approximately 11.3% of the Company's net sales for the period, compared to approximately 7.9% of the Company's 1997 net sales and approximately 12.5% of the Company's 1996 net sales. Sales of classrooms to private schools, day care providers and out-of-state customers accounted for less than one percent of the Company's net sales during the years ended December 31, 1996, 1997 and 1998. One of the lessors to which the Company sells classrooms for lease 4 5 to California school districts is affiliated with the Company through common ownership by two of the Company's directors. During the years ended December 31, 1996, 1997 and 1998, sales of classrooms to this affiliated leasing company comprised approximately 2.9%, 2.2% and 2.1%, respectively, of the Company's net sales. See "Management -- Certain Transactions." OTHER PRODUCTS In addition to modular relocatable classrooms that are designed and manufactured in accordance with the California Department of State Architects standards, the Company also manufactures modular, portable buildings, which can be used as office facilities and construction trailers and for other commercial purposes. Currently, most of these non-classroom products are manufactured at the Patterson, California plant, which the Company acquired in 1996. During the years ended December 31, 1996, 1997 and 1998, sales of such modular, portable buildings to commercial customers accounted, in the aggregate, for approximately 5.8%, 1.9% and 2.3%, respectively, of the Company's net sales. The Company also manufactures a small number of modular structures that house and shelter electronic equipment used in the wireless telecommunications industry. During the years ended December 31, 1996, 1997 and 1998, sales of modular telecommunications equipment shelters, which are included above in sales to commercial customers, accounted for less than one percent of the Company's net sales for each period. SALES AND MARKETING At December 31, 1998 the Company's classroom sales force was divided into three marketing regions: Northern, Central and Southern California. At December 31, 1998 the Company employed 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 the Company's contracts are awarded on an open bid basis. The marketing process for many of the Company's contracts begins prior to the time the bid process begins. After the Company selects bids or contracts that it desires to pursue, the Company's marketing and engineering personnel interface directly with various school boards, superintendents or architects during the process of formulating bid or contract specifications. The Company prepares its bids or proposals using various criteria, including current material prices, historical overhead costs and a targeted profit margin. Substantially all of the Company's contracts are turnkey, including engineering and design, manufacturing, transportation, installation and necessary site work. Open bid contracts are normally awarded to the lowest responsible bidder. A fourth salesperson is charged with increasing the Company's sales of buildings to the commercial and telecommunications markets. In addition, the Company has two additional salespeople whose focus is on the sale of classrooms in Nevada and Arizona, and to private schools and day care operators in California. MANUFACTURING AND ON-SITE INSTALLATION The Company uses an assembly-line approach in the manufacture of its standardized classrooms. The process begins with the fabrication of the steel floor joists. The floor joists are welded to steel frames to form the floor sub-assembly, which is covered by plywood flooring. Metal roof trusses and structural supports are fabricated separately and added as the unit progresses down the assembly-line. Installation of walls, insulation, suspended grid ceilings, electrical wiring, air conditioning, windows, doors, fire sprinklers, plumbing and chalkboards follow, with painting and finishing crews completing the process. Once construction of a standard classroom commences, the building can be completed in as little as three days. The construction of custom units on-site, from pre-manufactured components, is similar to factory-built units in its progressively-staged assembly process but may involve more extensive structural connections and finish work depending upon the size and type of building, and typically takes 30 to 60 days to complete. The Company is vertically-integrated in the manufacture of its standardized modular classrooms, in that the Company fabricates substantially all of its own metal components at its facility in Perris, California, including structural floor and roof joists, exterior roof panels, gutters, down spouts, vents, ramps, stairs and railings. The Company believes that the ability to fabricate its own metal components helps it reduce the costs of its products and to control their quality and delivery schedules. The Company maintains a quality control system throughout the manufacturing process, under the supervision of its own quality control personnel and inspectors engaged by its customers. In addition, the Company tracks the status of all classrooms from sale through installation. Completed standard classroom units, or components used in customized units, are loaded onto specially designed flatbed trailers for towing by trucks to the school building site. Upon arrival at the site, the units are structurally connected, or components are assembled, and the classroom is installed on its foundation. Connection with utilities is completed in the same manner as in conventional on-site construction. Installation of the modular classrooms may be on a separate foundation, or several units may be incorporated on a common foundation under a unified roof, so that upon installation they appear to be an integral part of an existing school facility or function as a larger building, such as a gymnasium or cafeteria. 5 6 The Company oversees installation of its modular classrooms on-site, using its own employees for job supervision as a general contractor and, whenever possible, for utility hook-ups and other tasks. In many custom projects, the Company performs or supervises subcontracted electrical, plumbing, grading, paving and foundation work, landscaping and other site preparation work and services. Sub-contractors are typically used for larger utility, grading, concrete and landscaping jobs. The Company has a general contractor's license in the State of California. In addition to approvals by the Department of State Architects, licensed inspectors representing various school districts are on-site at each manufacturing facility of the Company to continuously inspect the construction of classrooms for structural integrity. On-site inspections after installation are also made by local fire departments for purposes of determining adequate accessibility. At December 31, 1998 the Company had five manufacturing facilities. Two are located in Southern California, in Perris, California, which is approximately 60 miles east of Los Angeles. The Company has another two facilities near Lathrop, California. Lathrop is located approximately 75 miles east of San Francisco. The fifth manufacturing facility is located in Glendale, Arizona, which is located in the Phoenix Metropolitan area. At December 31, 1998, the Company had a total of five production lines in operation. The standard contractual warranty for the Company's modular relocatable classrooms is one year, although it may be varied by contract specifications. Purchased equipment installed by the Company, such as air conditioning units, carry the manufacturers' standard warranty. Warranty costs have not been material in the past. The Company believes that there are multiple sources of supplies available for all raw materials and equipment used in manufacturing its classrooms, most of which are standard construction items such as steel, plywood and wallboard. BACKLOG The Company manufactures classrooms to fill existing orders only, and not for inventory. As of December 31, 1998, the backlog of sales orders was approximately $25.0 million, down from approximately $71.0 million at December 31, 1997 and $58.0 million at December 31, 1998. Only orders, which are scheduled for completion during the following 12-month period, are included in the Company's backlog. The rate of booking new contracts can vary from month to month, and customer changes in delivery schedules can occur. For these reasons, among others, the Company's backlog as of any particular date may not be representative of actual sales for any succeeding period. COMPETITION The Company believes that, based upon 1997 net sales, it is the largest modular relocatable classroom manufacturer in California. However, the modular relocatable classroom industry is highly competitive, with the market divided among a number of privately-owned companies whose share of the market is smaller than that of the Company. The Company believes that the nature of the bidding process, the level of performance bonding required, and the industry's regulated environment serve as barriers to market entry, and that the expertise of its management gives it an advantage over competitors. Nevertheless, the Company believes that additional competitors may enter the market in the future, some of whom may have significantly greater capital and other resources than are available to the Company, and that competition may therefore increase. The Company also believes that its expertise in site preparation and on-site installation gives it a competitive advantage over many manufacturers of higher-priced, customized modular units, while its vertically integrated, assembly-line approach to manufacturing enables the Company to be one of the low cost producers of standardized, modular relocatable classrooms in California. Unlike many of its competitors, the Company manufactures most of its own metal components which allows the Company to maintain quality control over these components and to produce them at a lower average cost than that at which they could be obtained from outside sources. The Company also believes that the quality and appearance of its buildings, and its reputation for reliability in completion of its contracts, enable it to maintain a favorable position among its competition. The Company categorizes its current competition based upon the geographic market served (Northern California versus Southern California), as well as upon the relative degree of customization of products sold. Beyond a radius of approximately 300 miles, the Company believes that transportation costs typically will either significantly increase the prices at which it bids for given projects, or will substantially erode the Company's gross profit margins. The primary competitors of the Company for standardized classrooms are believed to be Aurora Modular Industries in Southern California and American Modular Systems in Northern California. Profiles Structures, Inc. in Southern California and Design Mobile Systems in Northern California are the Company's primary competitors in the market for higher-priced, customized classrooms. Each of these four competitors is a privately-owned company. 6 7 PERFORMANCE BONDS A substantial portion of the Company's sales require that the Company provide bonds to ensure that the contracts will be performed and completed in accordance with contract terms and conditions, and to assure that subcontractors and materialmen will be paid. In determining whether to issue a performance bond on behalf of the Company, bonding companies consider a variety of factors concerning the specific project to be bonded, as well as the Company's levels of working capital, shareholders' equity and outstanding indebtedness. From time to time the Company has had, and in the future may again encounter, difficulty in obtaining bonding for a given project. Although it has had no difficulty in obtaining the necessary bonding in the last twelve months, the Company believes that its difficulty in obtaining bonding for certain large projects from time to time in the past has been attributable to the Company's levels of working capital, shareholders' equity and indebtedness, and not to concerns about the Company's ability to perform the work required under the contract. To assist the Company in obtaining performance bonds in certain instances, the Company's executive officers have been required to indemnify the bonding companies against all losses they might suffer as a result of providing performance bonds for the Company. REGULATION OF CLASSROOM CONSTRUCTION In 1933, the California Legislature adopted the Field Act, which generally provides that school facilities must be constructed in accordance with more rigorous structural and seismic safety specifications than are applicable to general commercial buildings. Under the Field Act, the Department of General Services, through the Department of State Architects, has prescribed extensive regulations regarding the design and construction of school facilities, and reviews all plans for the construction of material modifications to any school building. Construction authorization is not given unless the school district's architect certifies that a proposed project satisfies construction cost and allowable area standards. In addition, the Field Act provides for the submittal of complete plans, cost estimates, and filing fees by the school district to the Department of General Services, for the adoption of regulations setting minimum qualifications for the preparation of plans and specifications, and the supervision of school construction by a licensed architect or structural engineer. Additionally, California legislation provides that certain factory-built school buildings may be pre-approved by the State for use in school construction. Once plans and specifications for a given classroom have been pre-approved by the Department of General Services, school districts can thereafter include in their application to obtain State funds for new facilities a notification that they intend to use pre-approved, standardized factory-built classrooms. This procedure reduces the time required in the State's approval process thereby providing additional incentive to use factory-built relocatable classrooms. The Department of General Services provides for the continuous on-site inspection during actual manufacturing of the classrooms, with the school districts obligated to reimburse the Department for the costs of such inspection. LEGISLATION AND FUNDING The demand for modular relocatable classrooms in California is affected by various statutes. These statutes, among other things, prescribe the methods by which the Company's customers, primarily individual school districts, obtain funding for the construction of new school facilities, and the manner in which available funding is to be spent by the school districts. In 1978, Proposition 13 was approved, which rolled back property taxes and limited the ability of local school districts to rely upon revenue from such taxes to finance the construction of school facilities. As a result, financing for new school construction and rehabilitation of existing schools by California school districts is currently provided, at the state level, by funds derived from general revenue sources or statewide bond issues, and, at the local level, by local bond issues and fees imposed on the developers of residential, commercial and industrial real property ("Developer Fees"). Historically, the primary source of financing for the purchase or lease of relocatable classrooms has been state funding. STATE FUNDING. In November 1996, California implemented the Class Size Reduction Program in response to overcrowding in classrooms in the state and its assumed negative impact on learning. An additional impetus for the program was a study conducted by Tennessee State University which indicated that students in small classrooms outperformed their peers from larger classes at least through the eighth grade on standardized tests in math and reading. The goal of the California Class Size Reduction Program is to reduce public elementary school class sizes in kindergarten through the third grade. Under this program, schools that reduce class size to 20 students in those grades receive additional funds. For the 1996-1997 school year, a school district was entitled to receive $25,000 for each new classroom added which reduced the average class size for a specified grade level to 20 students or less. Among other ways new classrooms can quickly and inexpensively be added, school districts may reconfigure existing space to convert it to classrooms from other uses, or purchase or lease a modular relocatable classroom. 7 8 Until the adoption of the Class Size Reduction Program in 1996, the most important source of funding at the State level for new school facilities was through the issuance and sale of statewide general obligation bonds which are repaid out of the State's General Funds. Proposals to issue such bonds are placed on statewide ballots from time-to-time in connection with general or special elections, and require approval by a majority of the votes cast in connection with such proposals. As in the case of the Class Size Reduction Program, the State also may annually allocate funds from the State's budget for the support of school districts and community college districts. AUTHORITY FOR BOND FINANCING. Under the School Building Lease -- Purchase Law of 1976, the State Allocation Board is empowered to purchase or lease school facilities using funds from the periodic issuance of general obligation bonds of the State of California. These purchased or leased school facilities may be made available by the State Allocation Board to school districts. Certain matching funds, usually derived from Developer Fees, are required to be supplied by the school districts seeking state funded facilities. If the school districts acquire relocatable structures using Developer Fees, the amount of the required matching funds is reduced by the cost of such facilities. This reduction in matching funds is intended to provide an incentive for school districts to lease relocatable classrooms. Prior to November 1998, 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 passed in November 1998 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 added, consists of relocatable classrooms. The bill also placed a $9.2 billion bond issue on the November 1998 ballot, which was approved by the voters. The bill allocates from the bond issue $2.9 billion for growth and new construction, and $2.2 billion for modernization and reconstruction through the year 2001. In addition, it allocates $700 million for class-size reductions to fully implement the program from kindergarten through third grade. The costs to implement the foregoing will include land acquisition costs, hiring of new teachers, remodeling of existing structures and construction of new permanent and relocatable structures. The bill does not designate the specific usage of funds, and the actual amount spent on relocatable classrooms will vary among school districts. Implementation of Senate Bill 50 began the third week of January 1999. The Company does not expect any significant change in its future operating results due to implementation of Senate Bill 50. In response to the adoption of Proposition 13, the State of California adopted the California Emergency Classroom Law of 1979, pursuant to which the State Allocation Board may spend up to $35 million per year from available funds to purchase relocatable classrooms to be leased to school districts. Relocatable classrooms are not available to school districts under this program if the school district has available local bond proceeds that could be used to purchase classroom facilities, unless the district has approved projects pending under the School Building Lease-Purchase Law of 1976. The State has, in the past, funded this program primarily from the proceeds of statewide bond issues approved by voters. BUDGET ALLOCATIONS. Proposition 98, which was approved in 1988, requires the State to allocate annually from the State's budget, for the support of school districts and community college districts, a minimum amount equal to the same percentage of funds as was appropriated for the support of those institutions in fiscal year 1986-87. While this requirement may be suspended for a given year by emergency legislation, it has the effect of limiting the ability of the California legislature to reduce the level of school funding from that in existence in 1986-87. The State raises the necessary funds through proceeds from the sale of statewide bond issues, income tax revenues and other revenues. A recent reduction in California's corporate tax rates, and a proposed reduction in personal income tax rates, may affect future levels of the State's income tax revenues. LOCAL FUNDING. Local school districts in California have the ability to issue local general obligation bonds for the acquisition and improvement of real property for school construction. These bond issues require the approval of two-thirds of the voters in the district and are repaid using the proceeds of increases in local property taxes. A local school district may also levy Developer Fees on new development projects in the district, subject to a maximum rate set by state law. The Developer Fees can only be levied if the project can be shown to contribute to the need for additional school facilities and the fee levied is reasonably related to such need. In addition, California law provides for the issuance of bonds by Community Facilities Districts which can be formed by a variety of local government agencies, including school districts. These districts, known as "Mello-Roos" districts, can have flexible boundaries and the tax imposed to repay the bonds can be based on property use, acreage, population density or other factors. 8 9 OTHER LEGISLATION California legislation adopted in 1989 provides that school districts which currently lease any building which does not meet the prescribed structural standards must have replaced nonconforming buildings with conforming ones by September 1, 1990. However, any district has the right to request a one-time waiver for a maximum of three years upon presentation of satisfactory evidence to the State Allocation Board that the district is proceeding in a timely fashion with a program that will eliminate the need for the nonconforming facilities within that time period. The State has authorized districts to renew these waivers through 2000 and may grant further waivers. The Company understands that a number of school districts have requested and been granted such waivers. Based upon information received by the State Allocation Board from school districts and provided to the Company, it is believed that there are approximately 4,500 trailers currently being used as classrooms by school districts throughout California that eventually must be replaced with conforming facilities by these school districts. California has taken steps to encourage local school districts to adopt year-round school programs to help increase the use of existing school facilities and reduce the need for additional school facilities. School districts requesting state funding under the School Building Lease-Purchase Law of 1976 or the Emergency Classroom Law of 1979 discussed above must submit a study examining the feasibility of implementing in the district a year-round educational program that is designed to increase pupil capacity in the district or in overcrowded high school attendance areas. The feasibility study requirement is waived, however, if the district demonstrates that emergency or urgent conditions exist in the district that necessitate the immediate need for relocatable buildings. The demand for new school facilities, including relocatable classrooms, would be adversely affected in the event that a significant number of California school districts implemented year-round school programs. In addition, a significant increase in the level of voluntary or mandatory busing of students from overcrowded schools to schools with excess capacity could adversely affect demand for new school facilities. ENVIRONMENTAL MATTERS The Company is subject to a variety of federal, state and local governmental regulations related to the storage, use and disposal of any hazardous materials used by the Company in connection with the manufacture of its products. Both the governmental regulations and the costs associated with complying with such regulations are subject to change in the future. EMPLOYEES At December 31, 1998, the Company had 481 employees, including 429 in manufacturing, 6 in sales, 17 in operations and 29 in general management and administration. The Company's employees are not represented by a labor union, and it has experienced no work stoppages. The Company believes that its employee relations are good. ITEM 2. PROPERTIES The Company's principal executive and administrative facilities are located in approximately 12,000 square feet of modular buildings at its primary manufacturing facility located in Perris, California. This manufacturing facility occupies twenty-five acres, with approximately 226,000 square feet of covered production space under roof, pursuant to a lease expiring in 2014. A second facility in Perris occupies approximately thirty acres, with approximately 120,000 square feet of covered production space under roof, pursuant to a lease expiring in 2014. This second facility also includes approximately 80,000 square feet under roof used as a metal working facility. The Company's third plant consists of a 400,000 square foot manufacturing facility on a 30-acre site in Lathrop, California that is leased through 2019. The fourth plant, which was leased for up to five years in October 1996, consists of approximately 50,000 square feet of manufacturing area on a 4-acre site in Patterson, California. The fifth plant consists of approximately 30,000 square feet of manufacturing area on a 4-acre site in Glendale, Arizona. The Company believes that its facilities are well maintained and in good operating condition, and meet the requirements for its immediately foreseeable business needs. Each of the Company's facilities at December 31, 1998, other than the Patterson plant and Arizona plant, are leased from an affiliate. See "Management - -- Certain Transactions." ITEM 3. LEGAL PROCEEDINGS The Company is from time to time involved in various lawsuits related to its ongoing business operations, primarily collection actions or vendor disputes. In the opinion of management, no pending lawsuit will result in any material adverse effect upon the Company or its financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 9 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock was traded on the NASDAQ National Market System under the symbol "MODT" at December 31, 1998. The range of high and low sales prices for the common stock as reported by the National Association of Securities Dealers, Inc. for the periods indicated below, are as follows: Quarter Ended High Low ------------- ------ ------ 3/31/98 29.125 19.125 6/30/98 23.688 18.500 9/30/98 20.500 16.000 12/31/98 20.250 13.000 On December 31, 1998, the closing sales price on The NASDAQ National Market for a share of the Company's Common Stock was $15.25. The approximate number of holders of record of the Company's Common Stock as of December 31, 1998, was 90. DIVIDEND POLICY The Company has not paid cash dividends on its Common Stock since 1990. The Board of Directors currently intends to follow a policy of retaining all earnings, if any, to finance the continued growth and development of the Company's business and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. Any future determination as to the payment of cash dividends will be dependent upon the Company's financial condition and results of operations and other factors deemed relevant by the Board of Directors. 10 11 ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The selected income statement and balance sheet data set forth below for the three years ended December 31, 1996, 1997 and 1998 have been derived from the audited financial statements of the Company included elsewhere herein. The selected income statement and balance sheet data set forth below for the years ended December 31, 1994 and 1995 have been derived from audited financial statements of the Company that are not included herein. The selected income statement and balance sheet data set forth below should be read in conjunction with those financial statements (including the notes thereto) and with "Management's Discussion and Analysis of Results of Operations and Financial Condition" also included elsewhere herein.
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 1994 1995 1996 1997 1998 --------- --------- --------- --------- --------- INCOME STATEMENT DATA: Net sales .................................. $ 20,355 $ 19,386 $ 49,886 $ 134,050 $ 127,620 Cost of goods sold ......................... 17,766 16,401 42,629 107,367 97,765 --------- --------- --------- --------- --------- Gross profit ............................... 2,589 2,985 7,257 26,683 29,855 Selling, general and administrative expenses 1,554 1,613 2,345 5,156 4,739 Income from operations ..................... 1,035 1,372 4,912 21,527 25,116 Interest income (expense), net ............. (471) (387) (422) (909) 1,097 Other income (expense) ..................... 42 (1) (13) 92 25 --------- --------- --------- --------- --------- Income before income taxes ................. 606 984 4,477 20,711 26,238 Provision for income taxes ................. 4 19 208 (7,703) (9,708) --------- --------- --------- --------- --------- Net income ................................. 602 965 4,269 13,008 16,530 ========= ========= ========= ========= ========= Net income available for common stock(1) ................................. $ 602 $ 799 $ 4,221 $ 13,008 $ 16,530 ========= ========= ========= ========= ========= Basic earnings per common share(2) ......... $ 0.19 $ 0.25 $ 0.77 $ 1.47 $ 1.68 Weighted average shares outstanding (in thousands)(2) ........................ 3,209 3,170 5,461 8,854 9,857 Diluted earnings per common share(2) ....... $ 0.11 $ 0.14 $ 0.47 $ 1.31 $ 1.50 Weighted average shares outstanding (in thousands)(2) ........................ 5,294 6,712 9,041 9,898 10,988
AS OF DECEMBER 31, --------------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- BALANCE SHEET DATA: Working capital ................. $ 4,403 $ 4,383 $14,069 $36,417 $52,129 Total assets .................... 15,919 15,154 34,029 68,220 82,873 Total liabilities ............... 7,900 6,411 18,716 20,177 17,777 Long-term debt, excluding current portion................ 4,400 3,590 7,844 -- -- Shareholders' equity ............ 8,019 8,743 8,743 48,043 65,097
YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 1994 1995 1996 1997 1998 -------- --------- --------- --------- --------- SELECTED OPERATING DATA: Gross margin .............. 12.7% 15.4% 14.5% 19.9% 23.4% Operating margin .......... 5.1% 7.1% 9.8% 16.1% 19.7% Standard classrooms sold(3) 680 605 1,610 4,514 6,852 Backlog at period end(4) .. $7,000 $4,100 $58,000 $71,000 $25,000
- ----------------- (1) 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. All of the preferred stock was converted into common stock during 1996. See Note 11 of Notes to Financial Statements. (2) Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 "Earnings per Share". All prior periods have been restated accordingly. (3) Determined by dividing the total square footage of floors sold during the year by 960 square feet, the floor area of a standard classroom. See "Business--Relocatable Modular Classrooms." (4) The Company manufactures classrooms to fill existing orders only, and not for inventory. Backlog consists of sales orders scheduled for completion during the next 12 months. 11 12 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS Following are the unaudited pro forma combined condensed balance sheet as of December 31, 1998 and the unaudited pro forma combined condensed income statements for the year ended December 31, 1998 and 1997 of Modtech, Inc. and SPI Holdings, Inc. These statements are based on the historical consolidated financial statements of Modtech, Inc. and SPI Manufacturing, Inc., combined, and are adjusted to give effect to the mergers. In addition, pro forma adjustments have been made for the acquisitions consummated by SPI prior to the merger. Certain reclassifications have been made to the historical financial statements to conform with this pro forma presentation. The pro forma adjustments are based upon preliminary estimates, information currently available and certain assumptions that management believes are reasonable under the circumstances. Holding's actual consolidated financial statements will reflect the effects of the mergers on and after February 16, 1999 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. These statements should be read in conjunction with (i) Modtech Inc.'s historical financial statements and notes thereto included elsewhere herein, and (ii) Holdings' Joint Proxy Statement/Prospectus dated January 11, 1999 which is included in Holding's Registration Statement on Form S-4 filed with the Securities and Exchange Commission (Commission File No. 333-69033). UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF DECEMBER 31, 1998 (AMOUNTS IN THOUSANDS) ASSETS
HISTORICAL ----------------- PRO FORMA PRO FORMA MODTECH SPI NOTES ADJUSTMENTS COMBINED ------- ----- ----- ----------- --------- Current assets: Cash and cash equivalents $40,142 $ 259 (B) $(36,289) $ 4,112 Contracts receivable, net 12,923 2,433 15,356 Costs in excess of billings 3,823 -- 3,823 Inventories 4,442 3,852 8,294 Due from affiliates 2,389 -- 2,389 Income tax receivable 2,368 840 3,208 Deferred tax asset 3,440 135 (C) (135) 3,440 Other current assets 281 1,068 (T) (745) 604 ------- ------- -------- -------- Total current assets 69,808 8,587 (37,169) 41,226 Property and equipment, net 12,314 2,175 14,489 Other assets: Deferred tax asset -- 62 (C) (62) -- Other assets 751 3,521 (D,E) 1,494 5,766 Costs in excess of net assets of business acquired, net -- 33,560 (F,G) 95,391 128,951 ------- ------- -------- -------- $82,873 $47,905 $ 59,654 $190,432 ======= ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $10,541 $ 2,811 (H) $ 750 $ 14,102 Billings in excess of costs 7,138 -- 7,138 Revolving credit facility -- 4,524 (I,J) 1,576 6,100 Current portion of long-term debt -- 4,914 (J,K) 1,086 6,000 ------- ------- -------- -------- Total current liabilities 17,679 12,249 3,412 33,340 Deferred tax liability 97 -- 97 Long-term debt -- 23,701 (J,K) 15,299 39,000 ------- ------- -------- -------- Total liabilities 17,776 35,950 18,711 72,437 ------- ------- -------- -------- Stockholders' equity: Common stock 99 6 (L,M,N) 21 126 Preferred stock -- 10,106 (L,N) (10,102) 4 Additional paid-in capital 39,854 -- (A,M,N) 52,867 92,721 Retained earnings 25,144 1,843 (L) (1,843) 25,144 ------- ------- -------- -------- Total stockholders' equity 65,097 11,955 40,943 117,995 $82,873 $47,905 $59,654 $190,432 ======= ======= ======= ========
See the accompanying notes to the unaudited pro forma combined condensed financial statements. 12 13 UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1998 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO FORMA PRO FORMA PRO FORMA MODTECH SPI NOTES ADJUSTMENTS COMBINED NOTES ---------- --------- ----- ----------- --------- ----- Net sales $127,620 $72,643 $ $200,263 Cost of goods sold 97,765 61,161 158,926 -------- ------- --------- -------- Gross profit 29,855 11,482 -- 41,337 -------- ------- --------- -------- Selling, general and administrative expenses 4,739 7,006 (F,G) 2,375 14,120 -------- ------- --------- -------- Income from operations 25,116 4,476 (2,375) 27,217 Interest income (expense), net 1,097 (3,795) (D,E,J,O,P) (306) (3,004) Other income 25 38 63 -------- ------- --------- -------- Income before income taxes 26,238 719 (2,681) 24,276 Income taxes 9,708 787 (Q) (122) 10,373 -------- ------- --------- -------- Net income (loss) $ 16,530 $ (68) $ (2,559) $ 13,903 ======== ======= ========= ======== Basic earnings per share $1.68 $1.09 (R) ===== ===== Number of shares used in computing basic earnings per share 9,857 12,622 (R) ===== ====== Diluted earnings per share $1.50 $0.94 (S) ===== ===== Number of shares used in computing diluted earnings per share 10,988 14,845 (S) ====== ======
See the accompanying notes to the unaudited pro forma combined condensed financial statements. 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 administrative expenses 5,156 7,324 (F,G) 2,380 14,860 -------- ------- --------- -------- Income from operations 21,527 7,852 (2,380) 26,999 Interest expense, net (908) (4,041) (D,E,J,O,P) (494) (5,443) Other income 92 195 287 -------- ------- --------- -------- Income before income taxes 20,711 4,006 (2,874) 21,843 Income taxes 7,703 1,950 (Q) (198) 9,455 -------- ------- --------- -------- Net income $ 13,008 $ 2,056 $ (2,676) $ 12,388 ======== ======= ========= ======== Basic earnings per share $1.47 $0.97 (R) ===== ===== Number of shares used in computing basic earnings per share 8,854 12,622 (R) ===== ====== Diluted earnings per share $1.31 $0.83 (S) ===== ===== Number of shares used in computing diluted earnings per share 9,898 14,845 (S) ===== ======
See the accompanying notes to the unaudited pro forma combined condensed financial statements. 13 14 NOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS A. The unaudited pro forma combined condensed balance sheet has been prepared to reflect the acquisition of SPI for an estimated aggregate purchase price, including estimated transaction costs, of $105,648,000 which is subject to adjustment and is summarized as follows: Modtech Holdings Common Stock offered hereby...... $ 87,627,000 Fair value of stock options offered hereby........ 5,195,000 Cash paid to SPI stockholders..................... 8,076,000 Estimated acquisition costs....................... 4,750,000 ------------ Total............................... $105,648,000 ============
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. 6,100,000 Cash paid to SPI Stockholders..................... (8,076,000) Cash distribution to Modtech Stockholders......... (39,924,000) Retirement of SPI Indebtedness.................... (33,139,000) Payment of Estimated Debt Issuance Costs.......... (2,250,000) Payment of Estimated Merger Costs................. (4,000,000) ------------ Net cash distribution....................... $(36,289,000) ============
C. To eliminate current deferred tax assets of $135,000 and non-current deferred tax assets of $62,000 not available to the Company. D. To eliminate unamortized SPI debt issuance costs of $756,000 and the related amortization expense of debt issuance costs of $178,000 and $170,000 for the year ended December 31, 1998 and 1997, respectively. E. To record (i) estimated debt issuance costs of $2,250,000 to be amortized over the term of the New Term Loan and (ii) amortization of debt issuance costs of $450,000 for the fiscal year ended December 31, 1998 and 1997. F. To record (i) $128,951,000 for the excess of the consideration paid over the preliminary estimate of the fair value of net liabilities assumed, to be amortized over 40 years and (ii) to record goodwill amortization of $3,224,000 for the year ended December 31, 1998 and 1997. The preliminary purchase price allocation of the SPI acquisition is as follows: Current assets................................... $ 7,707,000 Property, plant & equipment...................... 2,175,000 Other tangible assets............................ 189,000 Identifiable intangible assets................... 2,576,000 Current liabilities.............................. (2,811,000) Current portion of long-term debt................ (9,438,000) Long-term debt................................... (23,701,000) ------------- Net liabilities assumed....................... (23,303,000) Total Estimated Aggregate Purchase Price... (105,648,000) ------------- Goodwill......................................... $ 128,951,000 =============
G. To eliminate $33,560,000 of goodwill previously recorded by SPI and the related amortization expense of $849,000 and $844,000 for the year ended December 31, 1998 and 1997, respectively. H. To record the recognition of liabilities related to certain merger costs. I. To record the incurrence of $6,100,000 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. J. To eliminate the $33,139,000 of SPI indebtedness, including $4,914,000 classified as current and $4,524,000 under the revolving credit facility, which will be retired by Modtech, and to eliminate the related interest expense of $3,798,000 and $4,046,000 for the year ended December 31, 1998 and 1997, respectively. K. To record the assumed of $45,000,000 of indebtedness, including $6,000,000 classified as current, under a New Term Loan, with an assumed effective interest rate of 7.5%, utilized to partially finance the cash portion of the Merger Consideration, retire SPI indebtedness and to pay certain related transaction costs. L. To eliminate the equity of SPI, which includes common stock of $6,000, preferred stock of $10,106,000 and retained earnings of $1,843,000. 14 15 M. To reflect the equity adjustments necessary to reflect the acquisition of SPI under the purchase method of accounting. Such adjustment had the effect of increasing common stock by $46,000 to record the common stock par value and increasing additional paid-in capital by $92,776,000. N. To record the repurchase of Modtech common stock for $39,924,000 cash in connection with the Modtech Merger, resulting in a decrease of $39,909,000 to additional paid-in capital, a decrease of $19,000 to common stock and an increase of $4,000 to preferred stock. O. To record interest expense on borrowings under the New Term Loan of $3,375,000 for the year ended December 31, 1998 and 1997, 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 for the year ended December 31, 1998 and 1997. P. To record interest expense on borrowings under the New Revolving Credit Facility of $457,000 for the year ended December 31, 1998 and 1997 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 $7,600 for the year ended December 31, 1998 and 1997. Q. To record the income tax effects of the pro forma adjustments at a pro forma effective tax rate of 40%. R. Basic shares include 8,034,334 common shares assumed issued to former Modtech stockholders and 4,587,824 common shares assumed issued to former SPI stockholders. Net income is reduced by preferred dividends of $104,000 for the year ended December 31, 1998 and 1997. S. Diluted shares include basic shares, preferred shares converted into common shares on a one-to-one basis and exercise of stock options reduced by the number of shares purchase with the proceeds. T. To eliminate SPI merger costs as of December 31, 1998. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL Since its inception in 1982, the Company's principal business has been the design, manufacture, marketing and installation of modular relocatable classrooms. The Company's primary customers consist of individual school districts located in California and the State of California. The need for new classrooms in California school districts is generally governed by the number of students per class, which is a function of the net migration of families into and out of school districts and the total number of new students entering the school system in any given year. Specific provisions of California legislation govern the amount of the State's budget that must be directed toward the public school system. A portion of these funds may be allocated for the addition of new classrooms. In addition, the State can raise funds to build or add new classrooms through the issuance of general obligation bonds. See "Business -- Legislation and Funding." In the early to mid 1990's, California suffered through a recession that resulted in statewide budgetary constraints. During this period, the amount of State funds available for the addition of new classrooms was severely limited. As a result, the Company experienced a decline in net sales in 1992 and 1993, and net sales in 1994 and 1995 were essentially the same as those generated in 1993. In response, the Company initiated a cost control program that included layoffs of approximately 80% of its staff as compared to the June 1991 work force, and temporarily closed its plant in Lathrop, California. In addition, the Chief Executive Officer of the Company agreed to a 50% salary reduction and each of the Company's other top management personnel agreed to a 10% salary reduction. Due in large measure to the amelioration of the State budget crises and the realization that the need for new classrooms in California far exceeded supply, beginning in the second half of 1996 and continuing into 1997 and 1998, the State has increased the amount of funds targeted specifically for the addition of new classrooms. In November 1996, the State implemented the Class Size Reduction Program, the goal of which is to reduce public school class sizes in kindergarten through the third grade. For the 1996-1997 school year the State spent $822 million under this program, including $200 million specifically for facilities, which may be relocatable classrooms. Primarily as a result of the implementation of the Class 15 16 Size Reduction Program, the Company's net sales increased to $134.0 million in 1997 as compared to $49.9 million for the year ended December 31, 1996 and $19.4 million in 1995. In addition, a $9.2 billion school construction bond issue was approved in November 1998. $2.9 billion of the bond issue is allocated for growth and new construction and $2.2 billion for modernization and reconstruction through the year 2001. It additionally allocated $700 million for class-size reductions to fully implement the program from kindergarten through third grade. See "Business -- Legislation and Funding." In response to the increased demand for its modular relocatable classrooms, the Company re-opened the Northern California Lathrop plant in 1997 and expanded its Southern California production capacity in Perris in 1998. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages of net sales represented by certain items in the Company's statements of operations. PERCENTAGE OF NET SALES
YEARS ENDED DECEMBER 31, ------------------------- 1996 1997 1998 ------ ------ ----- Net sales......................... 100.0% 100.0% 100.0% Cost of sales..................... 85.5 80.1 76.6 ----- ----- ----- Gross profit...................... 14.5 19.9 23.4 Selling, general and administrative expenses......... 4.7 3.8 3.7 ----- ----- ----- Income from operations............ 9.8 16.1 19.7 Interest income (expense), net.... (0.8) (0.7) 0.9 Other income...................... -- -- -- Income before income taxes........ 9.0 15.4 20.6 Provision for income taxes........ 0.4 5.7 7.6 ----- ----- ----- Net income........................ 8.6% 9.7% 13.0% ===== ===== =====
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Net sales for the year ended December 31, 1998 decreased to $127.6 million, a decrease of $6.4 million, or approximately 4.8%, from $134.0 million in 1997. The decrease in 1998 was due in part to the fact that the California Legislature was more than two months late in passing the state budget. Additionally, there was a delay in allocating the funds from the $9.2 billion school construction bond issue which was passed in November 1998. For the year ended December 31, 1998, gross profit was $29.9 million, an increase of $3.2 million, or approximately 11.9%, over 1997 gross profit of $26.7 million. Gross profit percentage of net sales increased to 23.4% in 1998 from 19.9% in 1997. The increase in gross profit as a percentage of net sales was primarily attributable to the realization of manufacturing efficiencies. In 1998, selling, general and administrative expenses decreased to $4.7 million from $5.2 million, due to decreases in the number of employees and a decrease in selling costs. As a percentage of net sales, selling, general and administrative expenses decreased to 3.7% in 1998 from 3.8% in 1997. Due to higher cash balance and reduced line of credit borrowing, the year ended December 31, 1998 reflects net interest income of $1,097,000, compared to net interest expense of $909,000 for the same period in 1997, a favorable increase of $2,006,000 or 220.7%. The provision for income taxes was $9.7 million for the year ended December 31, 1998, compared to $7.7 million for 1997. The Company's effective tax rate decreased to 37.0% for the year ended December 31, 1998 from 37.2% for the year ended December 31, 1997. The effective tax rate in 1998 was positively impacted by a reduction in the federal valuation allowance. The effective tax rate in 1997 was positively impacted by the utilization for federal income tax purposes of net operating loss carryforwards generated in prior years. 16 17 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 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 increase from $422,000 in 1996 to $909,000 for 1997. The provision for income taxes was $7.7 million for the year ended December 31, 1997, compared to $208,000 for 1996. The Company'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 1996 was positively impacted by the utilization for federal income tax purposes of net operating loss carryforwards generated in prior years. LIQUIDITY AND CAPITAL RESOURCES Since the 1994 Financing described below, the Company has funded its operations and capital expenditures with cash generated internally by operations, supplemented by borrowings under various credit facilities. During the years ended December 31, 1996, 1997 and 1998, the Company's operations provided (used) cash in the amounts of approximately ($4.9 million), $2.0 million and $32.8 million, respectively. At December 31, 1998, the Company had approximately $40.1 million in cash. The Company's revolving loan facility, which was scheduled to expire in September 2000, was paid off on December 4, 1998. The Company had working capital of $14.1 million, $36.4 million and $52.1 million at December 31, 1996, 1997 and 1998, respectively. In 1998, current assets increased by $13.2 million, with an increase of $28.5 million in cash, an increase of $1.4 million in deferred tax assets and an increase of $1.3 million in due from affiliates, offset by a decrease of $8.6 million in contracts receivable and a decrease of $12.2 million in costs and estimated earnings in excess of billings. Current liabilities decreased by $2.5 million, with various accrued liabilities and current maturities of long-term debt decreasing by $1.9 million and $1.4 million, respectively, offset by a $0.7 million increase in accounts payable. In 1997, contracts receivable, costs and estimated earnings in excess of billings on contracts increased by $11.2 million and $6.9 million, respectively, as the Company's net sales increased significantly due to the implementation of the State's Class Size Reduction Program. Accrued liabilities increased by $6.1 million in 1997, also as a result of the increase in net sales. 17 18 Capital expenditures amounted to $2.0 million, $4.1 million and $2.1 million during the years ended December 31, 1996, 1997 and 1998, respectively. In 1996, the majority of expenditures were as a result of the re-opening of the Company's Lathrop, California Manufacturing facility. In 1997 and 1998, the majority of expenditures were related to the construction of an additional production line at one of its Perris, California facilities. The Company had a $4.0 million Industrial Development Bond issued by the Industrial Development Authority of the County of San Joaquin, California, the net proceeds of which were used to partially finance the $6.0 million cost of construction of the Company's Lathrop, California facility. The loan was paid in full during 1998. In May 1994, the Company raised net proceeds of approximately $2.7 million through the sale of 2,850,000 shares of Series A Preferred Stock to several private investors who are Selling Shareholders in this Offering (the "1994 Financing"). In April 1996, all of the Series A Preferred Stock was converted into 2,850,000 shares of Common Stock. In December 1996, warrants issued to the investors in connection with the 1994 Financing were exercised, resulting in cash proceeds to the Company of approximately $1.6 million and the issuance of 2,204,000 additional shares of Common Stock. 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 Holding's bank line of credit, to finance the Company's business over the next twelve months. However, additional cash resources may be required if the Company's rate of growth exceeds currently anticipated levels. Moreover, it may prove necessary for the Company to construct or acquire additional manufacturing facilities in order for the Company to compete effectively in new market areas or states which are beyond a 300 mile radius from one of its production facilities. The construction or acquisition of new facilities could require significant additional capital. 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 it. NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board (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 embedded in other contracts, and hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Application of SFAS 133 is not expected to have a material impact on the Company's financial position, results of operations or liquidity. YEAR 2000 The "year 2000" issue concerns the potential exposures related to the automated generation of business and financial misinformation resulting from the application of computer programs which have been written using two digits, rather than four, to define the applicable year of business transactions. When the year 2000 begins, programs with such date-related logic will not be able to distinguish between the years 1900 and 2000, potentially causing software and hardware to fail, generating erroneous calculations or presenting information in an unusable format. The Company is dependent on multiple computer servers and the third-party computer programs running on them to provide data in support of its accounting and engineering functions. In recognition of the potential year 2000 problem, in November 1997, the Company began a program to replace all of its existing engineering and accounting software with new software that is warranted by its vendors as being year 2000 compliant. The software replacement program was completed in November 1998 at a total cost of approximately $250,000. SPI's computer data is currently being transferred to the Company's computer system. The Company estimates that this transfer will be completed by the end of the second quarter of 1999 at a cost of approximately $100,000. The Company has relationships with various third parties on whom it relies to provide goods and services necessary for the manufacture and distribution of its products. These include suppliers and vendors. As part of its determination of year 2000 readiness, the Company had identified material relationships with third-party vendors and is in the process of assessing the status of their compliance through the use of questionnaires. The Company expects this process will be completed by the second quarter of 1999 at a cost of approximately $100,000. The total cost of the Company's year 2000 efforts, including hardware, software, related consulting costs, assessment of third-party compliance, and transfer of SPI data is estimated to be about $500,000, and is not material to the Company's financial statements. The Company's construction materials are available through numerous independent sources. Due to the broad diversification of these sources, the risk associated with potential business interruptions as a result of year 2000 non-compliance by one or more sources is not considered significant. The Company's primary customers are California school districts, each of which obtains its funds for paying the Company's invoices through the computer system operated by the State of California. If this system does not properly function after January 1, 2000, it could result in a temporary shutdown of portions of the state government, in which case, payment of the Company's invoices would be delayed, and new purchase orders may not be processed. If the shutdown lasted for more than 60 days, the Company would experience a severe cash shortage and a material decline in revenue during the period of the government shutdown. The cash shortage can be alleviated to some degree by borrowings from Holding's line of credit and by reductions in work force and possible temporary plant closures. The Company does not believe it can design or implement any other contingency plans that will mitigate the effects of such a government shutdown. It is anticipated that the steps the Company has taken and is continuing to take deal with the year 2000 problem will reduce the risk of significant business interruption, but there is no assurance that this outcome will be achieved. Failure to detect and correct all internal instances of non-compliance or the inability of third parties to achieve timely compliance could result in the interruption of normal business operations which could, depending on its duration, have a material adverse effect on the Company's financial statements. 18 19 SEASONALITY Historically, the Company's quarterly revenues have been highest in the second and third quarters of each calendar year because a large number of orders for modular classrooms placed by school districts require that classrooms be constructed, delivered and installed in time for the upcoming new school year which generally commences in September. The Company has typically been able to add employees as needed to respond to the corresponding increases in manufacturing output required by such seasonality to meet currently foreseeable increases in this seasonal demand. In addition, the Company's operating margins may vary on a quarterly basis depending upon the mix of revenues between standardized classrooms and higher margin customized classrooms and the timing of the completion of large, higher margin customized contracts. INFLATION During the past three years, 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. However, there can be no assurance that the Company's business will not be affected by inflation in the future. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Company, along with the notes thereto and the report of Independent Certified Public Accountants thereon, required to be filed in response to this Item 8 are attached hereto as exhibits under Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference. 19 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Exhibits and Financial Statement Schedules 1 & 2. Index to Financial Statements The following financial statements and financial statement schedules of the Company, along with the notes thereto and the Independent Auditors' Reports, are filed herewith, as required by Part II, Item 8 hereof. Financial Statements Independent Auditors' Reports Consolidated Balance Sheets - December 31, 1997 and 1998 Consolidated Statements of Income - For the Years Ended December 31, 1996, 1997 and 1998 Consolidated Statements of Shareholders' Equity - For the Years Ended December 31, 1996, 1997 and 1998 Consolidated Statements of Cash Flows - For the Years Ended December 31, 1996, 1997 and 1998 Summary of Significant Accounting Policies Notes to Consolidated Financial Statements Schedule Included - For the Years Ended December 31, 1996, 1997 and 1998 Schedule II - Valuation and Qualifying Accounts All other Financial Statement Schedules have been omitted because the required information is shown in the financial statements or notes thereto, the amounts involved are not significant, or the schedules are not applicable. 3. Exhibits
Exhibit Number Name of Exhibit - ------ --------------- 3.1(1) Certificate of Incorporation of Modtech Holdings, Inc. 3.2(1) Bylaws of Modtech Holdings, Inc. 10.1(2) Modtech, Inc.'s 1996 Stock Option Plan. 10.2(3) Transaction Advisory Agreement. 10.3(4) Employment Agreement between the Company and Evan M. Gruber. 10.4(4) Employment Agreement between the Company and Patrick Van Den Bossche. 10.5(4) Employment Agreement between the Company and Michael G. Rhodes. 10.6(5) Amendment to Loan and Security Agreement. 10.7(6) Industrial Development Bond agreements. 10.8(6) Lease between the Company and Pacific Continental Modular Enterprises, relating to the Barrett Street property in Perris, California. 10.9(6) Lease between the Company and Gerald Bashaw, relating to the Morgan Street property in Perris, California. 10.10(6) Lease between the Company and BMG, relating to the property in Lathrop, California. 10.11(6) Form of Indemnity Agreement between the Company and its executive officers and directors. 10.12(3) Financial Advisory Services Agreement. 10.13 Credit Agreement. 27 Financial Data Schedule
- ------------- (1) Incorporated by reference to Modtech Holdings, Inc.'s Registration Statement on Form S-4 filed with the Commission on October 27, 1998 (Commission File No. 333-69033). (2) Incorporated by reference to Modtech, Inc.'s Registration Statement on Form S-8 filed with the Commission on December 11, 1996 (Commission File No. 333-17623). (3) Incorporated by reference to Amendment No. 2 to Modtech Holdings, Inc.'s Registration Statement on Form S-4, filed with the Commission on January 11, 1999 (Commission File No. 333-69033). (4) Incorporated by reference to Amendment No. 1 to Modtech Holdings, Inc.'s Registration Statement on Form S-4, filed with the Commission on December 15, 1998 (Commission File No. 333-69033). (5) Incorporated by reference to Modtech, Inc.'s Registration Statement on Form S-1 filed with the Commission on October 9, 1997 (Commission File No. 333-37473). (6) Incorporated by reference to Modtech, Inc.'s Registration Statement on Form S-1 filed with the Commission on June 6, 1990 (Commission File No. 033-035239). 20 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: APRIL 14, 1999 MODTECH HOLDINGS, INC., a Delaware corporation By: /s/ MICHAEL G. RHODES --------------------------- Michael G. Rhodes Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Capacities Date - ---- ---------- ---- /s/ EVAN M. GRUBER Director, Chairman of the Board, APRIL 14, 1999 - ----------------------------- Chief Executive Officer Evan M. Gruber /s/ ROBERT W. CAMPBELL Director APRIL 14, 1999 - ----------------------------- Robert W. Campbell /s/ DANIEL J. DONAHOE Director APRIL 14, 1999 - ----------------------------- Daniel J. Donahoe /s/ CHARLES R. GWIRTSMAN Director APRIL 14, 1999 - ----------------------------- Charles R. Gwirtsman /s/ CHARLES A. HAMILTON Director APRIL 14, 1999 - ----------------------------- Charles A. Hamilton /s/ CHARLES C. McGETTIGAN Director APRIL 14, 1999 - ----------------------------- Charles C. McGettigan /s/ PATRICK VAN DEN BOSSCHE Director, President APRIL 14, 1999 - ----------------------------- Patrick Van Den Bossche /s/ MYRON A. WICK III Director APRIL 14, 1999 - ----------------------------- Myron A. Wick III
21 22 MODTECH, INC. Annual Report - Form 10-K Consolidated Financial Statements and Schedule December 31, 1996, 1997 and 1998 (With Independent Auditors' Report Thereon) 23 INDEPENDENT AUDITORS' REPORT The Board of Directors Modtech, Inc.: We have audited the accompanying consolidated balance sheets of Modtech, Inc. and subsidiary as of December 31, 1997 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated 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 Modtech, Inc. and subsidiary as of December 31, 1997 and 1998 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Orange County, California March 17, 1999 24 MODTECH, INC. Consolidated Balance Sheets December 31, 1997 and 1998
ASSETS 1997 1998 ----------- ----------- Current assets: Cash $11,628,851 $40,142,355 Contracts receivable, less allowance for contract adjustments of $410,119 in 1997 and $429,107 in 1998 (note 2) 21,510,146 12,923,491 Costs and estimated earnings in excess of billings on contracts (notes 3 and 8) 16,020,986 3,823,364 Inventories 3,931,505 4,441,537 Due from affiliates (note 8) 1,052,634 2,343,968 Note receivable from affiliates (note 8) 45,212 45,212 Prepaid assets 83,585 261,525 Income tax receivable 184,710 2,367,924 Deferred tax asset (note 7) 2,094,059 3,440,199 Other current assets 42,274 18,502 ----------- ----------- Total current assets 56,593,962 69,808,077 ----------- ----------- Property and equipment, net (note 4) 11,229,163 12,313,675 Other assets 298,258 751,517 Deferred tax asset (note 7) 98,874 -- ----------- ----------- $68,220,257 $82,873,269 =========== ===========
See accompanying notes to consolidated financial statements. 25 MODTECH, INC. Consolidated Balance Sheets December 31, 1997 and 1998
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1998 ----------- ----------- Current liabilities: Accounts payable $ 2,421,346 $ 3,126,185 Accrued compensation 3,616,498 2,665,231 Accrued insurance expense 1,470,725 1,410,887 Other accrued liabilities 3,237,255 3,338,717 Income tax payable 1,017,027 -- Billings in excess of costs and estimated earnings on contracts (notes 3 and 8) 6,997,350 7,138,142 Current note payable (note 5) 42,185 -- Current maturities of long-term debt (note 6) 1,374,952 -- ----------- ----------- Total current liabilities 20,177,338 17,679,162 ----------- ----------- Deferred tax liability (note 7) -- 97,366 ----------- ----------- Total liabilities 20,177,338 17,776,528 ----------- ----------- Shareholders' equity: Common stock, $.01 par. Authorized 20,000,000 shares; issued and outstanding 9,819,959 and 9,871,409 in 1997 and 1998 (notes 10 and 11) 98,200 98,714 Additional paid-in capital 39,330,902 39,854,127 Retained earnings 8,613,817 25,143,900 ----------- ----------- Total shareholders' equity 48,042,919 65,096,741 ----------- ----------- Commitments and contingencies (notes 3, 8, 15 and 18) ----------- ----------- $68,220,257 $82,873,269 =========== ===========
See accompanying notes to consolidated financial statements. 26 MODTECH, INC. Consolidated Statements of Income Years ended December 31, 1996, 1997 and 1998
1996 1997 1998 ------------- ------------- ------------- Net sales (notes 8 and 13) $ 49,885,858 $ 134,050,485 $ 127,620,102 Cost of goods sold (note 8) 42,628,970 107,367,035 97,765,554 ------------- ------------- ------------- Gross profit 7,256,888 26,683,450 29,854,548 Selling, general, and administrative expenses 2,345,182 5,155,987 4,738,884 ------------- ------------- ------------- Income from operations 4,911,706 21,527,463 25,115,664 ------------- ------------- ------------- Other income (expense): Interest expense (445,631) (1,004,198) (204,535) Interest income 23,704 95,551 1,301,952 Other, net (13,116) 92,103 25,146 ------------- ------------- ------------- (435,043) (816,544) 1,122,563 ------------- ------------- ------------- Income before income taxes 4,476,663 20,710,919 26,238,227 Income taxes (note 7) (207,631) (7,702,634) (9,708,144) ------------- ------------- ------------- Net income $ 4,269,032 $ 13,008,285 $ 16,530,083 ------------- ------------- ------------- 5% Convertible preferred stock dividend (note 11) (47,500) -- -- Net income available to common stock $ 4,221,532 $ 13,008,285 $ 16,530,083 ============= ============= ============= Basic earnings per common share (note 12) $ 0.77 $ 1.47 $ 1.68 ============= ============= ============= Basic weighted-average shares outstanding (note 12) 5,461,007 8,853,786 9,857,422 ============= ============= ============= Diluted earnings per common share (note 12) $ 0.47 $ 1.31 $ 1.50 ============= ============= ============= Diluted weighted-average shares outstanding (note 12) 9,041,084 9,897,935 10,988,302 ============= ============= =============
See accompanying notes to consolidated financial statements. 27 MODTECH, INC. Consolidated Statements of Shareholders' Equity Years ended December 31, 1996, 1997 and 1998
(ACCUMULATED 5% CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL DEFICIT) ------------------------------ ---------------------------- PAID-IN RETAINED SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ------------ ------------ ------------ ------------ ------------ ------------ 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 (note 11) (2,850,000) (2,685,500) 2,850,000 28,500 2,656,500 -- 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 $753,874 (notes 7 and 10) -- -- 170,523 1,706 1,119,890 -- Secondary offering - Net (note 16) -- -- 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 Exercise of options, including tax benefit of $451,563 (notes 7 and 10) -- -- 51,450 514 523,225 -- Net income -- -- -- -- -- 16,530,083 ------------ ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1998 -- $ -- 9,871,409 $ 98,714 $ 39,854,127 $ 25,143,900 ============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 28 MODTECH, INC. Consolidated Statements of Cash Flows Years ended December 31, 1996, 1997 and 1998
1996 1997 1998 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 4,269,032 $ 13,008,285 $ 16,530,083 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 540,421 1,344,098 1,247,557 Provision for contract adjustments (5,283) -- -- Loss (gain) on sale of equipment 17,265 (9,177) (1,500) (Increase) decrease in assets, net of effects from acquisition: Contracts receivable (7,135,702) (11,200,285) 8,922,813 Costs and estimated earnings in excess of billings (7,648,812) (6,918,253) 12,197,622 Inventories (3,520,404) 235,195 54,579 Amounts due from affiliates 686,774 (298,567) (1,291,334) Prepaids and other assets (12,947) 83,673 (543,045) Income tax receivable -- -- (2,183,214) Deferred tax asset -- (2,192,933) (960,702) Increase (decrease) in liabilities, net of effects from acquisition: Accounts payable 5,304,183 (3,988,076) 186,075 Accrued compensation 1,081,171 2,247,057 (974,453) Accrued insurance expense 526,813 919,145 (59,838) Other accrued liabilities 465,766 2,147,816 271,805 Income tax payable 184,919 813,010 (852,028) Deferred tax liability -- -- 97,366 Billings in excess of costs and earnings 388,448 5,849,300 140,792 ------------ ------------ ------------ Net cash provided by (used in) operating activities (4,858,356) 2,040,288 32,782,578 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from sale of equipment 5,550 60,604 1,500 Purchase of property and equipment (1,958,303) (4,071,968) (2,125,613) Acquisition of subsidiary -- -- (800,000) ------------ ------------ ------------ Net cash used in investing activities (1,952,753) (4,011,364) (2,924,113) ------------ ------------ ------------
(Continued) 29 MODTECH, INC. Consolidated Statements of Cash Flows, Continued
1996 1997 1998 ------------ ------------ ------------ Cash flows from financing activities: Net principal borrowings (payments) under revolving credit lines $ 4,353,843 $ (5,901,668) $ (42,185) Principal payments on long-term debt -- (625,000) (1,374,952) Net proceeds from issuance of common stock 2,348,327 19,721,614 72,176 Declared dividends (note 11) (47,500) -- -- ------------ ------------ ------------ Net cash provided by (used in) financing activities 6,654,670 13,194,946 (1,344,961) ------------ ------------ ------------ Net increase (decrease) in cash (156,439) 11,223,870 28,513,504 Cash at beginning of year 561,420 404,981 11,628,851 ------------ ------------ ------------ Cash at end of year $ 404,981 $ 11,628,851 $ 40,142,355 ============ ============ ============
See accompanying notes to consolidated financial statements. 30 MODTECH, INC. Notes to Consolidated Financial Statements December 31, 1996, 1997 and 1998 (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Modtech, Inc. and its majority owned subsidiary (the Company) design, manufacture, market and install modular relocatable classrooms and other modular buildings for commercial use. 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. The Company's modular classrooms include standardized units prefabricated at its manufacturing facilities, as well as customized units that are modular in design but constructed on site using components manufactured by the Company. In addition to modular relocatable classrooms, the Company also manufactures modular, portable buildings which can be used as office facilities and construction trailers and for other commercial purposes, including modular structures that house and shelter electronic equipment used in the wireless telecommunications industry. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial statements of Modtech, Inc. and its majority owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES 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 note 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 Contracts are recognized 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. 31 MODTECH, INC. Notes to Consolidated Financial Statements, Continued Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling, general, and administrative costs are charged to expense as incurred. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is recognized in the financial statements. The current asset, "Costs and Estimated Earnings in Excess of Billings on Contracts," represents revenues recognized in excess of amounts billed. The current liability, "Billings in Excess of Costs and Estimated Earnings on Contracts," represents billings in excess of revenues recognized. 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 are calculated 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 HELD FOR DISPOSAL Long-lived assets and certain identifiable intangibles are 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. STOCK OPTION PLANS Prior to January 1, 1996, the Company accounted for stock option plans 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 recognized on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standard No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to 32 MODTECH, INC. Notes to Consolidated Financial Statements, Continued 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 replaced 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. INCOME TAXES 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 1996 and 1997 financial statements have been reclassified to conform to the 1998 presentation. (2) CONTRACTS RECEIVABLE Contracts receivable consisted of customer billings for:
1997 1998 ------------ ------------ Completed contracts $ 9,226,114 $ 5,936,682 Contracts in progress 9,444,794 5,134,815 Retentions 3,249,357 2,281,101 ------------ ------------ 21,920,265 13,352,598 Less allowance for contract adjustments (410,119) (429,107) ------------ ------------ $ 21,510,146 $ 12,923,491 ============ ============
(3) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON CONTRACTS Net costs and estimated earnings in excess of billings on contracts consisted of: 33 MODTECH, INC. Notes to Consolidated Financial Statements, Continued
1997 1998 ------------- ------------- Net costs and estimated earnings on uncompleted contracts $ 105,465,154 $ 96,036,279 Billings to date (96,144,454) (99,722,520) ------------- ------------- 9,320,700 (3,686,241) Net under (over) billed receivables from completed contracts (297,064) 371,463 ------------- ------------- $ 9,023,636 $ (3,314,778) ============= =============
These amounts are shown in the accompanying balance sheets under the following captions:
1997 1998 ------------ ------------ Costs and estimated earnings in excess of billings on uncompleted contracts $ 15,832,818 $ 3,372,864 Costs and estimated earnings in excess of billings on completed contracts 188,168 450,500 ------------ ------------ Costs and estimated earnings in excess of billings 16,020,986 3,823,364 ------------ ------------ Billings in excess of costs and estimated earnings on uncompleted contracts (6,512,121) (7,059,106) Billings in excess of costs and estimated earnings on completed contracts (485,229) (79,036) ------------ ------------ Billings in excess of costs and estimated earnings (6,997,350) (7,138,142) ------------ ------------ $ 9,023,636 $ (3,314,778) ============ ============
(4) PROPERTY AND EQUIPMENT, NET Property and equipment, net consists of:
1997 1998 ------------ ------------ Land $ -- $ 451,281 Leasehold improvements 10,764,783 11,528,459 Machinery and equipment 4,347,692 4,508,908 Trucks and automobiles 181,001 191,402 Office equipment 364,510 651,436 Construction in progress 354,826 293,860 ------------ ------------ 16,012,812 17,625,346 Less accumulated depreciation and amortization (4,783,649) (5,311,671) ------------ ------------ $ 11,229,163 $ 12,313,675 ============ ============
34 MODTECH, INC. Notes to Consolidated Financial Statements, Continued (5) NOTE PAYABLE - REVOLVING CREDIT AGREEMENT The Company's revolving credit facility, which was scheduled to expire in September 2000, was paid off on December 4, 1998 and the revolving loan commitment was terminated. Actual outstanding borrowings were $42,185 at December 31, 1997. (6) LONG-TERM DEBT Long-term debt consists of:
1997 1998 ----------- ----------- Industrial development bonds $ 1,374,952 $ -- Less current portion of long-term debt (1,374,952) -- ----------- ----------- $ -- $ -- =========== ===========
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 the Company's manufacturing facility on leased property located in Lathrop, California. The Company fully utilized the bonds at December 31, 1991. The bonds were paid in full during 1998. (7) INCOME TAXES The components of the 1996, 1997 and 1998 provision for Federal and state income tax (expense) benefit computed in accordance with Financial Accounting Standard No. 109 are summarized below:
1996 1997 1998 ------------ ------------ ------------ Current: Federal $ (90,483) $ (7,874,257) $ (8,585,201) State (117,148) (2,021,309) (2,272,844) ------------ ------------ ------------ (207,631) (9,895,566) (10,858,045) Deferred: Federal -- 1,634,085 593,693 State -- 558,847 556,208 ------------ ------------ ------------ $ (207,631) $ (7,702,634) $ (9,708,144) ============ ============ ============
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: 35 MODTECH, INC. Notes to Consolidated Financial Statements, Continued
1996 1997 1998 ------ ------ ------ Taxes, U.S. statutory rates (34.0%) (35.0%) (35.0%) State taxes, less Federal benefit -- (4.5) (4.0) Reduction in Federal valuation allowance -- -- 2.0 Utilization of income tax benefit relating to loss carryover 34.0 3.8 -- Other (4.6) (1.5) -- ------ ------ ------ Total taxes on income (4.6%) (37.2%) (37.0%) ====== ====== ======
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, 1997 and 1998 are as follows:
1997 1998 ----------- ----------- Deferred tax assets: Reserves and accruals not recognized for income tax purposes $ 2,490,821 $ 2,672,468 State taxes 474,653 578,535 Other 368,579 265,732 ----------- ----------- Total gross deferred tax assets 3,334,053 3,516,735 Less valuation allowance (1,059,576) -- ----------- ----------- Net deferred tax assets $ 2,274,477 $ 3,516,735 =========== =========== Deferred tax liabilities: Revenue recognition $ (73,589) $ (8,182) Prepaids (7,955) (165,720) ----------- ----------- Total gross deferred tax liabilities (81,544) (173,902) ----------- ----------- Net deferred tax assets $ 2,192,933 $ 3,342,833 =========== ===========
These amounts have been presented in the balance sheet as follows:
1997 1998 ----------- ----------- Current deferred tax asset $ 2,094,059 $ 3,440,199 Noncurrent deferred tax asset 98,874 -- ----------- ----------- Total gross deferred tax assets 2,192,933 3,440,199 Noncurrent deferred tax liability -- (97,366) ----------- ----------- Total deferred tax assets $ 2,192,933 $ 3,342,833 =========== ===========
36 MODTECH, INC. Notes to Consolidated Financial Statements, Continued The valuation allowance for deferred tax assets as of December 31, 1997 and 1998 was $1,059,576 and $0, respectively. The net change in the total valuation allowance for the years ended December 31, 1997 and 1998 was a decrease of $99,138 and $1,059,576, respectively. Management believes the existing net deductible temporary differences will reverse during periods in which the Company will have the ability to utilize the deductions to offset other reversing temporary differences which give rise to taxable income. (8) TRANSACTIONS WITH RELATED PARTIES SALES The Company sells modular classrooms to certain companies and partnerships, the shareholders and partners of which 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:
1996 1997 1998 ---------- ---------- ---------- Sales $1,452,868 $2,942,313 $2,675,457 Cost of goods sold 1,239,425 2,530,803 2,116,691 Gross profit percentage 14.69% 13.99% 20.90% ========== ========== ==========
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, 1997 and 1998 these amounts totaled $825,963 and $2,171,896, respectively. Additional amounts arising from these transactions are included in the following captions:
1997 1998 ----------- ----------- Costs and estimated earnings in excess of billings on uncompleted contracts $ 1,406,897 $ 492,418 Billings in excess of costs and estimated earnings on uncompleted contracts (65,405) (90,838) =========== ===========
NOTE RECEIVABLE At December 31, 1997 and 1998, the Company had a 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 $226,671 at December 31, 1997 and $160,590 at December 31, 1998 and is included in due from affiliates. The Company has negotiated payment terms on the accrued interest and is receiving regular interest payments. 37 MODTECH, INC. Notes to Consolidated Financial Statements, Continued OPERATING LEASES Certain manufacturing facilities are leased from the Company's Chairman and partnerships composed of an officer and certain shareholders. These related party leases require monthly payments which aggregate $41,000. In connection with the lease at the Lathrop facility, the Company made an $83,000 security deposit during 1990. Future minimum lease payments under these leases are discussed in note 15. Included in cost of goods sold is $447,000, $444,000 and $478,000 in rent expense paid to related parties for the years ended December 31, 1996, 1997, and 1998, 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 $53,031, $77,016 and $100,452 in 1996, 1997, and 1998, 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, 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 Exercised (38,450) 0.81 -------- ----- December 31, 1998 167,600 $1.88 ======== =====
38 MODTECH, INC. Notes to Consolidated Financial Statements, Continued As of December 31, 1998, 158,520 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, no options were exercised during 1998 and 75,000 shares remained outstanding as of December 31, 1998. 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 under the March 1994 Plan are summarized as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE -------- ---------------- 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 Exercised (6,600) 1.50 -------- ----- December 31, 1998 162,500 $1.19 ======== =====
As of December 31, 1998, 162,500 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 SHARES EXERCISE PRICE ------------ ---------------- December 31, 1995 285,000 $ 1.60 Granted 205,000 2.59 Terminated (37,500) 1.50 Exercised (12,500) 1.50 ------------ ------------
39 MODTECH, INC. Notes to Consolidated 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 Granted 40,000 20.05 Exercised (5,775) 3.99 ------------ ------------ December 31, 1998 472,350 $ 3.80 ============ ============
As of December 31, 1998, 339,914 options are vested and exercisable at prices ranging from $1.50 to $19.50 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 Granted 130,869 19.58 Exercised (625) 12.88 ------------ ------------ December 31, 1998 482,577 $ 10.82 ============ ============
As of December 31, 1998, 149,833 options are vested and exercisable at prices ranging from $4.50 to $12.88 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, 1997 and 1998 was $1.94, $9.05 and $11.27, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 40 MODTECH, INC. Notes to Consolidated Financial Statements, Continued
1996 1997 1998 ------- ------- ------- Expected dividend yield 0% 0% 0% Average risk-free interest rate 7.8% 7.8% 5.6% Volatility factor 72.66% 73.06% 71.15% Expected life 4 years 4 years 4 years ======= ======= =======
The Company applies APB Opinion No. 25 in accounting for its Plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
1996 1997 1998 -------------- -------------- -------------- Net Income As Reported $ 4,269,032 $ 13,008,285 $ 16,530,083 Pro Forma 3,657,659 12,044,970 15,424,671 ============== ============== ============== Basic earnings per share As Reported $ 0.77 $ 1.47 $ 1.68 Pro forma 0.67 1.36 1.57 ============== ============== ============== Diluted earnings per share As Reported $ 0.47 $ 1.31 $ 1.50 Pro Forma 0.40 1.22 1.40 ============== ============== ==============
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 with 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 $47,500 were declared for the year ended December 31, 1996. (12) EARNINGS PER SHARE 41 MODTECH, INC. Notes to Consolidated Financial Statements, Continued As discussed in Note 1, the Company adopted SFAS No. 128 effective December 31, 1997. The following table illustrates the calculation of basic and diluted earnings per common share under the provisions of SFAS No. 128:
1996 1997 1998 ----------- ----------- ----------- BASIC Net income $ 4,269,032 $13,008,285 $16,530,083 Dividends on preferred stock (note 11) (47,500) -- -- ----------- ----------- ----------- Net income available to common stock $ 4,221,532 $13,008,285 $16,530,083 =========== =========== =========== Weighted-average common shares outstanding 5,461,007 8,853,786 9,857,422 =========== =========== =========== Basic earnings per common share $ 0.77 $ 1.47 $ 1.68 =========== =========== =========== DILUTED Net income available to common stock $ 4,221,532 $13,008,285 $16,530,083 =========== =========== =========== Weighted-average common shares outstanding 5,461,007 8,853,786 9,857,422 Add: Exercise of options 3,580,077 1,044,149 1,130,880 ----------- ----------- ----------- Adjusted weighted-average common shares outstanding 9,041,084 9,897,935 10,988,302 =========== =========== =========== Diluted earnings per common share $ 0.47 $ 1.31 $ 1.50 =========== =========== ===========
(13) MAJOR CUSTOMER Sales to two major customers represented the following percentage of net sales:
1996 1997 1998 --------- --------- --------- Customer A 13% 4% 11% Customer B 4% 11% 5% ========= ========= =========
(14) SUPPLEMENTAL CASH FLOW DISCLOSURES SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1996 1997 1998 ----------- ----------- ----------- Cash paid during the year for: Interest $ 470,248 $ 1,058,256 $ 209,677 =========== =========== =========== Income taxes $ 24,320 $ 8,400,000 $13,755,000 =========== =========== ===========
42 MODTECH, INC. Notes to Consolidated Financial Statements, Continued SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES: 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). (15) 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: 1999 $ 487,000 2000 487,000 2001 487,000 2002 487,000 2003 487,000 Thereafter 6,244,000 ---------- $ 8,679,000 ==========
Of the $8,679,000 in future rental payments, substantially all is payable to related parties (note 8). Rent expense for the years ended December 31, 1996, 1997 and 1998 was $447,000, $522,000 and $713,000, respectively. (16) SECONDARY STOCK OFFERING In November 1997 the Company held a secondary offering of 1,000,000 shares of common stock, which were sold 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 were used as additions to working capital. (17) WARRANTY The Company provides a one year warranty relating to the workmanship on their modular units. Purchased equipment installed by the Company, such as air conditioning units, carry the manufacturers' standard warranty. To date, warranty costs incurred on completed contracts have been immaterial. (18) PENDING CLAIMS AND LITIGATION The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the outcome of the claims will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 43 MODTECH, INC. Notes to Consolidated Financial Statements, Continued (19) SUBSEQUENT EVENTS SPI Merger. On February 16, 1999, Modtech, Inc. ("Modtech") and SPI Holdings, Inc., a Colorado corporation ("SPI") merged pursuant to the Agreement and Plan of Reorganization and Merger, dated as of September 28, 1998 (the "Merger Agreement"), between Modtech and SPI, and the mergers contemplated therein. SPI is a designer, manufacturer and wholesaler of commercial and light industrial modular buildings. Pursuant to the Merger Agreement, SPI was merged with a subsidiary of Modtech Holdings, Inc. ("Holdings"), a newly formed Delaware corporation (the "SPI Merger"). Concurrently, Modtech was merged with a separate subsidiary of Holdings (the "Modtech Merger"). Pursuant to the mergers, both SPI and Modtech became wholly owned subsidiaries of Holdings. The SPI Merger will be accounted for by the purchase method of accounting. In connection with the SPI Merger, SPI stockholders received approximately $8 million in cash and approximately 4.3 million shares of Holdings Common Stock. Holdings refinanced approximately $32 million of SPI debt. In connection with the Modtech Merger, Modtech stockholders received approximately $40 million in cash, approximately 8.3 million shares of Holdings Common Stock and 388,939 shares of Holdings Series A Preferred Stock. In connection with both mergers, Holdings incurred a total of approximately $51 million of debt. Coastal Acquisition. In March 1999, Holdings purchased 100% of the stock of Coastal Modular Buildings, Inc. ("Coastal"). Coastal designs and manufactures modular relocatable classrooms and other modular buildings for commercial use. Coastal is based in St. Petersburg, Florida. The acquisition will be accounted for by the purchase method of accounting. 44 Schedule II MODTECH, INC. Valuation and Qualifying Accounts Years ended December 31, 1996, 1997, and 1998
BALANCE AT ACQUIRED AMOUNTS BEGINNING THROUGH CHARGED BALANCE AT DESCRIPTION OF YEAR ACQUISITION TO EXPENSE DEDUCTIONS END OF YEAR - ----------------------------------- ---------- -------------- -------------- ---------- ------------ Allowance for contract adjustments: Year ended December 31, 1996 $408,090 $ -- $ 5,866 $ (583) $413,373 ======== ============== ============== ======== ======== Year ended December 31, 1997 $413,373 $ -- $ -- $ (3,254) $410,119 ======== ============== ============== ======== ======== Year ended December 31, 1998 $410,119 $ 30,988 $ -- $(12,000) $429,107 ======== ============== ============== ======== ========
45 EXHIBIT INDEX
Exhibit Number Name of Exhibit - ------ --------------- 3.1(1) Certificate of Incorporation of Modtech Holdings, Inc. 3.2(1) Bylaws of Modtech Holdings, Inc. 10.1(2) Modtech, Inc.'s 1996 Stock Option Plan. 10.2(3) Transaction Advisory Agreement. 10.3(4) Employment Agreement between the Company and Evan M. Gruber. 10.4(4) Employment Agreement between the Company and Patrick Van Den Bossche. 10.5(4) Employment Agreement between the Company and Michael G. Rhodes. 10.6(5) Amendment to Loan and Security Agreement. 10.7(6) Industrial Development Bond agreements. 10.8(6) Lease between the Company and Pacific Continental Modular Enterprises, relating to the Barrett Street property in Perris, California. 10.9(6) Lease between the Company and Gerald Bashaw, relating to the Morgan Street property in Perris, California. 10.10(6) Lease between the Company and BMG, relating to the property in Lathrop, California. 10.11(6) Form of Indemnity Agreement between the Company and its executive officers and directors. 10.12(3) Financial Advisory Services Agreement. 10.13 Credit Agreement. 27 Financial Data Schedule
- ------------- (1) Incorporated by reference to Modtech Holdings, Inc.'s Registration Statement on Form S-4 filed with the Commission on October 27, 1998 (Commission File No. 333-69033). (2) Incorporated by reference to Modtech, Inc.'s Registration Statement on Form S-8 filed with the Commission on December 11, 1996 (Commission File No. 333-17623). (3) Incorporated by reference to Amendment No. 2 to Modtech Holdings, Inc.'s Registration Statement on Form S-4, filed with the Commission on January 11, 1999 (Commission File No. 333-69033). (4) Incorporated by reference to Amendment No. 1 to Modtech Holdings, Inc.'s Registration Statement on Form S-4, filed with the Commission on December 15, 1998 (Commission File No. 333-69033). (5) Incorporated by reference to Modtech, Inc.'s Registration Statement on Form S-1 filed with the Commission on October 9, 1997 (Commission File No. 333-37473). (6) Incorporated by reference to Modtech, Inc.'s Registration Statement on Form S-1 filed with the Commission on June 6, 1990 (Commission File No. 033-035239). EX-10.13 2 CREDIT AGREEMENT 1 EXHIBIT 10.13 CREDIT AGREEMENT Dated as of February 16, 1999 among MODTECH HOLDINGS, INC. as Borrower, CERTAIN SUBSIDIARIES OF THE BORROWER FROM TIME TO TIME PARTY HERETO, as Guarantors, THE SEVERAL LENDERS FROM TIME TO TIME PARTY HERETO, NATIONSBANC MONTGOMERY SECURITIES LLC, as Sole Lead Arranger and Sole Book Manager and NATIONSBANK, N. A., as Administrative Agent 2 TABLE OF CONTENTS SECTION 1 DEFINITIONS............................................................................................1 1.1 Definitions..........................................................................................1 1.2 Computation of Time Periods.........................................................................26 1.3 Accounting Terms....................................................................................26 SECTION 2 CREDIT FACILITIES.....................................................................................27 2.1 Revolving Loans.....................................................................................27 2.2 Letter of Credit Subfacility of the Revolver........................................................29 2.3 Swingline Loan Subfacility of the Revolver..........................................................33 2.4 Tranche A Term Loan.................................................................................35 2.5 Delayed Draw Term Loan..............................................................................38 SECTION 3 OTHER PROVISIONS RELATING TO CREDIT FACILITIES........................................................40 3.1 Default Rate........................................................................................40 3.2 Extension and Conversion............................................................................40 3.3 Prepayments.........................................................................................41 3.4 Termination and Reduction of Revolving Committed Amount.............................................43 3.5 Fees................................................................................................43 3.6 Capital Adequacy....................................................................................45 3.7 Limitation on Eurodollar Loans......................................................................45 3.8 Illegality..........................................................................................46 3.9 Requirements of Law.................................................................................46 3.10 Treatment of Affected Loans........................................................................47 3.11 Taxes..............................................................................................48 3.12 Compensation.......................................................................................49 3.13 Pro Rata Treatment.................................................................................50 3.14 Sharing of Payments................................................................................51 3.15 Payments, Computations, Etc........................................................................51 3.16 Evidence of Debt...................................................................................53 SECTION 4 GUARANTY..............................................................................................54 4.1 The Guaranty........................................................................................54 4.2 Obligations Unconditional...........................................................................54 4.3 Reinstatement.......................................................................................56 4.4 Certain Additional Waivers..........................................................................56 4.5 Remedies............................................................................................56 4.6 Rights of Contribution..............................................................................56 4.7 Guarantee of Payment; Continuing Guarantee..........................................................57 SECTION 5 CONDITIONS............................................................................................58 5.1 Closing Conditions..................................................................................58 5.2 Conditions to all Extensions of Credit..............................................................64 SECTION 6 REPRESENTATIONS AND WARRANTIES........................................................................66 6.1 Financial Condition.................................................................................66 6.2 No Material Change..................................................................................67
3 6.3 Organization and Good Standing......................................................................68 6.4 Power; Authorization; Enforceable Obligations.......................................................68 6.5 No Conflicts........................................................................................68 6.6 No Default..........................................................................................69 6.7 Ownership...........................................................................................69 6.8 Indebtedness........................................................................................69 6.9 Litigation..........................................................................................69 6.10 Taxes..............................................................................................69 6.11 Compliance with Law................................................................................69 6.12 ERISA..............................................................................................70 6.13 Subsidiaries.......................................................................................71 6.14 Governmental Regulations, Etc......................................................................71 6.15 Purpose of Loans and Letters of Credit.............................................................72 6.16 Environmental Matters..............................................................................73 6.17 Intellectual Property..............................................................................74 6.18 Solvency...........................................................................................74 6.19 Investments........................................................................................74 6.20 Location of Collateral.............................................................................74 6.21 Disclosure.........................................................................................74 6.22 No Burdensome Restrictions.........................................................................74 6.23 Brokers' Fees......................................................................................75 6.24 Labor Matters......................................................................................75 6.25 Nature of Business.................................................................................75 6.26 Merger Agreement...................................................................................75 6.27 Year 2000 Compliance...............................................................................75 6.28 Collateral Documents...............................................................................75 SECTION 7 AFFIRMATIVE COVENANTS.................................................................................76 7.1 Information Covenants...............................................................................76 7.2 Preservation of Existence and Franchises............................................................79 7.3 Books and Records...................................................................................79 7.4 Compliance with Law.................................................................................79 7.5 Payment of Taxes and Other Indebtedness.............................................................80 7.6 Insurance...........................................................................................80 7.7 Maintenance of Property.............................................................................82 7.8 Performance of Obligations..........................................................................82 7.9 Use of Proceeds.....................................................................................82 7.10 Audits/Inspections.................................................................................82 7.11 Financial Covenants................................................................................82 7.12 Additional Guarantors..............................................................................83 7.13 Pledged Assets.....................................................................................83 7.14 Year 2000 Compliance...............................................................................84 7.15 Fiscal Year; Reincorporation Mergers...............................................................84 7.16 Post-Closing Conditions............................................................................85 SECTION 8 NEGATIVE COVENANTS....................................................................................85 8.1 Indebtedness........................................................................................85
4 8.2 Liens...............................................................................................86 8.3 Nature of Business..................................................................................86 8.4 Consolidation, Merger, Dissolution, etc.............................................................87 8.5 Asset Dispositions..................................................................................87 8.6 Investments.........................................................................................88 8.7 Restricted Payments.................................................................................88 8.8 Other Indebtedness..................................................................................88 8.9 Transactions with Affiliates........................................................................89 8.10 Fiscal Year; Organizational Documents..............................................................89 8.11 Limitation on Restricted Actions...................................................................90 8.12 Ownership of Subsidiaries; Limitations on Borrower.................................................90 8.13 Sale Leasebacks....................................................................................91 8.14 Capital Expenditures...............................................................................91 8.15 No Further Negative Pledges........................................................................91 8.16 Operating Lease Obligations........................................................................91 8.17 No Foreign Subsidiaries............................................................................91 SECTION 9 EVENTS OF DEFAULT.....................................................................................92 9.1 Events of Default...................................................................................92 9.2 Acceleration; Remedies..............................................................................94 SECTION 10 AGENCY PROVISIONS....................................................................................95 10.1 Appointment, Powers and Immunities.................................................................95 10.2 Reliance by Administrative Agent...................................................................96 10.3 Defaults...........................................................................................96 10.4 Rights as a Lender.................................................................................96 10.5 Indemnification....................................................................................97 10.6 Non-Reliance on Administrative Agent and Other Lenders.............................................97 10.7 Successor Administrative Agent.....................................................................97 SECTION 11 MISCELLANEOUS........................................................................................98 11.1 Notices............................................................................................98 11.2 Right of Set-Off; Adjustments......................................................................99 11.3 Benefit of Agreement...............................................................................99 11.4 No Waiver; Remedies Cumulative....................................................................101 11.5 Expenses; Indemnification.........................................................................101 11.6 Amendments, Waivers and Consents.................................................................102 11.7 Counterparts......................................................................................104 11.8 Headings..........................................................................................104 11.9 Survival..........................................................................................104 11.10 Governing Law; Submission to Jurisdiction; Venue.................................................104 11.11 Severability.....................................................................................105 11.12 Entirety.........................................................................................105 11.13 Binding Effect; Termination......................................................................105 11.14 Confidentiality..................................................................................106 11.15 Source of Funds..................................................................................106 11.16 Conflict.........................................................................................107
5 SCHEDULES Schedule 1.1A Investments Schedule 1.1B Liens Schedule 2.1(a) Lenders Schedule 5.1(c)(i) Form of Legal Opinion (General External Counsel) Schedule 5.1(c)(ii) Form of Legal Opinion (Local Corporate Counsel) Schedule 5.1(c)(iii) Form of Legal Opinion (Local Collateral Counsel) Schedule 5.1(e) Mortgaged Properties Schedule 5.1(h) Corporate Structure Schedule 6.4 Required Consents, Authorizations, Notices and Filings Schedule 6.9 Litigation Schedule 6.12 ERISA Schedule 6.13 Subsidiaries Schedule 6.16 Environmental Disclosures Schedule 6.17 Intellectual Property Schedule 6.20(a) Mortgaged Properties Schedule 6.20(b) Collateral Locations Schedule 6.20(c) Chief Executive Offices/Principal Places of Business Schedule 6.23 Broker's Fees Schedule 6.24 Labor Matters Schedule 7.6 Insurance Schedule 8.1 Indebtedness Schedule 8.9 Transactions with Affiliates EXHIBITS Exhibit 1.1A Form of Pledge Agreement Exhibit 1.1B Form of Security Agreement Exhibit 1.1C Terms of Subordinated Indebtedness Exhibit 2.1(b)(i) Form of Notice of Borrowing Exhibit 2.1(e) Form of Revolving Note Exhibit 2.3(d) Form of Swingline Note Exhibit 2.4(f) Form of Tranche A Term Note Exhibit 2.5(f) Form of Delayed Draw Term Note Exhibit 3.2 Form of Notice of Extension/Conversion Exhibit 7.1(c) Form of Officer's Compliance Certificate Exhibit 7.12 Form of Joinder Agreement Exhibit 11.3(b) Form of Assignment and Acceptance 6 CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of February 16, 1999 (as amended, modified, restated or supplemented from time to time, the "Credit Agreement"), is by and among MODTECH HOLDINGS, INC., a Delaware corporation (the "Borrower"), the Guarantors (as defined herein), the Lenders (as defined herein), NATIONSBANC MONTGOMERY SECURITIES LLC, as Sole Lead Arranger and Sole Book Manager, and NATIONSBANK, N. A., as Administrative Agent for the Lenders (in such capacity, the "Administrative Agent"). W I T N E S S E T H WHEREAS, the Borrower has requested that the Lenders provide credit facilities in an aggregate amount of $100,000,000 (the "Credit Facilities") for the purposes hereinafter set forth; and WHEREAS, the Lenders have agreed to make the requested Credit Facilities available to the Borrower on the terms and conditions hereinafter set forth; NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1 DEFINITIONS 1.1 DEFINITIONS. As used in this Credit Agreement, the following terms shall have the meanings specified below unless the context otherwise requires: "Acquisition", by any Person, means the acquisition by such Person of all of the Capital Stock or all or substantially all of the Property of another Person, whether or not involving a merger or consolidation with such other Person. "Adjusted Base Rate" means the Base Rate plus the Applicable Percentage. "Adjusted Eurodollar Rate" means the Eurodollar Rate plus the Applicable Percentage. "Administrative Agent" shall have the meaning assigned to such term in the heading hereof, together with any successors or assigns. 7 "Administrative Agent's Fee Letter" means that certain letter agreement, dated as of the date hereof, between the Borrower and the Administrative Agent, as the same may be amended, modified, restated or supplemented from time to time. "Administrative Agent's Fees" shall have the meaning assigned to such term in Section 3.5(d). "Affiliate" means, with respect to any Person, any other Person (i) directly or indirectly controlling or controlled by or under direct or indirect common control with such Person or (ii) directly or indirectly owning or holding five percent (5%) or more of the Capital Stock of such Person. For purposes of this definition, "control", when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agency Services Address" means NationsBank, N. A., NC1-001-15-04, 101 North Tryon Street, Charlotte, North Carolina 28255, Attn: Agency Services, or such other address as may be identified by written notice from the Administrative Agent to the Borrower. "Applicable Lending Office" means, for each Lender, the office of such Lender (or of an Affiliate of such Lender) as such Lender may from time to time specify to the Administrative Agent and the Borrower by written notice as the office by which its Eurodollar Loans are made and maintained. "Applicable Percentage" means, for purposes of calculating the applicable interest rate for any day for any Loan, the applicable rate of the Unused Fee for any day for purposes of Section 3.5(b), and the applicable rate of the Letter of Credit Fee for any day for purposes of Section 3.5(c), the appropriate applicable percentage corresponding to the Leverage Ratio in effect as of the most recent Calculation Date:
- -------------------------------------------------------------------------------------------------------------- APPLICABLE PERCENTAGES --------------------------------------------------------------------------------- PRICING LEVERAGE RATIO FOR EURODOLLAR LOANS FOR BASE RATE LOANS FOR LETTER OF FOR UNUSED FEE LEVEL CREDIT FEE - -------------------------------------------------------------------------------------------------------------- I > 2.0 to 1.0 2.25% 1.00% 2.25% 0.50% - -------------------------------------------------------------------------------------------------------------- < 2.0 to 1.0 II but > 1.5 to 2.00% 0.75% 2.00% 0.50% 1.0 - -------------------------------------------------------------------------------------------------------------- < 1.5 to 1.0 III but > 1.0 to 1.75% 0.50% 1.75% 0.50% 1.0 - -------------------------------------------------------------------------------------------------------------- IV < 1.0 to 1.0 1.50% 0.25% 1.50% 0.375% - - --------------------------------------------------------------------------------------------------------------
The Applicable Percentages shall be determined and adjusted quarterly on the date (each a "Calculation Date") five Business Days after the date by which the Credit Parties are 2 8 required to provide the officer's certificate in accordance with the provisions of Section 7.1(c) for the most recently ended fiscal quarter of the Consolidated Parties; provided, however, that (i) the initial Applicable Percentages shall be based on Pricing Level III and shall remain at Pricing Level III until the Calculation Date for the fiscal quarter of the Consolidated Parties ending on June 30, 1999, on and after which time the Pricing Level shall be determined by the Leverage Ratio as of the last day of the most recently ended fiscal quarter of the Consolidated Parties preceding the applicable Calculation Date, and (ii) if the Credit Parties fail to provide the officer's certificate to the Agency Services Address as required by Section 7.1(c) for the last day of the most recently ended fiscal quarter of the Consolidated Parties preceding the applicable Calculation Date, the Applicable Percentage from such Calculation Date shall be based on Pricing Level I until such time as an appropriate officer's certificate is provided, whereupon the Pricing Level shall be determined by the Leverage Ratio as of the last day of the most recently ended fiscal quarter of the Consolidated Parties preceding such Calculation Date. Each Applicable Percentage shall be effective from one Calculation Date until the next Calculation Date. Any adjustment in the Applicable Percentages shall be applicable to all existing Loans and Letters of Credit as well as any new Loans and Letters of Credit made or issued. "Application Period", in respect of any Asset Disposition, shall have the meaning assigned to such term in Section 8.5. "Approved Shareholders" means Infrastructure and Environmental Private Equity Fund III, L.P. and its Affiliates, Environmental & Information Technology Private Equity Fund III, L.P. and its Affiliates, Proactive Partners, L.P. and its Affiliates, KRG Capital Partners, LLC and its members and NationsCredit Commercial Corporation and its Affiliates. "Asset Disposition" means any disposition, other than pursuant to an Excluded Asset Disposition, of any or all of the Property (including, without limitation, the Capital Stock of a Subsidiary) of any Credit Party, whether by sale, lease, transfer or otherwise. "Asset Disposition Prepayment Event" means, with respect to any Asset Disposition, the failure of the Credit Parties to apply (or cause to be applied) the Net Cash Proceeds of such Asset Disposition to Eligible Reinvestments during the Application Period for such Asset Disposition. "Bankruptcy Code" means the Bankruptcy Code in Title 11 of the United States Code, as amended, modified, succeeded or replaced from time to time. "Bankruptcy Event" means, with respect to any Person, the occurrence of any of the following with respect to such Person: (i) a court or governmental agency having jurisdiction in the premises shall enter a decree or order for relief in respect of such Person in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its Property or ordering the winding up or liquidation of its affairs; or (ii) there shall be commenced against such Person an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or any case, proceeding or other action for the 3 9 appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its Property or for the winding up or liquidation of its affairs, and such involuntary case or other case, proceeding or other action shall remain undismissed, undischarged or unbonded for a period of sixty (60) consecutive days; or (iii) such Person shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its Property or make any general assignment for the benefit of creditors; or (iv) such Person shall be unable to, or shall admit in writing its inability to, pay its debts generally as they become due. "Base Rate" means, for any day, the rate per annum equal to the higher of (a) the Federal Funds Rate for such day plus one-half of one percent (0.5%) and (b) the Prime Rate for such day. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective on the effective date of such change in the Prime Rate or Federal Funds Rate. "Base Rate Loan" means any Loan bearing interest at a rate determined by reference to the Base Rate. "Borrower" means the Person identified as such in the heading hereof, together with any permitted successors and assigns. "Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks in Charlotte, North Carolina, Los Angeles, California or New York, New York are authorized or required by law to close, except that, when used in connection with a Eurodollar Loan, such day shall also be a day on which dealings between banks are carried on in U.S. dollar deposits in London, England. "Calculation Date" has the meaning set forth in the definition of "Applicable Percentage" set forth in this Section 1.1. "Capital Lease" means, as applied to any Person, any lease of any Property (whether real, personal or mixed) by that Person as lessee which, in accordance with GAAP, is or should be accounted for as a capital lease on the balance sheet of that Person. "Capital Stock" means (i) in the case of a corporation, capital stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of capital stock, (iii) in the case of a partnership, partnership interests (whether general or limited), (iv) in the case of a limited liability company, membership interests and (v) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means (a) securities issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not 4 10 more than 12 months from the date of acquisition, (b) U.S. dollar denominated time deposits and certificates of deposit of (i) any Lender, (ii) any domestic commercial bank of recognized standing having capital and surplus in excess of $500,000,000 or (iii) any bank whose short-term commercial paper rating from S&P is at least A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent thereof (any such bank being an "Approved Bank"), in each case with maturities of not more than 270 days from the date of acquisition, (c) commercial paper and variable or fixed rate notes issued by any Approved Bank (or by the parent company thereof) or any variable rate notes issued by, or guaranteed by, any domestic corporation rated A-1 (or the equivalent thereof) or better by S&P or P-1 (or the equivalent thereof) or better by Moody's and maturing within six months of the date of acquisition, (d) repurchase agreements entered into by any Person with a bank or trust company (including any of the Lenders) or recognized securities dealer having capital and surplus in excess of $500,000,000 for direct obligations issued by or fully guaranteed by the United States in which such Person shall have a perfected first priority security interest (subject to no other Liens) and having, on the date of purchase thereof, a fair market value of at least 100% of the amount of the repurchase obligations and (e) Investments, classified in accordance with GAAP as current assets, in money market investment programs registered under the Investment Company Act of 1940, as amended, which are administered by reputable financial institutions having capital of at least $500,000,000 and the portfolios of which are limited to Investments of the character described in the foregoing subdivisions (a) through (d). "Change of Control" means any of the following events: (a) the sale, lease, transfer or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Borrower and its Subsidiaries taken as a whole to any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act), (b) the Borrower shall fail to own, directly or indirectly, 100% of the outstanding Capital Stock of any Guarantor other than Trac Modular Manufacturing, Inc. or at least 80% of the outstanding Capital Stock of Trac Modular Manufacturing, Inc, (c) any Person or two or more Persons acting in concert (in each case other than the Approved Shareholders) shall have acquired beneficial ownership, directly or indirectly, of, or shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation, will result in its or their acquisition of, control over, 33-1/3% or more of the Capital Stock of the Borrower or (d) during any period of up to 24 consecutive months, commencing after the Closing Date, individuals who at the beginning of such 24 month period were directors of the Borrower (together with any new director whose election by the Borrower's Board of Directors or whose nomination for election by the Borrower's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors of the Borrower then in office. As used herein, "beneficial ownership" shall have the meaning provided in Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act. "Closing Date" means the date hereof. "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute thereto, as interpreted by the rules and regulations issued thereunder, in each case as 5 11 in effect from time to time. References to sections of the Code shall be construed also to refer to any successor sections. "Collateral" means a collective reference to the collateral which is identified in, and at any time will be covered by, the Collateral Documents. "Collateral Documents" means a collective reference to the Security Agreement, the Pledge Agreement, the Mortgage Instruments and such other documents executed and delivered in connection with the attachment and perfection of the Administrative Agent's security interests and liens arising thereunder, including, without limitation, UCC financing statements and patent and trademark filings. "Commitment" means (i) with respect to each Lender, the Revolving Commitment of such Lender, the Tranche A Term Loan Commitment and the Delayed Draw Term Loan Commitment of such Lender and (ii) with respect to the Issuing Lender, the LOC Commitment. "Consolidated Capital Expenditures" means, as of any date for the four fiscal quarter period ending on such date with respect to the Consolidated Parties on a consolidated basis, all capital expenditures, as determined in accordance with GAAP. "Consolidated Cash Taxes" means, as of any date for the four fiscal quarter period ending on such date with respect to the Consolidated Parties on a consolidated basis, the aggregate of all taxes, as determined in accordance with GAAP, to the extent the same are paid in cash. "Consolidated EBITDA" means, as of any date for the four fiscal quarter period ending on such date with respect to the Consolidated Parties on a consolidated basis, the sum of (i) Consolidated Net Income, plus (ii) an amount which, in the determination of Consolidated Net Income, has been deducted for (A) Consolidated Interest Expense, (B) total federal, state, local and foreign income, value added and similar taxes and (C) depreciation and amortization expense, all as determined in accordance with GAAP. "Consolidated Interest Expense" means, as of any date for the four fiscal quarter period ending on such date with respect to the Consolidated Parties on a consolidated basis, interest expense (including the amortization of debt discount and premium, the interest component under Capital Leases and the implied interest component under Synthetic Leases), as determined in accordance with GAAP. "Consolidated Net Income" means, as of any date for the four fiscal quarter period ending on such date with respect to the Consolidated Parties on a consolidated basis, net income (excluding extraordinary items) after interest expense, income taxes and depreciation and amortization, all as determined in accordance with GAAP. "Consolidated Net Worth" means, as of any date with respect to the Consolidated Parties on a consolidated basis, shareholders' equity or net worth, as determined in accordance with GAAP. 6 12 "Consolidated Parties" means a collective reference to the Borrower and its Subsidiaries, and "Consolidated Party" means any one of them. "Consolidated Scheduled Funded Debt Payments" means, as of any date for the four fiscal quarter period ending on such date with respect to the Consolidated Parties on a consolidated basis, the sum of all scheduled payments of principal on Funded Indebtedness (including the principal component of payments due on Capital Leases); it being understood that Consolidated Scheduled Funded Debt Payments shall not include voluntary prepayments or the mandatory prepayments required pursuant to Section 3.3. "Continue", "Continuation", and "Continued" shall refer to the continuation pursuant to Section 3.2 hereof of a Eurodollar Loan from one Interest Period to the next Interest Period. "Convert", "Conversion", and "Converted" shall refer to a conversion pursuant to Section 3.2 or Sections 3.7 through 3.12, inclusive, of a Base Rate Loan into a Eurodollar Loan. "Credit Documents" means a collective reference to this Credit Agreement, the Notes, the LOC Documents, each Joinder Agreement, the Administrative Agent's Fee Letter, the Collateral Documents and all other related agreements and documents issued or delivered hereunder or thereunder or pursuant hereto or thereto (in each case as the same may be amended, modified, restated, supplemented, extended, renewed or replaced from time to time), and "Credit Document" means any one of them. "Credit Facilities" shall have the meaning assigned to such term in the recitals hereto. "Credit Parties" means a collective reference to the Borrower and the Guarantors, and "Credit Party" means any one of them. "Credit Party Obligations" means, without duplication, (i) all of the obligations of the Credit Parties to the Lenders (including the Issuing Lender) and the Administrative Agent, whenever arising, under this Credit Agreement, the Notes, the Collateral Documents or any of the other Credit Documents (including, but not limited to, any interest accruing after the occurrence of a Bankruptcy Event with respect to any Credit Party, regardless of whether such interest is an allowed claim under the Bankruptcy Code) and (ii) all liabilities and obligations, whenever arising, owing from any Credit Party to any Lender, or any Affiliate of a Lender, arising under any Hedging Agreement. "Debt Issuance" means the issuance of any Indebtedness for borrowed money by any Consolidated Party other than an Excluded Debt Issuance. "Default" means any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Defaulting Lender" means, at any time, any Lender that (a) has failed to make a Loan or purchase a Participation Interest required pursuant to the term of this Credit 7 13 Agreement within one Business Day of when due, (b) other than as set forth in (a) above, has failed to pay to the Administrative Agent or any Lender an amount owed by such Lender pursuant to the terms of this Credit Agreement within one Business Day of when due, unless such amount is subject to a good faith dispute or (c) has been deemed insolvent or has become subject to a bankruptcy or insolvency proceeding or with respect to which (or with respect to any of assets of which) a receiver, trustee or similar official has been appointed. "Delayed Draw Term Loan" shall have the meaning assigned to such term in Section 2.5(a). "Delayed Draw Term Loan Commitment" means, with respect to each Lender, the commitment of such Lender to make its portion of the Delayed Draw Term Loan in a principal amount equal to such Lender's Delayed Draw Term Loan Commitment Percentage (if any) of the Delayed Draw Term Loan Committed Amount. "Delayed Draw Term Loan Commitment Percentage" means, for any Lender, the percentage identified as its Delayed Draw Term Loan Commitment Percentage on Schedule 2.1(a), as such percentage may be modified in connection with any assignment made in accordance with the provisions of Section 11.3. "Delayed Draw Term Loan Committed Amount" shall have the meaning assigned to such term in Section 2.5(a). "Delayed Draw Term Note" or "Delayed Draw Term Notes" means the promissory notes of the Borrower in favor of each of the Lenders evidencing the Delayed Draw Term Loans provided pursuant to Section 2.5(f), individually or collectively, as appropriate, as such promissory notes may be amended, modified, restated, supplemented, extended, renewed or replaced from time to time. "Delayed Draw Unused Fee" shall have the meaning assigned to such term in Section 3.5(b)(ii). "Delayed Draw Unused Fee Calculation Period" shall have the meaning assigned to such term in Section 3.5(b)(ii). "Dollars" and "$" means dollars in lawful currency of the United States. "EBITDA" means, for any Person or Property for any period, the net income (excluding extraordinary items) of such Person or Property for such period before (without duplication) interest expense, income taxes and depreciation and amortization, all as determined in accordance with GAAP. "Eligible Assets" means any assets or any business (or any substantial part thereof) used or useful in the same or a similar line of business as the Borrower and its Subsidiaries were engaged in on the Closing Date (or any reasonable extensions or expansions thereof). 8 14 "Eligible Assignee" means (i) a Lender; (ii) an Affiliate of a Lender or any fund that invests in bank loans and is managed by an investment advisor to a Lender; and (iii) any other Person approved by the Administrative Agent and, unless an Event of Default has occurred and is continuing at the time any assignment is effected in accordance with Section 11.3, the Borrower (such approval not to be unreasonably withheld or delayed by the Borrower and such approval to be deemed given by the Borrower if no objection is received by the assigning Lender and the Administrative Agent from the Borrower within two Business Days after notice of such proposed assignment has been provided by the assigning Lender to the Borrower); provided, however, that neither the Borrower nor an Affiliate of the Borrower shall qualify as an Eligible Assignee. "Eligible Reinvestment" means (i) any acquisition (whether or not constituting a capital expenditure, but not constituting an Acquisition) of Eligible Assets and (ii) any Permitted Acquisition. "Environmental Laws" means any and all lawful and applicable Federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment, including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes. "Equity Issuance" means any issuance, other than pursuant to an Excluded Equity Issuance, by any Consolidated Party to any Person of (a) shares of its Capital Stock, (b) any shares of its Capital Stock pursuant to the exercise of options or warrants or (c) any shares of its Capital Stock pursuant to the conversion of any debt securities to equity. The term "Equity Issuance" shall not include any Asset Disposition. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto, as interpreted by the rules and regulations thereunder, all as the same may be in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections. "ERISA Affiliate" means an entity which is under common control with any Consolidated Party within the meaning of Section 4001(a)(14) of ERISA, or is a member of a group which includes any Consolidated Party and which is treated as a single employer under Sections 414(b) or (c) of the Code. "ERISA Event" means (i) with respect to any Plan, the occurrence of a Reportable Event or the substantial cessation of operations (within the meaning of Section 4062(e) of ERISA); (ii) the withdrawal by any Consolidated Party or any ERISA Affiliate from a Multiple Employer Plan during a plan year in which it was a substantial employer (as such term is defined in Section 4001(a)(2) of ERISA), or the termination of a Multiple Employer Plan; (iii) the distribution of a notice of intent to terminate or the actual termination of a Plan pursuant to Section 4041(a)(2) or 4041A of ERISA; (iv) the institution of proceedings 9 15 to terminate or the actual termination of a Plan by the PBGC under Section 4042 of ERISA; (v) any event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan; (vi) the complete or partial withdrawal of any Consolidated Party or any ERISA Affiliate from a Multiemployer Plan; (vii) the conditions for imposition of a lien under Section 302(f) of ERISA exist with respect to any Plan; or (viii) the adoption of an amendment to any Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA. "Eurodollar Loan" means any Loan that bears interest at a rate based upon the Eurodollar Rate. "Eurodollar Rate" means, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Administrative Agent to be equal to the quotient obtained by dividing (a) the Interbank Offered Rate for such Eurodollar Loan for such Interest Period by (b) 1 minus the Eurodollar Reserve Requirement for such Eurodollar Loan for such Interest Period. "Eurodollar Reserve Requirement" means, at any time, the maximum rate at which reserves (including, without limitation, any marginal, special, supplemental, or emergency reserves) are required to be maintained under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) by member banks of the Federal Reserve System against "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Eurodollar Reserve Requirement shall reflect any other reserves required to be maintained by such member banks with respect to (i) any category of liabilities which includes deposits by reference to which the Adjusted Eurodollar Rate is to be determined, or (ii) any category of extensions of credit or other assets which include Eurodollar Loans. The Adjusted Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Requirement. "Event of Default" shall have the meaning as defined in Section 9.1. "Excess Proceeds" shall have the meaning as defined in Section 7.6(b). "Excluded Asset Disposition" means, with respect to any Consolidated Party, (i) the sale of inventory in the ordinary course of such Consolidated Party's business, (ii) the sale or disposition of machinery and equipment no longer used or useful in the conduct of such Consolidated Party's business or (iii) any Equity Issuance by such Consolidated Party and (iv) any Asset Disposition by such Consolidated Party to any Credit Party, provided that the Credit Parties shall cause to be executed and delivered such documents, instruments and certificates as the Administrative Agent may request so as to cause the Credit Parties to be in compliance with the terms of Section 7.13 after giving effect to such Asset Disposition. "Excluded Debt Issuance" means any issuance of Indebtedness permitted by Section 8.1. 10 16 "Excluded Equity Issuance" means (i) any Equity Issuance by any Consolidated Party to any Credit Party, (ii) any Equity Issuance by any Consolidated Party to any employee of a Consolidated Party pursuant to an employee stock option plan, (iii) any Equity Issuance by the Borrower to the seller of a business acquired in a Permitted Acquisition, (iv) any Equity Issuance by the Borrower the proceeds of which are used to finance a Permitted Acquisition, (v) any Equity Issuance by the shareholders of the Merger Companies in connection with the Transaction or (vi) any sale by any Approved Shareholder of Capital Stock of the Borrower. "Executive Officer" of any Person means any of the chief executive officer, chief operating officer, president, vice president, chief financial officer or treasurer of such Person. "Existing Credit Facility" means the $34,817,767 credit facility provided by NationsCredit Commercial Corporation to SPI and the loan documents evidencing such credit facility. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate charged to the Administrative Agent (in its individual capacity) on such day on such transactions as determined by the Administrative Agent. "Fees" means all fees payable pursuant to Section 3.5. "Fixed Charge Coverage Ratio" means, as of the end of any fiscal quarter of the Consolidated Parties for the four fiscal quarter period ending on such date with respect to the Consolidated Parties on a consolidated basis, the ratio of (a) the sum of (i) Consolidated EBITDA for such period minus (iii) Consolidated Capital Expenditures for such period minus (iv) Consolidated Cash Taxes for such period to (b) the sum of (i) Consolidated Interest Expense for such period plus (ii) Consolidated Scheduled Funded Debt Payments for such period. "Foreign Subsidiary" means any direct or indirect Subsidiary of the Borrower which is not incorporated or organized under the laws of any State of the United States or the District of Columbia. "Funded Indebtedness" means, with respect to any Person, without duplication, (a) all Indebtedness of such Person other than Indebtedness of the types referred to in clause (e), (g), (i) and (m) of the definition of "Indebtedness" set forth in this Section 1.1, (b) all Funded Indebtedness of others of the type referred to in clause (a) above secured by (or for which the holder of such Funded Indebtedness has an existing right, contingent or 11 17 otherwise, to be secured by) any Lien on, or payable out of the proceeds of production from, Property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (c) all Guaranty Obligations of such Person with respect to Funded Indebtedness of the type referred to in clause (a) above of another Person and (d) Funded Indebtedness of the type referred to in clause (a) above of any partnership or unincorporated joint venture in which such Person is a general partner or a joint venturer. "GAAP" means generally accepted accounting principles in the United States applied on a consistent basis and subject to the terms of Section 1.3. "Glendale Property" shall have the meaning as defined in Section 5.1(e)(vii). "Governmental Authority" means any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "Guarantors" means a collective reference to each of the Subsidiaries of the Borrower, together with their successors and permitted assigns, and "Guarantor " means any one of them. "Guaranty Obligations" means, with respect to any Person, without duplication, any obligations of such Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing or intended to guarantee any Indebtedness of any other Person in any manner, whether direct or indirect, and including, without limitation, any obligation, whether or not contingent, (i) to purchase any such Indebtedness or any Property constituting security therefor, (ii) to advance or provide funds or other support for the payment or purchase of any such Indebtedness or to maintain working capital, solvency or other balance sheet condition of such other Person (including, without limitation, keep well agreements, maintenance agreements, comfort letters or similar agreements or arrangements) for the benefit of any holder of Indebtedness of such other Person, (iii) to lease or purchase Property, securities or services primarily for the purpose of assuring the holder of such Indebtedness, (iv) to otherwise assure or hold harmless the holder of such Indebtedness against loss in respect thereof, or (v) in the form of a performance bond or other surety to assure the prompt and complete performance by any Consolidated Party of obligations to manufacture products in the ordinary course of business. The amount of any Guaranty Obligation hereunder shall (subject to any limitations set forth therein) be deemed to be an amount equal to the outstanding principal amount (or maximum principal amount, if larger) of the Indebtedness in respect of which such Guaranty Obligation is made. "Hedging Agreements" means any interest rate protection agreement or foreign currency exchange agreement. "Indebtedness" means, with respect to any Person, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, or upon which interest payments are customarily made, (c) all obligations of such Person under conditional sale or other title retention agreements relating to Property purchased by such Person (other than customary reservations or retentions of title under agreements with suppliers entered into in 12 18 the ordinary course of business), (d) all obligations of such Person issued or assumed as the deferred purchase price of Property or services purchased by such Person (other than trade debt incurred in the ordinary course of business and due within six months of the incurrence thereof) which would appear as liabilities on a balance sheet of such Person, (e) all obligations of such Person under take-or-pay or similar arrangements or under commodities agreements, (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on, or payable out of the proceeds of production from, Property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (g) all Guaranty Obligations of such Person with respect to Indebtedness of another Person, (h) the principal portion of all obligations of such Person under Capital Leases, (i) all obligations of such Person under Hedging Agreements, (j) the maximum amount of all standby letters of credit issued or bankers' acceptance facilities created for the account of such Person and, without duplication, all drafts drawn thereunder (to the extent unreimbursed), (k) all preferred Capital Stock issued by such Person and which by the terms thereof could be (at the request of the holders thereof or otherwise) subject to mandatory sinking fund payments, redemption or other acceleration (other than as a result of a Change of Control or an Asset Disposition that does not in fact result in a redemption of such preferred Equity Interests), (l) the principal portion of all obligations of such Person under Synthetic Leases, and (m) the Indebtedness of any partnership or unincorporated joint venture in which such Person is a general partner or a joint venturer. "Interbank Offered Rate" means, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "Interbank Offered Rate" shall mean, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates (rounded upwards, if necessary, to the nearest 1/100 of 1%). "Interest Payment Date" means (a) as to Base Rate Loans (including Swingline Loans which are Base Rate Loans), each March 31, June 30, September 30 and December 31, the date of repayment of principal of such Loan and the Maturity Date, and (b) as to Eurodollar Loans, the last day of each applicable Interest Period, the date of repayment of principal of such Loan and the Maturity Date, and in addition where the applicable Interest Period for a Eurodollar Loan is greater than three months, then also the date three months from the beginning of the Interest Period and each three months thereafter. "Interest Period" means, as to Eurodollar Loans, a period of one, two, three or six months' duration, as the Borrower may elect, commencing, in each case, on the date of the borrowing (including continuations and conversions thereof); provided, however, (a) if any Interest Period would end on a day which is not a Business Day, such Interest Period shall 13 19 be extended to the next succeeding Business Day (except that where the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding Business Day), (b) no Interest Period shall extend beyond the Maturity Date, (c) with regard to the Tranche A Term Loans, (i) the initial Interest Period shall end on March 31, 1999 and (ii) no Interest Period shall extend beyond any Principal Amortization Payment Date unless the portion of Tranche A Term Loans comprised of Base Rate Loans together with the portion of Tranche A Term Loans comprised of Eurodollar Loans with Interest Periods expiring prior to the date such Principal Amortization Payment is due, is at least equal to the amount of such Principal Amortization Payment due on such date, (d) with regard to the Delayed Draw Term Loans, no Interest Period shall extend beyond any Principal Amortization Payment Date unless the portion of Delayed Draw Term Loans comprised of Base Rate Loans together with the portion of Delayed Draw Term Loans comprised of Eurodollar Loans with Interest Periods expiring prior to the date such Principal Amortization Payment is due, is at least equal to the amount of such Principal Amortization Payment due on such date and (e) where an Interest Period begins on a day for which there is no numerically corresponding day in the calendar month in which the Interest Period is to end, such Interest Period shall end on the last Business Day of such calendar month. "Investment" in any Person means (a) the acquisition (whether for cash, property, services, assumption of Indebtedness, securities or otherwise) of assets (other than equipment, inventory and supplies in the ordinary course of business), Capital Stock, bonds, notes, debentures, partnership, joint ventures or other ownership interests or other securities of such other Person or (b) any deposit with, or advance, loan or other extension of credit to, such Person (other than deposits made in connection with the purchase of equipment or other assets in the ordinary course of business) or (c) any other capital contribution to or investment in such Person, including, without limitation, any Guaranty Obligations (including any support for a letter of credit issued on behalf of such Person) incurred for the benefit of such Person, but excluding any Restricted Payment to such Person. "Issuing Lender" means NationsBank. "Issuing Lender Fees" shall have the meaning assigned to such term in Section 3.5(c)(ii). "Joinder Agreement" means a Joinder Agreement substantially in the form of Exhibit 7.12 hereto, executed and delivered by a new Guarantor in accordance with the provisions of Section 7.12. "Lender" means any of the Persons identified as a "Lender" on the signature pages hereto, and any Person which may become a Lender by way of assignment in accordance with the terms hereof, together with their successors and permitted assigns. "Letter of Credit" means any letter of credit issued by the Issuing Lender for the account of the Borrower in accordance with the terms of Section 2.2. "Leverage Ratio" means, as of the end of any fiscal quarter of the Consolidated Parties for the four fiscal quarter period ending on such date with respect to the Consolidated Parties on a consolidated basis, the ratio of (a) Funded Indebtedness of the 14 20 Consolidated Parties on a consolidated basis on the last day of such period to (b) Consolidated EBITDA for such period. "Lien" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, security interest, encumbrance, lien (statutory or otherwise), preference, priority or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any financing or similar statement or notice filed under the Uniform Commercial Code as adopted and in effect in the relevant jurisdiction or other similar recording or notice statute, and any lease in the nature thereof). "Loan" or "Loans" means the Revolving Loans, the Tranche A Term Loans, the Delayed Draw Term Loans (or a portion of any Revolving Loan, any Tranche A Term Loan or Delayed Draw Term Loan bearing interest at the Adjusted Base Rate or the Adjusted Eurodollar Rate) and/or the Swingline Loans, individually or collectively, as appropriate. "LOC Commitment" means the commitment of the Issuing Lender to issue Letters of Credit in an aggregate face amount at any time outstanding (together with the amounts of any unreimbursed drawings thereon) of up to the LOC Committed Amount. "LOC Committed Amount" shall have the meaning assigned to such term in Section 2.2. "LOC Documents" means, with respect to any Letter of Credit, such Letter of Credit, any amendments thereto, any documents delivered in connection therewith, any application therefor, and any agreements, instruments, guarantees or other documents (whether general in application or applicable only to such Letter of Credit) governing or providing for (i) the rights and obligations of the parties concerned or at risk or (ii) any collateral security for such obligations. "LOC Obligations" means, at any time, the sum of (i) the maximum amount which is, or at any time thereafter may become, available to be drawn under Letters of Credit then outstanding, assuming compliance with all requirements for drawings referred to in such Letters of Credit plus (ii) the aggregate amount of all drawings under Letters of Credit honored by the Issuing Lender but not theretofore reimbursed by the Borrower. "Material Adverse Effect" means a material adverse effect on (i) the condition (financial or otherwise), operations, business, assets, liabilities or prospects of the Consolidated Parties taken as a whole, (ii) the ability of any Credit Party to perform any material obligation under the Credit Documents to which it is a party or (iii) the material rights and remedies of the Administrative Agent and the Lenders under the Credit Documents. "Materials of Environmental Concern" means any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Laws, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation. 15 21 "Maturity Date" means as to all Loans and Letters of Credit (and the related LOC Obligations), February 16, 2004. "Merger Agreement" means that certain Agreement and Plan of Reorganization and Merger, dated as of September 28, 1998, between Modtech and SPI, as amended prior to the Closing Date. "Merger Documents" means, collectively, the Merger Agreement and any other agreement, document or instrument executed in connection therewith. "Merger Parties" means Modtech and SPI. "Modtech" means Modtech, Inc., a California corporation. "Moody's" means Moody's Investors Service, Inc., or any successor or assignee of the business of such company in the business of rating securities. "Mortgage Instruments" shall have the meaning assigned such term in Section 5.1(e). "Mortgage Policies" shall have the meaning assigned such term in Section 5.1(e). "Mortgaged Properties" shall have the meaning assigned such term in Section 5.1(e). "Multiemployer Plan" means a Plan which is a "multiemployer plan" as defined in Sections 3(37) or 4001(a)(3) of ERISA. "Multiple Employer Plan" means a Plan (other than a Multiemployer Plan) which any Consolidated Party or any ERISA Affiliate and at least one employer other than the Consolidated Parties or any ERISA Affiliate are contributing sponsors. "NationsBank" means NationsBank, N. A. and its successors. "Net Cash Proceeds" means the aggregate cash proceeds received by the Consolidated Parties in respect of any Asset Disposition, Equity Issuance or Debt Issuance, net of (a) direct costs (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and (b) taxes paid or payable as a result thereof; it being understood that "Net Cash Proceeds" shall include, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received by the Consolidated Parties in any Asset Disposition, Equity Issuance or Debt Issuance. "NMS" means NationsBanc Montgomery Securities LLC. "Note" or "Notes" means the Revolving Notes, the Tranche A Term Notes, the Delayed Draw Term Notes and/or the Swingline Note, individually or collectively, as appropriate. 16 22 "Notice of Borrowing" means a written notice of borrowing in substantially the form of Exhibit 2.1(b)(i), as required by Section 2.1(b)(i), Section 2.4(b) or Section 2.5(b). "Notice of Extension/Conversion" means the written notice of extension or conversion in substantially the form of Exhibit 3.2, as required by Section 3.2. "Operating Lease" means, as applied to any Person, any lease (including, without limitation, leases which may be terminated by the lessee at any time) of any Property (whether real, personal or mixed) which is not a Capital Lease other than any such lease in which that Person is the lessor. "Other Taxes" shall have the meaning assigned to such term in Section 3.11. "Participation Interest" means a purchase by a Lender of a participation in Letters of Credit or LOC Obligations as provided in Section 2.2, in Swingline Loans as provided in Section 2.3(b)(iii) or in any Loans as provided in Section 3.14. "PBGC" means the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA and any successor thereof. "Permitted Acquisition" means an Acquisition by the Borrower or any Subsidiary of the Borrower for consideration no greater than the fair market value of the Capital Stock or Property acquired, provided that (i) the Property acquired (or the Property of the Person acquired) in such Acquisition is used or useful in the same or a substantially similar line of business as the Borrower and its Subsidiaries were engaged in on the Closing Date (or any reasonable extensions or expansions thereof), (ii) the Administrative Agent shall have received all items in respect of the Capital Stock or Property acquired in such Acquisition (and/or the seller thereof) required to be delivered by the terms of Section 7.12 and/or Section 7.13, (iii) in the case of an Acquisition of the Capital Stock of another Person, the board of directors (or other comparable governing body) of such other Person shall have duly approved such Acquisition, (iv) the Borrower shall have delivered to the Administrative Agent a Pro Forma Compliance Certificate demonstrating that, upon giving effect to such Acquisition on a Pro Forma Basis, (A) the Credit Parties shall be in compliance with all of the covenants set forth in Section 7.11 and (B) the Leverage Ratio shall be less than 2.00 to 1.00, (v) EBITDA of the Person or Property to be acquired in such Acquisition for the most recent four fiscal quarter period preceding the date of such Acquisition shall be greater than zero, (vi) the representations and warranties made by the Credit Parties in any Credit Document shall be true and correct in all material respects at and as if made as of the date of such Acquisition (after giving effect thereto) except to the extent such representations and warranties expressly relate to an earlier date, (vii) if such transaction involves the purchase of an interest in a partnership between the Borrower (or a Subsidiary of the Borrower) as a general partner and entities unaffiliated with the Borrower or such Subsidiary as the other partners, such transaction shall be effected by having such equity interest acquired by a corporate holding company directly or indirectly wholly-owned by the Borrower newly formed for the sole purpose of effecting such transaction, (viii) after giving effect to such Acquisition, there shall be at least $7,500,000 of availability existing under the Revolving Committed Amount, (ix) the aggregate consideration (including cash and any assumption of Funded Indebtedness, but excluding consideration 17 23 consisting of any Capital Stock of the Borrower) for any such Acquisition shall not exceed $10,000,000 and (x) immediately prior to and after giving effect to such Acquisition, no Default or Event of Default shall exist. "Permitted Investments" means Investments which are either (i) cash and Cash Equivalents; (ii) accounts receivable created, acquired or made by any Consolidated Party in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; (iii) Investments consisting of Capital Stock, obligations, securities or other property received by any Consolidated Party in settlement of accounts receivable (created in the ordinary course of business) from bankrupt obligors; (iv) Investments existing as of the Closing Date and set forth in Schedule 1.1A; (vi) advances or loans to directors, officers, employees, agents, customers or suppliers that do not exceed $250,000 in the aggregate at any one time outstanding for all of the Consolidated Parties; (vii) Investments in any Credit Party; or (viii) Permitted Acquisitions. "Permitted Liens" means: (i) Liens in favor of the Administrative Agent to secure the Credit Party Obligations; (ii) Liens (other than Liens created or imposed under ERISA) for taxes, assessments or governmental charges or levies not yet due or Liens for taxes being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the Property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof); (iii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and suppliers and other Liens imposed by law or pursuant to customary reservations or retentions of title arising in the ordinary course of business, provided that such Liens secure only amounts not yet due and payable or, if due and payable, are unfiled and no other action has been taken to enforce the same or are being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the Property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof); (iv) Liens (other than Liens created or imposed under ERISA) incurred or deposits made by any Consolidated Party in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (v) Liens in connection with attachments or judgments (including judgment or appeal bonds), provided that the judgments secured shall, within 30 days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall have been discharged within 30 days after the expiration of any such stay; 18 24 (vi) easements, rights-of-way, restrictions (including zoning restrictions), minor defects or irregularities in title and other similar charges or encumbrances not, in any material respect, impairing the use of the encumbered Property for its intended purposes; (vii) Liens on Property of any Person securing purchase money Indebtedness (including Capital Leases and Synthetic Leases) of such Person to the extent permitted under Section 8.1(c), provided that any such Lien attaches to such Property concurrently with or within 90 days after the acquisition thereof; (viii) any interest of title of a lessor under, and Liens arising from UCC financing statements (or equivalent filings, registrations or agreements in foreign jurisdictions) relating to, leases permitted by this Credit Agreement; (ix) Liens deemed to exist in connection with Investments in repurchase agreements permitted under Section 8.6; (x) normal and customary rights of setoff upon deposits of cash in favor of banks or other depository institutions; (xi) Liens of a collection bank arising under Section 4-210 of the Uniform Commercial Code on items in the course of collection; (xii) Liens existing as of the Closing Date and set forth on Schedule 1.1B; provided that (a) no such Lien shall at any time be extended to or cover any Property other than the Property subject thereto on the Closing Date and (b) the principal amount of the Indebtedness secured by such Liens shall not be extended, renewed, refunded or refinanced; and (xiii) Liens on receivables arising from the sale by any Consolidated Party of manufactured goods and securing the reimbursement obligations of such Consolidated Party in respect of payment or performance bonds or other surety to assure the prompt and complete performance by such Consolidated Party of obligations to manufacture such goods in the ordinary course of its business. "Person" means any individual, partnership, joint venture, firm, corporation, limited liability company, association, trust or other enterprise (whether or not incorporated) or any Governmental Authority. "Plan" means any employee benefit plan (as defined in Section 3(3) of ERISA) which is covered by ERISA and with respect to which any Consolidated Party or any ERISA Affiliate is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" within the meaning of Section 3(5) of ERISA. "Pledge Agreement" means the pledge agreement dated as of the Closing Date in the form of Exhibit 1.1A to be executed in favor of the Administrative Agent by each of the Credit Parties, as amended, modified, restated or supplemented from time to time. 19 25 "Prime Rate" means the per annum rate of interest established from time to time by NationsBank as its prime rate, which rate may not be the lowest rate of interest charged by NationsBank to its customers. "Principal Amortization Payment" means a principal payment on the Tranche A Term Loans as set forth in Section 2.4(d) or on the Delayed Draw Term Loans as set forth in Section 2.5(d). "Principal Amortization Payment Date" means the date a Principal Amortization Payment is due. "Principal Office" means the principal office of NationsBank, presently located at Charlotte, North Carolina. "Pro Forma Basis" means, for purposes of calculating (utilizing the principles set forth in the second paragraph of Section 1.3) compliance with each of the financial covenants set forth in Section 7.11 in respect of a proposed transaction, that such transaction shall be deemed to have occurred as of the first day of the four fiscal-quarter period ending as of the most recent fiscal quarter end preceding the date of such transaction with respect to which the Administrative Agent has received the Required Financial Information. As used herein, "transaction" shall mean (i) any incurrence or assumption of Indebtedness as referred to in Section 8.1(g)(i), (ii) any merger or consolidation as referred to in Section 8.4, (iii) any Asset Disposition as referred to in Section 8.5 or (iv) any Acquisition as referred to in clause (iv) of the definition of "Permitted Acquisition" set forth in this Section 1.1. In connection with any calculation of the financial covenants set forth in Section 7.11 upon giving effect to a transaction on a Pro Forma Basis: (A) for purposes of any such calculation in respect of any incurrence or assumption of Indebtedness as referred to in Section 8.1(g)(i), any Indebtedness which is retired in connection with such incurrence or assumption shall be excluded and deemed to have been retired as of the first day of the applicable period; (B) for purposes of any such calculation in respect of any Asset Disposition as referred to in Section 8.5, (1) income statement items (whether positive or negative) attributable to the Property disposed of in such Asset Disposition shall be excluded and (2) any Indebtedness which is retired in connection with such Asset Disposition shall be excluded and deemed to have been retired as of the first day of the applicable period; and (C) for purposes of any such calculation in respect of any merger or consolidation as referred to in Section 8.4 or any Acquisition as referred to in clause (iv) of the definition of "Permitted Acquisition" set forth in this Section 1.1, (1) any Indebtedness incurred by any Consolidated Party in connection with such transaction (x) shall be deemed to have been incurred as of the first day of the applicable period and (y) if such Indebtedness has a floating or formula rate, shall have an implied rate of interest for the applicable period for purposes of this 20 26 definition determined by utilizing the rate which is or would be in effect with respect to such Indebtedness as at the relevant date of determination and (2) income statement items (whether positive or negative) attributable to the Property acquired in such transaction or to the Acquisition comprising such transaction, as applicable, shall be included to the extent relating to the relevant period. "Pro Forma Compliance Certificate" means a certificate of an Executive Officer of the Borrower delivered to the Administrative Agent in connection with (i) any incurrence, assumption or retirement of Indebtedness as referred to in Section 8.1(f)(i), (ii) any merger or consolidation as referred to in Section 8.4, (iii) any Asset Disposition as referred to in Section 8.5 or (iv) any Acquisition as referred to in clause (iv) of the definition of "Permitted Acquisition" set forth in this Section 1.1, as applicable, and containing reasonably detailed calculations, upon giving effect to the applicable transaction on a Pro Forma Basis, of each of the financial covenants set forth in Section 7.11 as of the most recent fiscal quarter end preceding the date of the applicable transaction with respect to which the Administrative Agent shall have received the Required Financial Information. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Register" shall have the meaning given such term in Section 11.3(c). "Regulation U, or X" means Regulation U or X, respectively, of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof. "Reportable Event" means any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the notice requirement has been waived by regulation. "Required Financial Information" means, with respect to the applicable Calculation Date, (i) the financial statements of the Consolidated Parties required to be delivered pursuant to Section 7.1(a) or (b) for the fiscal period or quarter ending as of such Calculation Date, and (ii) the certificate of the chief financial officer of the Borrower required by Section 7.1(c) to be delivered with the financial statements described in clause (i) above. "Required Lenders" means, at any time, Lenders other than Defaulting Lenders which are then in compliance with their obligations hereunder (as determined by the Administrative Agent) and holding in the aggregate at least a majority of (i) the Revolving Commitments (and Participation Interests therein), the outstanding Tranche A Term Loans (and Participation Interests therein) and the outstanding Delayed Draw Term Loans (and Participation Interests therein) or (ii) if the Commitments have been terminated, the outstanding Loans and Participation Interests (including the Participation Interests of the Issuing Lender in any Letters of Credit and the Participation Interests of the Swingline Lender in any Swingline Loans). 21 27 "Requirement of Law" means, as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its material property is subject. "Restricted Payment" means (i) any dividend or other payment or distribution, direct or indirect, on account of any shares of any class of Capital Stock of any Consolidated Party, now or hereafter outstanding (including, without limitation, any payment in connection with any merger or consolidation involving any Consolidated Party), or to the holders, in their capacity as such, of any shares of any class of Capital Stock of any Consolidated Party, now or hereafter outstanding (other than dividends or distributions payable in the same class of Capital Stock of the applicable Person or to any Credit Party (directly or indirectly through Subsidiaries), (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of Capital Stock of any Consolidated Party, now or hereafter outstanding and (iii) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of Capital Stock of any Consolidated Party, now or hereafter outstanding. "Revolving Commitment" means, with respect to each Lender, the commitment of such Lender in an aggregate principal amount at any time outstanding of up to such Lender's Revolving Commitment Percentage (if any) of the Revolving Committed Amount, (i) to make Revolving Loans in accordance with the provisions of Section 2.1(a), (ii) to purchase Participation Interests in Letters of Credit in accordance with the provisions of Section 2.2(c) and (iii) to purchase Participation Interests in the Swingline Loans in accordance with the provisions of Section 2.3(b)(iii). "Revolving Commitment Percentage" means, for any Lender, the percentage identified as its Revolving Commitment Percentage on Schedule 2.1(a), as such percentage may be modified in connection with any assignment made in accordance with the provisions of Section 11.3. "Revolving Committed Amount" shall have the meaning assigned to such term in Section 2.1(a). "Revolving Loans" shall have the meaning assigned to such term in Section 2.1(a). "Revolving Note" or "Revolving Notes" means the promissory notes of the Borrower in favor of each of the Lenders evidencing the Revolving Loans provided pursuant to Section 2.1(e), individually or collectively, as appropriate, as such promissory notes may be amended, modified, restated, supplemented, extended, renewed or replaced from time to time. "Revolving Unused Fee" shall have the meaning assigned to such term in Section 3.5(b)(i). 22 28 "Revolving Unused Fee Calculation Period" shall have the meaning assigned to such term in Section 3.5(b)(i). "S&P" means Standard & Poor's Ratings Group, a division of The McGraw Hill Companies, Inc., or any successor or assignee of the business of such division in the business of rating securities. "Sale and Leaseback Transaction" means any direct or indirect arrangement with any Person or to which any such Person is a party, providing for the leasing to any Consolidated Party of any Property, whether owned by such Consolidated Party as of the Closing Date or later acquired, which has been or is to be sold or transferred by such Consolidated Party to such Person or to any other Person from whom funds have been, or are to be, advanced by such Person on the security of such Property. "Securities Exchange Act" means the Securities Exchange Act of 1934. "Security Agreement" means the security agreement dated as of the Closing Date in the form of Exhibit 1.1B to be executed in favor of the Administrative Agent by each of the Credit Parties, as amended, modified, restated or supplemented from time to time. "Single Employer Plan" means any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan or a Multiple Employer Plan. "Solvent" or "Solvency" means, with respect to any Person as of a particular date, that on such date (i) such Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (ii) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature in their ordinary course, (iii) such Person is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which such Person's Property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such Person is engaged or is to engage, (iv) the fair value of the Property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person and (v) the present fair salable value of the assets (on a going concern, rather than a liquidation, basis) of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "SPI" means SPI Holdings, Inc., a Colorado corporation. "Standby Letter of Credit Fee" shall have the meaning assigned to such term in Section 3.5(c)(i). 23 29 "Subordinated Indebtedness" means any Indebtedness incurred by the Borrower which by its terms is specifically subordinated in right of payment to the prior payment of the Credit Party Obligations on substantially the terms and conditions described in Exhibit 1.1C. "Subsidiary" means, as to any Person at any time, (a) any corporation more than 50% of whose Capital Stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at such time, any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at such time owned by such Person directly or indirectly through Subsidiaries, and (b) any partnership, association, joint venture or other entity of which such Person directly or indirectly through Subsidiaries owns at such time more than 50% of the Capital Stock. "Swingline Commitment" means the commitment of the Swingline Lender to make Swingline Loans in an aggregate principal amount at any time outstanding of up to the Swingline Committed Amount. "Swingline Committed Amount" shall have the meaning assigned to such term in Section 2.3(a). "Swingline Lender" means NationsBank. "Swingline Loan" shall have the meaning assigned to such term in Section 2.3(a). "Swingline Note" means the promissory note of the Borrower in favor of the Swingline Lender evidencing the Swingline Loans provided pursuant to Section 2.3(d), as such promissory notes may be amended, modified, restated, supplemented, extended, renewed or replaced from time to time. "Synthetic Lease" means any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing product where such transaction is considered borrowed money indebtedness for tax purposes but is classified as an Operating Lease. "Taxes" shall have the meaning assigned to such term in Section 3.11. "Trade Letter of Credit Fee" shall have the meaning assigned to such term in Section 3.5(c)(ii). "Tranche A Term Loan" shall have the meaning assigned to such term in Section 2.4(a). "Tranche A Term Loan Commitment" means, with respect to each Lender, the commitment of such Lender to make its portion of the Tranche A Term Loan in a principal amount equal to such Lender's Tranche A Term Loan Commitment Percentage (if any) of the Tranche A Term Loan Committed Amount. 24 30 "Tranche A Term Loan Commitment Percentage" means, for any Lender, the percentage identified as its Tranche A Term Loan Commitment Percentage on Schedule 2.1(a), as such percentage may be modified in connection with any assignment made in accordance with the provisions of Section 11.3. "Tranche A Term Loan Committed Amount" shall have the meaning assigned to such term in Section 2.4(a). "Tranche A Term Note" or "Tranche A Term Notes" means the promissory notes of the Borrower in favor of each of the Lenders evidencing the Tranche A Term Loans provided pursuant to Section 2.4(f), individually or collectively, as appropriate, as such promissory notes may be amended, modified, restated, supplemented, extended, renewed or replaced from time to time. "Transaction" means the collective reference to the merger of Modtech with a Subsidiary of the Borrower, with Modtech being the surviving corporation, and the merger of SPI with a Subsidiary of the Borrower, with SPI being the surviving corporation, in each case as provided for and pursuant to the Merger Agreement. "Unused Delayed Draw Term Loan Committed Amount" means, for any period, the amount by which (a) the then applicable Delayed Draw Term Loan Committed Amount exceeds (b) the daily average sum for such period of the outstanding aggregate principal amount of all Delayed Draw Term Loans. "Unused Fee" means the Revolving Unused Fee or the Delayed Draw Unused Fee, as applicable. "Unused Revolving Committed Amount" means, for any period, the amount by which (a) the then applicable Revolving Committed Amount exceeds (b) the daily average sum for such period of (i) the outstanding aggregate principal amount of all Revolving Loans (but not including any Swingline Loans) plus (ii) the outstanding aggregate principal amount of all LOC Obligations. "Upfront Fee" shall have the meaning assigned to such term in Section 3.5(a). "Voting Stock" means, with respect to any Person, Capital Stock issued by such Person the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even though the right so to vote has been suspended by the happening of such a contingency. "Wholly Owned Subsidiary" of any Person means any Subsidiary 100% of whose Voting Stock is at the time owned by such Person directly or indirectly through other Wholly Owned Subsidiaries. "Year 2000 Compliant" shall have the meaning assigned to such term in Section 6.27. 25 31 1.2 COMPUTATION OF TIME PERIODS. For purposes of computation of periods of time hereunder, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding." 1.3 ACCOUNTING TERMS. Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lenders hereunder shall be prepared, in accordance with GAAP applied on a consistent basis. All calculations made for the purposes of determining compliance with this Credit Agreement shall (except as otherwise expressly provided herein) be made by application of GAAP applied on a basis consistent with the most recent annual or quarterly financial statements delivered pursuant to Section 7.1 (or, prior to the delivery of the first financial statements pursuant to Section 7.1, consistent with the financial statements of Modtech as at December 31, 1997); provided, however, if (a) the Credit Parties shall object to determining such compliance on such basis at the time of delivery of such financial statements due to any change in GAAP or the rules promulgated with respect thereto or (b) the Administrative Agent or the Required Lenders shall so object in writing within 60 days after delivery of such financial statements, then such calculations shall be made on a basis consistent with the most recent financial statements delivered by the Credit Parties to the Lenders as to which no such objection shall have been made. Notwithstanding the above, the parties hereto acknowledge and agree that, for purposes of all calculations made under the financial covenants set forth in Section 7.11 (including, without limitation, for purposes of the definitions of "Applicable Percentage" and "Pro Forma Basis" set forth in Section 1.1), (i) in connection with any Property disposed of in any Asset Disposition as contemplated by Section 8.5, (A) income statement items (whether positive or negative) attributable to the Property disposed of in such transaction shall be excluded to the extent relating to any period occurring prior to the date of such transaction and (B) Indebtedness which is retired in connection with any such transaction shall be excluded and deemed to have been retired as of the first day of the applicable period, and (ii) in connection with any Acquisition contemplated by the definition of "Permitted Acquisition" set forth in Section 1.1, (A) income statement items (whether positive or negative, but excluding EBITDA to the extent not set forth in an income statement prepared in accordance with GAAP by independent certified public accountants of recognized national standing or regional or local repute reasonably acceptable to the Administrative Agent (whose opinion shall not be limited as to the scope or qualified as to going concern status)) attributable to the Person or Property acquired in such transaction shall, to the extent not otherwise included in such income statement items for the Consolidated Parties in accordance with GAAP or in accordance with any defined terms set forth in Section 1.1, be included to the extent relating to any period applicable in such calculations and (B) to the extent that EBITDA attributable to the Person or Property acquired in such transaction is allowed to be included in Consolidated EBITDA for the applicable period pursuant to clause (ii)(A) above, such EBITDA may be adjusted to the extent approved by the Administrative Agent, provided that, adjustments in any such EBITDA that would result from owners' salaries or other cash compensation or fringe benefits (such as life insurance or club memberships) provided to such owners that will either be eliminated or replaced or reduced upon consummation of the related Acquisition need not be approved by the Administrative Agent so long as the Borrower provides supporting 26 32 documentation for such adjustments in form and substance reasonably satisfactory to the Administrative Agent. SECTION 2 CREDIT FACILITIES 2.1 REVOLVING LOANS. (a) Revolving Commitment. Subject to the terms and conditions hereof and in reliance upon the representations and warranties set forth herein, each Lender severally agrees to make available to the Borrower such Lender's Revolving Commitment Percentage of revolving credit loans requested by the Borrower in Dollars ("Revolving Loans") from time to time from the Closing Date until the Maturity Date, or such earlier date as the Revolving Commitments shall have been terminated as provided herein; provided, however, that the sum of the aggregate principal amount of outstanding Revolving Loans shall not exceed THIRTY MILLION DOLLARS ($30,000,000) (as such aggregate maximum amount may be reduced from time to time as provided in Section 3.4, the "Revolving Committed Amount"); provided, further, (A) with regard to each Lender individually, the sum of the aggregate outstanding principal amount of such Lender's Revolving Loans plus Participation Interests shall not exceed such Lender's Revolving Commitment Percentage of the Revolving Committed Amount, and (B) the sum of the aggregate outstanding principal amount of Revolving Loans plus LOC Obligations plus Swingline Loans shall not exceed the Revolving Committed Amount. Revolving Loans may consist of Base Rate Loans or Eurodollar Loans, or a combination thereof, as the Borrower may request; provided, however, that no more than 10 Eurodollar Loans shall be outstanding hereunder at any time (it being understood that, for purposes hereof, Eurodollar Loans with different Interest Periods shall be considered as separate Eurodollar Loans, even if they begin on the same date, although borrowings, extensions and conversions may, in accordance with the provisions hereof, be combined at the end of existing Interest Periods to constitute a new Eurodollar Loan with a single Interest Period). Revolving Loans hereunder may be repaid and reborrowed in accordance with the provisions hereof. (b) Revolving Loan Borrowings. (i) Notice of Borrowing. The Borrower shall request a Revolving Loan borrowing by written notice (or telephonic notice promptly confirmed in writing) to the Administrative Agent not later than 1:00 P.M. (Charlotte, North Carolina time) on the Business Day prior to the date of the requested borrowing in the case of Base Rate Loans, and on the third Business Day prior to the date of the requested borrowing in the case of Eurodollar Loans. Each such request for borrowing shall be irrevocable and shall specify (A) that a Revolving Loan is requested, (B) the date of the requested borrowing (which shall be a Business Day), (C) the aggregate principal amount to be borrowed, and (D) whether the borrowing shall be comprised of Base Rate Loans, Eurodollar Loans or a combination thereof, and if Eurodollar Loans are requested, the Interest Period(s) therefor. If the Borrower shall fail to specify in any such Notice of Borrowing (I) an applicable Interest Period in the case 27 33 of a Eurodollar Loan, then such notice shall be deemed to be a request for an Interest Period of one month, or (II) the type of Revolving Loan requested, then such notice shall be deemed to be a request for a Base Rate Loan hereunder. The Administrative Agent shall give notice to each affected Lender promptly upon receipt of each Notice of Borrowing pursuant to this Section 2.1(b)(i), the contents thereof and each such Lender's share of any borrowing to be made pursuant thereto. (ii) Minimum Amounts. Each Eurodollar Loan that is a Revolving Loan shall be in a minimum aggregate principal amount of $1,000,000 and integral multiples of $100,000 in excess thereof (or the remaining amount of the Revolving Committed Amount, if less). Each Base Rate Loan that is a Revolving Loan shall be in a minimum aggregate principal amount of $250,000 and integral multiples of $25,000 in excess thereof (or the remaining amount of the Revolving Committed Amount, if less). (iii) Advances. Each Lender will make its Revolving Commitment Percentage of each Revolving Loan borrowing available to the Administrative Agent for the account of the Borrower as specified in Section 3.15(a), or in such other manner as the Administrative Agent may specify in writing, by 1:00 P.M. (Charlotte, North Carolina time) on the date specified in the applicable Notice of Borrowing in Dollars and in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the Borrower by the Administrative Agent by crediting the account of the Borrower on the books of such office with the aggregate of the amounts made available to the Administrative Agent by the Lenders and in like funds as received by the Administrative Agent. (c) Repayment. The principal amount of all Revolving Loans shall be due and payable in full on the Maturity Date, unless accelerated sooner pursuant to Section 9.2. (d) Interest. Subject to the provisions of Section 3.1, (i) Base Rate Loans. During such periods as Revolving Loans shall be comprised in whole or in part of Base Rate Loans, such Base Rate Loans shall bear interest at a per annum rate equal to the Adjusted Base Rate. (ii) Eurodollar Loans. During such periods as Revolving Loans shall be comprised in whole or in part of Eurodollar Loans, such Eurodollar Loans shall bear interest at a per annum rate equal to the Adjusted Eurodollar Rate. Interest on Revolving Loans shall be payable in arrears on each applicable Interest Payment Date (or at such other times as may be specified herein). (e) Revolving Notes. The Revolving Loans made by each Lender shall be evidenced by a duly executed promissory note of the Borrower to such Lender in an original principal amount equal to such Lender's Revolving Commitment Percentage of the Revolving Committed Amount and in substantially the form of Exhibit 2.1(e). 28 34 2.2 LETTER OF CREDIT SUBFACILITY OF THE REVOLVER. (a) Issuance. Subject to the terms and conditions hereof and of the LOC Documents, if any, and any other terms and conditions which the Issuing Lender may reasonably require and in reliance upon the representations and warranties set forth herein, the Issuing Lender agrees to issue, and each Lender severally agrees to participate in the issuance by the Issuing Lender of, standby and trade Letters of Credit in Dollars from time to time from the Closing Date until the date five (5) days prior to the Maturity Date as the Borrower may request, in a form acceptable to the Issuing Lender; provided, however, that (i) the LOC Obligations outstanding shall not at any time exceed TEN MILLION DOLLARS ($10,000,000) (the "LOC Committed Amount") and (ii) the sum of the aggregate outstanding principal amount of Revolving Loans plus LOC Obligations plus Swingline Loans shall not at any time exceed the Revolving Committed Amount. No Letter of Credit shall (x) have an original expiry date more than one year from the date of issuance or (y) as originally issued or as extended, have an expiry date extending beyond the Maturity Date. Each Letter of Credit shall comply with the related LOC Documents. The issuance and expiry dates of each Letter of Credit shall be a Business Day. (b) Notice and Reports. The request for the issuance of a Letter of Credit shall be submitted by the Borrower to the Issuing Lender at least three (3) Business Days prior to the requested date of issuance. The Issuing Lender will, at least quarterly and more frequently upon request, disseminate to each of the Lenders a detailed report specifying the Letters of Credit which are then issued and outstanding and any activity with respect thereto which may have occurred since the date of the prior report, and including therein, among other things, the beneficiary, the face amount and the expiry date, as well as any payment or expirations which may have occurred. (c) Participation. Each Lender, upon issuance of a Letter of Credit, shall be deemed to have purchased without recourse a Participation Interest from the Issuing Lender in such Letter of Credit and the obligations arising thereunder and any collateral relating thereto, in each case in an amount equal to its pro rata share of the obligations under such Letter of Credit (based on the respective Revolving Commitment Percentages of the Lenders) and shall absolutely, unconditionally and irrevocably assume and be obligated to pay to the Issuing Lender and discharge when due, its pro rata share of the obligations arising under such Letter of Credit. Without limiting the scope and nature of each Lender's Participation Interest in any Letter of Credit, to the extent that the Issuing Lender has not been reimbursed as required hereunder or under any such Letter of Credit, each such Lender shall pay to the Issuing Lender its pro rata share of such unreimbursed drawing in same day funds on the day of notification by the Issuing Lender of an unreimbursed drawing pursuant to the provisions of subsection (d) below. The obligation of each Lender to so reimburse the Issuing Lender shall be absolute and unconditional and shall not be affected by the occurrence of a Default, an Event of Default or any other occurrence or event. Any such reimbursement shall not relieve or otherwise impair the obligation of the Borrower to reimburse the Issuing Lender under any Letter of Credit, together with interest as hereinafter provided. (d) Reimbursement. In the event of any drawing under any Letter of Credit, the Issuing Lender will promptly notify the Borrower. Unless the Borrower shall immediately 29 35 notify the Issuing Lender that the Borrower intends to otherwise reimburse the Issuing Lender for such drawing, the Borrower shall be deemed to have requested that the Lenders make a Revolving Loan in the amount of the drawing as provided in subsection (e) below on the related Letter of Credit, the proceeds of which will be used to satisfy the related reimbursement obligations. The Borrower promises to reimburse the Issuing Lender on the day of drawing under any Letter of Credit (either with the proceeds of a Revolving Loan obtained hereunder or otherwise) in same day funds. If the Borrower shall fail to reimburse the Issuing Lender as provided hereinabove, the unreimbursed amount of such drawing shall bear interest at a per annum rate equal to the Adjusted Base Rate plus 2%. The Borrower's reimbursement obligations hereunder shall be absolute and unconditional under all circumstances irrespective of any rights of setoff, counterclaim or defense to payment the Borrower may claim or have against the Issuing Lender, the Administrative Agent, the Lenders, the beneficiary of the Letter of Credit drawn upon or any other Person, including, without limitation, any defense based on any failure of the Borrower or any other Credit Party to receive consideration or the legality, validity, regularity or unenforceability of the Letter of Credit. The Issuing Lender will promptly notify the other Lenders of the amount of any unreimbursed drawing and each Lender shall promptly pay to the Administrative Agent for the account of the Issuing Lender in Dollars and in immediately available funds, the amount of such Lender's pro rata share of such unreimbursed drawing. Such payment shall be made on the day such notice is received by such Lender from the Issuing Lender if such notice is received at or before 2:00 P.M. (Charlotte, North Carolina time); otherwise such payment shall be made at or before 12:00 Noon (Charlotte, North Carolina time) on the Business Day next succeeding the day such notice is received. If such Lender does not pay such amount to the Issuing Lender in full upon such request, such Lender shall, on demand, pay to the Administrative Agent for the account of the Issuing Lender interest on the unpaid amount during the period from the date of such drawing until such Lender pays such amount to the Issuing Lender in full at a rate per annum equal to, if paid within two (2) Business Days of the date that such Lender is required to make payments of such amount pursuant to the preceding sentence, the Federal Funds Rate and thereafter at a rate equal to the Base Rate. Each Lender's obligation to make such payment to the Issuing Lender, and the right of the Issuing Lender to receive the same, shall be absolute and unconditional, shall not be affected by any circumstance whatsoever and without regard to the termination of this Credit Agreement or the Commitments hereunder, the existence of a Default or Event of Default or the acceleration of the obligations of the Borrower hereunder and shall be made without any offset, abatement, withholding or reduction whatsoever. Simultaneously with the making of each such payment by a Lender to the Issuing Lender, such Lender shall, automatically and without any further action on the part of the Issuing Lender or such Lender, acquire a Participation Interest in an amount equal to such payment (excluding the portion of such payment constituting interest owing to the Issuing Lender) in the related unreimbursed drawing portion of the LOC Obligation and in the interest thereon and in the related LOC Documents, and shall have a claim against the Borrower with respect thereto. (e) Repayment with Revolving Loans. On any day on which the Borrower shall have requested, or been deemed to have requested, a Revolving Loan advance to reimburse a drawing under a Letter of Credit, the Administrative Agent shall give notice to the Lenders that a Revolving Loan has been requested or deemed requested by the Borrower to be made in connection with a drawing under a Letter of Credit, in which case a Revolving 30 36 Loan advance comprised of Base Rate Loans (or Eurodollar Loans to the extent the Borrower has complied with the procedures of Section 2.1(b)(i) with respect thereto) shall be immediately made to the Borrower by all Lenders (notwithstanding any termination of the Commitments pursuant to Section 9.2) pro rata based on the respective Revolving Commitment Percentages of the Lenders (determined before giving effect to any termination of the Commitments pursuant to Section 9.2) and the proceeds thereof shall be paid directly to the Issuing Lender for application to the respective LOC Obligations. Each such Lender hereby irrevocably agrees to make its pro rata share of each such Revolving Loan immediately upon any such request or deemed request in the amount, in the manner and on the date specified in the preceding sentence notwithstanding (i) the amount of such borrowing may not comply with the minimum amount for advances of Revolving Loans otherwise required hereunder, (ii) whether any conditions specified in Section 5.2 are then satisfied, (iii) whether a Default or an Event of Default then exists, (iv) failure for any such request or deemed request for Revolving Loan to be made by the time otherwise required hereunder, (v) whether the date of such borrowing is a date on which Revolving Loans are otherwise permitted to be made hereunder or (vi) any termination of the Commitments relating thereto immediately prior to or contemporaneously with such borrowing. In the event that any Revolving Loan cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code with respect to the Borrower or any other Credit Party), then each such Lender hereby agrees that it shall forthwith purchase (as of the date such borrowing would otherwise have occurred, but adjusted for any payments received from the Borrower on or after such date and prior to such purchase) from the Issuing Lender such Participation Interests in the outstanding LOC Obligations as shall be necessary to cause each such Lender to share in such LOC Obligations ratably (based upon the respective Revolving Commitment Percentages of the Lenders (determined before giving effect to any termination of the Commitments pursuant to Section 9.2)), provided that at the time any purchase of Participation Interests pursuant to this sentence is actually made, the purchasing Lender shall be required to pay to the Issuing Lender, to the extent not paid to the Issuer by the Borrower in accordance with the terms of subsection (d) above, interest on the principal amount of Participation Interests purchased for each day from and including the day upon which such borrowing would otherwise have occurred to but excluding the date of payment for such Participation Interests, at the rate equal to, if paid within two (2) Business Days of the date of the Revolving Loan advance, the Federal Funds Rate, and thereafter at a rate equal to the Base Rate. (f) Designation of Consolidated Parties as Account Parties. Notwithstanding anything to the contrary set forth in this Credit Agreement, including, without limitation, Section 2.2(a), a Letter of Credit issued hereunder may contain a statement to the effect that such Letter of Credit is issued for the account of a Consolidated Party other than the Borrower, provided that, notwithstanding such statement, the Borrower shall be the actual account party for all purposes of this Credit Agreement for such Letter of Credit and such statement shall not affect the Borrower's reimbursement obligations hereunder with respect to such Letter of Credit. (g) Renewal, Extension. The renewal or extension of any Letter of Credit shall, for purposes hereof, be treated in all respects the same as the issuance of a new Letter of Credit hereunder. 31 37 (h) Uniform Customs and Practices. The Issuing Lender may have the Letters of Credit be subject to The Uniform Customs and Practice for Documentary Credits, as published as of the date of issue by the International Chamber of Commerce (the "UCP"), in which case the UCP may be incorporated therein and deemed in all respects to be a part thereof. (i) Indemnification; Nature of Issuing Lender's Duties. (i) In addition to its other obligations under this Section 2.2, the Borrower hereby agrees to pay, and protect, indemnify and save each Lender harmless from and against, any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) that such Lender may incur or be subject to as a consequence, direct or indirect, of (A) the issuance of any Letter of Credit or (B) the failure of such Lender to honor a drawing under a Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or Governmental Authority (all such acts or omissions, herein called "Government Acts"). (ii) As between the Borrower and the Lenders (including the Issuing Lender), the Borrower shall assume all risks of the acts, omissions or misuse of any Letter of Credit by the beneficiary thereof. No Lender (including the Issuing Lender) shall be responsible: (A) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (B) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, that may prove to be invalid or ineffective for any reason; (C) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (D) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under a Letter of Credit or of the proceeds thereof; and (E) for any consequences arising from causes beyond the control of such Lender, including, without limitation, any Government Acts. None of the above shall affect, impair, or prevent the vesting of the Issuing Lender's rights or powers hereunder. (iii) In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by any Lender (including the Issuing Lender), under or in connection with any Letter of Credit or the related certificates, if taken or omitted in good faith, shall not put such Lender under any resulting liability to the Borrower or any other Credit Party. It is the intention of the parties that this Credit Agreement shall be construed and applied to protect and indemnify each Lender (including the Issuing Lender) against any and all risks involved in the issuance of the Letters of Credit, all of which risks are hereby assumed by the Borrower (on behalf of itself and each of the other Credit Parties), including, without limitation, any and all Government Acts. No Lender 32 38 (including the Issuing Lender) shall, in any way, be liable for any failure by such Lender or anyone else to pay any drawing under any Letter of Credit as a result of any Government Acts or any other cause beyond the control of such Lender. (iv) Nothing in this subsection (i) is intended to limit the reimbursement obligations of the Borrower contained in subsection (d) above. The obligations of the Borrower under this subsection (i) shall survive the termination of this Credit Agreement. No act or omission of any current or prior beneficiary of a Letter of Credit shall in any way affect or impair the rights of the Lenders (including the Issuing Lender) to enforce any right, power or benefit under this Credit Agreement. (v) Notwithstanding anything to the contrary contained in this subsection (i), the Borrower shall have no obligation to indemnify any Lender (including the Issuing Lender) in respect of any liability incurred by such Lender (A) arising solely out of the gross negligence or willful misconduct of such Lender, as determined by a court of competent jurisdiction, or (B) caused by such Lender's failure to pay under any Letter of Credit after presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit, as determined by a court of competent jurisdiction, unless such payment is prohibited by any law, regulation, court order or decree. (j) Responsibility of Issuing Lender. It is expressly understood and agreed that the obligations of the Issuing Lender hereunder to the Lenders are only those expressly set forth in this Credit Agreement and that the Issuing Lender shall be entitled to assume that the conditions precedent set forth in Section 5.2 have been satisfied unless it shall have acquired actual knowledge that any such condition precedent has not been satisfied; provided, however, that nothing set forth in this Section 2.2 shall be deemed to prejudice the right of any Lender to recover from the Issuing Lender any amounts made available by such Lender to the Issuing Lender pursuant to this Section 2.2 in the event that it is determined by a court of competent jurisdiction that the payment with respect to a Letter of Credit constituted gross negligence or willful misconduct on the part of the Issuing Lender. (k) Conflict with LOC Documents. In the event of any conflict between this Credit Agreement and any LOC Document (including any letter of credit application), this Credit Agreement shall control. 2.3 SWINGLINE LOAN SUBFACILITY OF THE REVOLVER. (a) Swingline Commitment. Subject to the terms and conditions hereof and in reliance upon the representations and warranties set forth herein, the Swingline Lender, in its individual capacity, agrees to make certain revolving credit loans requested by the Borrower in Dollars to the Borrower (each a "Swingline Loan" and, collectively, the "Swingline Loans") from time to time from the Closing Date until the Maturity Date for the purposes hereinafter set forth; provided, however, (i) the aggregate principal amount of Swingline Loans outstanding at any time shall not exceed TWO MILLION DOLLARS ($2,000,000) (the "Swingline Committed Amount"), and (ii) the sum of the aggregate outstanding principal amount of Revolving Loans plus LOC Obligations plus Swingline Loans shall not exceed the Revolving Committed Amount. Swingline Loans hereunder 33 39 shall be made as Base Rate Loans and may be repaid and reborrowed in accordance with the provisions hereof. (b) Swingline Loan Advances. (i) Notices; Disbursement. Whenever the Borrower desires a Swingline Loan advance hereunder it shall give written notice (or telephonic notice promptly confirmed in writing) to the Swingline Lender not later than 3:00 P.M. (Charlotte, North Carolina time) on the Business Day of the requested Swingline Loan advance. Each such notice shall be irrevocable and shall specify (A) that a Swingline Loan advance is requested, (B) the date of the requested Swingline Loan advance (which shall be a Business Day) and (C) the principal amount of the Swingline Loan advance requested. Each Swingline Loan shall be made as a Base Rate Loan and shall have such maturity date as the Swingline Lender and the Borrower shall agree upon receipt by the Swingline Lender of any such notice from the Borrower. The Swingline Lender shall initiate the transfer of funds representing the Swingline Loan advance to the Borrower by 3:00 P.M. (Charlotte, North Carolina time) on the Business Day of the requested borrowing. (ii) Minimum Amounts. Each Swingline Loan advance shall be in a minimum principal amount of $100,000 and integral multiples of $50,000 (or the remaining amount of the Swingline Committed Amount, if less). (iii) Repayment of Swingline Loans. The principal amount of all Swingline Loans shall be due and payable on the earlier of (A) the maturity date agreed to by the Swingline Lender and the Borrower with respect to such Loan (which maturity date shall not be a date more than seven (7) Business Days from the date of advance thereof) or (B) the Maturity Date. The Swingline Lender may, at any time, in its sole discretion, by written notice to the Borrower and the Lenders, demand repayment of its Swingline Loans by way of a Revolving Loan advance, in which case the Borrower shall be deemed to have requested a Revolving Loan advance comprised solely of Base Rate Loans in the amount of such Swingline Loans; provided, however, that any such demand shall be deemed to have been given one Business Day prior to the Maturity Date and on the date of the occurrence of any Event of Default described in Section 9.1 and upon acceleration of the indebtedness hereunder and the exercise of remedies in accordance with the provisions of Section 9.2. Each Lender hereby irrevocably agrees to make its pro rata share of each such Revolving Loan in the amount, in the manner and on the date specified in the preceding sentence notwithstanding (I) the amount of such borrowing may not comply with the minimum amount for advances of Revolving Loans otherwise required hereunder, (II) whether any conditions specified in Section 5.2 are then satisfied, (III) whether a Default or an Event of Default then exists, (IV) failure of any such request or deemed request for Revolving Loan to be made by the time otherwise required hereunder, (V) whether the date of such borrowing is a date on which Revolving Loans are otherwise permitted to be made hereunder or (VI) any termination of the Commitments relating thereto immediately prior to or contemporaneously with such borrowing. In the event that any Revolving Loan cannot for any reason be made on the date otherwise required 34 40 above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code with respect to the Borrower or any other Credit Party), then each Lender hereby agrees that it shall forthwith purchase (as of the date such borrowing would otherwise have occurred, but adjusted for any payments received from the Borrower on or after such date and prior to such purchase) from the Swingline Lender such Participation Interests in the outstanding Swingline Loans as shall be necessary to cause each such Lender to share in such Swingline Loans ratably based upon its Revolving Commitment Percentage of the Revolving Committed Amount (determined before giving effect to any termination of the Commitments pursuant to Section 3.4), provided that (A) all interest payable on the Swingline Loans shall be for the account of the Swingline Lender until the date as of which the respective Participation Interest is purchased and (B) at the time any purchase of Participation Interests pursuant to this sentence is actually made, the purchasing Lender shall be required to pay to the Swingline Lender, to the extent not paid to the Swingline Lender by the Borrower in accordance with the terms of subsection (c)(ii) below, interest on the principal amount of Participation Interests purchased for each day from and including the day upon which such borrowing would otherwise have occurred to but excluding the date of payment for such Participation Interests, at the rate equal to the Federal Funds Rate. (c) Interest on Swingline Loans. (i) Rate of Interest . Subject to the provisions of Section 3.1, each Swingline Loan shall bear interest at a per annum rate equal to the Adjusted Base Rate for Revolving Loans. (ii) Payment of Interest. Interest on Swingline Loans shall be payable in arrears on each applicable Interest Payment Date (or at such other times as may be specified herein), unless accelerated sooner pursuant to Section 9.2. (d) Swingline Note. The Swingline Loans shall be evidenced by a duly executed promissory note of the Borrower to the Swingline Lender in an original principal amount equal to the Swingline Committed Amount substantially in the form of Exhibit 2.3(d). 2.4 TRANCHE A TERM LOAN. (a) Tranche A Term Commitment. Subject to the terms and conditions hereof and in reliance upon the representations and warranties set forth herein, each Lender severally agrees to make available to the Borrower on the Closing Date such Lender's Tranche A Term Loan Commitment Percentage of a term loan in Dollars (the "Tranche A Term Loan") in the aggregate principal amount of FORTY-FIVE MILLION DOLLARS ($45,000,000) (the "Tranche A Term Loan Committed Amount"). The Tranche A Term Loan may consist of Base Rate Loans or Eurodollar Loans, or a combination thereof, as the Borrower may request; provided, however, that no more than 5 Eurodollar Loans shall be outstanding hereunder at any time (it being understood that, for purposes hereof, Eurodollar Loans with different Interest Periods shall be considered as separate Eurodollar Loans, even if they begin on the same date, although borrowings, extensions and conversions may, in 35 41 accordance with the provisions hereof, be combined at the end of existing Interest Periods to constitute a new Eurodollar Loan with a single Interest Period). Amounts repaid on the Tranche A Term Loan may not be reborrowed. (b) Borrowing Procedures. The Borrower shall submit an appropriate Notice of Borrowing to the Administrative Agent not later than 1:00 P.M. (Charlotte, North Carolina time) on the Closing Date, with respect to the portion of the Tranche A Term Loan initially consisting of a Base Rate Loan, or on the third Business Day prior to the Closing Date, with respect to the portion of the Tranche A Term Loan initially consisting of one or more Eurodollar Loans, which Notice of Borrowing shall be irrevocable and shall specify (i) that the funding of a Tranche A Term Loan is requested and (ii) whether the funding of the Tranche A Term Loan shall be comprised of Base Rate Loans, Eurodollar Loans or a combination thereof, and if Eurodollar Loans are requested, the Interest Period(s) therefor. If the Borrower shall fail to deliver such Notice of Borrowing to the Administrative Agent by 1:00 P.M. (Charlotte, North Carolina time) on the third Business Day prior to the Closing Date, then the full amount of the Tranche A Term Loan shall be disbursed on the Closing Date as a Eurodollar Loan with a period ending March 31, 1999. Each Lender shall make its Tranche A Term Loan Commitment Percentage of the Tranche A Term Loan available to the Administrative Agent for the account of the Borrower at the office of the Administrative Agent specified in Schedule 2.1(a), or at such other office as the Administrative Agent may designate in writing, by 1:00 P.M. (Charlotte, North Carolina time) on the Closing Date in Dollars and in funds immediately available to the Administrative Agent. (c) Minimum Amounts. Each Eurodollar Loan or Base Rate Loan that is part of the Tranche A Term Loan shall be in an aggregate principal amount that is not less than $1,000,000 and integral multiples of $250,000 in excess thereof (or the then remaining principal balance of the Tranche A Term Loan, if less). (d) Repayment of Tranche A Term Loan. The principal amount of the Tranche A Term Loan shall be repaid in twenty (20) consecutive quarterly installments as follows, unless accelerated sooner pursuant to Section 9.2: 36 42
=========================================================== PRINCIPAL AMORTIZATION TRANCHE A TERM LOAN PAYMENT PRINCIPAL AMORTIZATION DATES PAYMENT - ----------------------------------------------------------- March 31, 1999, June 30, 1999, September 30, 1999 and December 31, 1999 $1,500,000 - ----------------------------------------------------------- March 31, 2000, June 30, 2000, September 30, 2000 and December 31, 2000 $1,750,000 - ----------------------------------------------------------- March 31, 2001, June 30, 2001, September 30, 2001 and December 31, 2001 $2,000,000 - ----------------------------------------------------------- March 31, 2002, June 30, 2002, September 30, 2002 and December 31, 2002 $2,250,000 - ----------------------------------------------------------- March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003 $3,750,000 ===========================================================
(e) Interest. Subject to the provisions of Section 3.1, the Tranche A Term Loan shall bear interest at a per annum rate equal to: (i) Base Rate Loans. During such periods as the Tranche A Term Loan shall be comprised in whole or in part of Base Rate Loans, such Base Rate Loans shall bear interest at a per annum rate equal to the Adjusted Base Rate. (ii) Eurodollar Loans. During such periods as the Tranche A Term Loan shall be comprised in whole or in part of Eurodollar Loans, such Eurodollar Loans shall bear interest at a per annum rate equal to the Adjusted Eurodollar Rate. Interest on the Tranche A Term Loan shall be payable in arrears on each applicable Interest Payment Date (or at such other times as may be specified herein). (f) Tranche A Term Notes. The portion of the Tranche A Term Loan made by each Lender shall be evidenced by a duly executed promissory note of the Borrower to such Lender in an original principal amount equal to such Lender's Tranche A Term Loan Commitment Percentage of the Tranche A Term Loan and substantially in the form of Exhibit 2.4(f). 37 43 2.5 DELAYED DRAW TERM LOAN. (a) Delayed Draw Term Commitment. Subject to the terms and conditions hereof and in reliance upon the representations and warranties set forth herein, each Lender severally agrees to make available to the Borrower from time to time from the Closing Date until the second anniversary of the Closing Date, or such earlier date as the Delayed Draw Term Loan Commitments shall have been terminated as provided herein, such Lender's Delayed Draw Term Loan Commitment Percentage of a term loan in Dollars (the "Delayed Draw Term Loan") in the aggregate principal amount of up to TWENTY-FIVE MILLION DOLLARS ($25,000,000) (the "Delayed Draw Term Loan Committed Amount"). The Delayed Draw Term Loan may consist of Base Rate Loans or Eurodollar Loans, or a combination thereof, as the Borrower may request; provided, however, that no more than 5 Eurodollar Loans shall be outstanding hereunder at any time (it being understood that, for purposes hereof, Eurodollar Loans with different Interest Periods shall be considered as separate Eurodollar Loans, even if they begin on the same date, although borrowings, extensions and conversions may, in accordance with the provisions hereof, be combined at the end of existing Interest Periods to constitute a new Eurodollar Loan with a single Interest Period). Amounts repaid on the Delayed Draw Term Loan may not be reborrowed. The proceeds of the Delayed Draw Term Loan may only be used to finance Permitted Acquisitions. (b) Borrowing Procedures. The Borrower shall request the full amount of the Delayed Draw Term Loan or a portion thereof by written notice (or telephonic notice promptly confirmed in writing) to the Administrative Agent not later than 1:00 P.M. (Charlotte, North Carolina time) on the Business Day prior to the date of the requested borrowing in the case of Base Rate Loans, and on the third Business Day prior to the date of the requested borrowing in the case of Eurodollar Loans. Each such request for borrowing shall be irrevocable and shall specify (i) that the funding of a Delayed Draw Term Loan is requested, (ii) the date of the requested borrowing (which shall be a Business Day), (iii) the aggregate principal amount to be borrowed, and (iv) whether the funding of the Delayed Draw Term Loan shall be comprised of Base Rate Loans, Eurodollar Loans or a combination thereof, and if Eurodollar Loans are requested, the Interest Period(s) therefor. If the Borrower shall fail to specify in any such Notice of Borrowing (I) an applicable Interest Period in the case of a Eurodollar Loan, then such notice shall be deemed to be a request for an Interest Period of one month, or (II) the type of Delayed Draw Term Loan requested, then such notice shall be deemed to be a request for a Base Rate Loan hereunder. The Administrative Agent shall give notice to each affected Lender promptly upon receipt of each Notice of Borrowing pursuant to this Section 2.5(b), the contents thereof and each such Lender's share of any borrowing to be made pursuant thereto. Each Lender shall make its Delayed Draw Term Loan Commitment Percentage of the Delayed Draw Term Loan available to the Administrative Agent for the account of the Borrower at the office of the Administrative Agent specified in Schedule 2.1(a), or at such other office as the Administrative Agent may designate in writing, by 1:00 P.M. (Charlotte, North Carolina time) on the date specified in the applicable Notice of Borrowing in Dollars and in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the Borrower by the Administrative Agent by crediting the account of the Borrower on the books of such office with the aggregate of the amounts made available to 38 44 the Administrative Agent by the Lenders and in like funds as received by the Administrative Agent. (c) Minimum Amounts. Each Eurodollar Loan or Base Rate Loan that is part of the Delayed Draw Term Loan shall be in an aggregate principal amount that is not less than $1,000,000 and integral multiples of $250,000 (or the then remaining principal balance of the Delayed Draw Term Loan, if less). (d) Repayment of Delayed Draw Term Loan. The principal amount of the Delayed Draw Term Loan shall be repaid in twelve (12) consecutive quarterly installments equal to the product of the percentages set forth below multiplied by the outstanding principal amount of the Delayed Draw Term Loan on the second anniversary of the Closing Date, unless accelerated sooner pursuant to Section 9.2:
====================================================== PRINCIPAL AMORTIZATION DELAYED DRAW TERM LOAN PAYMENT PRINCIPAL AMORTIZATION DATES PAYMENT - ------------------------------------------------------ March 31, 2001, June 30, 2001, September 30, 2001 and December 31, 2001 5.0% - ------------------------------------------------------ March 31, 2002, June 30, 2002, September 30, 2002 and December 31, 2002 7.5% - ------------------------------------------------------ March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003 12.5% ======================================================
(e) Interest. Subject to the provisions of Section 3.1, the Delayed Draw Term Loan shall bear interest at a per annum rate equal to: (i) Base Rate Loans. During such periods as the Delayed Draw Term Loan shall be comprised in whole or in part of Base Rate Loans, such Base Rate Loans shall bear interest at a per annum rate equal to the Adjusted Base Rate. (ii) Eurodollar Loans. During such periods as the Delayed Draw Term Loan shall be comprised in whole or in part of Eurodollar Loans, such Eurodollar Loans shall bear interest at a per annum rate equal to the Adjusted Eurodollar Rate. Interest on the Delayed Draw Term Loan shall be payable in arrears on each applicable Interest Payment Date (or at such other times as may be specified herein). (f) Delayed Draw Term Notes. The portion of the Delayed Draw Term Loan made by each Lender shall be evidenced by a duly executed promissory note of the 39 45 Borrower to such Lender in an original principal amount equal to such Lender's Delayed Draw Term Loan Commitment Percentage of the Delayed Draw Term Loan and substantially in the form of Exhibit 2.4(f). SECTION 3 OTHER PROVISIONS RELATING TO CREDIT FACILITIES 3.1 DEFAULT RATE. Upon the occurrence, and during the continuance, of an Event of Default, (i) the principal of and, to the extent permitted by law, interest on the Loans and any other amounts owing hereunder or under the other Credit Documents shall bear interest, payable on demand, at a per annum rate 2% greater than the rate which would otherwise be applicable (or if no rate is applicable, whether in respect of interest, fees or other amounts, then the Adjusted Base Rate plus 2%) and (ii) the Letter of Credit Fee and the Trade Letter of Credit shall accrue at a per annum rate 2% greater than the rate which would otherwise be applicable. 3.2 EXTENSION AND CONVERSION. The Borrower shall have the option, on any Business Day, to extend existing Loans into a subsequent permissible Interest Period or to convert Loans into Loans of another interest rate type; provided, however, that (i) except as provided in Section 3.8, Eurodollar Loans may be converted into Base Rate Loans or extended as Eurodollar Loans for new Interest Periods only on the last day of the Interest Period applicable thereto, (ii) without the consent of the Required Lenders, Eurodollar Loans may be extended, and Base Rate Loans may be converted into Eurodollar Loans, only if the conditions precedent set forth in Section 5.2 are satisfied on the date of extension or conversion, (iii) Loans extended as, or converted into, Eurodollar Loans shall be subject to the terms of the definition of "Interest Period" set forth in Section 1.1 and shall be in such minimum amounts as provided in, with respect to Revolving Loans, Section 2.1(b)(ii), with respect to the Tranche A Term Loan, Section 2.4(c), or, with respect to the Delayed Draw Term Loan, Section 2.5(c), (iv) no more than 10 Eurodollar Loans shall be outstanding hereunder at any time (it being understood that, for purposes hereof, Eurodollar Loans with different Interest Periods shall be considered as separate Eurodollar Loans, even if they begin on the same date, although borrowings, extensions and conversions may, in accordance with the provisions hereof, be combined at the end of existing Interest Periods to constitute a new Eurodollar Loan with a single Interest Period), (v) any request for extension or conversion of a Eurodollar Loan which shall fail to specify an Interest Period shall be deemed to be a request for an Interest Period of one month and (vi) Swingline Loans may not be extended or converted pursuant to this Section 3.2. Each such extension or conversion shall be effected by the Borrower by giving a Notice of Extension/Conversion (or telephonic notice promptly confirmed in writing) to the office of the Administrative Agent specified in Schedule 2.1(a), or at such other office as the Administrative Agent may designate in writing, prior to 1:00 P.M. (Charlotte, North Carolina time) on the Business Day of, in the case of the conversion of a Eurodollar Loan into a Base Rate Loan, and on the third Business Day prior to, in the case of the extension of a Eurodollar Loan as, or conversion of a Base Rate Loan into, a Eurodollar Loan, the date of the proposed extension or conversion, specifying the date of the proposed extension or conversion, the Loans to be so extended or converted, the types of Loans into which such Loans are 40 46 to be converted and, if appropriate, the applicable Interest Periods with respect thereto. Each request for extension or conversion shall be irrevocable and shall constitute a representation and warranty by the Borrower of the matters specified in subsections (b), (c), (d), (e) and (f) of Section 5.2. In the event the Borrower fails to request an extension or conversion of any Eurodollar Loan in accordance with this Section, then such Eurodollar Loan shall be automatically converted into a Eurodollar Loan with a period of one month's duration at the end of the Interest Period applicable thereto. If any such conversion or extension is not permitted or required by this Section, then such Eurodollar Loan shall be automatically converted into a Base Rate Loan at the end of the Interest Period applicable thereto. The Administrative Agent shall give each Lender notice as promptly as practicable of any such proposed extension or conversion affecting any Loan. 3.3 PREPAYMENTS. (a) Voluntary Prepayments. The Borrower shall have the right to prepay Loans in whole or in part from time to time; provided, however, that each partial prepayment of Loans (other than Swingline Loans) shall be in a minimum principal amount of $1,000,000 and integral multiples of $250,000 in excess thereof (or the then remaining principal balance of the Revolving Loans, the Tranche A Term Loan or the Delayed Draw Term Loan, as applicable, if less). Subject to the foregoing terms, amounts prepaid under this Section 3.3(a) shall be applied as the Borrower may elect; provided that if the Borrower fails to specify a voluntary prepayment then such prepayment shall be applied first to Revolving Loans and then ratably to the Tranche A Term Loan and the Delayed Draw Term Loan (in each case ratably to the remaining Principal Amortization Payments thereof), in each case first to Base Rate Loans and then to Eurodollar Loans in direct order of Interest Period maturities. All prepayments under this Section 3.3(a) shall be subject to Section 3.12, but otherwise without premium or penalty, and be accompanied by interest on the principal amount prepaid through the date of prepayment. (b) Mandatory Prepayments. (i) (A) Revolving Committed Amount. If at any time, the sum of the aggregate outstanding principal amount of Revolving Loans plus LOC Obligations plus Swingline Loans shall exceed the Revolving Committed Amount, the Borrower immediately shall prepay the Revolving Loans and (after all Revolving Loans have been repaid) cash collateralize the LOC Obligations, in an amount sufficient to eliminate such excess (such prepayment to be applied as set forth in clause (v) below). (B) LOC Committed Amount. If at any time, the sum of the aggregate principal amount of LOC Obligations shall exceed the LOC Committed Amount, the Borrower immediately shall cash collateralize the LOC Obligations in an amount sufficient to eliminate such excess (such prepayment to be applied as set forth in clause (v) below). (ii) (A) Asset Dispositions. Immediately upon the occurrence of any Asset Disposition Prepayment Event, the Borrower shall prepay the Loans in an aggregate amount equal to 100% of the Net Cash Proceeds of the related Asset Disposition not applied (or caused to be applied) by the Credit 41 47 Parties during the related Application Period to make Eligible Reinvestments as contemplated by the terms of Section 8.5(f) (such prepayment to be applied as set forth in clause (v) below). (B) Casualty and Condemnation Events. Immediately upon the occurrence of any event requiring application of any insurance proceeds to the prepayment of Loans (and cash collateralization of LOC Obligations) pursuant to Section 7.6(d), the Borrower shall prepay the Loans in the amount required by such Section 7.6(d) (such prepayment to be applied as set forth in clause (v) below). (iii) Debt Issuances. Immediately upon receipt by any Consolidated Party of proceeds from any Debt Issuance other than a Excluded Debt Issuance, the Borrower shall prepay the Loans in an aggregate amount equal to 100% of the Net Cash Proceeds of such Debt Issuance to the Lenders (such prepayment to be applied as set forth in clause (v) below). (iv) Issuances of Equity. Immediately upon receipt by a Consolidated Party of proceeds from any Equity Issuance (other than an Excluded Equity Issuance), the Borrower shall prepay the Loans in an aggregate amount equal to 50% of the Net Cash Proceeds of such Equity Issuance to the Lenders (such prepayment to be applied as set forth in clause (v) below). (v) Application of Mandatory Prepayments. All amounts required to be paid pursuant to this Section 3.3(b) shall be applied as follows: (A) with respect to all amounts prepaid pursuant to Section 3.3(b)(i)(A), to Revolving Loans and (after all Revolving Loans have been repaid) to a cash collateral account in respect of LOC Obligations, (B) with respect to all amounts prepaid pursuant to Section 3.3(b)(i)(B), to a cash collateral account in respect of LOC Obligations, (C) with respect to all amounts prepaid pursuant to Section 3.3(b)(ii), pro rata to (1) the Tranche A Term Loan (ratably to the remaining Principal Amortization Payments thereof), (2) the Delayed Draw Term Loan (ratably to the remaining Principal Amortization Payments thereof) and (3) the Revolving Loans and (after all Revolving Loans have been repaid) to a cash collateral account in respect of LOC Obligations (with a corresponding reduction in the Revolving Committed Amount in an amount equal to all amounts applied pursuant to this clause (3)) and (D) with respect to all amounts prepaid pursuant to Section 3.3(b)(iii) or (iv), pro rata to the Tranche A Term Loan and the Delayed Draw Term Loan (in each case ratably to the remaining Principal Amortization Payments thereof). Within the parameters of the applications set forth above, prepayments shall be applied first to Base Rate Loans and then to Eurodollar Loans in direct order of Interest Period maturities. All prepayments under this Section 3.3(b) shall be subject to Section 3.12 and be accompanied by interest on the principal amount prepaid through the date of prepayment. 42 48 3.4 TERMINATION AND REDUCTION OF REVOLVING COMMITTED AMOUNT. (a) Voluntary Reductions. The Borrower may from time to time permanently reduce or terminate the Revolving Committed Amount in whole or in part (in minimum aggregate amounts of $2,000,000 and integral multiples of $1,000,000 in excess thereof (or, if less, the full remaining amount of the then applicable Revolving Committed Amount)) upon five Business Days' prior written notice to the Administrative Agent; provided, however, no such termination or reduction shall be made which would cause the sum of the aggregate outstanding principal amount of Revolving Loans plus LOC Obligations plus Swingline Loans to exceed the Revolving Committed Amount, unless, concurrently with such termination or reduction, the Revolving Loans are repaid to the extent necessary to eliminate such excess. The Administrative Agent shall promptly notify each affected Lender of receipt by the Administrative Agent of any notice from the Borrower pursuant to this Section 3.4(a). (b) Mandatory Reductions. On any date that the Revolving Loans are required to be prepaid pursuant to the terms of Section 3.3(b)(v), the Revolving Committed Amount automatically shall be permanently reduced by the amount of such required prepayment and/or reduction. (c) Maturity Date. The Revolving Commitments of the Lenders, the LOC Commitment of the Issuing Lender and the Swingline Commitment of the Swingline Lender shall automatically terminate on the Maturity Date. (d) General. The Borrower shall pay to the Administrative Agent for the account of the Lenders in accordance with the terms of Section 3.5(b)(i), on the date of each termination or reduction of the Revolving Committed Amount, the Revolving Unused Fee accrued through the date of such termination or reduction on the amount of the Revolving Committed Amount so terminated or reduced. 3.5 FEES. (a) Upfront Fees. The Borrower agrees to pay to NationsBank in immediately available funds on or before the Closing Date an upfront fee (the "Upfront Fee") in the amount provided in the Administrative Agent's Fee Letter. (b) Unused Fee. (i) In consideration of the Revolving Commitments of the Lenders hereunder, the Borrower agrees to pay to the Administrative Agent for the account of each Lender a fee (the "Revolving Unused Fee") on the Unused Revolving Committed Amount computed at a per annum rate for each day during the applicable Revolving Unused Fee Calculation Period (hereinafter defined) at a rate equal to the Applicable Percentage in effect from time to time. The Revolving Unused Fee shall commence to accrue on the Closing Date and shall be due and payable in arrears on the last Business Day of each March, June, September and December (and any date that the Revolving Committed Amount is reduced as provided in Section 3.4(a) and the Maturity Date) for the immediately preceding 43 49 quarter (or portion thereof) (each such quarter or portion thereof for which the Revolving Unused Fee is payable hereunder being herein referred to as a "Revolving Unused Fee Calculation Period"), beginning with the first of such dates to occur after the Closing Date. (ii) In consideration of the Delayed Draw Term Loan Commitments of the Lenders hereunder, the Borrower agrees to pay to the Administrative Agent for the account of each Lender a fee (the "Delayed Draw Unused Fee") on the Unused Delayed Draw Term Loan Committed Amount computed at a per annum rate for each day during the applicable Delayed Draw Unused Fee Calculation Period (hereinafter defined) at a rate equal to the Applicable Percentage in effect from time to time. The Delayed Draw Unused Fee shall commence to accrue on the Closing Date and shall be due and payable in arrears on the last Business Day of each March, June, September and December for the immediately preceding quarter (or portion thereof) (each such quarter or portion thereof for which the Delayed Draw Unused Fee is payable hereunder being herein referred to as a "Delayed Draw Unused Fee Calculation Period"), beginning with the first of such dates to occur after the Closing Date and ending with the first of such dates to occur after the second anniversary of the Closing Date. (c) Letter of Credit Fees. (i) Standby Letter of Credit Issuance Fee. In consideration of the issuance of standby Letters of Credit hereunder, the Borrower promises to pay to the Administrative Agent for the account of each Lender a fee (the "Standby Letter of Credit Fee") on such Lender's Revolving Commitment Percentage of the average daily maximum amount available to be drawn under each such standby Letter of Credit computed at a per annum rate for each day from the date of issuance to the date of expiration equal to the Applicable Percentage. The Standby Letter of Credit Fee will be payable quarterly in arrears on the last Business Day of each March, June, September and December for the immediately preceding quarter (or a portion thereof). (ii) Trade Letter of Credit Drawing Fee. In consideration of the issuance of trade Letters of Credit hereunder, the Borrower promises to pay to the Administrative Agent for the account of each Lender a fee (the "Trade Letter of Credit Fee") equal to one-half (1/2) of the Standby Letter of Credit Fee. The Trade Letter of Credit Fee will be payable quarterly in arrears on the last Business Day of each March, June, September and December for the immediately preceding quarter (or a portion thereof). (iii) Issuing Lender Fees. In addition to the Standby Letter of Credit Fee payable pursuant to clause (i) above and the Trade Letter of Credit Fee payable pursuant to clause (ii) above, the Borrower promises to pay to the Administrative Agent for the account of each applicable Issuing Lender without sharing by the other Lenders (i) a letter of credit fronting fee of 0.25% on the average daily maximum amount available to be drawn under each standby Letter of Credit issued by such Issuing Lender computed at a per annum rate for each day from the date of 44 50 issuance to the date of expiration and (ii) the customary charges from time to time of the Issuing Lender with respect to the issuance, amendment, transfer, administration, cancellation and conversion of, and drawings under, such Letters of Credit (collectively, the "Issuing Lender Fees"). The Issuing Lender Fee will be payable quarterly in arrears on the last Business Day of each March, June, September and December for the immediately preceding quarter (or a portion thereof). (d) Administrative Fees. The Borrower agrees to pay to the Administrative Agent, for its own account, for the account of the Issuing Lender and for the account of NationsBanc Montgomery Securities LLC, as applicable, the fees referred to in the Administrative Agent's Fee Letter (collectively, the "Administrative Agent's Fees"). 3.6 CAPITAL ADEQUACY. If any Lender has determined, after the date hereof, that the adoption or the becoming effective of, or any change in, or any change by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof in the interpretation or administration of, any applicable law, rule or regulation regarding capital adequacy, or compliance by such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital or assets as a consequence of its commitments or obligations hereunder to a level below that which such Lender could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Lender's policies with respect to capital adequacy), then, upon notice from such Lender to the Borrower, the Borrower shall be obligated to pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. Each determination by any such Lender of amounts owing under this Section shall, absent manifest error, be conclusive and binding on the parties hereto. 3.7 LIMITATION ON EURODOLLAR LOANS. If on or prior to the first day of any Interest Period for any Eurodollar Loan: (a) the Administrative Agent determines (which determination shall be conclusive) that by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period; or (b) the Required Lenders determine (which determination shall be conclusive) and notify the Administrative Agent that the Eurodollar Rate will not adequately and fairly reflect the cost to the Lenders of funding Eurodollar Loans for such Interest Period; then the Administrative Agent shall give the Borrower prompt notice thereof, and so long as such condition remains in effect, the Lenders shall be under no obligation to make additional Eurodollar Loans, Continue Eurodollar Loans, or to Convert Base Rate Loans into Eurodollar Loans and the Borrower shall, on the last day(s) of the then current Interest Period(s) for the outstanding 45 51 Eurodollar Loans, either repay such Eurodollar Loans or Convert such Eurodollar Loans into Base Rate Loans in accordance with the terms of this Credit Agreement. 3.8 ILLEGALITY. Notwithstanding any other provision of this Credit Agreement, in the event that it becomes unlawful for any Lender or its Applicable Lending Office to make, maintain, or fund Eurodollar Loans hereunder, then such Lender shall promptly notify the Borrower thereof and such Lender's obligation to make or Continue Eurodollar Loans and to Convert Base Rate Loans into Eurodollar Loans shall be suspended until such time as such Lender may again make, maintain, and fund Eurodollar Loans (in which case the provisions of Section 3.10 shall be applicable). 3.9 REQUIREMENTS OF LAW. If, after the date hereof, the adoption of any applicable law, rule, or regulation, or any change in any applicable law, rule, or regulation, or any change in the interpretation or administration thereof by any Governmental Authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such Governmental Authority, central bank, or comparable agency: (i) shall subject such Lender (or its Applicable Lending Office) to any tax, duty, or other charge with respect to any Eurodollar Loans, its Notes, or its obligation to make Eurodollar Loans, or change the basis of taxation of any amounts payable to such Lender (or its Applicable Lending Office) under this Credit Agreement or its Notes in respect of any Eurodollar Loans (other than taxes imposed on the overall net income of such Lender by the jurisdiction in which such Lender has its principal office or such Applicable Lending Office); (ii) shall impose, modify, or deem applicable any reserve, special deposit, assessment, or similar requirement (other than the Eurodollar Reserve Requirement utilized in the determination of the Adjusted Eurodollar Rate) relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Lender (or its Applicable Lending Office), including the Commitment of such Lender hereunder; or (iii) shall impose on such Lender (or its Applicable Lending Office) or the London interbank market any other condition affecting this Credit Agreement or its Notes or any of such extensions of credit or liabilities or commitments; and the result of any of the foregoing is to increase the cost to such Lender (or its Applicable Lending Office) of making, Converting into, Continuing, or maintaining any Eurodollar Loans or to reduce any sum received or receivable by such Lender (or its Applicable Lending Office) under this Credit Agreement or its Notes with respect to any Eurodollar Loans, then the Borrower shall pay to such Lender on demand such amount or amounts as will compensate such Lender for such increased cost or reduction. If any Lender requests compensation by the Borrower under this Section 3.9, the Borrower may, by notice to such Lender (with a copy to the Administrative Agent), suspend the obligation of such Lender to make or Continue Eurodollar Loans, or to Convert Base 46 52 Rate Loans into Eurodollar Loans, until the event or condition giving rise to such request ceases to be in effect (in which case the provisions of Section 3.10 shall be applicable); provided that such suspension shall not affect the right of such Lender to receive the compensation so requested. Each Lender shall promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this Section 3.9 and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Lender, be otherwise disadvantageous to it. Any Lender claiming compensation under this Section 3.9 shall furnish to the Borrower and the Administrative Agent a statement setting forth the additional amount or amounts to be paid to it hereunder which shall be conclusive in the absence of manifest error. In determining such amount, such Lender may use any reasonable averaging and attribution methods. 3.10 TREATMENT OF AFFECTED LOANS. If the obligation of any Lender to make any Eurodollar Loan or to Continue, or to Convert Base Rate Loans into, Eurodollar Loans shall be suspended pursuant to Section 3.7, 3.8 or 3.9 hereof, such Lender's Eurodollar Loans shall be automatically Converted into Base Rate Loans (unless repaid by the Borrower) on the last day(s) of the then current Interest Period(s) for such Eurodollar Loans (or, in the case of a Conversion required by Section 3.8 hereof, on such earlier date as such Lender may specify to the Borrower with a copy to the Administrative Agent) and, unless and until such Lender gives notice as provided below that the circumstances specified in Section 3.7, 3.8 or 3.9 hereof that gave rise to such Conversion no longer exist: (a) to the extent that such Lender's Eurodollar Loans have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Lender's Eurodollar Loans shall be applied instead to its Base Rate Loans; and (b) all Loans that would otherwise be made or Continued by such Lender as Eurodollar Loans shall be made or Continued instead as Base Rate Loans, and all Base Rate Loans of such Lender that would otherwise be Converted into Eurodollar Loans shall remain as Base Rate Loans. If such Lender gives notice to the Borrower (with a copy to the Administrative Agent) that the circumstances specified in Section 3.7, 3.8 or 3.9 hereof that gave rise to the Conversion of such Lender's Eurodollar Loans pursuant to this Section 3.10 no longer exist (which such Lender agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Loans made by other Lenders are outstanding, such Lender's Base Rate Loans shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Eurodollar Loans (but in any event not earlier than three Business Days after the date on which such circumstances cease to exist), to the extent necessary so that, after giving effect thereto, all Loans held by the Lenders holding Eurodollar Loans and by such Lender are held pro rata (as to principal amounts, interest rate basis, and Interest Periods) in accordance with their respective Commitments. 47 53 3.11 TAXES. (a) Any and all payments by any Credit Party to or for the account of any Lender or the Administrative Agent hereunder or under any other Credit Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Administrative Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender (or its Applicable Lending Office) or the Administrative Agent (as the case may be) is organized or any political subdivision thereof (all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings, and liabilities being hereinafter referred to as "Taxes"). If any Credit Party shall be required by law to deduct any Taxes from or in respect of any sum payable under this Credit Agreement or any other Credit Document to any Lender or the Administrative Agent, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.11) such Lender or the Administrative Agent receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Credit Party shall make such deductions, (iii) such Credit Party shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law, and (iv) such Credit Party shall furnish to the Administrative Agent, at its address referred to in Section 11.1, the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, the Borrower agrees to pay any and all present or future stamp or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under this Credit Agreement or any other Credit Document or from the execution or delivery of, or otherwise with respect to, this Credit Agreement or any other Credit Document (hereinafter referred to as "Other Taxes"). (c) The Borrower agrees to indemnify each Lender and the Administrative Agent for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 3.11) paid by such Lender or the Administrative Agent (as the case may be) and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto. (d) Each Lender that is not a United States person under Section 7701(a)(30) of the Code, on or prior to the date of its execution and delivery of this Credit Agreement in the case of each Lender listed on the signature pages hereof and on or prior to the date on which it becomes a Lender in the case of each other Lender, and from time to time thereafter if requested in writing by the Borrower or the Administrative Agent (but only so long as such Lender remains lawfully able to do so), shall provide the Borrower and the Administrative Agent with (i) Internal Revenue Service Form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Lender is entitled to benefits under an income tax treaty to which the United States is a party which reduces the rate of withholding tax on payments of interest or certifying that the income receivable pursuant to this Credit Agreement is effectively connected with the conduct of a trade or business in the United States, (ii) Internal Revenue Service Form W-8 48 54 or W-9, as appropriate, or any successor form prescribed by the Internal Revenue Service, and/or (iii) any other form or certificate required by any taxing authority (including any certificate required by Sections 871(h) and 881(c) of the Internal Revenue Code), certifying that such Lender is entitled to an exemption from or a reduced rate of tax on payments pursuant to this Credit Agreement or any of the other Credit Documents. (e) For any period with respect to which a Lender has failed to provide the Borrower and the Administrative Agent with the appropriate form pursuant to Section 3.11(d) (unless such failure is due to a change in treaty, law, or regulation occurring subsequent to the date on which a form originally was required to be provided), such Lender shall not be entitled to indemnification under Section 3.11(a) or 3.11(b) with respect to Taxes imposed by the United States; provided, however, that should a Lender, which is otherwise exempt from or subject to a reduced rate of withholding tax, become subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Lender shall reasonably request to assist such Lender to recover such Taxes. (f) If any Credit Party is required to pay additional amounts to or for the account of any Lender pursuant to this Section 3.11, then such Lender will agree to use reasonable efforts to change the jurisdiction of its Applicable Lending Office so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the judgment of such Lender, is not otherwise disadvantageous to such Lender. (g) Within thirty (30) days after the date of any payment of Taxes, the applicable Credit Party shall furnish to the Administrative Agent the original or a certified copy of a receipt evidencing such payment. (h) Without prejudice to the survival of any other agreement of the Credit Parties hereunder, the agreements and obligations of the Credit Parties contained in this Section 3.11 shall survive the repayment of the Loans, LOC Obligations and other obligations under the Credit Documents and the termination of the Commitments hereunder. 3.12 COMPENSATION. Upon the request of any Lender, the Borrower shall pay to such Lender such amount or amounts as shall be sufficient (in the reasonable opinion of such Lender) to compensate it for any loss, cost, or expense (including loss of anticipated profits) incurred by it as a result of: (a) any payment, prepayment, or Conversion of a Eurodollar Loan for any reason (including, without limitation, (i) in connection with any assignment by NationsBank pursuant to Section 11.3(b) as part of the primary syndication of the Loans during the 180-day period immediately following the Closing Date and (ii) the acceleration of the Loans pursuant to Section 9.2) on a date other than the last day of the Interest Period for such Loan; or (b) any failure by the Borrower for any reason (including, without limitation, the failure of any condition precedent specified in Section 5 to be satisfied) to borrow, 49 55 Convert,Continue, or prepay a Eurodollar Loan on the date for such borrowing, Conversion, Continuation, or prepayment specified in the relevant notice of borrowing, prepayment, Continuation, or Conversion under this Credit Agreement. With respect to Eurodollar Loans, such indemnification may include an amount equal to the excess, if any, of (a) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of the applicable Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Eurodollar Loans provided for herein (excluding, however, the Applicable Percentage included therein, if any) over (b) the amount of interest (as reasonably determined by such Lender) which would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank Eurodollar market. The covenants of the Borrower set forth in this Section 3.12 shall survive the repayment of the Loans, LOC Obligations and other obligations under the Credit Documents and the termination of the Commitments hereunder. 3.13 PRO RATA TREATMENT. Except to the extent otherwise provided herein: (a) Loans. Each Loan, each payment or (subject to the terms of Section 3.3) prepayment of principal of any Loan or reimbursement obligations arising from drawings under Letters of Credit, each payment of interest on the Loans or reimbursement obligations arising from drawings under Letters of Credit, each payment of Unused Fees, each payment of the Letter of Credit Fee, each reduction of the Revolving Committed Amount and each conversion or extension of any Loan, shall be allocated pro rata among the Lenders in accordance with the respective principal amounts of their outstanding Loans and Participation Interests. (b) Advances. No Lender shall be responsible for the failure or delay by any other Lender in its obligation to make its ratable share of a borrowing hereunder; provided, however, that the failure of any Lender to fulfill its obligations hereunder shall not relieve any other Lender of its obligations hereunder. Unless the Administrative Agent shall have been notified by any Lender prior to the date of any requested borrowing that such Lender does not intend to make available to the Administrative Agent its ratable share of such borrowing to be made on such date, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent on the date of such borrowing, and the Administrative Agent in reliance upon such assumption, may (in its sole discretion but without any obligation to do so) make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent, the Administrative Agent shall be able to recover such corresponding amount from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent's demand therefor, the Administrative Agent shall attempt, in good faith, to obtain the commitment of a third party to be an assignee of such Lender, and if such commitment is not obtained within three Business Days of the commencement of the Administrative Agent's efforts, the Administrative Agent will promptly notify the Borrower, and the Borrower shall immediately pay such corresponding amount to the 50 56 Administrative Agent. The Administrative Agent shall also be entitled to recover from the Lender or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to the Borrower to the date such corresponding amount is recovered by the Administrative Agent at a per annum rate equal to (i) from the Borrower at the applicable rate for the applicable borrowing pursuant to the Notice of Borrowing and (ii) from a Lender at the Federal Funds Rate. 3.14 SHARING OF PAYMENTS. The Lenders agree among themselves that, in the event that any Lender shall obtain payment in respect of any Loan, LOC Obligations or any other obligation owing to such Lender under this Credit Agreement through the exercise of a right of setoff, banker's lien or counterclaim, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, in excess of its pro rata share of such payment as provided for in this Credit Agreement, such Lender shall promptly purchase from the other Lenders a Participation Interest in such Loans, LOC Obligations and other obligations in such amounts, and make such other adjustments from time to time, as shall be equitable to the end that all Lenders share such payment in accordance with their respective ratable shares as provided for in this Credit Agreement. The Lenders further agree among themselves that if payment to a Lender obtained by such Lender through the exercise of a right of setoff, banker's lien, counterclaim or other event as aforesaid shall be rescinded or must otherwise be restored, each Lender which shall have shared the benefit of such payment shall, by repurchase of a Participation Interest theretofore sold, return its share of that benefit (together with its share of any accrued interest payable with respect thereto) to each Lender whose payment shall have been rescinded or otherwise restored. The Borrower agrees that any Lender so purchasing such a Participation Interest may, to the fullest extent permitted by law, exercise all rights of payment, including setoff, banker's lien or counterclaim, with respect to such Participation Interest as fully as if such Lender were a holder of such Loan, LOC Obligations or other obligation in the amount of such Participation Interest. Except as otherwise expressly provided in this Credit Agreement, if any Lender or the Administrative Agent shall fail to remit to the Administrative Agent or any other Lender an amount payable by such Lender or the Administrative Agent to the Administrative Agent or such other Lender pursuant to this Credit Agreement on the date when such amount is due, such payments shall be made together with interest thereon for each date from the date such amount is due until the date such amount is paid to the Administrative Agent or such other Lender at a rate per annum equal to the Federal Funds Rate. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section 3.14 applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders under this Section 3.14 to share in the benefits of any recovery on such secured claim. 3.15 PAYMENTS, COMPUTATIONS, ETC. (a) Except as otherwise specifically provided herein, all payments hereunder shall be made to the Administrative Agent in dollars in immediately available funds, without setoff, deduction, counterclaim or withholding of any kind, at the Administrative Agent's office specified in Schedule 2.1(a) not later than 2:00 P.M. (Charlotte, North 51 57 Carolina time) on the date when due. Payments received after such time shall be deemed to have been received on the next succeeding Business Day. The Administrative Agent may (but shall not be obligated to) debit the amount of any such payment which is not made by such time to any ordinary deposit account of the Borrower or any other Credit Party maintained with the Administrative Agent (with notice to the Borrower or such other Credit Party). The Borrower shall, at the time it makes any payment under this Credit Agreement, specify to the Administrative Agent the Loans, LOC Obligations, Fees, interest or other amounts payable by the Borrower hereunder to which such payment is to be applied (and in the event that it fails so to specify, or if such application would be inconsistent with the terms hereof, the Administrative Agent shall distribute such payment to the Lenders in such manner as the Administrative Agent may determine to be appropriate in respect of obligations owing by the Borrower hereunder, subject to the terms of Section 3.13(a)). The Administrative Agent will distribute such payments to such Lenders, if any such payment is received prior to 12:00 Noon (Charlotte, North Carolina time) on a Business Day in like funds as received prior to the end of such Business Day and otherwise the Administrative Agent will distribute such payment to such Lenders on the next succeeding Business Day. Whenever any payment hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day (subject to accrual of interest and Fees for the period of such extension), except that in the case of Eurodollar Loans, if the extension would cause the payment to be made in the next following calendar month, then such payment shall instead be made on the next preceding Business Day. Except as expressly provided otherwise herein, all computations of interest and fees shall be made on the basis of actual number of days elapsed over a year of 360 days, except with respect to computation of interest on Base Rate Loans which shall be calculated based on a year of 365 or 366 days, as appropriate. Interest shall accrue from and include the date of borrowing, but exclude the date of payment. (b) Allocation of Payments After Event of Default. Notwithstanding any other provisions of this Credit Agreement to the contrary, after the occurrence and during the continuance of an Event of Default, all amounts collected or received by the Administrative Agent or any Lender on account of the Credit Party Obligations or any other amounts outstanding under any of the Credit Documents or in respect of the Collateral shall be paid over or delivered as follows: FIRST, to the payment of all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable attorneys' fees) of the Administrative Agent in connection with enforcing the rights of the Lenders under the Credit Documents and any protective advances made by the Administrative Agent with respect to the Collateral under or pursuant to the terms of the Collateral Documents; SECOND, to payment of any fees owed to the Administrative Agent; THIRD, to the payment of all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable attorneys' fees) of each of the Lenders in connection with enforcing its rights under the Credit Documents or otherwise with respect to the Credit Party Obligations owing to such Lender; 52 58 FOURTH, to the payment of all of the Credit Party Obligations (other than obligations under Hedging Agreements) consisting of accrued fees and interest; FIFTH, to the payment of the outstanding principal amount of the Credit Party Obligations (including obligations under Hedging Agreements between a Credit Party and any Lender or any Affiliate of a Lender and the payment or cash collateralization of the outstanding LOC Obligations); SIXTH, to all other Credit Party Obligations and other obligations which shall have become due and payable under the Credit Documents or otherwise and not repaid pursuant to clauses "FIRST" through "FIFTH" above; and SEVENTH, to the payment of the surplus, if any, to whoever may be lawfully entitled to receive such surplus. In carrying out the foregoing, (i) amounts received shall be applied in the numerical order provided until exhausted prior to application to the next succeeding category; (ii) each of the Lenders shall receive an amount equal to its pro rata share (based on the proportion that the then outstanding Loans and LOC Obligations held by such Lender bears to the aggregate then outstanding Loans and LOC Obligations) of amounts available to be applied pursuant to clauses "THIRD", "FOURTH", "FIFTH" and "SIXTH" above; and (iii) to the extent that any amounts available for distribution pursuant to clause "FIFTH" above are attributable to the issued but undrawn amount of outstanding Letters of Credit, such amounts shall be held by the Administrative Agent in a cash collateral account and applied (A) first, to reimburse the Issuing Lender from time to time for any drawings under such Letters of Credit and (B) then, following the expiration of all Letters of Credit, to all other obligations of the types described in clauses "FIFTH" and "SIXTH" above in the manner provided in this Section 3.15(b). 3.16 EVIDENCE OF DEBT. (a) Each Lender shall maintain an account or accounts evidencing each Loan made by such Lender to the Borrower from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Credit Agreement. Each Lender will make reasonable efforts to maintain the accuracy of its account or accounts and to promptly update its account or accounts from time to time, as necessary. (b) The Administrative Agent shall maintain the Register pursuant to Section 11.3(c), and a subaccount for each Lender, in which Register and subaccounts (taken together) shall be recorded (i) the amount, type and Interest Period of each such Loan hereunder, (ii) the amount of any principal or interest due and payable or to become due and payable to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder from or for the account of any Credit Party and each Lender's share thereof. The Administrative Agent will make reasonable efforts to maintain the accuracy of the subaccounts referred to in the preceding sentence and to promptly update such subaccounts from time to time, as necessary. 53 59 (c) The entries made in the accounts, Register and subaccounts maintained pursuant to subsection (b) of this Section 3.16 (and, if consistent with the entries of the Administrative Agent, subsection (a)) shall be prima facie evidence of the existence and amounts of the obligations of the Credit Parties therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain any such account, such Register or such subaccount, as applicable, or any error therein, shall not in any manner affect the obligation of the Credit Parties to repay the Credit Party Obligations owing to such Lender. SECTION 4 GUARANTY 4.1 THE GUARANTY. In consideration for the making of the Loans and the potential providing of a portion of the proceeds thereof directly to the Guarantors, each of the Guarantors hereby jointly and severally guarantees to each Lender, each Affiliate of a Lender that enters into a Hedging Agreement with any Credit Party, and the Administrative Agent as hereinafter provided, as primary obligor and not as surety, the prompt payment of the Credit Party Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration, as a mandatory cash collateralization or otherwise) strictly in accordance with the terms thereof. The Guarantors hereby further agree that if any of the Credit Party Obligations are not paid in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration, as a mandatory cash collateralization or otherwise), the Guarantors will, jointly and severally, promptly pay the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Credit Party Obligations, the same will be promptly paid in full when due (whether at extended maturity, as a mandatory prepayment, by acceleration, as a mandatory cash collateralization or otherwise) in accordance with the terms of such extension or renewal. Notwithstanding any provision to the contrary contained herein or in any other of the Credit Documents or Hedging Agreements between any Credit Party and any Lender (or any Affiliate of a Lender), the obligations of each Guarantor under this Credit Agreement and the other Credit Documents shall be limited to an aggregate amount equal to the largest amount that would not render such obligations subject to avoidance under Section 548 of the Bankruptcy Code or any comparable provisions of any applicable state law. 4.2 OBLIGATIONS UNCONDITIONAL. The obligations of the Guarantors under Section 4.1 are joint and several, absolute and unconditional, irrespective of the value, genuineness, validity, regularity or enforceability of any of the Credit Documents or Hedging Agreements between any Credit Party and any Lender (or any Affiliate of a Lender), or any other agreement or instrument referred to therein, or any substitution, release, impairment or exchange of any other guarantee of or security for any of the Credit Party Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 4.2 that the obligations of the Guarantors 54 60 hereunder shall be absolute and unconditional under any and all circumstances. Each Guarantor agrees that such Guarantor shall have no right of subrogation, indemnity, reimbursement or contribution against the Borrower or any other Guarantor for amounts paid under this Section 4 until such time as the Lenders (and any Affiliates of Lenders entering into Hedging Agreements with any Credit Party) have been paid in full in respect of all Credit Party Obligations, all Commitments under this Credit Agreement have been terminated and no Person or Governmental Authority shall have any right to request any return or reimbursement of funds from the Lenders in connection with monies received under the Credit Documents or Hedging Agreements between any Credit Party and any Lender, or any Affiliate of a Lender. Without limiting the generality of the foregoing, it is agreed that, to the fullest extent permitted by law, the occurrence of any one or more of the following shall not alter or impair the liability of any Guarantor hereunder which shall remain absolute and unconditional as described above: (a) at any time or from time to time, without notice to any Guarantor, the time for any performance of or compliance with any of the Credit Party Obligations shall be extended, or such performance or compliance shall be waived; (b) any of the acts mentioned in any of the provisions of any of the Credit Documents, any Hedging Agreement between any Consolidated Party and any Lender, or any Affiliate of a Lender, or any other agreement or instrument referred to in the Credit Documents or such Hedging Agreements shall be done or omitted; (c) the maturity of any of the Credit Party Obligations shall be accelerated, or any of the Credit Party Obligations shall be modified, supplemented or amended in any respect, or any right under any of the Credit Documents, any Hedging Agreement between any Consolidated Party and any Lender, or any Affiliate of a Lender, or any other agreement or instrument referred to in the Credit Documents or such Hedging Agreements shall be waived or any other guarantee of any of the Credit Party Obligations or any security therefor shall be released, impaired or exchanged in whole or in part or otherwise dealt with; (d) any Lien granted to, or in favor of, the Administrative Agent or any Lender or Lenders as security for any of the Credit Party Obligations shall fail to attach or be perfected; or (e) any of the Credit Party Obligations shall be determined to be void or voidable (including, without limitation, for the benefit of any creditor of any Guarantor) or shall be subordinated to the claims of any Person (including, without limitation, any creditor of any Guarantor). With respect to its obligations hereunder, each Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that the Administrative Agent or any Lender exhaust any right, power or remedy or proceed against any Person under any of the Credit Documents, any Hedging Agreement between any Consolidated Party and any Lender, or any Affiliate of a Lender, or any other agreement or instrument referred to in the Credit Documents or such Hedging Agreements, or against any other Person under any other guarantee of, or security for, any of the Credit Party Obligations. 55 61 4.3 REINSTATEMENT. The obligations of the Guarantors under this Section 4 shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Credit Party Obligations is rescinded or must be otherwise restored by any holder of any of the Credit Party Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and each Guarantor agrees that it will indemnify the Administrative Agent and each Lender on demand for all reasonable costs and expenses (including, without limitation, fees and expenses of counsel) incurred by the Administrative Agent or such Lender in connection with such rescission or restoration, including any such costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. 4.4 CERTAIN ADDITIONAL WAIVERS. Without limiting the generality of the provisions of this Section 4, each Guarantor hereby specifically waives the benefits of N.C. Gen. Stat. Sections 26-7 through 26-9, inclusive, to the extent applicable. Each Guarantor further agrees that such Guarantor shall have no right of recourse to security for the Credit Party Obligations, except through the exercise of rights of subrogation pursuant to Section 4.2 and through the exercise of rights of contribution pursuant to Section 4.6. 4.5 REMEDIES. The Guarantors agree that, to the fullest extent permitted by law, as between the Guarantors, on the one hand, and the Administrative Agent and the Lenders, on the other hand, the Credit Party Obligations may be declared to be forthwith due and payable as provided in Section 9.2 (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 9.2) for purposes of Section 4.1 notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing the Credit Party Obligations from becoming automatically due and payable) as against any other Person and that, in the event of such declaration (or the Credit Party Obligations being deemed to have become automatically due and payable), the Credit Party Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by the Guarantors for purposes of Section 4.1. The Guarantors acknowledge and agree that their obligations hereunder are secured in accordance with the terms of the Security Agreements and the other Collateral Documents and that the Lenders may exercise their remedies thereunder in accordance with the terms thereof. 4.6 RIGHTS OF CONTRIBUTION. The Guarantors hereby agree as among themselves that, if any Guarantor shall make an Excess Payment (as defined below), such Guarantor shall have a right of contribution from each other Guarantor in an amount equal to such other Guarantor's Contribution Share (as defined below) of such Excess Payment. The payment obligations of any Guarantor under this Section 4.6 shall be subordinate and subject in right of payment to the prior payment in full to the Administrative Agent and the Lenders of the Guaranteed Obligations, and none of the Guarantors shall exercise any right or remedy under this Section 4.6 against any other Guarantor until payment and satisfaction in full of all of such Guaranteed Obligations. For purposes of this Section 4.6, (a) "Guaranteed Obligations" shall mean any obligations arising under the other provisions of this 56 62 Section 4; (b) "Excess Payment" shall mean the amount paid by any Guarantor in excess of its Pro Rata Share of any Guaranteed Obligations; (c) "Pro Rata Share" shall mean, for any Guarantor in respect of any payment of Guaranteed Obligations, the ratio (expressed as a percentage) as of the date of such payment of Guaranteed Obligations of (i) the amount by which the aggregate present fair salable value of all of its assets and properties exceeds the amount of all debts and liabilities of such Guarantor (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of such Guarantor hereunder) to (ii) the amount by which the aggregate present fair salable value of all assets and other properties of all of the Credit Parties exceeds the amount of all of the debts and liabilities (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of the Credit Parties hereunder) of the Credit Parties; provided, however, that, for purposes of calculating the Pro Rata Shares of the Guarantors in respect of any payment of Guaranteed Obligations, any Guarantor that became a Guarantor subsequent to the date of any such payment shall be deemed to have been a Guarantor on the date of such payment and the financial information for such Guarantor as of the date such Guarantor became a Guarantor shall be utilized for such Guarantor in connection with such payment; and (d) "Contribution Share" shall mean, for any Guarantor in respect of any Excess Payment made by any other Guarantor, the ratio (expressed as a percentage) as of the date of such Excess Payment of (i) the amount by which the aggregate present fair salable value of all of its assets and properties exceeds the amount of all debts and liabilities of such Guarantor (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of such Guarantor hereunder) to (ii) the amount by which the aggregate present fair salable value of all assets and other properties of the Credit Parties other than the maker of such Excess Payment exceeds the amount of all of the debts and liabilities (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of the Credit Parties) of the Credit Parties other than the maker of such Excess Payment; provided, however, that, for purposes of calculating the Contribution Shares of the Guarantors in respect of any Excess Payment, any Guarantor that became a Guarantor subsequent to the date of any such Excess Payment shall be deemed to have been a Guarantor on the date of such Excess Payment and the financial information for such Guarantor as of the date such Guarantor became a Guarantor shall be utilized for such Guarantor in connection with such Excess Payment. This Section 4.6 shall not be deemed to affect any right of subrogation, indemnity, reimbursement or contribution that any Guarantor may have under applicable law against the Borrower in respect of any payment of Guaranteed Obligations. Notwithstanding the foregoing, all rights of contribution against any Guarantor shall terminate from and after such time, if ever, that such Guarantor shall be relieved of its obligations pursuant to Section 8.4. 4.7 GUARANTEE OF PAYMENT; CONTINUING GUARANTEE. The guarantee in this Section 4 is a guaranty of payment and not of collection, is a continuing guarantee, and shall apply to all Credit Party Obligations whenever arising. 57 63 SECTION 5 CONDITIONS 5.1 CLOSING CONDITIONS. The obligation of the Lenders to enter into this Credit Agreement shall be subject to the receipt by the Administrative Agent (in form and substance acceptable to the Lenders) of duly executed copies of: (i) this Credit Agreement, (ii) the Notes, (iii) the Collateral Documents, (iv) the Administrative Agent's Fee Letter and (v) all other Credit Documents, each in form and substance acceptable to the Administrative Agent in its sole discretion. The obligation of the Lenders to make the initial Loans or the Issuing Lender to issue the initial Letter of Credit, whichever shall occur first, shall be subject to satisfaction of the following conditions (in form and substance acceptable to the Lenders): (a) [Intentionally Left Blank]. (b) Corporate Documents. Receipt by the Administrative Agent of the following: (i) Charter Documents. Copies of the articles or certificates of incorporation or other charter documents of each Credit Party certified to be true and complete as of a recent date by the appropriate Governmental Authority of the state or other jurisdiction of its incorporation and certified by a secretary or assistant secretary of such Credit Party to be true and correct as of the Closing Date. (ii) Bylaws. A copy of the bylaws of each Credit Party certified by a secretary or assistant secretary of such Credit Party to be true and correct as of the Closing Date. (iii) Resolutions. Copies of resolutions of the Board of Directors of each Credit Party approving and adopting the Credit Documents to which it is a party, the transactions contemplated therein and authorizing execution and delivery thereof, certified by a secretary or assistant secretary of such Credit Party to be true and correct and in force and effect as of the Closing Date. (iv) Good Standing. Copies of (A) certificates of good standing, existence or its equivalent with respect to each Credit Party certified as of a recent date by the appropriate Governmental Authorities of the state or other jurisdiction of incorporation and each other jurisdiction in which the failure to so qualify and be in good standing could have a Material Adverse Effect and (B) to the extent available, a certificate indicating payment of all corporate franchise taxes certified as of a recent date by the appropriate governmental taxing authorities. (v) Incumbency. An incumbency certificate of each Credit Party certified by a secretary or assistant secretary to be true and correct as of the Closing Date. 58 64 (c) Opinions of Counsel. The Administrative Agent shall have received, in each case dated as of the Closing Date: (i) a legal opinion of Dorsey & Whitney LLP substantially in the form of Schedule 5.1(c)(i); (ii) a legal opinion of special local counsel for each Credit Party not incorporated in the States of Delaware and Colorado, substantially in the form of Schedule 5.1(c)(ii); and (iii) a legal opinion of special local counsel for the Credit Parties for each State in which any Collateral is located, substantially in the form of Schedule 5.1(c)(iii). (d) Personal Property Collateral. The Administrative Agent shall have received: (i) searches of Uniform Commercial Code filings in the jurisdiction of the chief executive office of each Credit Party and each jurisdiction where any Collateral is located or where a filing would need to be made in order to perfect the Administrative Agent's security interest in the Collateral, copies of the financing statements on file in such jurisdictions and evidence that no Liens exist other than Permitted Liens; (ii) duly executed UCC financing statements for each appropriate jurisdiction as is necessary, in the Administrative Agent's sole discretion, to perfect the Administrative Agent's security interest in the Collateral; (iii) searches of ownership of, and Liens on, intellectual property of each Credit Party in the appropriate governmental offices and such patent/trademark/copyright filings as requested by the Administrative Agent in order to perfect the Administrative Agent's security interest in the Collateral; (iv) all certificates evidencing any certificated Capital Stock pledged to the Administrative Agent pursuant to the Pledge Agreement (other than the certificates evidencing the Capital Stock of Modtech and SPI which will be delivered pursuant to Section 7.16(c)), together with duly executed in blank, undated stock powers attached thereto; (v) such patent/trademark/copyright filings as requested by the Administrative Agent in order to perfect the Administrative Agent's security interest in the Collateral; (vi) all instruments and chattel paper in the possession of any of the Credit Parties, together with allonges or assignments as may be necessary or appropriate to perfect the Administrative Agent's security interest in the Collateral; 59 65 (vii) duly executed consents as are necessary, in the Administrative Agent's sole discretion, to perfect the Administrative Agent's security interest in the Collateral; and (viii) in the case of any personal property Collateral located at a premises leased by a Credit Party, such estoppel letters, consents and waivers from the landlords on such real property as may be required by the Administrative Agent. (e) Real Property Collateral. The Administrative Agent shall have received, in form and substance reasonably satisfactory to the Administrative Agent: (i) fully executed and notarized mortgages, deeds of trust or deeds to secure debt (each, as the same may be amended, modified, restated or supplemented from time to time, a "Mortgage Instrument" and collectively the "Mortgage Instruments") encumbering the fee interest and/or leasehold interest of any Credit Party in each real property asset designated in Schedule 5.1(e) (each a "Mortgaged Property" and collectively the "Mortgaged Properties"); (ii) except in respect of the Mortgaged Properties described in items (7) through (10) on Schedule 5.1(e), a title report obtained by the Credit Parties in respect of each of the Mortgaged Properties; (iii) in the case of each real property leasehold interest of any Credit Party constituting Mortgaged Property (except in respect of the Mortgaged Properties described in items (7) through (10) on Schedule 5.1(e)), (a) such estoppel letters, consents and waivers from the landlords on such real property as may be required by the Administrative Agent, which estoppel letters shall be in the form and substance reasonably satisfactory to the Administrative Agent and (b) evidence that the applicable lease, a memorandum of lease with respect thereto, or other evidence of such lease in form and substance reasonably satisfactory to the Administrative Agent, has been or will be recorded in all places to the extent necessary or desirable, in the reasonable judgment of the Administrative Agent, so as to enable the Mortgage Instrument encumbering such leasehold interest to effectively create a valid and enforceable first priority lien (subject to Permitted Liens) on such leasehold interest in favor of the Administrative Agent (or such other Person as may be required or desired under local law) for the benefit of Lenders; (iv) except in respect of the Mortgaged Properties described in items (7) through (10) on Schedule 5.1(e), maps or plats of an as-built survey of the sites of the real property covered by the Mortgage Instruments certified to the Administrative Agent and the title insurance company issuing the policy referred to in Section 5.1(e)(v) (the "Title Insurance Company") in a manner reasonably satisfactory to each of the Administrative Agent and the Title Insurance Company, dated a date reasonably satisfactory to each of the Administrative Agent and the Title Insurance Company by an independent professional licensed land surveyor, which maps or plats and the surveys on which they are based shall be sufficient to 60 66 delete any standard printed survey exception contained in the applicable title policy and be made in accordance with the Minimum Standard Detail Requirements for Land Title Surveys jointly established and adopted by the American Land Title Association and the American Congress on Surveying and Mapping in 1992, and, without limiting the generality of the foregoing, there shall be surveyed and shown on such maps, plats or surveys the following: (A) the locations on such sites of all the buildings, structures and other improvements and the established building setback lines; (B) the lines of streets abutting the sites and width thereof; (C) all access and other easements appurtenant to the sites necessary to use the sites; (D) all roadways, paths, driveways, easements, encroachments and overhanging projections and similar encumbrances affecting the site, whether recorded, apparent from a physical inspection of the sites or otherwise known to the surveyor; (E) any encroachments on any adjoining property by the building structures and improvements on the sites; and (F) if the site is described as being on a filed map, a legend relating the survey to said map; (v) except in respect of the Mortgaged Properties described in items (7) through (10) on Schedule 5.1(e), ALTA mortgagee title insurance policies issued by a title company reasonably acceptable to the Administrative Agent (the "Mortgage Policies"), in amounts reasonably acceptable to the Administrative Agent, assuring the Administrative Agent that each of the Mortgage Instruments creates a valid and enforceable first priority mortgage lien on the applicable Mortgaged Property, free and clear of all defects and encumbrances except Permitted Liens, which Mortgage Policies shall be in form and substance reasonably satisfactory to the Administrative Agent and shall provide for affirmative insurance and such reinsurance as the Administrative Agent may reasonably request, all of the foregoing in form and substance reasonably satisfactory to the Administrative Agent; (vi) evidence as to (A) whether any Mortgaged Property is in an area designated by the Federal Emergency Management Agency as having special flood or mud slide hazards (a "Flood Hazard Property") and (B) if any Mortgaged Property is a Flood Hazard Property, (1) whether the community in which such Mortgaged Property is located is participating in the National Flood Insurance Program, (2) the applicable Credit Party's written acknowledgment of receipt of written notification from the Administrative Agent (a) as to the fact that such Mortgaged Property is a Flood Hazard Property and (b) as to whether the community in which each such Flood Hazard Property is located is participating in the National Flood Insurance Program and (3) copies of insurance policies or certificates of insurance of the Consolidated Parties evidencing flood insurance satisfactory to the Administrative Agent and naming the Administrative Agent as sole loss payee on behalf of the Lenders. (vii) except in respect of the Mortgaged Properties described in items (7) and (10) on Schedule 5.1(e), evidence satisfactory to the Administrative Agent that each of the Mortgaged Properties, and the uses of the Mortgaged Properties, are in compliance in all material respects with all applicable laws, regulations and ordinances including, without limitation, health and environmental protection 61 67 laws, erosion control ordinances, storm drainage control laws, doing business and/or licensing laws, zoning laws (the evidence submitted as to zoning should include the zoning designation made for each of the Mortgaged Properties, the permitted uses of each such Mortgaged Properties under such zoning designation and zoning requirements as to parking, lot size, ingress, egress and building setbacks) and laws regarding access and facilities for disabled persons, including, but not limited to, the federal Architectural Barriers Act, the Fair Housing Amendments Act of 1988, the Rehabilitation Act of 1973 and the Americans with Disabilities Act of 1990; provided, however, the delivery by the Credit Parties to the Administrative Agent of an environmental assessment with respect to the leasehold property of Trac Modular Manufacturing, Inc. located in Glendale, Arizona (the "Glendale Property") shall not constitute a closing or funding condition under this Section 5.1. (f) Availability. After giving effect to the Transaction, including the initial Loans made and Letters of Credit issued hereunder on the Closing Date, there shall be at least $20,000,000 of availability existing under the Revolving Committed Amount. (g) Evidence of Insurance. Receipt by the Administrative Agent of copies of insurance policies or certificates of insurance of the Consolidated Parties evidencing liability and casualty insurance meeting the requirements set forth in the Credit Documents, including, but not limited to, naming the Administrative Agent as additional insured (in the case of liability insurance) or sole loss payee (in the case of hazard insurance) on behalf of the Lenders. (h) Corporate Structure.. The corporate capital and ownership structure of the Consolidated Parties (after giving effect to the Transaction) shall be as described in Schedule 5.1(h). (i) Equity Investment. Receipt by the Administrative Agent of evidence that a cash equity investment, in the form of a dividend or otherwise, of at least $34,000,000 shall have been made in the Borrower by Modtech or SPI on terms that are reasonably satisfactory to the Administrative Agent. (j) Government Consent. Receipt by the Administrative Agent of evidence that all governmental, shareholder and material third party consents (including Hart-Scott-Rodino clearance) and approvals necessary or desirable in connection with the Transaction and expiration of all applicable waiting periods without any action being taken by any authority that could restrain, prevent or impose any material adverse conditions on the Transaction or that could seek or threaten any of the foregoing, and no law or regulation shall be applicable which in the judgment of the Administrative Agent could have such effect. (k) Material Adverse Effect. No material adverse change shall have occurred in the condition (financial or otherwise), business, management or prospects of (A) Modtech and its Subsidiaries taken as a whole since December 31, 1997 and (B) SPI and its Subsidiaries taken as a whole since March 31, 1998. 62 68 (l) Litigation. There shall not exist (i) any order, decree, judgment, ruling or injunction which restrains the consummation of the Transaction in the manner contemplated by the Merger Documents or (ii) any pending or threatened action, suit, investigation or proceeding against a Consolidated Party that could have a Material Adverse Effect. (m) Other Indebtedness. Receipt by the Administrative Agent of (i) evidence that, after giving effect to the Transaction, the Consolidated Parties shall have no Funded Indebtedness other than the Indebtedness under the Credit Documents or otherwise permitted by the Credit Documents, and (ii) a payoff letter with respect to the Existing Credit Facility, in form and substance satisfactory to the Administrative Agent, and such other documents, agreements and instruments (including, without limitation, UCC-3 termination statements) with respect to the Existing Credit Facility and the liens and security interests granted in connection therewith as the Administrative Agent may reasonably request. (n) Solvency Certificate. The Administrative Agent shall have received a certificate, dated as of the Closing Date, from an Executive Officer of the Borrower as to the financial condition, solvency and related matters of the Credit Parties on a consolidated basis after giving effect to the Transaction. (o) Merger Agreement. The Transaction (i) shall have been consummated in accordance with the terms of the Merger Agreement and in compliance with applicable law and regulatory approvals, and all conditions precedent to the obligations of the parties thereunder shall have been satisfied and (ii) the Merger Agreement shall not have been altered, amended or otherwise changed or supplemented in any material respect or any material condition therein waived, without the prior written consent of the Administrative Agent. The Administrative Agent shall have received a copy, certified by an officer of the Borrower as true and complete, of the Merger Agreement as originally executed and delivered, together with all exhibits and schedules. (p) Officer's Certificates. The Administrative Agent shall have received a certificate or certificates executed by an Executive Officer of the Borrower as of the Closing Date stating that (A) each Credit Party is in compliance with all existing financial obligations, (B) all governmental, shareholder and third party consents and approvals, if any, with respect to the Credit Documents and the transactions contemplated thereby have been obtained, (C) no action, suit, investigation or proceeding is pending or threatened in any court or before any arbitrator or governmental instrumentality that purports to affect any Credit Party or any transaction contemplated by the Credit Documents, if such action, suit, investigation or proceeding could have a Material Adverse Effect, (D) the transactions contemplated by the Merger Agreement have been consummated, simultaneously with the consummation of this Credit Agreement, in accordance with the terms thereof and (E) immediately after giving effect to the Transaction, (1) no Default or Event of Default exists, (2) all representations and warranties contained herein and in the other Credit Documents are true and correct in all material respects, and (3) the Credit Parties are in compliance with each of the financial covenants set forth in Section 7.11. 63 69 (q) Fees and Expenses. Payment by the Credit Parties of all fees and expenses owed by them to NMS and the Administrative Agent, including, without limitation, payment to the Administrative Agent of the fees set forth in the Fee Letter. (r) Year 2000 Problem. The Administrative Agent shall be reasonably satisfied that (i) the Credit Parties and their Subsidiaries are taking all necessary and appropriate steps to ascertain the extent of, and to quantify and successfully address, business and financial risks facing the Credit Parties and Subsidiaries as a result of what is commonly referred to as the "Year 2000 Problem" (i.e., the inability of certain computer applications to recognize correctly and perform date-sensitive functions involving certain dates prior to and after December 31, 1999), to successfully address the Year 2000 Problem, and (ii) the Credit Parties' and their Subsidiaries' material computer applications will, on a timely basis, adequately address the Year 2000 Problem in all material respects. (s) Subordination Agreement. The Administrative Agent shall have received a subordination agreement, dated as of the date hereof, executed by Modtech, Inc. in favor of the Lenders with respect to the intercompany loan from Modtech, Inc. to Trac Modular Manufacturing, Inc., which subordination agreement shall be in form and substance satisfactory to the Administrative Agent. (t) Merger of SPIM Acquisition, Inc. The Administrative Agent shall have received evidence of the merger of SPIM Acquisition, Inc. with and into SPI Manufacturing, Inc., in form and substance satisfactory to the Administrative Agent. (u) Evidence of NationsCredit Waiver. The Administrative Agent shall have received evidence of the waiver by NationsCredit Commercial Corporation of any default under the Existing Credit Facility caused by the consummation of the Transaction. (v) SPI Option Plan Waivers. The Administrative Agent shall have received copies of waivers from the holders of options under the SPI Second Amended and Restated 1997 Long Term Incentive Stock Option Plan (the "SPI Option Plan") of any provision thereunder that accelerates the vesting of all outstanding options issued under the SPI Option Plan upon the consummation of the Transaction. (w) Other. Receipt by the Lenders of such other documents, instruments, agreements or information as reasonably requested by any Lender, including, but not limited to, information regarding litigation, tax, accounting, labor, insurance, pension liabilities (actual or contingent), real estate leases, material contracts, debt agreements, property ownership and contingent liabilities of the Consolidated Parties. This Credit Agreement and the other Credit Documents shall terminate if the initial Loans are not made on or prior to March 5, 1999. 5.2 CONDITIONS TO ALL EXTENSIONS OF CREDIT. The obligations of each Lender to make, convert or extend any Loan and of the Issuing Lender to issue or extend any Letter of Credit (including the initial Loans and the initial Letter of 64 70 Credit) are subject to satisfaction of the following conditions in addition to satisfaction of the conditions set forth in Section 5.1: (a) The Borrower shall have delivered (i) in the case of any Revolving Loan, any portion of the Tranche A Term Loan or any portion of the Delayed Draw Term Loan, an appropriate Notice of Borrowing or Notice of Extension/Conversion or (ii) in the case of any Letter of Credit, the Issuing Lender shall have received an appropriate request for issuance in accordance with the provisions of Section 2.2(b); (b) The representations and warranties set forth in Section 6 shall, subject to the limitations set forth therein, be true and correct in all material respects as of such date (except for those which expressly relate to an earlier date); (c) There shall not have been commenced against any Consolidated Party an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or any case, proceeding or other action for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its Property or for the winding up or liquidation of its affairs, and such involuntary case or other case, proceeding or other action shall remain undismissed, undischarged or unbonded; (d) No Default or Event of Default shall exist and be continuing either prior to or after giving effect thereto; (e) No development or event which has had or could have a Material Adverse Effect shall have occurred since December 31, 1997; and (f) Immediately after giving effect to the making of such Loan (and the application of the proceeds thereof) or to the issuance of such Letter of Credit, as the case may be, (i) the sum of the aggregate outstanding principal amount of Revolving Loans plus LOC Obligations plus Swingline Loans shall not exceed the Revolving Committed Amount, and (ii) the LOC Obligations shall not exceed the LOC Committed Amount. The delivery of each Notice of Borrowing, each Notice of Extension/Conversion and each request for a Letter of Credit pursuant to Section 2.2(b) shall constitute a representation and warranty by the Credit Parties of the correctness of the matters specified in subsections (b), (c), (d), (e) and (f) above. 65 71 SECTION 6 REPRESENTATIONS AND WARRANTIES The Credit Parties hereby represent to the Administrative Agent and each Lender that: 6.1 FINANCIAL CONDITION. (a) The audited consolidated and consolidating balance sheets and income statements of Modtech and its Subsidiaries for the fiscal years ended December 31, 1995, December 31, 1996, December 31, 1997 and for the 9-month period ended September 30, 1998 have heretofore been furnished to each Lender. Such financial statements (including the notes thereto) (i) with respect to each such fiscal year, have been audited by KPMG Peat Marwick LLP, and with respect to such 9-month period, have been reviewed by KPMG Peat Marwick LLP, (ii) have been prepared in accordance with GAAP consistently, applied throughout the periods covered thereby and (iii) present fairly (on the basis disclosed in the footnotes to such financial statements) the consolidated financial condition, results of operations and cash flows of the Modtech and its Subsidiaries as of such date and for such periods. The unaudited interim balance sheets of Modtech and its Subsidiaries as at the end of, and the related unaudited interim statements of earnings and of cash flows for, each fiscal month and quarterly period ended after December 31, 1997 and prior to the Closing Date have heretofore been furnished to each Lender. Such interim financial statements for each such quarterly period, (i) have been prepared in accordance with GAAP consistently applied throughout the periods covered thereby and (ii) present fairly (on the basis disclosed in the footnotes to such financial statements) the consolidated and consolidating financial condition, results of operations and cash flows of Modtech and its Subsidiaries as of such date and for such periods. During the period from December 31, 1997 to and including the Closing Date, there has been no sale, transfer or other disposition by Modtech or any Subsidiary of Modtech of any material part of the business or property of Modtech and its Subsidiaries, taken as a whole, and no purchase or other acquisition by any of them of any business or property (including any Capital Stock of any other person) material in relation to the consolidated financial condition of Modtech and its Subsidiaries, taken as a whole, in each case, which is not reflected in the foregoing financial statements or in the notes thereto and has not otherwise been disclosed in writing to the Lenders on or prior to the Closing Date. (b) The consolidated and consolidating balance sheets and income statements of SPI and its Subsidiaries for the fiscal years ended January 31, 1996 and January 31, 1997, the two months ended March 27, 1997, the fiscal year ended March 31, 1998 and the 6-month period ended September 30, 1998 have heretofore been furnished to each Lender. Such financial statements (including the notes thereto) (i) with respect to each such fiscal year, have been audited by Arthur Anderson LLP, and with respect to such 6-month period ended September 30, 1998, have been reviewed by Arthur Anderson LLP, (ii) have been prepared in accordance with GAAP consistently applied throughout the periods covered thereby and (iii) present fairly (on the basis disclosed in the footnotes to such financial statements) the consolidated financial condition, results of operations and cash flows of the SPI and its Subsidiaries as of such date and for such periods. The unaudited interim balance sheets of SPI and its Subsidiaries as at the end of, and the related unaudited interim 66 72 statements of earnings and of cash flows for, each fiscal month and quarterly period ended after March 31, 1998 and prior to the Closing Date have heretofore been furnished to each Lender. Such interim financial statements for each such quarterly period, (i) have been prepared in accordance with GAAP consistently applied throughout the periods covered thereby and (ii) present fairly (on the basis disclosed in the footnotes to such financial statements) the consolidated and consolidating financial condition, results of operations and cash flows of SPI and its Subsidiaries as of such date and for such periods. During the period from March 31, 1998 to and including the Closing Date, there has been no sale, transfer or other disposition by SPI or any Subsidiary of SPI of any material part of the business or property of SPI and its Subsidiaries, taken as a whole, and no purchase or other acquisition (other than the acquisition of Rosewood Enterprises, Inc. by SPI) by any of them of any business or property (including any Capital Stock of any other person) material in relation to the consolidated financial condition of SPI and its Subsidiaries, taken as a whole, in each case, which is not reflected in the foregoing financial statements or in the notes thereto and has not otherwise been disclosed in writing to the Lenders on or prior to the Closing Date. (c) The pro forma consolidated balance sheet of the Consolidated Parties as of the Closing Date giving effect to the Transaction in accordance with the terms of the Merger Agreement and reflecting estimated purchase price accounting adjustments will be furnished to each Lender within 45 days subsequent to the Closing Date. Such pro forma balance sheet (i) will be prepared in accordance with the requirements of Regulation S-X under the Securities Act of 1933, as amended, applicable to a Registration Statement under such Act on Form S-4, and (ii) will be based upon reasonable assumptions made known to the Lenders and upon information not known to be incorrect or misleading in any material respect. (d) The financial statements delivered to the Lenders pursuant to Section 7.1(a) and (b), (i) have been prepared in accordance with GAAP (except as may otherwise be permitted under Section 7.1(a) and (b)) and (ii) present fairly (on the basis disclosed in the footnotes to such financial statements) the consolidated and consolidating financial condition, results of operations and cash flows of the Consolidated Parties as of such date and for such periods. 6.2 NO MATERIAL CHANGE. (a) Since December 31, 1997, (i) there has been no development or event relating to or affecting Modtech or any of its Subsidiaries which has had or could have a Material Adverse Effect and (b) except for those dividends contemplated by the Merger Agreement and except as otherwise permitted under this Credit Agreement, no dividends or other distributions have been declared, paid or made upon the Capital Stock of Modtech or any of its Subsidiaries nor has any of the Capital Stock of Modtech or any of its Subsidiaries been redeemed, retired, purchased or otherwise acquired for value. (b) Since March 31, 1998, (i) there has been no development or event relating to or affecting SPI or any of its Subsidiaries which has had or could have a Material Adverse Effect and (b) except as otherwise permitted under this Credit Agreement, no dividends or other distributions have been declared, paid or made upon the Capital Stock of SPI or any of 67 73 its Subsidiaries nor has any of the Capital Stock of SPI or any of its Subsidiaries been redeemed, retired, purchased or otherwise acquired for value. 6.3 ORGANIZATION AND GOOD STANDING. Each of the Consolidated Parties (a) is duly organized, validly existing and is in good standing under the laws of the jurisdiction of its incorporation or organization, (b) has the corporate or other necessary power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged and (c) is duly qualified as a foreign entity and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification, other than in such jurisdictions where the failure to be so qualified and in good standing would not have a Material Adverse Effect. 6.4 POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. Each of the Credit Parties has the corporate or other necessary power and authority, and the legal right, to make, deliver and perform the Credit Documents to which it is a party, and in the case of the Borrower, to obtain extensions of credit hereunder, and has taken all necessary corporate action to authorize the borrowings and other extensions of credit on the terms and conditions of this Credit Agreement and to authorize the execution, delivery and performance of the Credit Documents to which it is a party. No consent or authorization of, filing with, notice to or other similar act by or in respect of, any Governmental Authority or any other Person is required to be obtained or made by or on behalf of any Credit Party in connection with (i) the borrowings or other extensions of credit hereunder, (ii) the execution, delivery, performance, validity or enforceability of the Credit Documents to which such Credit Party is a party or (iii) the consummation of the Transaction, except for (A) consents, authorizations, notices and filings described in Schedule 6.4, all of which have been obtained or made or have the status described in such Schedule 6.4 and (B) filings to perfect the Liens created by the Collateral Documents. This Credit Agreement has been, and each other Credit Document to which any Credit Party is a party will be, duly executed and delivered on behalf of the Credit Parties. This Credit Agreement constitutes, and each other Credit Document to which any Credit Party is a party, when executed and delivered, will constitute, a legal, valid and binding obligation of such Credit Party enforceable against such party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 6.5 NO CONFLICTS. Neither the execution and delivery of the Credit Documents, nor the consummation of the transactions contemplated therein, nor performance of and compliance with the terms and provisions thereof by such Credit Party will (a) violate or conflict with any provision of its articles or certificate of incorporation or bylaws or other organizational or governing documents of such Person, (b) violate, contravene or materially conflict with any Requirement of Law or any other law, regulation (including, without limitation, Regulation U or Regulation X), order, writ, judgment, injunction, decree or permit applicable to it, (c) violate, contravene or conflict with contractual provisions of, or cause an event of default under, any indenture, loan agreement, 68 74 mortgage, deed of trust, contract or other agreement or instrument to which it is a party or by which it may be bound, the violation of which could have a Material Adverse Effect, or (d) result in or require the creation of any Lien (other than those contemplated in or created in connection with the Credit Documents) upon or with respect to its properties. 6.6 NO DEFAULT. No Consolidated Party is in default in any respect under any contract, lease, loan agreement, indenture, mortgage, security agreement or other agreement or obligation to which it is a party or by which any of its properties is bound which default could have a Material Adverse Effect. No Default or Event of Default has occurred or exists except as previously disclosed in writing to the Lenders. 6.7 OWNERSHIP. Each Consolidated Party is the owner of, and has good and marketable title to, all of its respective assets and none of such assets is subject to any Lien other than Permitted Liens. 6.8 INDEBTEDNESS. Except as otherwise permitted under Section 8.1, the Consolidated Parties have no Indebtedness. 6.9 LITIGATION. Except as disclosed in Schedule 6.9, there are no actions, suits or legal, equitable, arbitration or administrative proceedings, pending or, to the knowledge of any Credit Party, threatened against any Consolidated Party which might reasonably be expected to have a Material Adverse Effect. 6.10 TAXES. Each Consolidated Party has filed, or caused to be filed, all tax returns (federal, state, local and foreign) required to be filed and paid (a) all amounts of taxes shown thereon to be due (including interest and penalties) and (b) all other taxes, fees, assessments and other governmental charges (including mortgage recording taxes, documentary stamp taxes and intangibles taxes) owing by it, except for such taxes (i) which are not yet delinquent or (ii) that are being contested in good faith and by proper proceedings, and against which adequate reserves are being maintained in accordance with GAAP. No Credit Party is aware as of the Closing Date of any proposed tax assessments against it or any other Consolidated Party. 6.11 COMPLIANCE WITH LAW. Each Consolidated Party is in compliance with all Requirements of Law and all other laws, rules, regulations, orders and decrees (including, without limitation, Environmental Laws) applicable to it, or to its properties, unless such failure to comply could not have a Material Adverse Effect. No Requirement of Law could cause a Material Adverse Effect. 69 75 6.12 ERISA. Except as disclosed and described in Schedule 6.12 attached hereto: (a) During the five-year period prior to the date on which this representation is made or deemed made: (i) no ERISA Event has occurred, and, to the best knowledge of the Credit Parties, no event or condition has occurred or exists as a result of which any ERISA Event could reasonably be expected to occur, with respect to any Plan; (ii) no "accumulated funding deficiency," as such term is defined in Section 302 of ERISA and Section 412 of the Code, whether or not waived, has occurred with respect to any Plan; (iii) each Plan has been maintained, operated, and funded in compliance with its own terms and in material compliance with the provisions of ERISA, the Code, and any other applicable federal or state laws; and (iv) no lien in favor of the PBGC or a Plan has arisen or is reasonably likely to arise on account of any Plan. (b) The actuarial present value of all "benefit liabilities" (as defined in Section 4001(a)(16) of ERISA), whether or not vested, under each Single Employer Plan, as of the last annual valuation date prior to the date on which this representation is made or deemed made (determined, in each case, in accordance with Financial Accounting Standards Board Statement 87, utilizing the actuarial assumptions used in such Plan's most recent actuarial valuation report), did not exceed as of such valuation date the fair market value of the assets of such Plan. (c) Neither any Consolidated Party nor any ERISA Affiliate has incurred, or, to the best knowledge of the Credit Parties, could be reasonably expected to incur, any withdrawal liability under ERISA to any Multiemployer Plan or Multiple Employer Plan. Neither any Consolidated Party nor any ERISA Affiliate would become subject to any withdrawal liability under ERISA if any Consolidated Party or any ERISA Affiliate were to withdraw completely from all Multiemployer Plans and Multiple Employer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. Neither any Consolidated Party nor any ERISA Affiliate has received any notification that any Multiemployer Plan is in reorganization (within the meaning of Section 4241 of ERISA), is insolvent (within the meaning of Section 4245 of ERISA), or has been terminated (within the meaning of Title IV of ERISA), and no Multiemployer Plan is, to the best knowledge of the Credit Parties, reasonably expected to be in reorganization, insolvent, or terminated. (d) No prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) or breach of fiduciary responsibility has occurred with respect to a Plan which has subjected or may subject any Consolidated Party or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Code, or under any agreement or other instrument pursuant to which any Consolidated Party or any ERISA Affiliate has agreed or is required to indemnify any Person against any such liability. (e) Neither any Consolidated Party nor any ERISA Affiliates has any material liability with respect to "expected post-retirement benefit obligations" within the meaning of the Financial Accounting Standards Board Statement 106. Each Plan which is a welfare 70 76 plan (as defined in Section 3(1) of ERISA) to which Sections 601-609 of ERISA and Section 4980B of the Code apply has been administered in compliance in all material respects of such sections. (f) Neither the execution and delivery of this Credit Agreement nor the consummation of the financing transactions contemplated thereunder will involve any transaction which is subject to the prohibitions of Sections 404, 406 or 407 of ERISA or in connection with which a tax could be imposed pursuant to Section 4975 of the Code. The representation by the Credit Parties in the preceding sentence is made in reliance upon and subject to the accuracy of the Lenders' representation in Section 11.15 with respect to their source of funds and is subject, in the event that the source of the funds used by the Lenders in connection with this transaction is an insurance company's general asset account, to the application of Prohibited Transaction Class Exemption 95-60, 60 Fed. Reg. 35,925 (1995), compliance with the regulations issued under Section 401(c)(1)(A) of ERISA, or the issuance of any other prohibited transaction exemption or similar relief, to the effect that assets in an insurance company's general asset account do not constitute assets of an "employee benefit plan" within the meaning of Section 3(3) of ERISA of a "plan" within the meaning of Section 4975(e)(1) of the Code. 6.13 SUBSIDIARIES. Set forth on Schedule 6.13 is a complete and accurate list of all Subsidiaries of each Consolidated Party. Information on Schedule 6.13 includes jurisdiction of incorporation, the number of shares of each class of Capital Stock outstanding, the number and percentage of outstanding shares of each class owned (directly or indirectly) by such Consolidated Party; and the number and effect, if exercised, of all outstanding options, warrants, rights of conversion or purchase and all other similar rights with respect thereto. The outstanding Capital Stock of all such Subsidiaries is validly issued, fully paid and non-assessable and is owned by each such Consolidated Party, directly or indirectly, free and clear of all Liens (other than those arising under or contemplated in connection with the Credit Documents). Other than as set forth in Schedule 6.13, no Consolidated Party has outstanding any securities convertible into or exchangeable for its Capital Stock nor does any such Person have outstanding any rights to subscribe for or to purchase or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to its Capital Stock. 6.14 GOVERNMENTAL REGULATIONS, ETC. (a) No part of the Letters of Credit or proceeds of the Loans will be used, directly or indirectly, for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation U, or for the purpose of purchasing or carrying or trading in any securities. If requested by any Lender or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form U-1 referred to in Regulation U. No indebtedness being reduced or retired out of the proceeds of the Loans was or will be incurred for the purpose of purchasing or carrying any margin stock within the meaning of Regulation U or any "margin security" within the meaning of Regulation T. "Margin stock" within the meaning of Regulation U does not constitute more than 25% of the value of the consolidated assets of the Consolidated Parties. None of the transactions contemplated by 71 77 this Credit Agreement (including, without limitation, the direct or indirect use of the proceeds of the Loans) will violate or result in a violation of the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or regulations issued pursuant thereto, or Regulation T, U or X. (b) No Consolidated Party is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or the Investment Company Act of 1940, each as amended. In addition, no Consolidated Party is (i) an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended, and is not controlled by such a company, or (ii) a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. (c) No director, executive officer or principal shareholder of any Consolidated Party is a director, executive officer or principal shareholder of any Lender. For the purposes hereof the terms "director", "executive officer" and "principal shareholder" (when used with reference to any Lender) have the respective meanings assigned thereto in Regulation O issued by the Board of Governors of the Federal Reserve System. (d) Each Consolidated Party has obtained and holds in full force and effect, all franchises, licenses, permits, certificates, authorizations, qualifications, accreditations, easements, rights of way and other rights, consents and approvals which are necessary for the ownership of its respective Property and to the conduct of its respective businesses as presently conducted. (e) No Consolidated Party is in violation of any applicable statute, regulation or ordinance of the United States, or of any state, city, town, municipality, county or any other jurisdiction, or of any agency thereof (including, without limitation, environmental laws and regulations), which violation could have a Material Adverse Effect. (f) Each Consolidated Party is current with all material reports and documents, if any, required to be filed with any state or federal securities commission or similar agency and is in full compliance in all material respects with all applicable rules and regulations of such commissions. 6.15 PURPOSE OF LOANS AND LETTERS OF CREDIT. The proceeds of the Loans hereunder shall be used solely by the Borrower to (a) finance a portion of a $48,000,000 cash distribution to the shareholders of Modtech and SPI of record on November 30, 1998, (b) pay closing fees and expenses in connection with the Transaction, (c) refinance the Existing Credit Facility, (d) finance Acquisitions and (e) finance working capital needs and other general corporate purposes of the Credit Parties. The Letters of Credit shall be used only for or in connection with appeal bonds, reimbursement obligations arising in connection with surety and reclamation bonds, reinsurance, domestic or international trade transactions and obligations not otherwise aforementioned relating to transactions entered into by the applicable account party in the ordinary course of business. The proceeds of the Delayed Draw Term Loan shall be used only to finance Permitted Acquisitions and reasonable expenses related thereto. 72 78 6.16 ENVIRONMENTAL MATTERS. Except as disclosed and described in Schedule 6.16 attached hereto: (a) Each of the facilities and properties owned, leased or operated by the Consolidated Parties (the "Real Properties") and all operations at the Properties are in compliance with all applicable Environmental Laws, and there is no violation of any Environmental Law with respect to the Real Properties or the businesses operated by the Consolidated Parties (the "Businesses"), and there are no conditions relating to the Businesses or Real Properties that could reasonably give rise to a material liability under any applicable Environmental Laws. (b) None of the Real Properties contains, or has previously contained, any Materials of Environmental Concern at, on or under the Real Properties in amounts or concentrations that constitute or constituted a violation of, or could give rise to liability under, Environmental Laws. (c) No Consolidated Party has received any written or verbal notice of, or inquiry from any Governmental Authority regarding, any violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Real Properties or the Businesses, nor does any Consolidated Party have knowledge or reason to believe that any such notice will be received or is being threatened. (d) Materials of Environmental Concern have not been transported or disposed of from the Real Properties, or generated, treated, stored or disposed of at, on or under any of the Real Properties or any other location, in each case by or on behalf of any Consolidated Party in violation of, or in a manner that could give rise to liability under, any applicable Environmental Law, which violation or liability could reasonably have a Material Adverse Effect. (e) No judicial proceeding or governmental or administrative action is pending or, to the best knowledge of any Credit Party, threatened, under any Environmental Law to which any Consolidated Party is or will be named as a party, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Consolidated Parties, the Real Properties or the Businesses, in each case which could reasonably have a Material Adverse Effect. (f) There has been no release, or threat of release, of Materials of Environmental Concern at or from the Real Properties, or arising from or related to the operations (including, without limitation, disposal) of any Consolidated Party in connection with the Real Properties or otherwise in connection with the Businesses, in violation of or in amounts or in a manner that could give rise to liability under Environmental Laws, which violation or liability could reasonably have a Material Adverse Effect. 73 79 6.17 INTELLECTUAL PROPERTY. Each Consolidated Party owns, or has the legal right to use, all trademarks, tradenames, copyrights, technology, know-how and processes (the "Intellectual Property") necessary for each of them to conduct its business as currently conducted except for those the failure to own or have such legal right to use could not have a Material Adverse Effect. Set forth on Schedule 6.17 is a list of all Intellectual Property owned by each Consolidated Party or that any Consolidated Party has the right to use. Except as provided on Schedule 6.17, no claim has been asserted and is pending by any Person challenging or questioning the use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does any Credit Party know of any such claim, and to the Credit Parties' knowledge the use of such Intellectual Property by any Consolidated Party does not infringe on the rights of any Person, except for such claims and infringements that, in the aggregate, could not reasonably have a Material Adverse Effect. 6.18 SOLVENCY. Each Credit Party is and, after consummation of the transactions contemplated by this Credit Agreement (including, without limitation, the Transaction), will be Solvent. 6.19 INVESTMENTS. All Investments of each Consolidated Party are Permitted Investments. 6.20 LOCATION OF COLLATERAL. Set forth on Schedule 6.20(a) is a list as of the Closing Date of all real property located in the United States and owned or leased by any Consolidated Party with street address, county and state where located. Set forth on Schedule 6.20(b) is a list of all locations where any tangible personal property of a Consolidated Party is located, including county and state where located. Set forth on Schedule 6.20(c) is the chief executive office and principal place of business of each Consolidated Party. 6.21 DISCLOSURE. Neither this Credit Agreement nor any financial statements delivered to the Lenders nor any other document, certificate or statement furnished to the Lenders by or on behalf of any Consolidated Party in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein or herein not misleading. 6.22 NO BURDENSOME RESTRICTIONS. No Consolidated Party is a party to any agreement or instrument or subject to any other obligation or any charter or corporate restriction or any provision of any applicable law, rule or regulation which, individually or in the aggregate, could have a Material Adverse Effect. 74 80 6.23 BROKERS' FEES. Except as set forth in Schedule 6.23, no Consolidated Party has any obligation to any Person in respect of any finder's, broker's, investment banking or other similar fee in connection with any of the transactions contemplated under the Credit Documents. 6.24 LABOR MATTERS. Except as set forth in Schedule 6.24, there are no collective bargaining agreements or Multiemployer Plans covering the employees of a Consolidated Party as of the Closing Date and none of the Consolidated Parties has suffered any strikes, walkouts, work stoppages or other material labor difficulty within the last five years. 6.25 NATURE OF BUSINESS. As of the Closing Date, the Consolidated Parties are engaged in the business of design and manufacture of modular buildings. 6.26 MERGER AGREEMENT. As of the Closing Date, each of the representations and warranties made in the Merger Agreement by each of the parties thereto is true and correct in all material respects. The Merger Agreement and the other Merger Documents have been consummated in accordance with their terms simultaneously with the consummation of this Credit Agreement. 6.27 YEAR 2000 COMPLIANCE. Each of the Credit Parties has (i) initiated a review and assessment of all areas within its and each of its Subsidiaries' businesses and operations (including those affected by suppliers, vendors and customers) that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications may not be able to recognize and properly perform date-sensitive functions after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in accordance with that timetable. Based on the foregoing, each Credit Party believes that all computer applications that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 Compliant"), except to the extent that a failure to do so could not reasonably be expected to have a Material Adverse Effect. 6.28 COLLATERAL DOCUMENTS. The Collateral Documents create valid security interests in, and Liens on, the Collateral purported to be covered thereby, which security interests and Liens are perfected security interests and Liens, prior to all other Liens other than Permitted Liens. 75 81 SECTION 7 AFFIRMATIVE COVENANTS Each Credit Party hereby covenants and agrees that, so long as this Credit Agreement is in effect or any amounts payable hereunder or under any other Credit Document shall remain outstanding, and until all of the Commitments hereunder shall have terminated: 7.1 INFORMATION COVENANTS. The Credit Parties will furnish, or cause to be furnished, to the Administrative Agent and each of the Lenders: (a) Annual Financial Statements. As soon as available, and in any event within 90 days after the close of each fiscal year of the Consolidated Parties (other than SPI and its Subsidiaries with respect to the fiscal year of such Credit Parties ending March 31, 1999), a consolidated and consolidating balance sheet and income statement of the Consolidated Parties as of the end of such fiscal year, together with related consolidated and consolidating statements of operations and retained earnings and of cash flows for such fiscal year, in each case setting forth in comparative form consolidated and consolidating figures for the preceding fiscal year, all such financial information described above to be in reasonable form and detail and audited by independent certified public accountants of recognized national standing reasonably acceptable to the Administrative Agent and whose opinion shall be to the effect that such financial statements have been prepared in accordance with GAAP (except for changes with which such accountants concur) and shall not be limited as to the scope of the audit or qualified as to the status of the Consolidated Parties as a going concern. (b) Quarterly Financial Statements. As soon as available, and in any event within 45 days after the close of each fiscal quarter of the Consolidated Parties (other than the fourth fiscal quarter, in which case 90 days after the end thereof) a consolidated and consolidating balance sheet and income statement of the Consolidated Parties as of the end of such fiscal quarter, together with related consolidated and consolidating statements of operations and retained earnings and of cash flows for such fiscal quarter, in each case setting forth in comparative form (i) consolidated and consolidating figures for the corresponding period of the preceding fiscal year and (ii) consolidated and consolidating figures for the corresponding period set forth in the annual budget provided pursuant to Section 7.1(e), all such financial information described above to be in reasonable form and detail and reasonably acceptable to the Administrative Agent, and accompanied by a certificate of the chief financial officer of the Borrower to the effect that such quarterly financial statements fairly present in all material respects the financial condition of the Consolidated Parties and have been prepared in accordance with GAAP, subject to changes resulting from audit and normal year-end audit adjustments. (c) Officer's Certificate. At the time of delivery of the financial statements provided for in Sections 7.1(a) and 7.1(b) above, a certificate of the chief financial officer of the Borrower substantially in the form of Exhibit 7.1(c), (i) demonstrating compliance with the financial covenants contained in Section 7.11 by calculation thereof as of the end of 76 82 each such fiscal period and (ii) stating that no Default or Event of Default exists, or if any Default or Event of Default does exist, specifying the nature and extent thereof and what action the Credit Parties propose to take with respect thereto. (d) Post-Closing Pro Forma Balance Sheet. Within 30 days subsequent to the Closing Date, the Borrower shall deliver to the Administrative Agent and the Lenders a pro forma balance sheet of the Borrower and its Subsidiaries as of the Closing Date which shall (i) give effect to the Transaction and the transactions contemplated by the Credit Documents, (ii) reflect estimated purchase price accounting adjustments and (iii) be prepared by independent certified public accountants of recognized national standing reasonably acceptable to the Administrative Agent. (e) Annual Business Plan and Budgets. (i) Within 90 days subsequent to the end of the Borrower's fiscal year ending December 31, 1998 and (ii) at least 30 days prior to the end of each fiscal year thereafter, beginning with the fiscal year ending December 31, 1999, a budget of the Consolidated Parties containing, among other things, pro forma financial statements for the next fiscal year and detailed assumptions relating thereto, together with a proposed schedule of Capital Expenditures. (f) Compliance With Certain Provisions of the Credit Agreement. Within 90 days after the end of each fiscal year of the Credit Parties, a certificate containing information regarding the amount of all Asset Dispositions, Debt Issuances and Equity Issuances that were made during the prior fiscal year. (g) Accountant's Certificate. Within the period for delivery of the annual financial statements provided in Section 7.1(a), a certificate of the accountants conducting the annual audit stating that they have reviewed this Credit Agreement and stating further whether, in the course of their audit, they have become aware of any Default or Event of Default and, if any such Default or Event of Default exists, specifying the nature and extent thereof. (h) Auditor's Reports. Promptly upon receipt thereof, a copy of any other report or "management letter" submitted by independent accountants to any Consolidated Party in connection with any annual, interim or special audit of the books of such Person. (i) Reports. Promptly upon transmission or receipt thereof, (i) copies of any filings and registrations with, and reports to or from, the Securities and Exchange Commission, or any successor agency, and copies of all financial statements, proxy statements, notices and reports as any Consolidated Party shall send to its shareholders or to a holder of any Indebtedness owed by any Consolidated Party in its capacity as such a holder and (ii) upon the request of the Administrative Agent, all reports and written information to and from the United States Environmental Protection Agency, or any state or local agency responsible for environmental matters, the United States Occupational Health and Safety Administration, or any state or local agency responsible for health and safety matters, or any successor agencies or authorities concerning environmental, health or safety matters. 77 83 (j) Notices. Upon obtaining knowledge thereof, the Credit Parties will give written notice to the Administrative Agent immediately of (i) the occurrence of an event or condition consisting of a Default or Event of Default, specifying the nature and existence thereof and what action the Credit Parties propose to take with respect thereto, and (ii) the occurrence of any of the following with respect to any Consolidated Party (A) the pendency or commencement of any litigation, arbitral or governmental proceeding against such Person which if adversely determined is likely to have a Material Adverse Effect or (B) the institution of any proceedings against such Person with respect to, or the receipt of notice by such Person of potential liability or responsibility for violation, or alleged violation of any federal, state or local law, rule or regulation, including but not limited to, Environmental Laws, the violation of which could have a Material Adverse Effect. (k) ERISA. Upon obtaining knowledge thereof, the Credit Parties will give written notice to the Administrative Agent promptly (and in any event within five Business Days) of: (i) any event or condition, including, but not limited to, any Reportable Event, that constitutes, or might reasonably lead to, an ERISA Event; (ii) with respect to any Multiemployer Plan, the receipt of notice as prescribed in ERISA or otherwise of any withdrawal liability assessed against the Credit Parties or any ERISA Affiliates, or of a determination that any Multiemployer Plan is in reorganization or insolvent (both within the meaning of Title IV of ERISA); (iii) the failure to make full payment on or before the due date (including extensions) thereof of all amounts which any Consolidated Party or any ERISA Affiliate is required to contribute to each Plan pursuant to its terms and as required to meet the minimum funding standard set forth in ERISA and the Code with respect thereto; or (iv) any change in the funding status of any Plan that could have a Material Adverse Effect, together with a description of any such event or condition or a copy of any such notice and a statement by the chief financial officer of the Borrower briefly setting forth the details regarding such event, condition, or notice, and the action, if any, which has been or is being taken or is proposed to be taken by the Credit Parties with respect thereto. Promptly upon request, the Credit Parties shall furnish the Administrative Agent and the Lenders with such additional information concerning any Plan as may be reasonably requested, including, but not limited to, copies of each annual report/return (Form 5500 series), as well as all schedules and attachments thereto required to be filed with the Department of Labor and/or the Internal Revenue Service pursuant to ERISA and the Code, respectively, for each "plan year" (within the meaning of Section 3(39) of ERISA). (l) Environmental. (i) Upon the reasonable written request of the Administrative Agent, the Credit Parties will furnish or cause to be furnished to the Administrative Agent, at the Credit Parties' expense, a report of an environmental assessment of reasonable scope, form and depth, (including, where appropriate, invasive soil or groundwater sampling) by a consultant reasonably acceptable to the Administrative Agent as to the nature and extent of the presence of any Materials of Environmental Concern on any Real Properties (as defined in Section 6.16) and as to the compliance by any Consolidated Party with Environmental Laws at such Real Properties; provided, however, the Credit Parties shall not be required to furnish to the Administrative Agent an environmental assessment with respect to the Glendale Property unless such environmental assessment is required pursuant to Section 7.16(b). If the Credit 78 84 Parties fail to deliver such an environmental report within seventy-five (75) days after receipt of such written request then the Administrative Agent may arrange for same, and the Consolidated Parties hereby grant to the Administrative Agent and their representatives access to the Real Properties to reasonably undertake such an assessment (including, where appropriate, invasive soil or groundwater sampling). The reasonable cost of any assessment arranged for by the Administrative Agent pursuant to this provision will be payable by the Credit Parties on demand and added to the obligations secured by the Collateral Documents. (ii) The Consolidated Parties will conduct and complete all investigations, studies, sampling, and testing and all remedial, removal, and other actions necessary to address all Materials of Environmental Concern on, from or affecting any of the Real Properties to the extent necessary to be in compliance with all Environmental Laws and with the validly issued orders and directives of all Governmental Authorities with jurisdiction over such Real Properties to the extent any failure could have a Material Adverse Effect. (m) Additional Patents and Trademarks. At the time of delivery of the financial statements and reports provided for in Section 7.1(a), a report signed by the chief financial officer or treasurer of the Borrower setting forth (i) a list of registration numbers for all patents, trademarks, service marks, tradenames and copyrights awarded to any Consolidated Party since the last day of the immediately preceding fiscal year and (ii) a list of all patent applications, trademark applications, service mark applications, trade name applications and copyright applications submitted by any Consolidated Party since the last day of the immediately preceding fiscal year and the status of each such application, all in such form as shall be reasonably satisfactory to the Administrative Agent. (n) Other Information. With reasonable promptness upon any such request, such other information regarding the business, properties or financial condition of any Consolidated Party as the Administrative Agent or the Required Lenders may reasonably request. 7.2 PRESERVATION OF EXISTENCE AND FRANCHISES. Except as a result of or in connection with a dissolution, merger or disposition of a Subsidiary permitted under Section 8.4 or Section 8.5, each Credit Party will, and will cause each of its Subsidiaries to, do all things necessary to preserve and keep in full force and effect its existence, rights, franchises and authority. 7.3 BOOKS AND RECORDS. Each Credit Party will, and will cause each of its Subsidiaries to, keep complete and accurate books and records of its transactions in accordance with good accounting practices on the basis of GAAP (including the establishment and maintenance of appropriate reserves). 7.4 COMPLIANCE WITH LAW. 79 85 Each Credit Party will, and will cause each of its Subsidiaries to, comply with all laws, rules, regulations and orders, and all applicable restrictions imposed by all Governmental Authorities, applicable to it and its Property if noncompliance with any such law, rule, regulation, order or restriction could have a Material Adverse Effect. 7.5 PAYMENT OF TAXES AND OTHER INDEBTEDNESS. Each Credit Party will, and will cause each of its Subsidiaries to, pay and discharge (a) all taxes, assessments and governmental charges or levies imposed upon it, or upon its income or profits, or upon any of its properties, before they shall become delinquent, (b) all lawful claims (including claims for labor, materials and supplies) which, if unpaid, might give rise to a Lien upon any of its properties, and (c) except as prohibited hereunder, all of its other Indebtedness as it shall become due; provided, however, that no Consolidated Party shall be required to pay any such tax, assessment, charge, levy, claim or Indebtedness which is being contested in good faith by appropriate proceedings and as to which adequate reserves therefor have been established in accordance with GAAP, unless the failure to make any such payment (i) could give rise to an immediate right to foreclose on a Lien securing such amounts or (ii) could have a Material Adverse Effect. 7.6 INSURANCE. (a) Each Credit Party will, and will cause each of its Subsidiaries to, at all times maintain in full force and effect insurance (including worker's compensation insurance, liability insurance, casualty insurance and business interruption insurance) in such amounts, covering such risks and liabilities and with such deductibles or self-insurance retentions as are in accordance with normal industry practice (or as otherwise required by the Collateral Documents). The Administrative Agent shall be named as loss payee or mortgagee, as its interest may appear, and/or additional insured with respect to any such insurance providing coverage in respect of any Collateral, and each provider of any such insurance shall agree, by endorsement upon the policy or policies issued by it or by independent instruments furnished to the Administrative Agent, that it will give the Administrative Agent thirty (30) days' prior written notice before any such policy or policies shall be altered or canceled, and that no act or default of any Consolidated Party or any other Person shall affect the rights of the Administrative Agent or the Lenders under such policy or policies. The present insurance coverage of the Consolidated Parties is outlined as to carrier, policy number, expiration date, type and amount on Schedule 7.6. (b) In case of any material loss of, damage to or destruction of any Collateral, such Credit Party (i) shall promptly give written notice thereof to the Administrative Agent generally describing the nature and extent of such damage or destruction, (ii) in the event that such Credit Party receives insurance proceeds on account of any loss of, damage to or destruction of Collateral in a net amount in excess of $500,000 (in respect of any insurance event, the "Excess Proceeds"), such Credit Party will immediately pay over such Excess Proceeds to the Administrative Agent as cash collateral for the Credit Party Obligations and (iii) whether or not the insurance proceeds, if any, received on account of such damage or destruction shall be sufficient for that purpose, at such Credit Party's cost and expense, will promptly repair or replace the Collateral of such Credit Party so lost, damaged or destroyed; provided, however, that (A) such Credit Party need not repair or replace the Collateral of 80 86 such Credit Party so lost, damaged or destroyed to the extent the failure to make such repair or replacement (1) is desirable to the proper conduct of the business of such Credit Party in the ordinary course and otherwise in the best interest of such Credit Party and (2) would not materially impair the rights and benefits of the Administrative Agent or the Lenders under the Collateral Documents, any other Credit Document or any Hedging Agreement between any Consolidated Party and any Lender, or any Affiliate of a Lender, and (B) in the event that such Credit Party receives insurance proceeds on account of any loss of, damage to or destruction of Collateral in a net amount in excess of $500,000, such Credit Party shall not undertake replacement or restoration of any lost, damaged or destroyed Collateral of such Credit Party with insurance proceeds in respect thereof unless (1) the Administrative Agent has received evidence reasonably satisfactory to it that the Collateral lost, damaged or destroyed has been or will be replaced or restored to its condition immediately prior to the loss, destruction or other event giving rise to the payment of such insurance proceeds and (2) no violation of Section 7.11 would have occurred as of the most recent fiscal quarter end preceding the date of determination with respect to which the Administrative Agent has received the Required Financial Information upon giving pro forma effect to any Indebtedness to be incurred in connection with such replacement or restoration (assuming, for purposes hereof, that such Indebtedness was incurred as of the first day of the four fiscal-quarter period ending as of such fiscal quarter end). (c) With respect to any Excess Proceeds deposited with the Administrative Agent by any Credit Party as provided in the subsection (b) above, the Administrative Agent agrees to release such Excess Proceeds to such Credit Party for replacement or restoration of the portion of the Collateral of such Credit Party lost, damaged or destroyed, provided that, within 30 days from the date that the Administrative Agent receives such Excess Proceeds, the Administrative Agent shall have received a written application for release of such Excess Proceeds from such Credit Party establishing satisfaction of the conditions set forth in clause (B) of subsection (b) above. (d) Any insurance proceeds received by any Credit Party on account of any loss of, damage to or destruction of Collateral that (i) are not applied pursuant to clause (A) of subsection (b) above to repair or replace the Collateral within the period of 180 days following the date the applicable Credit Party receives such proceeds, (ii) are not permitted to be applied pursuant to clause (B) of the preceding paragraph to repair or replace the Collateral or (iii) constitute Excess Proceeds which have been deposited with the Administrative Agent and with respect to which the conditions for application to replacement or restoration set forth in subsection (c) above shall not have been met on or before the first Business Day following the date 30 days from the date the Administrative Agent receives such Excess Proceeds, shall be applied (by the Credit Parties or, in the case of Excess Proceeds held by the Administrative Agent, by the Administrative Agent) to prepay the Loans (and cash collateralize of LOC Obligations) in accordance with the terms of Section 3.3(b)(iii)(B). (e) All insurance proceeds shall be subject to the security interest of the Administrative Agent (for the ratable of the Lenders) under the Collateral Documents. 81 87 7.7 MAINTENANCE OF PROPERTY. Each Credit Party will, and will cause each of its Subsidiaries to, maintain and preserve its properties and equipment material to the conduct of its business in good repair, working order and condition, normal wear and tear and casualty and condemnation excepted, and will make, or cause to be made, in such properties and equipment from time to time all repairs, renewals, replacements, extensions, additions, betterments and improvements thereto as may be needed or proper, to the extent and in the manner customary for companies in similar businesses. 7.8 PERFORMANCE OF OBLIGATIONS. Each Credit Party will, and will cause each of its Subsidiaries to, perform in all material respects all of its obligations under the terms of all material agreements, indentures, mortgages, security agreements or other debt instruments to which it is a party or by which it is bound. 7.9 USE OF PROCEEDS. The Borrower will use the proceeds of the Loans and will use the Letters of Credit solely for the purposes set forth in Section 6.15. 7.10 AUDITS/INSPECTIONS. Upon reasonable notice and during normal business hours, each Credit Party will, and will cause each of its Subsidiaries to, permit representatives appointed by the Administrative Agent, including, without limitation, independent accountants, agents, attorneys, and appraisers to visit and inspect its property, including its books and records, its accounts receivable and inventory, its facilities and its other business assets, and to make photocopies or photographs thereof and to write down and record any information such representative obtains and shall permit the Administrative Agent or its representatives to investigate and verify the accuracy of information provided to the Lenders and to discuss all such matters with the officers, employees and representatives of such Person. The Credit Parties agree that the Administrative Agent and its representatives may conduct an annual audit of the Collateral at the expense of the Credit Parties; provided, however, upon the occurrence and during the continuance of an Event of Default, the Administrative Agent and its representatives may conduct an audit of the Collateral at any time and from time to time at the expense of the Credit Parties. 7.11 FINANCIAL COVENANTS. (a) Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio, as of the last day of each fiscal quarter of the Consolidated Parties, shall be greater than or equal to: (i) for the period from the Closing Date to and including March 30, 2003, 2.00 to 1.00; and (ii) for the period from March 31, 2003 and at all times thereafter, 1.75 to 1.00. 82 88 (b) Leverage Ratio. The Leverage Ratio, as of the last day of each fiscal quarter of the Consolidated Parties, shall be less than or equal to 2.50 to 1.00. (c) Consolidated Net Worth. At all times the Consolidated Net Worth of the Borrower shall be greater than or equal to the sum of an amount equal to 85% of the Net Worth set forth in the pro forma balance sheet referenced in Section 6.1(b), increased on a cumulative basis as of the end of each fiscal quarter of the Consolidated Parties, commencing with the fiscal quarter ending March 31, 1999, by an amount equal to the sum of (A) 50% of Consolidated Net Income (to the extent positive) for the fiscal quarter then ended and (B) 50% of the Net Cash Proceeds of any Equity Issuance made during the fiscal quarter then ended. 7.12 ADDITIONAL GUARANTORS. As soon as practicable and in any event within 30 days after any Person becomes a direct or indirect Subsidiary of the Borrower shall provide the Administrative Agent with written notice thereof setting forth information in reasonable detail describing all of the assets of such Person and shall (a) cause such Person to execute a Joinder Agreement in substantially the same form as Exhibit 7.12, (b) cause 100% of the issued and outstanding Capital Stock of such Person to be delivered to the Administrative Agent (together with undated stock powers signed in blank) and pledged to the Administrative Agent pursuant to an appropriate pledge agreement(s) in substantially the form of the Pledge Agreement and otherwise in form acceptable to the Administrative Agent and (c) cause such Person to (i) if such Person owns or (to the extent deemed to be material by the Administrative Agent or the Required Lenders in its or their sole reasonable discretion) leases any real property located in the United States or located outside of the United States but deemed to be material by the Administrative Agent or the Required Lenders in its or their sole reasonable discretion, deliver to the Administrative Agent with respect to such real property documents, instruments and other items of the types required to be delivered pursuant to Section 5.1(e) all in form, content and scope reasonably satisfactory to the Administrative Agent and (ii) deliver such other documentation as the Administrative Agent may reasonably request in connection with the foregoing, including, without limitation, appropriate UCC-1 financing statements, real estate title insurance policies, environmental reports, landlord's waivers, certified resolutions and other organizational and authorizing documents of such Person, favorable opinions of counsel to such Person (which shall cover, among other things, the legality, validity, binding effect and enforceability of the documentation referred to above and the perfection of the Administrative Agent's liens thereunder) and other items of the types required to be delivered pursuant to Section 5.1(b), (c), (d) and (e), all in form, content and scope reasonably satisfactory to the Administrative Agent. 7.13 PLEDGED ASSETS. Subject to the terms of Section 5.1(e) and Section 7.16, each Credit Party will cause (i) all of its owned real and personal property located in the United States, (ii) all of its other owned real and personal property located in the United States and (iii) to the extent deemed to be material by the Administrative Agent or the Required Lenders, all of its leased real property located in the United States, to be subject at all times to first priority, perfected and, in the case of real property (whether owned or, to the extent deemed to be material by the Administrative Agent, leased), title insured Liens in favor of the Administrative Agent to secure the Credit Party 83 89 Obligations pursuant to the terms and conditions of the Collateral Documents or, with respect to any such property acquired subsequent to the Closing Date, such other additional security documents as the Administrative Agent shall reasonably request, subject in any case to Permitted Liens. With respect to any real property acquired by any Credit Party subsequent to the Closing Date and required by this Section 7.13 to be pledged to the Administrative Agent, such Person will cause to be delivered to the Administrative Agent, with respect to such real property, documents, instruments and other items of the types required to be delivered pursuant to Section 5.1(e) in a form acceptable to the Administrative Agent. Without limiting the generality of the above, the Credit Parties will cause 100% of the issued and outstanding Capital Stock of each Subsidiary to be subject at all times to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Collateral Documents or such other security documents as the Administrative Agent shall reasonably request. If, subsequent to the Closing Date, a Credit Party shall (a) acquire any intellectual property, securities, instruments, chattel paper or other personal property required to be pledged to the Administrative Agent as Collateral hereunder or under any of the Collateral Documents or (b) acquire or lease any real property, the Credit Parties shall promptly notify the Administrative Agent of same. Each Credit Party shall, and shall cause each of its Subsidiaries to, take such action (including but not limited to the actions set forth in Sections 5.1(d) and (e)) at its own expense as requested by the Administrative Agent to ensure that the Administrative Agent has a first priority perfected Lien to secure the Credit Party Obligations in (i) all owned real property and personal property of the Credit Parties located in the United States, (ii) to the extent deemed to be material by the Administrative Agent or the Required Lenders in its or their sole reasonable discretion, all other owned real and personal property of the Credit Parties and (iii) all leased real property located in the United States, subject in each case only to Permitted Liens. Each Credit Party shall, and shall cause each of its Subsidiaries to, adhere to the covenants regarding the location of personal property as set forth in the Security Agreement. 7.14 YEAR 2000 COMPLIANCE. The Credit Parties will promptly notify the Administrative Agent in the event any Credit Party discovers or determines that any computer application (including those of its suppliers, vendors and customers) that is material to its or any of its Subsidiaries' business and operations will not be Year 2000 Compliant, except to the extent that such failure could not reasonably be expected to have a Material Adverse Effect. 7.15 FISCAL YEAR; REINCORPORATION MERGERS. (a) Fiscal Year. On or prior to March 31, 1999, the Credit Parties will cause SPI to change its fiscal year to a calendar fiscal year. (b) Reincorporation Mergers. On or prior to the first anniversary of this Credit Agreement, the Credit Parties will cause SPI and Modtech to reincorporate in the State of Delaware by merging with or into Subsidiaries of the Borrower formed to accomplish such reincorporation. 84 90 7.16 POST-CLOSING CONDITIONS. (a) Within 30 days after the Closing Date (or such later date as is reasonably acceptable to the Administrative Agent), the Credit Parties shall use its reasonable best efforts to deliver to the Administrative Agent, with respect to each Mortgaged Property, the items set forth in Section 5.1(e)(ii)-(vii) which have not previously been delivered to the Administrative Agent for such Mortgaged Property in a form acceptable to the Administrative Agent; provided, however, that the Credit Parties shall not be required to deliver to the Administrative Agent the items set forth in Section 5.1(e)(vii) with respect to the Mortgaged Properties described in items (7) and (10) on Schedule 5.1(e). (b) Within 120 days after the Closing Date (or such later date as is reasonably acceptable to the Administrative Agent), the Credit Parties shall either (i) terminate the lease with respect to the Glendale Property or provide the Administrative Agent with evidence that Trac Modular Manufacturing, Inc. has been released from its obligations thereunder, or (ii) furnish or cause to be furnished to the Administrative Agent at the Credit Parties' expense, if required by the Administrative Agent in its reasonable discretion, an environmental assessment of the Glendale Property in accordance with the terms set forth in Section 7.1(l)(i). (c) Within 30 days after the Closing Date (or such later date as is reasonably acceptable to the Administrative Agent), the Credit Parties shall deliver to the Administrative Agent all certificates evidencing any certificated Capital Stock of Modtech and SPI pledged to the Administrative Agent pursuant to the Pledge Agreement, together with duly executed in blank, undated stock powers attached thereto. SECTION 8 NEGATIVE COVENANTS Each Credit Party hereby covenants and agrees that, so long as this Credit Agreement is in effect or any amounts payable hereunder or under any other Credit Document shall remain outstanding, and until all of the Commitments hereunder shall have terminated: 8.1 INDEBTEDNESS. The Credit Parties will not permit any Consolidated Party to contract, create, incur, assume or permit to exist any Indebtedness, except: (a) Indebtedness arising under this Credit Agreement and the other Credit Documents; (b) Indebtedness of the Borrower set forth in Schedule 8.1 (but not including any renewals, refinancings or extensions thereof); (c) purchase money Indebtedness (including obligations in respect of Capital Leases or Synthetic Leases) hereafter incurred by the Borrower to finance the purchase of fixed assets provided that (i) the total of all such Indebtedness (including any such 85 91 Indebtedness referred to in subsection (b) above) shall not exceed an aggregate principal amount of $5,000,000 at any one time outstanding; (ii) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed; and (iii) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing; (d) obligations of the Borrower in respect of Hedging Agreements entered into with any Lender, or any Affiliate of a Lender, in order to manage existing or anticipated interest rate or exchange rate risks and not for speculative purposes; (e) intercompany Indebtedness arising out of loans, advances and Guaranty Obligations permitted under Section 8.6; (f) unsecured Subordinated Indebtedness hereafter incurred by a Borrower in favor of the seller of a business acquired in a Permitted Acquisition; provided that the total of all such Indebtedness shall not exceed an aggregate principal amount of $10,000,000 at any one time outstanding; and (g) in addition to the Indebtedness otherwise permitted by this Section 8.1, (i) other Indebtedness hereafter incurred by the Borrower provided that (A) the loan documentation with respect to such Indebtedness shall not contain covenants or default provisions relating to any Consolidated Party that are more restrictive than the covenants and default provisions contained in the Credit Documents, (B) the Borrower shall have delivered to the Administrative Agent a Pro Forma Compliance Certificate demonstrating that, upon giving effect on a Pro Forma Basis to the incurrence of such Indebtedness and to the concurrent retirement of any other Indebtedness of any Consolidated Party, no Default or Event of Default would exist hereunder and (C) the aggregate principal amount of such Indebtedness plus the aggregate outstanding principal amount of Indebtedness permitted pursuant to clauses (b) and (c) above shall not exceed $10,000,000 at any time; and (ii) Guaranty Obligations of any Guarantor with respect to any Indebtedness of the Borrower permitted under this Section 8.1. 8.2 LIENS. The Credit Parties will not permit any Consolidated Party to contract, create, incur, assume or permit to exist any Lien with respect to any of its Property, whether now owned or after acquired, except for Permitted Liens. 8.3 NATURE OF BUSINESS. The Credit Parties will not permit any Consolidated Party to substantively alter the character or conduct of the business conducted by such Person as of the Closing Date. 86 92 8.4 CONSOLIDATION, MERGER, DISSOLUTION, ETC. Except in connection with an Asset Disposition permitted by the terms of Section 8.5, the Credit Parties will not permit any Consolidated Party to enter into any transaction of merger or consolidation or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution); provided that, notwithstanding the foregoing provisions of this Section 8.4, (a) the Borrower may merge or consolidate with any of its Subsidiaries, provided that (i) the Borrower shall be the continuing or surviving corporation, (ii) the Credit Parties shall cause to be executed and delivered such documents, instruments and certificates as the Administrative Agent may request so as to cause the Credit Parties to be in compliance with the terms of Section 7.13 after giving effect to such transaction and (iii) the Borrower shall have delivered to the Administrative Agent a Pro Forma Compliance Certificate demonstrating that, upon giving effect on a Pro Forma Basis to such transaction, no Default or Event of Default would exist, (b) any Credit Party other than the Borrower may merge or consolidate with any other Credit Party other than the Borrower provided that (i) the Credit Parties shall cause to be executed and delivered such documents, instruments and certificates as the Administrative Agent may request so as to cause the Credit Parties to be in compliance with the terms of Section 7.13 after giving effect to such transaction and (ii) the Borrower shall have delivered to the Administrative Agent a Pro Forma Compliance Certificate demonstrating that, upon giving effect on a Pro Forma Basis to such transaction, no Default or Event of Default would exist, (c) any Consolidated Party which is not a Credit Party may be merged or consolidated with or into any Credit Party provided that (i) such Credit Party shall be the continuing or surviving corporation, (ii) the Credit Parties shall cause to be executed and delivered such documents, instruments and certificates as the Administrative Agent may request so as to cause the Credit Parties to be in compliance with the terms of Section 7.13 after giving effect to such transaction and (iii) the Borrower shall have delivered to the Administrative Agent a Pro Forma Compliance Certificate demonstrating that, upon giving effect on a Pro Forma Basis to such transaction, no Default or Event of Default would exist, (d) any Consolidated Party which is not a Credit Party may be merged or consolidated with or into any other Consolidated Party which is not a Credit Party, provided the Borrower shall have delivered to the Administrative Agent a Pro Forma Compliance Certificate demonstrating that, upon giving effect on a Pro Forma Basis to such transaction, no Default or Event of Default would exist, (e) the Borrower or any Subsidiary of the Borrower may merge with any Person other than a Consolidated Party in connection with a Permitted Acquisition if (i) the Borrower or such Subsidiary shall be the continuing or surviving corporation, (ii) the Credit Parties shall cause to be executed and delivered such documents, instruments and certificates as the Administrative Agent may request so as to cause the Credit Parties to be in compliance with the terms of Section 7.13 after giving effect to such transaction and (iii) the Borrower shall have delivered to the Administrative Agent a Pro Forma Compliance Certificate demonstrating that, upon giving effect on a Pro Forma Basis to such transaction, no Default or Event of Default would exist and (f) any Wholly-Owned Subsidiary of the Borrower may dissolve, liquidate or wind up its affairs at any time. 8.5 ASSET DISPOSITIONS. The Credit Parties will not permit any Consolidated Party to make any Asset Disposition (including, without limitation, any Sale and Leaseback Transaction) unless (a) the consideration paid in connection therewith shall be cash or Cash Equivalents, (b) if such transaction is a Sale and Leaseback Transaction, such transaction is permitted by the terms of Section 8.13, (c) such transaction does not involve the sale or other disposition of a minority equity interest in any 87 93 Consolidated Party, (d) the aggregate net book value of all of the assets sold or otherwise disposed of by the Consolidated Parties in all such transactions after the Closing Date shall not exceed 5% of the aggregate assets of the Consolidated Parties, less intangible assets, (e) the Borrower shall have delivered to the Administrative Agent a Pro Forma Compliance Certificate demonstrating that, upon giving effect on a Pro Forma Basis to such transaction, no Default or Event of Default would exist hereunder, and (f) no later than 10 days prior to such Asset Disposition, the Administrative Agent and the Lenders shall have received a certificate of an officer of the Borrower specifying the anticipated or actual date of such Asset Disposition, briefly describing the assets to be sold or otherwise disposed of and setting forth the net book value of such assets, the aggregate consideration and the Net Cash Proceeds to be received for such assets in connection with such Asset Disposition, and thereafter the Credit Parties shall, within the period of 180 days following the consummation of such Asset Disposition (with respect to any such Asset Disposition, the "Application Period"), apply (or cause to be applied) an amount equal to the Net Cash Proceeds of such Asset Disposition to (i) make Eligible Reinvestments or (ii) prepay the Loans (and cash collateralize of LOC Obligations) in accordance with the terms of Section 3.3(b)(ii). Pending final application of the Net Cash Proceeds of any Asset Disposition, the Consolidated Parties may apply such Net Cash Proceeds to temporarily reduce the Revolving Loans or to make Investments in Cash Equivalents. Upon a sale of assets or the sale of Capital Stock of a Consolidated Party permitted by this Section 8.5, the Administrative Agent shall (to the extent applicable) deliver to the Credit Parties, upon the Credit Parties' request and at the Credit Parties' expense, such documentation as is reasonably necessary to evidence the release of the Administrative Agent's security interest, if any, in such assets or Capital Stock, including, without limitation, amendments or terminations of UCC financing statements, if any, the return of stock certificates, if any, and the release of such Consolidated Party from all of its obligations, if any, under the Credit Documents. 8.6 INVESTMENTS. The Credit Parties will not permit any Consolidated Party to make Investments in or to any Person, except for Permitted Investments. 8.7 RESTRICTED PAYMENTS. The Credit Parties will not permit any Consolidated Party to, directly or indirectly, declare, order, make or set apart any sum for or pay any Restricted Payment, except (a) to make dividends payable solely in the same class of Capital Stock of such Person, (b) to make dividends or other distributions payable to any Credit Party (directly or indirectly through Subsidiaries) and (c) as permitted by Section 8.8 or Section 8.9. 8.8 OTHER INDEBTEDNESS. The Credit Parties will not permit any Consolidated Party to (a) if any Default or Event of Default has occurred and is continuing or would be directly or indirectly caused as a result thereof, (i) after the issuance thereof, amend or modify (or permit the amendment or modification of) any of the terms of any Indebtedness of such Consolidated Party if such amendment or modification would add or change any terms in a manner adverse to the issuer of such Indebtedness, or shorten the final maturity or average life to maturity or require any payment to be made sooner than 88 94 originally scheduled or increase the interest rate applicable thereto or change any subordination provision thereof, or (ii) make (or give any notice with respect thereto) any voluntary or optional payment or prepayment or redemption or acquisition for value of (including, without limitation, by way of depositing money or securities with the trustee with respect thereto before due for the purpose of paying when due), refund, refinance or exchange of any other Indebtedness of such Consolidated Party, (b) amend or modify (or permit the amendment or modification of) any of the subordination provisions contained in the documents governing any Subordinated Indebtedness of such Consolidated Party, (c) make interest payments in respect of any Subordinated Indebtedness of such Consolidated Party in violation of the subordination provisions contained in the documents governing such Subordinated Indebtedness or (d) make any voluntary or optional payment or prepayment, redemption, acquisition for value or defeasance of, refund, refinance or exchange of, any Subordinated Indebtedness of such Consolidated Party. 8.9 TRANSACTIONS WITH AFFILIATES. Except as set forth on Schedule 8.9, the Credit Parties will not permit any Consolidated Party to enter into or permit to exist any transaction or series of transactions with any officer, director, shareholder, Subsidiary or Affiliate of such Person other than (a) advances of working capital to any Credit Party, (b) transfers of cash and assets to any Credit Party, (c) transactions permitted by Section 8.1, Section 8.4, Section 8.5, Section 8.6, or Section 8.7, (d) normal compensation and reimbursement of expenses of officers and directors, (e) so long as no Default or Event of Default has occurred and is continuing, (i) payments of transaction fees by any Credit Party to KRG Capital Partners, LLC ("KRG"), Infrastructure and Environmental Private Equity Management III, LLC, The Argentum Group and NationsCredit Commercial Corporation on the Closing Date of up to $750,000 and on or prior to the second anniversary of the Closing Date of up to $500,000, (ii) payments of investment banking fees by the Borrower to KRG of up to, or for Acquisitions in excess of $15 million, at least equal to, $100,000 per Acquisition (or such higher amount as is approved by the Borrower's Board of Directors pursuant to the terms of the agreement evidencing such fee arrangement (the "KRG Fee Agreement"), a copy of which has been provided to the Administrative Agent) made by the Borrower during the first two years subsequent to the Closing Date and for each year thereafter, an annual base advisory fee of $250,000 plus such additional fees as are set forth in the KRG Fee Agreement and (iii) payments of investment banking fees by any Credit Party to McGettigan, Wick & Co., Inc. on the Closing Date and on or prior to the second anniversary of the Closing Date of up to $1,250,000 plus such additional fees as are set forth in the agreement evidencing such fee arrangement, a copy of which has been provided to the Administrative Agent and (f) except as otherwise specifically limited in this Credit Agreement, other transactions which are entered into in the ordinary course of such Person's business on terms and conditions substantially as favorable to such Person as would be obtainable by it in a comparable arms-length transaction with a Person other than an officer, director, shareholder, Subsidiary or Affiliate. 8.10 FISCAL YEAR; ORGANIZATIONAL DOCUMENTS. Other than changing the fiscal year end of SPI or any of its Subsidiaries to December 31, the Credit Parties will not permit any Consolidated Party to change its fiscal year or amend, modify or change its articles of incorporation (or corporate charter or other similar organizational document) or bylaws (or other similar document) without the prior written consent of the Required Lenders. 89 95 8.11 LIMITATION ON RESTRICTED ACTIONS. The Credit Parties will not permit any Consolidated Party to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any such Person to (a) pay dividends or make any other distributions to any Credit Party on its Capital Stock or with respect to any other interest or participation in, or measured by, its profits, (b) pay any Indebtedness or other obligation owed to any Credit Party, (c) make loans or advances to any Credit Party, (d) sell, lease or transfer any of its properties or assets to any Credit Party, or (e) act as a Credit Party and pledge its assets pursuant to the Credit Documents or any renewals, refinancings, exchanges, refundings or extension thereof, except (in respect of any of the matters referred to in clauses (a)-(d) above) for such encumbrances or restrictions existing under or by reason of (i) this Credit Agreement and the other Credit Documents, (ii) applicable law or (iii) any Permitted Lien or any document or instrument governing any Permitted Lien, provided that any such restriction contained therein relates only to the asset or assets subject to such Permitted Lien. 8.12 OWNERSHIP OF SUBSIDIARIES; LIMITATIONS ON BORROWER. Notwithstanding any other provisions of this Credit Agreement to the contrary: (a) The Credit Parties will not permit any Consolidated Party to (i) (A) permit any Person (other than the Borrower or any Wholly-Owned Subsidiary of the Borrower) to own any Capital Stock of any Subsidiary of the Borrower (other than Trac Modular Manufacturing, Inc.) or (B) permit any Person (other than the Borrower or any Wholly-Owned Subsidiary of the Borrower) to own more than 20% of the outstanding Capital Stock of Trac Modular Manufacturing, Inc., (ii) permit any Subsidiary of the Borrower to issue Capital Stock (except to the Borrower or to a Wholly-Owned Subsidiary of the Borrower), (iii) permit, create, incur, assume or suffer to exist any Lien thereon, in each case except (A) as a result of or in connection with a dissolution, merger or disposition of a Subsidiary permitted under Section 8.4 or Section 8.5 or (B) for Permitted Liens and (iv) notwithstanding anything to the contrary contained in clause (ii) above, permit any Subsidiary of the Borrower to issue any shares of preferred Capital Stock. (b) Other than cash to pay expenses and to distribute to pay expenses of its Subsidiaries, the Borrower shall not (i) hold any assets other than the Capital Stock of its direct Subsidiaries, (ii) have any liabilities other than (A) the liabilities under the Credit Documents, (B) tax liabilities in the ordinary course of business, (C) loans and advances permitted under Section 8.9, (D) corporate, administrative and operating expenses in the ordinary course of business (including, without limitation, any expenses in connection with any management agreement between or among any combination of the Borrower, KRG Capital Partners, L.L.C. and/or McGettigan, Wick & Co., Inc.) and (E) Subordinated Indebtedness permitted under Section 8.1(f) and (iii) engage in any business other than (A) owning the Capital Stock of its direct Subsidiaries and activities incidental or related thereto and (B) acting as the borrower hereunder and pledging its assets to the Administrative Agent, for the benefit of the Lenders, pursuant to the Collateral Documents to which it is a party. 90 96 8.13 SALE LEASEBACKS. The Credit Parties will not permit any Consolidated Party to, directly or indirectly, become or remain liable as lessee or as guarantor or other surety with respect to any lease, whether an Operating Lease or a Capital Lease, of any Property (whether real, personal or mixed), whether now owned or hereafter acquired, (a) which such Consolidated Party has sold or transferred or is to sell or transfer to a Person which is not a Consolidated Party or (b) which such Consolidated Party intends to use for substantially the same purpose as any other Property which has been sold or is to be sold or transferred by such Consolidated Party to another Person which is not a Consolidated Party in connection with such lease. 8.14 CAPITAL EXPENDITURES. The Credit Party will not permit Consolidated Capital Expenditures for any fiscal year to exceed $4,500,000. 8.15 NO FURTHER NEGATIVE PLEDGES. The Credit Parties will not permit any Consolidated Party to enter into, assume or become subject to any agreement prohibiting or otherwise restricting the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired, or requiring the grant of any security for any obligation if security is given for any other obligation, except (a) pursuant to this Credit Agreement and the other Credit Documents, (b) pursuant to any document or instrument governing Indebtedness incurred pursuant to Section 8.1(c), provided that any such restriction contained therein relates only to the asset or assets constructed or acquired in connection therewith and (c) in connection with any Permitted Lien or any document or instrument governing any Permitted Lien, provided that any such restriction contained therein relates only to the asset or assets subject to such Permitted Lien. 8.16 OPERATING LEASE OBLIGATIONS. The Credit Parties will not permit any Consolidated Party to enter into, assume or permit to exist any obligations for the payment of rental under Operating Leases which in the aggregate for all such Persons would exceed $2,500,000 in any fiscal year. 8.17 NO FOREIGN SUBSIDIARIES. The Credit Parties will not create, acquire or permit to exist any Foreign Subsidiary. 91 97 SECTION 9 EVENTS OF DEFAULT 9.1 EVENTS OF DEFAULT. An Event of Default shall exist upon the occurrence of any of the following specified events (each an "Event of Default"): (a) Payment. Any Credit Party shall (i) default in the payment when due of any principal of any of the Loans or of any reimbursement obligations arising from drawings under Letters of Credit, or (ii) default, and such default shall continue for three (3) or more Business Days, in the payment when due of any interest on the Loans or on any reimbursement obligations arising from drawings under Letters of Credit, or of any Fees or other amounts owing hereunder, under any of the other Credit Documents or in connection herewith or therewith; or (b) Representations. Any representation, warranty or statement made or deemed to be made by any Credit Party herein, in any of the other Credit Documents, or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto shall prove untrue in any material respect on the date as of which it was deemed to have been made; or (c) Covenants. Any Credit Party shall (i) default in the due performance or observance of any term, covenant or agreement contained in Sections 7.2, 7.9, 7.11, 7.12, 7.13 or 8.1 through 8.17, inclusive; (ii) default in the due performance or observance of any term, covenant or agreement contained in Sections 7.1(a), (b), (c) or (d) and such default shall continue unremedied for a period of at least 5 days after the earlier of a responsible officer of a Credit Party becoming aware of such default or notice thereof by the Administrative Agent; or (iii) default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in subsections (a), (b), (c)(i) or (c)(ii) of this Section 9.1) contained in this Credit Agreement or any other Credit Document and such default shall continue unremedied for a period of at least 30 days after the earlier of a responsible officer of a Credit Party becoming aware of such default or notice thereof by the Administrative Agent; or 92 98 (d) Other Credit Documents. Except as a result of or in connection with a dissolution, merger or disposition of a Subsidiary permitted under Section 8.4 or Section 8.5, any Credit Document shall fail to be in full force and effect or to give the Administrative Agent and/or the Lenders the Liens, rights, powers and privileges purported to be created thereby, or any Credit Party shall so state in writing; or (e) Guaranties. Except as the result of or in connection with a dissolution, merger or disposition of a Subsidiary permitted under Section 8.4 or Section 8.5, the guaranty given by any Guarantor hereunder (including any Person after the Closing Date in accordance with Section 7.12) or any provision thereof shall cease to be in full force and effect, or any Guarantor (including any Person after the Closing Date in accordance with Section 7.12) hereunder or any Person acting by or on behalf of such Guarantor shall deny or disaffirm such Guarantor's obligations under such guaranty, or any Guarantor shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to any guaranty; or (f) Bankruptcy, etc. Any Bankruptcy Event shall occur with respect to any Consolidated Party; or (g) Defaults under Other Agreements. (i) Any Consolidated Party shall default in the performance or observance (beyond the applicable grace period with respect thereto, if any) of any obligation or condition of any contract or lease material to the Consolidated Parties taken as a whole, which default could reasonably have a Material Adverse Effect; or (ii) With respect to any Indebtedness (other than Indebtedness outstanding under this Credit Agreement) in excess of $500,000 in the aggregate for the Consolidated Parties taken as a whole, (A) any Consolidated Party shall (1) default in any payment (beyond the applicable grace period with respect thereto, if any) with respect to any such Indebtedness, or (2) the occurrence and continuance of a default in the observance or performance relating to such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event or condition shall occur or condition exist, the effect of which default or other event or condition is to cause, or permit, the holder or holders of such Indebtedness (or trustee or agent on behalf of such holders) to cause (determined without regard to whether any notice or lapse of time is required), any such Indebtedness to become due prior to its stated maturity; or (B) any such Indebtedness shall be declared due and payable, or required to be prepaid other than by a regularly scheduled required prepayment, prior to the stated maturity thereof; or (h) Judgments. One or more judgments or decrees shall be entered against one or more of the Consolidated Parties involving a liability of $500,000 or more in the aggregate (to the extent not paid or fully covered by insurance provided by a carrier who has acknowledged coverage and has the ability to perform) and any such judgments or decrees shall not have been vacated, discharged or stayed or bonded pending appeal within 30 days from the entry thereof; or 93 99 (i) ERISA. Any of the following events or conditions, if such event or condition could have a Material Adverse Effect: (i) any "accumulated funding deficiency," as such term is defined in Section 302 of ERISA and Section 412 of the Code, whether or not waived, shall exist with respect to any Plan, or any lien shall arise on the assets of any Consolidated Party or any ERISA Affiliate in favor of the PBGC or a Plan; (ii) an ERISA Event shall occur with respect to a Single Employer Plan, which is, in the reasonable opinion of the Administrative Agent, likely to result in the termination of such Plan for purposes of Title IV of ERISA; (iii) an ERISA Event shall occur with respect to a Multiemployer Plan or Multiple Employer Plan, which is, in the reasonable opinion of the Administrative Agent, likely to result in (A) the termination of such Plan for purposes of Title IV of ERISA, or (B) any Consolidated Party or any ERISA Affiliate incurring any liability in connection with a withdrawal from, reorganization of (within the meaning of Section 4241 of ERISA), or insolvency or (within the meaning of Section 4245 of ERISA) such Plan; or (iv) any prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) or breach of fiduciary responsibility shall occur which may subject any Consolidated Party or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Code, or under any agreement or other instrument pursuant to which any Consolidated Party or any ERISA Affiliate has agreed or is required to indemnify any person against any such liability; or (j) Ownership. There shall occur a Change of Control. 9.2 ACCELERATION; REMEDIES. Upon the occurrence of an Event of Default, and at any time thereafter unless and until such Event of Default has been waived by the requisite Lenders (pursuant to the voting requirements of Section 11.6) or cured to the satisfaction of the requisite Lenders (pursuant to the voting procedures in Section 11.6), the Administrative Agent shall, upon the request and direction of the Required Lenders, by written notice to the Credit Parties take any of the following actions: (a) Termination of Commitments. Declare the Commitments terminated whereupon the Commitments shall be immediately terminated. (b) Acceleration. Declare the unpaid principal of and any accrued interest in respect of all Loans, any reimbursement obligations arising from drawings under Letters of Credit and any and all other indebtedness or obligations of any and every kind owing by the Credit Parties to the Administrative Agent and/or any of the Lenders hereunder to be due whereupon the same shall be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Credit Parties. (c) Cash Collateral. Direct the Credit Parties to pay (and the Credit Parties agree that upon receipt of such notice, or upon the occurrence of an Event of Default under Section 9.1(f), they will immediately pay) to the Administrative Agent additional cash, to be held by the Administrative Agent, for the benefit of the Lenders, in a cash collateral account as additional security for the LOC Obligations in respect of subsequent drawings under all then outstanding Letters of Credit in an amount equal to the maximum aggregate amount which may be drawn under all Letters of Credits then outstanding. 94 100 (d) Enforcement of Rights. Enforce any and all rights and interests created and existing under the Credit Documents including, without limitation, all rights and remedies existing under the Collateral Documents, all rights and remedies against a Guarantor and all rights of set-off. Notwithstanding the foregoing, if an Event of Default specified in Section 9.1(f) shall occur with respect to the Borrower, then the Commitments shall automatically terminate and all Loans, all reimbursement obligations arising from drawings under Letters of Credit, all accrued interest in respect thereof, all accrued and unpaid Fees and other indebtedness or obligations owing to the Administrative Agent and/or any of the Lenders hereunder automatically shall immediately become due and payable without the giving of any notice or other action by the Administrative Agent or the Lenders. SECTION 10 AGENCY PROVISIONS 10.1 APPOINTMENT, POWERS AND IMMUNITIES. Each Lender hereby irrevocably appoints and authorizes the Administrative Agent to act as its agent under this Credit Agreement and the other Credit Documents with such powers and discretion as are specifically delegated to the Administrative Agent by the terms of this Credit Agreement and the other Credit Documents, together with such other powers as are reasonably incidental thereto. The Administrative Agent (which term as used in this sentence and in Section 10.5 and the first sentence of Section 10.6 hereof shall include its Affiliates and its own and its Affiliates' officers, directors, employees, and agents): (a) shall not have any duties or responsibilities except those expressly set forth in this Credit Agreement and shall not be a trustee or fiduciary for any Lender; (b) shall not be responsible to the Lenders for any recital, statement, representation, or warranty (whether written or oral) made in or in connection with any Credit Document or any certificate or other document referred to or provided for in, or received by any of them under, any Credit Document, or for the value, validity, effectiveness, genuineness, enforceability, or sufficiency of any Credit Document, or any other document referred to or provided for therein or for any failure by any Credit Party or any other Person to perform any of its obligations thereunder; (c) shall not be responsible for or have any duty to ascertain, inquire into, or verify the performance or observance of any covenants or agreements by any Credit Party or the satisfaction of any condition or to inspect the property (including the books and records) of any Credit Party or any of its Subsidiaries or Affiliates; (d) shall not be required to initiate or conduct any litigation or collection proceedings under any Credit Document; and (e) shall not be responsible for any action taken or omitted to be taken by it under or in connection with any Credit Document, except for its own gross negligence or willful misconduct. The Administrative Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. 95 101 10.2 RELIANCE BY ADMINISTRATIVE AGENT. The Administrative Agent shall be entitled to rely upon any certification, notice, instrument, writing, or other communication (including, without limitation, any thereof by telephone or telecopy) believed by it to be genuine and correct and to have been signed, sent or made by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel (including counsel for any Credit Party), independent accountants, and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any Note as the holder thereof for all purposes hereof unless and until the Administrative Agent receives and accepts an Assignment and Acceptance executed in accordance with Section 11.3(b) hereof. As to any matters not expressly provided for by this Credit Agreement, the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders, and such instructions shall be binding on all of the Lenders; provided, however, that the Administrative Agent shall not be required to take any action that exposes the Administrative Agent to personal liability or that is contrary to any Credit Document or applicable law or unless it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking any such action. 10.3 DEFAULTS. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of a Default or Event of Default unless the Administrative Agent has received written notice from a Lender or the a Credit Party specifying such Default or Event of Default and stating that such notice is a "Notice of Default". In the event that the Administrative Agent receives such a notice of the occurrence of a Default or Event of Default, the Administrative Agent shall give prompt notice thereof to the Lenders. The Administrative Agent shall (subject to Section 10.2 hereof) take such action with respect to such Default or Event of Default as shall reasonably be directed by the Required Lenders, provided that, unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interest of the Lenders. 10.4 RIGHTS AS A LENDER. With respect to its Commitment and the Loans made by it, NationsBank (and any successor acting as Administrative Agent) in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Administrative Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. NationsBank (and any successor acting as Administrative Agent) and its Affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to, make investments in, provide services to, and generally engage in any kind of lending, trust, or other business with any Credit Party or any of its Subsidiaries or Affiliates as if it were not acting as Administrative Agent, and NationsBank (and any successor acting as Administrative Agent) and its Affiliates may accept fees and other consideration from any Credit Party or any of its 96 102 Subsidiaries or Affiliates for services in connection with this Credit Agreement or otherwise without having to account for the same to the Lenders. 10.5 INDEMNIFICATION. The Lenders agree to indemnify the Administrative Agent (to the extent not reimbursed under Section 11.5 hereof, but without limiting the obligations of the Credit Parties under such Section) ratably in accordance with their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including attorneys' fees), or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Administrative Agent (including by any Lender) in any way relating to or arising out of any Credit Document or the transactions contemplated thereby or any action taken or omitted by the Administrative Agent under any Credit Document; provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Person to be indemnified. Without limitation of the foregoing, each Lender agrees to reimburse the Administrative Agent promptly upon demand for its ratable share of any costs or expenses payable by the Credit Parties under Section 11.5, to the extent that the Administrative Agent is not promptly reimbursed for such costs and expenses by the Credit Parties. The agreements in this Section 10.5 shall survive the repayment of the Loans, LOC Obligations and other obligations under the Credit Documents and the termination of the Commitments hereunder. 10.6 NON-RELIANCE ON ADMINISTRATIVE AGENT AND OTHER LENDERS. Each Lender agrees that it has, independently and without reliance on the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Credit Parties and their Subsidiaries and decision to enter into this Credit Agreement and that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under the Credit Documents. Except for notices, reports, and other documents and information expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition, or business of any Credit Party or any of its Subsidiaries or Affiliates that may come into the possession of the Administrative Agent or any of its Affiliates. 10.7 SUCCESSOR ADMINISTRATIVE AGENT. The Administrative Agent may resign at any time by giving notice thereof to the Lenders and the Credit Parties and the Administrative Agent may be removed at any time by the Required Lenders for gross negligence or willful misconduct in the performance of its duties hereunder. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within thirty (30) days after the retiring Administrative Agent's giving of notice of resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a commercial bank organized under the laws of the United States having 97 103 combined capital and surplus of at least $100,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor, such successor shall thereupon succeed to and become vested with all the rights, powers, discretion, privileges, and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Section 10 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. SECTION 11 MISCELLANEOUS 11.1 NOTICES. Except as otherwise expressly provided herein, all notices and other communications shall have been duly given and shall be effective (a) when delivered, (b) when transmitted via telecopy (or other facsimile device) to the number set out below, (c) the Business Day following the day on which the same has been delivered prepaid to a reputable national overnight air courier service, or (d) the third Business Day following the day on which the same is sent by certified or registered mail, postage prepaid, in each case to the respective parties at the address, in the case of the Credit Parties and the Administrative Agent, set forth below, and, in the case of the Lenders, set forth on Schedule 2.1(a), or at such other address as such party may specify by written notice to the other parties hereto: if to any Credit Party: Modtech Holdings, Inc. 2830 Barrett Avenue P.O. Box 1240 Perris, CA 92572 Attn: Evan M. Gruber Telephone: (909) 943-4014 Telecopy: (909) 943-9655 if to the Administrative Agent: NationsBank, N. A. Independence Center, 15th Floor NC1-001-15-04 101 North Tryon Street Charlotte, North Carolina 28255 Attn: Agency Services Telephone: (704) 386-9068 Telecopy: (704) 386-8694 98 104 with a copy to: NationsBank, N. A. NationsBank Corporate Center 100 N. Tryon Street Charlotte, NC 28255 Attn: Curtis D. Lueker Telephone: (704) 388-7353 Telecopy: (704) 386-9607 11.2 RIGHT OF SET-OFF; ADJUSTMENTS. Upon the occurrence and during the continuance of any Event of Default, each Lender (and each of its Affiliates) is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender (or any of its Affiliates) to or for the credit or the account of any Credit Party against any and all of the obligations of such Person now or hereafter existing under this Credit Agreement, under the Notes, under any other Credit Document or otherwise, irrespective of whether such Lender shall have made any demand hereunder or thereunder and although such obligations may be unmatured. Each Lender agrees promptly to notify any affected Credit Party after any such set-off and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section 11.2 are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Lender may have. 11.3 BENEFIT OF AGREEMENT. (a) This Credit Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; provided that none of the Credit Parties may assign or transfer any of its interests and obligations without prior written consent of the Lenders; provided further that the rights of each Lender to transfer, assign or grant participations in its rights and/or obligations hereunder shall be limited as set forth in this Section 11.3. (b) Each Lender may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Credit Agreement (including, without limitation, all or a portion of its Loans, its Notes, and its Commitment); provided, however, that (i) each such assignment shall be to an Eligible Assignee; (ii) except in the case of an assignment to another Lender, an Affiliate of an existing Lender or any fund that invests in bank loans and is advised or managed by an investment advisor to an existing Lender or an assignment of all of a Lender's rights and obligations under this Credit Agreement, any such partial assignment shall be in an amount at least equal to $5,000,000 (or, if less, the remaining amount of the Commitment being assigned by such Lender) or an integral multiple of $1,000,000 in excess thereof; 99 105 (iii) each such assignment shall be of a single, and not a varying, percentage of all of the assigning Lender's rights and obligations under this Credit Agreement; and (iv) the parties to such assignment shall execute and deliver to the Administrative Agent for its acceptance an Assignment and Acceptance in the form of Exhibit 11.3(b) hereto, together with any Note subject to such assignment and a processing fee of $3,500. Upon execution, delivery, and acceptance of such Assignment and Acceptance, the assignee thereunder shall be a party hereto and, to the extent of such assignment, have the obligations, rights, and benefits of a Lender hereunder and the assigning Lender shall, to the extent of such assignment, relinquish its rights and be released from its obligations under this Credit Agreement. Upon the consummation of any assignment pursuant to this Section 11.3(b), the assignor, the Administrative Agent and the Credit Parties shall make appropriate arrangements so that, if required, new Notes are issued to the assignor and the assignee. If the assignee is not a United States person under Section 7701(a)(30) of the Code, it shall deliver to the Credit Parties and the Administrative Agent certification as to exemption from deduction or withholding of Taxes in accordance with Section 3.11. (c) The Administrative Agent shall maintain at its address referred to in Section 11.1 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Loans owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Credit Parties, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Credit Agreement. The Register shall be available for inspection by the Credit Parties or any Lender at any reasonable time and from time to time upon reasonable prior notice. Any assignment of any Loan or other Credit Party Obligations shall be effective only upon an entry with respect thereto being made in the Register. (d) Upon its receipt of an Assignment and Acceptance executed by the parties thereto, together with any Note subject to such assignment and payment of the processing fee, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit 11.3(b) hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the parties thereto. (e) Each Lender may sell participations to one or more Persons in all or a portion of its rights, obligations or rights and obligations under this Credit Agreement (including all or a portion of its Commitment or its Loans); provided, however, that (i) such Lender's obligations under this Credit Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participant shall be entitled to the benefit of the yield protection provisions contained in Sections 3.7 through 3.12, inclusive, and the right of set-off 100 106 contained in Section 11.2, and (iv) the Credit Parties shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Credit Agreement, and such Lender shall retain the sole right to enforce the obligations of the Credit Parties relating to the Credit Party Obligations owing to such Lender and to approve any amendment, modification, or waiver of any provision of this Credit Agreement (other than amendments, modifications, or waivers decreasing the amount of principal of or the rate at which interest is payable on such Loans or Notes, extending any scheduled principal payment date or date fixed for the payment of interest on such Loans or Notes, or extending its Commitment). (f) Notwithstanding any other provision set forth in this Credit Agreement, any Lender may at any time assign and pledge all or any portion of its Loans and its Notes (i) to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank or (ii) in the case of any Lender which has made Delayed Draw Term Loans hereunder and is an investment fund, to the trustee under the indenture to which such fund is a party in support of its obligations to such trustee for the benefit of the applicable trust beneficiaries. No such assignment shall release the assigning Lender from its obligations hereunder. (g) Any Lender may furnish any information concerning the Consolidated Parties in the possession of such Lender from time to time to assignees and participants (including prospective assignees and participants), subject, however, to the provisions of Section 11.14 hereof. 11.4 NO WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of the Administrative Agent or any Lender in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Administrative Agent or any Lender and any of the Credit Parties shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies provided herein are cumulative and not exclusive of any rights or remedies which the Administrative Agent or any Lender would otherwise have. No notice to or demand on any Credit Party in any case shall entitle the Credit Parties to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Administrative Agent or the Lenders to any other or further action in any circumstances without notice or demand. 11.5 EXPENSES; INDEMNIFICATION. (a) The Credit Parties jointly and severally agree to pay on demand all costs and expenses of the Administrative Agent and NMS in connection with the negotiation, syndication, preparation, execution, delivery, administration, modification, and amendment of this Credit Agreement, the other Credit Documents, and the other documents to be delivered hereunder, including, without limitation, the reasonable fees and expenses of counsel for the Administrative Agent (including the cost of internal counsel) with respect thereto and with respect to advising the Administrative Agent as to its rights and responsibilities under the Credit Documents. The Credit Parties further 101 107 jointly and severally agree to pay on demand all costs and expenses of the Administrative Agent, NMS and the Lenders, if any (including, without limitation, reasonable attorneys' fees and expenses and the cost of internal counsel), in connection with (i) the enforcement (whether through negotiations, legal proceedings, or otherwise) of the Credit Documents and the other documents to be delivered hereunder, (ii) any bankruptcy or insolvency proceeding of a Credit Party or any of its Subsidiaries and (iii) upon the occurrence and during the continuance of an Event of Default, any work-out, renegotiation or restructuring of the Credit Facilities relating to the performance of the Credit Parties under the Credit Documents. (b) The Credit Parties jointly and severally agree to indemnify and hold harmless the Administrative Agent, NMS and each Lender and each of their Affiliates and their respective officers, directors, employees, agents, and advisors (each, an "Indemnified Party") from and against any and all claims, damages, losses, liabilities, costs, and expenses (including, without limitation, reasonable attorneys' fees) that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including, without limitation, in connection with any investigation, litigation, or proceeding or preparation of defense in connection therewith) the Credit Documents, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Loans, except to the extent such claim, damage, loss, liability, cost, or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 11.5 applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by any of the Credit Parties, their respective directors, shareholders or creditors or an Indemnified Party or any other Person or any Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated hereby are consummated. The Credit Parties agree not to assert any claim against the Administrative Agent, NMS, any Lender, any of their Affiliates, or any of their respective directors, officers, employees, attorneys, agents, and advisers, on any theory of liability, for special, indirect, consequential, or punitive damages arising out of or otherwise relating to the Credit Documents, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Loans. (c) Without prejudice to the survival of any other agreement of the Credit Parties hereunder, the agreements and obligations of the Credit Parties contained in this Section 11.5 shall survive the repayment of the Loans, LOC Obligations and other obligations under the Credit Documents and the termination of the Commitments hereunder. 11.6 AMENDMENTS, WAIVERS AND CONSENTS. Neither this Credit Agreement nor any other Credit Document nor any of the terms hereof or thereof may be amended, changed, waived, discharged or terminated unless such amendment, change, waiver, discharge or termination is in writing entered into by, or approved in writing by, the Required Lenders and the Borrower, provided, however, that: 102 108 (a) without the consent of each Lender affected thereby, neither this Credit Agreement nor any other Credit Document may be amended to (i) extend the final maturity of any Loan or of any reimbursement obligation, or any portion thereof, arising from drawings under Letters of Credit, or extend or waive any Principal Amortization Payment of any Loan, or any portion thereof, (ii) reduce the rate or extend the time of payment of interest (other than as a result of waiving the applicability of any post-default increase in interest rates) thereon or Fees hereunder, (iii) reduce or waive the principal amount of any Loan or of any reimbursement obligation, or any portion thereof, arising from drawings under Letters of Credit, (iv) increase the Commitment of a Lender over the amount thereof in effect (it being understood and agreed that a waiver of any Default or Event of Default or mandatory reduction in the Commitments shall not constitute a change in the terms of any Commitment of any Lender), (v) except as the result of or in connection with an Asset Disposition permitted by Section 8.5, release all or substantially all of the Collateral, (vi) except as the result of or in connection with a dissolution, merger or disposition of a Consolidated Party permitted under Section 8.4, release the Borrower or substantially all of the other Credit Parties from its or their obligations under the Credit Documents, (vii) amend, modify or waive any provision of this Section 11.6 or Section 3.6, 3.7, 3.8, 3.9, 3.10, 3.11, 3.12, 3.13, 3.14, 3.15, 9.1(a), 11.2, 11.3, 11.5 or 11.9, (viii) reduce any percentage specified in, or otherwise modify, the definition of Required Lenders, or (ix) consent to the assignment or transfer by the Borrower or all or substantially all of the other Credit Parties of any of its or their rights and obligations under (or in respect of) the Credit Documents except as permitted thereby; (b) without the consent of the Administrative Agent, no provision of Section 10 may be amended; (c) without the consent of the Issuing Lender, no provision of Section 2.2 may be amended; and 103 109 (d) without the consent of the Swingline Lender, no provision of Section 2.3 may be amended. Notwithstanding the fact that the consent of all the Lenders is required in certain circumstances as set forth above, (x) each Lender is entitled to vote as such Lender sees fit on any bankruptcy reorganization plan that affects the Loans, and each Lender acknowledges that the provisions of Section 1126(c) of the Bankruptcy Code supersedes the unanimous consent provisions set forth herein and (y) the Required Lenders may consent to allow a Credit Party to use cash collateral in the context of a bankruptcy or insolvency proceeding. 11.7 COUNTERPARTS. This Credit Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. It shall not be necessary in making proof of this Credit Agreement to produce or account for more than one such counterpart for each of the parties hereto. Delivery by facsimile by any of the parties hereto of an executed counterpart of this Credit Agreement shall be as effective as an original executed counterpart hereof and shall be deemed a representation that an original executed counterpart hereof will be delivered. 11.8 HEADINGS. The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Credit Agreement. 11.9 SURVIVAL. All indemnities set forth herein, including, without limitation, in Section 2.2(i), 3.11, 3.12, 10.5 or 11.5 shall survive the execution and delivery of this Credit Agreement, the making of the Loans, the issuance of the Letters of Credit, the repayment of the Loans, LOC Obligations and other obligations under the Credit Documents and the termination of the Commitments hereunder, and all representations and warranties made by the Credit Parties herein shall survive delivery of the Notes and the making of the Loans hereunder. 11.10 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE. (a) THIS CREDIT AGREEMENT AND, UNLESS OTHERWISE EXPRESSLY PROVIDED THEREIN, THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA. Any legal action or proceeding with respect to this Credit Agreement or any other Credit Document may be brought in the courts of the State of North Carolina in Mecklenburg County, or of the United States for the Western District of North Carolina, and, by execution and delivery of this Credit Agreement, each of the Credit Parties hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the nonexclusive jurisdiction of such courts. Each of the Credit Parties further irrevocably 104 110 consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at the address set out for notices pursuant to Section 11.1, such service to become effective three (3) days after such mailing. Nothing herein shall affect the right of the Administrative Agent or any Lender to serve process in any other manner permitted by law or to commence legal proceedings or to otherwise proceed against any Credit Party in any other jurisdiction. (b) Each of the Credit Parties hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Credit Agreement or any other Credit Document brought in the courts referred to in subsection (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. (c) TO THE EXTENT PERMITTED BY LAW, EACH OF THE AGENT, THE LENDERS, EACH OF THE CREDIT PARTIES HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS CREDIT AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY. 11.11 SEVERABILITY. If any provision of any of the Credit Documents is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions. 11.12 ENTIRETY. This Credit Agreement together with the other Credit Documents represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements and understandings, oral or written, if any, including any commitment letters or correspondence relating to the Credit Documents or the transactions contemplated herein and therein. 11.13 BINDING EFFECT; TERMINATION. (a) This Credit Agreement shall become effective at such time on or after the Closing Date when it shall have been executed by each Credit Party and the Administrative Agent, and the Administrative Agent shall have received copies hereof (telefaxed or otherwise) which, when taken together, bear the signatures of each Lender, and thereafter this Credit Agreement shall be binding upon and inure to the benefit of each Credit Party, the Administrative Agent and each Lender and their respective successors and assigns. (b) The term of this Credit Agreement shall be until no Loans, LOC Obligations or any other amounts payable hereunder or under any of the other Credit Documents shall remain outstanding, no Letters of Credit shall be outstanding, all of the Credit Party 105 111 Obligations have been irrevocably satisfied in full and all of the Commitments hereunder shall have expired or been terminated. 11.14 CONFIDENTIALITY. The Administrative Agent and each Lender (each, a "Lending Party") agrees to keep confidential any information furnished or made available to it by the Credit Parties pursuant to this Credit Agreement to the same extent that it affords such protection to its own proprietary information; provided that nothing herein shall prevent any Lending Party from disclosing such information (a) to any other Lending Party or any Affiliate of any Lending Party, or any officer, director, employee, agent, or advisor of any Lending Party or Affiliate of any Lending Party, (b) to any other Person if reasonably incidental to the administration of the Credit Facilities, (c) as required by any law, rule, or regulation, (d) upon the order of any court or administrative agency, (e) upon the request or demand of any regulatory agency or authority, (f) that is or becomes available to the public or that is or becomes available to any Lending Party other than as a result of a disclosure by any Lending Party prohibited by this Credit Agreement, (g) in connection with any litigation to which such Lending Party or any of its Affiliates may be a party, (h) to the extent necessary in connection with the exercise of any remedy under this Credit Agreement or any other Credit Document, (i) to the National Association of Insurance Commissioners or any similar organization or any nationally recognized rating agency that requires access to information about a Lender's investment portfolio in connection with ratings issued with respect to such Lender, (j) to any direct or indirect contractual counterparty in swap agreements or such contractual counterparty's professional advisor (so long as such contractual counterparty or professional advisor to such contractual counterparty (i) has been approved in writing by the Borrower and (ii) agrees in a writing enforceable by the Borrower to be bound by the provisions of this Section 11.14) and (k) subject to provisions substantially similar to those contained in this Section 11.14, to any actual or proposed participant or assignee. 11.15 SOURCE OF FUNDS. Each of the Lenders hereby represents and warrants to the Borrower that at least one of the following statements is an accurate representation as to the source of funds to be used by such Lender in connection with the financing hereunder: (a) no part of such funds constitutes assets allocated to any separate account maintained by such Lender in which any employee benefit plan (or its related trust) has any interest; (b) to the extent that any part of such funds constitutes assets allocated to any separate account maintained by such Lender, such Lender has disclosed to the Borrower the name of each employee benefit plan whose assets in such account exceed 10% of the total assets of such account as of the date of such purchase (and, for purposes of this subsection (b), all employee benefit plans maintained by the same employer or employee organization are deemed to be a single plan); (c) to the extent that any part of such funds constitutes assets of an insurance company's general account, such insurance company has complied with all of the requirements of the regulations issued under Section 401(c)(1)(A) of ERISA; or 106 112 (d) such funds constitute assets of one or more specific benefit plans which such Lender has identified in writing to the Borrower. As used in this Section 11.15, the terms "employee benefit plan" and "separate account" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 11.16 CONFLICT. To the extent that there is a conflict or inconsistency between any provision hereof, on the one hand, and any provision of any Credit Document, on the other hand, this Credit Agreement shall control. [Signature Page to Follow] 107 113 IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Credit Agreement to be duly executed and delivered as of the date first above written. BORROWER: MODTECH HOLDINGS, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ GUARANTORS: MODTECH, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ SPI HOLDINGS, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ SPI MANUFACTURING, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ OFFICE MASTER OF TEXAS, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ ROSEWOOD ENTERPRISES, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ 114 TRAC MODULAR MANUFACTURING, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ A SPACE, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ 115 LENDERS: NATIONSBANK, N. A., individually in its capacity as a Lender and in its capacity as Administrative Agent By:_________________________________________ Name:_______________________________________ Title:______________________________________ 116 UNION BANK OF CALIFORNIA, N.A. By:_________________________________________ Name:_______________________________________ Title:______________________________________ 117 LASALLE NATIONAL BANK By:_________________________________________ Name:_______________________________________ Title:______________________________________ 118 NATIONAL CITY BANK By:_________________________________________ Name:_______________________________________ Title:______________________________________ 119 SANWA BANK CALIFORNIA By:_________________________________________ Name:_______________________________________ Title:______________________________________ 120 MELLON BANK, N.A. By:_________________________________________ Name:_______________________________________ Title:______________________________________ 121 FLEET CAPITAL CORPORATION By:_________________________________________ Name:_______________________________________ Title:______________________________________ 122 IMPERIAL BANK By:_________________________________________ Name:_______________________________________ Title:______________________________________ 123 HARRIS TRUST AND SAVINGS BANK By:_________________________________________ Name:_______________________________________ Title:______________________________________ 124 SCHEDULE 1.1A INVESTMENTS 125 SCHEDULE 1.1B LIENS 126 SCHEDULE 2.1(a) LENDER ADDRESSES AND COMMITMENTS NATIONSBANK, N.A. MELLON BANK, N.A. Lynn Cole William R. Murray Agency Services 400 South Hope Street Independence Center, 15th Floor Fifth Floor Charlotte, NC 28255 Los Angeles, CA 90071 Phone: (704) 386-9068 Phone: (213) 553-9563 Fax: (704) 388-9436 Fax: (213) 629-0484 FLEET CAPITAL CORPORATION NATIONAL CITY BANK Jim Karnowski Joshua Sosland 15260 Ventura Blvd., Suite 400 1900 East 9th Street Sherman Oaks, CA 91403 Mail Locator 2077 Phone: (818) 382-4230 Cleveland, OH 44114 Fax: (818) 382-4291 Phone: (216) 575-9995 Fax: (216) 222-0003 HARRIS TRUST AND SAVINGS BANK SANWA BANK CALIFORNIA Bonnie Ogden Stephen J. Popovich 111 W. Monroe Street 9000 E. Valley Blvd. Chicago, IL 60603 Rosemead, CA 91770 Phone: (312) 461-7817 Phone: (626) 312-5741 Fax: (312) 293-5041 Fax: (626) 312-5751 IMPERIAL BANK UNION BANK OF CALIFORNIA, N.A. Jamie Harney Jon Strayer 9920 S. La Cienega Blvd., 14th Floor 445 South Figueroa St. Inglewood, CA 90301 Los Angeles, CA 90071 Phone: (310) 417-5656 Phone: (213) 236-7760 Fax: (310) 417-5997 Fax: (213) 236-7635 LASALLE NATIONAL BANK Michael Kriz 135 S. LaSalle, Suite 307 Chicago, IL 60603 Phone: (312) 904-2148 Fax: (312) 904-4605 127
- ------------------------------------------------------------------------------------------------------------------------- Revolving Tranche A Term Revolving Commitment Tranche A Term Loan Commitment Delayed Draw Term Lenders Commitment Percentage Loan Commitment Percentage Loan Commitment - ------------------------------------------------------------------------------------------------------------------------- NationsBank, N.A. $ 3,900,000 13.0% $ 5,850,000 13.0% $ 3,250,000 - ------------------------------------------------------------------------------------------------------------------------- Fleet Capital Corporation $ 3,300,000 11.0% $ 4,950,000 11.0% $ 2,750,000 - ------------------------------------------------------------------------------------------------------------------------- Harris Trust and Savings $ 3,300,000 11.0% $ 4,950,000 11.0% $ 2,750,000 Bank - ------------------------------------------------------------------------------------------------------------------------- Imperial Bank $ 3,300,000 11.0% $ 4,950,000 11.0% $ 2,750,000 - ------------------------------------------------------------------------------------------------------------------------- LaSalle National Bank $ 3,300,000 11.0% $ 4,950,000 11.0% $ 2,750,000 - ------------------------------------------------------------------------------------------------------------------------- Mellon Bank, N.A. $ 3,300,000 11.0% $ 4,950,000 11.0% $ 2,750,000 - ------------------------------------------------------------------------------------------------------------------------- Sanwa Bank California $ 3,300,000 11.0% $ 4,950,000 11.0% $ 2,750,000 - ------------------------------------------------------------------------------------------------------------------------- Union Bank of $ 3,300,000 11.0% $ 4,950,000 11.0% $ 2,750,000 California, N.A. - ------------------------------------------------------------------------------------------------------------------------- National City Bank $ 3,000,000 10.0% $ 4,500,000 10.0% $ 2,500,000 - ------------------------------------------------------------------------------------------------------------------------- Total: $30,000,000 100% $45,000,000 100% $25,000,000 - -------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------- Delayed Draw Term Loan Commitment Total Commitment Lenders Percentage Total Commitment Percentage - ---------------------------------------------------------------------------------- NationsBank, N.A. 13.0% $ 13,000,000 13.0% - ---------------------------------------------------------------------------------- Fleet Capital Corporation 11.0% $ 11,000,000 11.0% - ---------------------------------------------------------------------------------- Harris Trust and Savings 11.0% $ 11,000,000 11.0% Bank - ---------------------------------------------------------------------------------- Imperial Bank 11.0% $ 11,000,000 11.0% - ---------------------------------------------------------------------------------- LaSalle National Bank 11.0% $ 11,000,000 11.0% - ---------------------------------------------------------------------------------- Mellon Bank, N.A. 11.0% $ 11,000,000 11.0% - ---------------------------------------------------------------------------------- Sanwa Bank California 11.0% $ 11,000,000 11.0% - ---------------------------------------------------------------------------------- Union Bank of 11.0% $ 11,000,000 11.0% California, N.A. - ---------------------------------------------------------------------------------- National City Bank 10.0% $ 10,000,000 10.0% - ---------------------------------------------------------------------------------- Total: 100% $100,000,000 100% - ----------------------------------------------------------------------------------
128 SCHEDULE 5.1(c)(i) FORM OF LEGAL OPINION (GENERAL EXTERNAL COUNSEL) [Letterhead of General External Counsel] February 16, 1999 To the Lenders party to the Credit Agreement referred to below and NationsBank, N.A., as Administrative Agent thereunder Ladies and Gentlemen: We have acted as counsel to Modtech Holdings, Inc., a Delaware corporation (the "Borrower"), Modtech, Inc., a California corporation ("Modtech"), SPI Holdings, Inc., a Colorado corporation ("SPI"), the Subsidiaries of Modtech and SPI (together with Modtech and SPI, the "Guarantors"; the Guarantors, together with the Borrower, individually a "Credit Party" and collectively the "Credit Parties") in connection with the Credit Agreement dated as of the date hereof among the Borrower, the Guarantors, the Lenders party thereto and NationsBank, N.A., as Administrative Agent for such Lenders (the "Credit Agreement"). We are rendering the opinions set forth herein at the request of the Lenders in accordance with Section 5.1(c)(i) of the Credit Agreement. Capitalized terms used herein and not otherwise defined shall have the meanings assigned thereto in the Credit Agreement. In rendering this opinion, we have reviewed the following documents: (1) The Credit Agreement; (2) Each of the Notes; (3) The Security Agreement; (4) The Pledge Agreement; (5) The Mortgage Instruments; (6) The UCC-1 Financing Statement(s) executed by the Credit Parties in connection with the Colorado Mortgage Instruments (the "Fixture Financing Statements"); 129 (7) The UCC-1 Financing Statements executed by the Credit Parties (the "Code Collateral Financing Statements" and together with the Fixture Financing Statements, the "UCC Financing Statements") in connection with the Security Agreement; The documents referenced in numbers (1) through (7) above are collectively referred to as the "Credit Documents." In rendering the opinions expressed below, we have examined the Documents and originals or copies, certified or otherwise identified to our satisfaction, of such corporate records, agreements, documents and other instruments, and such certificates or comparable documents of public officials and of officers and representatives of the Credit Parties, and have made such inquiries of such officers and representatives, as we have deemed relevant and necessary as a basis for the opinions hereinafter set forth. In such examination, we have assumed the genuineness of all signatures (other than signatures on behalf of the Credit Parties to the Documents), the authenticity of all documents (other than the Documents) submitted to us as originals, the conformity to original documents of documents submitted to us as certified or photostatic copies and the authenticity of the originals of such latter documents. In rendering the opinion set forth in paragraph 5 below, we have assumed, to the extent that matters covered by such opinion would be governed by the laws of any jurisdiction other than the State of Colorado or the United States of America or the General Corporation Law of the State of Delaware, that the laws of such other jurisdiction are identical to the laws of the State of Colorado. The opinions set forth in paragraphs 1, 2, 3 and 4 below do not cover the following Credit Parties: Office Master of Texas, Inc., Rosewood Enterprises, Inc. and Trac Modular Manufacturing, Inc. Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that: 1. Each of the Credit Parties is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation. 2. Each of the Credit Parties has the corporate power and authority, and legal right, to own its properties and assets, to lease the property and assets it operates as lessee and to carry on its business as now being conducted, and is qualified to do business and in good standing in its state of incorporation and each other jurisdiction where it is required to be qualified and in good standing by the nature of its business. 3. Each of the Credit Parties has the corporate power and authority to execute, deliver and perform each of the Documents to which it is a party and has taken all proper and 130 necessary corporate action to authorize the execution, delivery and performance of the Documents to which it is a party. 4. Each of the Documents has been duly executed and delivered by each of the Credit Parties which is a party thereto. 5. Each of the Documents constitutes the legal, valid and binding obligation of each of the Credit Parties which is a party thereto, enforceable against each such Person in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors rights and remedies generally, including (without limitation) applicable fraudulent transfer laws, and subject, as to enforceability, to general principles of equity including (without limitation) concepts of materiality, reasonableness, good faith and fair dealing, and other similar doctrines affecting the enforceability of agreements generally (regardless of whether considered in a proceeding in equity or law). 6. The authorized capital stock and the issued and outstanding shares of stock of each of the direct and indirect Subsidiaries of the Borrower as set forth in Schedule 1 attached hereto constitute, after giving effect to the Merger, all of the authorized, issued and outstanding shares of stock of all of the direct and indirect Subsidiaries of the Borrower, and all of such issued and outstanding shares of stock are owned by such Persons as set forth in such schedule. All of the Pledged Shares (as defined in the Pledge Agreement) have been duly authorized and validly issued and are fully paid and non-assessable. 7. The Pledge Agreement creates a legal, valid and enforceable security interest in favor of the Administrative Agent in the Pledged Collateral (as defined in the Pledge Agreement). 8. Assuming continued possession by the Administrative Agent of the stock certificates representing the Pledged Shares, the Administrative Agent's security interests in the Pledged Shares constitute first priority, perfected security interests. 9. The execution, delivery and performance by each of the Credit Parties of the Documents to which it is a party, the borrowings under the Credit Documents, the use of the proceeds of the Loans and the consummation of the Merger, (i) will not conflict with or violate any Colorado, Delaware corporate or federal law or regulation, or the organic documents or bylaws or similar documents of any Credit Party, (ii) will not be in conflict with, result in a breach of or constitute an event of default, nor an event which, with the giving of notice or lapse of time or both, would constitute such an event of default, under any indenture, agreement or instrument known to us to which any Credit Party is a party and (iii) will not result in the creation or imposition of any Lien of any nature whatsoever upon any of the properties or assets of any Credit Party other than Permitted Liens. 10. No consent, approval, waiver, license, authorization or application or other action by or filing with any Colorado, Delaware or federal Governmental Authority is required in 131 connection with the execution, delivery or performance by any Credit Party of the Documents to which it is a party, except for those already obtained or made. 11. To our knowledge, there are no judicial, administrative or arbitration orders, awards or proceedings pending or threatened against or affecting any Credit Party in any court or before any Governmental Authority or arbitration board or tribunal that, if adversely determined, could reasonably have a Material Adverse Effect. 12. None of the Credit Parties is an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended, or controlled by such a company, or a "holding company," or a "Subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "Subsidiary company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 13. The execution and delivery of the Security Agreement by each Credit Party which is a party thereto creates a valid lien on and a security interest in the "Collateral" (as such term is defined in the Security Agreement) of each such Person covered thereby, to the extent the validity of a lien or security interest in the Collateral of each such Person is covered by Article 9 of the Uniform Commercial Code (the "UCC") in effect in the State of Colorado (the "Collateral State"), as security for the Secured Obligations referred to therein. With respect to each Credit Party which has its chief executive offices and/or principal place of business in the Collateral State and/or which owns (now or hereafter) any Collateral covered by Article 9 of the UCC of the Collateral State, the lien and security interest arising under the Security Agreement shall be duly perfected (to the extent a lien or security interest in Collateral owned (now or hereafter) by each such Person may be perfected by the filing of a financing statement under the UCC of the Collateral State) by the filing of the financing statements on Form UCC-1 in the offices in the jurisdictions indicated on Schedule 2 for each such Person. No opinion is expressed herein with respect to conflicts of law, choice of law, forum selection, severability, title to any property, the enforceability of any indemnification or liquidated damages provision. The opinions herein are limited to the laws of the State of Colorado, the General Corporation Law of the State of Delaware and the federal laws of the United States, except to the extent that, with respect to the opinion set forth in paragraph 5 above, we have assumed as provided above that such laws are identical to those of the State of Colorado. This opinion has been rendered solely for your benefit in connection with the transactions described above and may not be used, circulated, quoted, relied upon or otherwise referred to for any other purpose without our prior written consent; provided, however, that this opinion may be delivered to your regulators, accountants, attorneys and other professional advisers and may be used in connection with any legal or regulatory proceeding relating to the subject matter of this opinion; provided further, that any person that becomes a Lender pursuant to the transfer provisions of the Credit Agreement may rely upon this opinion as if it were addressed to such person and delivered on the date hereof. 132 This opinion speaks solely as of its date. We assume no obligation to inform the addressee, or any other person who is entitled to rely on this opinion, of any change in fact or law subsequent to the date hereof. Very truly yours, 133 Schedule 1 [Ownership of the Borrower's Subsidiaries] Schedule 2 [Locations for UCC-1 Filings] 134 SCHEDULE 5.1(c)(ii) FORM OF LEGAL OPINION (LOCAL CORPORATE COUNSEL) [Letterhead of Local Corporate Counsel] February 16, 1999 To the Lenders party to the Credit Agreement referred to below and NationsBank, N.A., as Administrative Agent thereunder Re: Modtech Holdings, Inc. Ladies and Gentlemen: We have acted as special [State of Incorporation] counsel to ____________, a [State of Incorporation] corporation (the "Company"), in connection with the Credit Agreement dated as of the date hereof (the "Credit Agreement") among Modtech Holdings, Inc., a Delaware corporation (the "Borrower"), certain guarantors party thereto (each a "Guarantor", and together, with the Borrower, individually a "Credit Party" and collectively the "Credit Parties"), the several lenders from time to time party thereto (the "Lenders"), and NationsBank, N.A., as administrative agent for the Lenders (in such capacity, the "Administrative Agent"). This opinion is being delivered at the request of the Credit Parties pursuant to Section 5.1(c)(ii) of the Credit Agreement. Capitalized terms used herein but not otherwise defined herein shall have the respective meanings accorded such terms in the Credit Agreement. In rendering the opinions expressed below, we have examined executed copies of the Credit Agreement, the other Credit Documents [and the Merger Documents] (collectively, the "Documents") and originals or copies, certified or otherwise identified to our satisfaction, of such corporate records, agreements, documents and other instruments, and such certificates or comparable documents of public officials and of officers and/or representatives of the Company, and have made such inquiries of such officers and/or representatives as we have deemed relevant and necessary as a basis for the opinions hereinafter set forth. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of documents 135 submitted to us as certified or photostatic copies and the authenticity of the originals of such latter documents. Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that: 1. The Company is a corporation duly organized and validly existing under the laws of the State of [State of Incorporation], has the corporate power and authority, and legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, and is qualified to do business and in good standing in the State of [State of Incorporation]. 2. The Company has the corporate power and authority to execute, deliver and perform each of the Documents to which it is a party, and the Company has taken all proper and necessary corporate action to authorize the execution, delivery and performance of each of the Documents to which it is a party. 3. The Company has duly executed and delivered each of the Documents to which it is a party. 4. Neither the execution and delivery of the Documents by the Company, nor the consummation by it of the transactions contemplated therein, will (a) violate or conflict with any provision of the articles of incorporation, bylaws or other organization documents of the Company, or (b) violate, contravene or materially conflict with any [State of Incorporation] or federal law, regulation (including, without limitation, Regulation U or Regulation X), order, writ, judgment, injunction, decree or permit applicable to the Company. 5. No consent, approval, authorization or order of, or filing, registration or qualification with, any [State of Incorporation] Governmental Authority in respect of the Company is required in connection with the execution, delivery or performance of the Documents by the Company. [6. The merger of the Company into [Merger Sub], a Delaware corporation (the "Merger"), has been consummated in accordance with all requirements of the California General Corporate Code (including, without limitation, the filing of a certificate of merger and other required items with the Secretary of State of the State of California) and the Merger has become effective under the California General Corporate Code.] The opinions herein are limited to the laws of [State of Incorporation] and federal laws, and we express no opinion as to the effect on the matters covered by this opinion of the laws of any other jurisdiction. This opinion is rendered solely for your benefit in connection with the transactions described above. This opinion may not be used or relied upon by any other person, and may not be disclosed, quoted, filed with a governmental agency or otherwise referred to without our prior 136 written consent except to your bank examiners, auditors and counsel and to prospective transferees of your interests under the Credit Agreement and their professional advisers, or as required by law or pursuant to legal process. Very truly yours, 137 SCHEDULE 5.1(c)(iii) FORM OF LEGAL OPINION (LOCAL COLLATERAL COUNSEL) [Letterhead of Local Collateral Counsel] February 16, 1999 To the Lenders party to the Credit Agreement referred to below and NationsBank, N.A., as Administrative Agent thereunder Re: Modtech Holdings, Inc. Ladies and Gentlemen: We have acted as special <> counsel to ______________, a ________ corporation (the "Company"), in connection with the Credit Agreement dated as of February 16, 1999 (the "Credit Agreement"), among Modtech Holdings, Inc., a Delaware corporation ("Borrower"), certain subsidiaries of the Borrower (each a "Guarantor", and together, with the Borrower, individually a "Credit Party and collectively the "Credit Parties"), the several Lenders from time to time party thereto and NationsBank, N.A., as Administrative Agent ("NationsBank"), the other Credit Documents referred to and defined therein and the transactions contemplated by the Credit Agreement and the other Credit Documents. This opinion is being delivered at the request of the Credit Parties pursuant to Section 5.1(c)(iii) of the Credit Agreement. Capitalized terms used herein but not otherwise defined herein shall have the respective meanings accorded such terms in the Credit Agreement. In rendering the opinions expressed below, we have examined executed copies of the Credit Agreement, the Security Agreement referred to and defined therein (the "Security Agreement") and the Mortgage Instruments referred to and defined therein for the locations identified on Schedule 2 attached hereto (the "<> Mortgage Instruments") and originals or copies, certified or otherwise identified to our satisfaction, of such corporate records, agreements, documents and other instruments, and such certificates or comparable documents of public officials and of officers and/or representatives of the Company, and have made such inquiries of such officers and/or representatives as we have deemed relevant and necessary as a basis for the opinions hereinafter set forth. 138 In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents (other than the Credit Agreement, the Security Agreement and the <> Mortgage Instruments) submitted to us as originals, the conformity to original documents of documents submitted to us as certified or photostatic copies and the authenticity of the originals of such latter documents. Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that: 1. The execution and delivery of the Security Agreement by the Company creates in favor of the Administrative Agent a valid lien on and a security interest in the "Collateral" (as such term is defined in the Security Agreement), to the extent the validity of a lien or security interest in the Collateral is covered by Article 9 of the Uniform Commercial Code in effect in <> (the "<> UCC"), as security for the Secured Obligations referred to therein. Assuming the filing of the financing statements on Form UCC-1 in the offices in the jurisdictions indicated on Schedule 1, such lien and security interest is duly perfected to the extent a lien or security interest in the Collateral owned (now or hereafter) by the Company may be perfected by the filing of a financing statement under the <> UCC. 2. Each <> Mortgage is in proper form for recording in the State of <> and upon recordation of each Mortgage Instrument, as appropriate, such Mortgage Instrument will provide the Administrative Agent, for the benefit of the Lenders, with a valid lien on the property described therein. 3. Assuming that the matter would be governed by the laws of the State of <>, each of the Security Agreement and the <> Mortgage Instruments constitutes a legal, valid and binding obligation of each Credit Party which is a party thereto, enforceable against such Person in accordance with its terms. The opinions herein are limited to the laws of <>, and we express no opinion as to the effect on the matters covered by this opinion of the laws of any other jurisdiction. This opinion is rendered solely for your benefit in connection with the transactions described above. This opinion may not be used or relied upon by any other person, and may not be disclosed, quoted, filed with a governmental agency or otherwise referred to without our prior written consent except to your bank examiners, auditors and counsel and to prospective transferees of your interests under the Credit Agreement and their professional advisers, or as required by law or pursuant to legal process. Very truly yours, 139 SCHEDULE 1 Name of Corporation Filing Office - ------------------- ------------- 140 SCHEDULE 2 Mortgage Instruments 141 SCHEDULE 5.1(e) MORTGAGED PROPERTIES 142 SCHEDULE 5.1(h) CORPORATE STRUCTURE 143 SCHEDULE 6.4 REQUIRED CONSENTS, AUTHORIZATIONS, NOTICES AND FILINGS 144 SCHEDULE 6.9 LITIGATION 145 SCHEDULE 6.12 ERISA 146 SCHEDULE 6.13 SUBSIDIARIES 147 SCHEDULE 6.16 ENVIRONMENTAL DISCLOSURES 148 SCHEDULE 6.17 INTELLECTUAL PROPERTY 149 SCHEDULE 6.20(a) MORTGAGED PROPERTIES 150 SCHEDULE 6.20(b) COLLATERAL LOCATIONS 151 SCHEDULE 6.20(c) CHIEF EXECUTIVE OFFICES/ PRINCIPAL PLACES OF BUSINESS 152 SCHEDULE 6.23 BROKER'S FEES 153 SCHEDULE 6.24 LABOR MATTERS 154 SCHEDULE 7.6 INSURANCE 155 SCHEDULE 8.1 INDEBTEDNESS 156 EXHIBIT 1.1A FORM OF PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (this "Pledge Agreement") is entered into as of February 16, 1999 among MODTECH HOLDINGS, INC., a Delaware corporation (the "Borrower"), certain Subsidiaries of the Borrower (individually a "Guarantor", and collectively the "Guarantors"; together with the Borrower, individually a "Pledgor", and collectively the "Pledgors") and NATIONSBANK, N.A., in its capacity as administrative agent (in such capacity, the "Administrative Agent") for the lenders from time to time party to the Credit Agreement described below (the "Lenders"). RECITALS WHEREAS, pursuant to that certain Credit Agreement dated as of the date hereof (as amended, modified, extended, renewed or replaced from time to time, the "Credit Agreement") among the Borrower, the Guarantors, the Lenders and the Administrative Agent, the Lenders have agreed to make Loans and issue Letters of Credit upon the terms and subject to the conditions set forth therein; and WHEREAS, it is a condition precedent to the effectiveness of the Credit Agreement and the obligations of the Lenders to make their respective Loans and to issue Letters of Credit under the Credit Agreement that the Pledgors shall have executed and delivered this Pledge Agreement to the Administrative Agent for the ratable benefit of the Lenders. NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Credit Agreement. For purposes of this Pledge Agreement, the term "Lender" shall include any Affiliate of any Lender which has entered into a Hedging Agreement with any Credit Party. 2. Pledge and Grant of Security Interest. To secure the prompt payment and performance in full when due, whether by lapse of time or otherwise, of the Pledgor Obligations (as defined in Section 3 hereof), each Pledgor hereby pledges and assigns to the Administrative Agent, for the benefit of the Lenders, and grants to the Administrative Agent, for the benefit of the Lenders, a continuing security interest in any and all right, title and interest of such Pledgor in and to the following, whether now owned or existing or owned, acquired, or arising hereafter (collectively, the "Pledged Collateral"): (a) Pledged Shares. (i) 100% (or, if less, the full amount owned by such Pledgor) of the issued and outstanding shares of capital stock owned by such Pledgor of each domestic Subsidiary set forth on Schedule 2(a) attached hereto and (ii) 65% (or, if 157 less, the full amount owned by such Pledgor) of the issued and outstanding shares of each class of capital stock or other ownership interests entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) ("Voting Equity") and 100% (or, if less, the full amount owned by such Pledgor) of the issued and outstanding shares of each class of capital stock or other ownership interests not entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) ("Non-Voting Equity") owned by such Pledgor of each Foreign Subsidiary set forth on Schedule 2(a) attached hereto, in each case together with the certificates (or other agreements or instruments), if any, representing such shares, and all options and other rights, contractual or otherwise, with respect thereto (collectively, together with the shares of capital stock described in Section 2(b) and 2(c) below, the "Pledged Shares"), including, but not limited to, the following: (y) all shares or securities representing a dividend on any of the Pledged Shares, or representing a distribution or return of capital upon or in respect of the Pledged Shares, or resulting from a stock split, revision, reclassification or other exchange therefor, and any subscriptions, warrants, rights or options issued to the holder of, or otherwise in respect of, the Pledged Shares; and (z) without affecting the obligations of the Pledgors under any provision prohibiting such action hereunder or under the Credit Agreement, in the event of any consolidation or merger involving the issuer of any Pledged Shares and in which such issuer is not the surviving corporation, all shares of each class of the capital stock of the successor corporation formed by or resulting from such consolidation or merger. (b) Additional Shares. 100% (or, if less, the full amount owned by such Pledgor) of the issued and outstanding shares of capital stock owned by such Pledgor of any Person which hereafter becomes a domestic Subsidiary and 65% (or, if less, the full amount owned by such Pledgor) of the Voting Equity and 100% (or, if less, the full amount owned by such Pledgor) of the Non-Voting Equity owned by such Pledgor of any Person which hereafter becomes a Foreign Subsidiary, including, without limitation, the certificates representing such shares. (c) Proceeds. All proceeds and products of the foregoing, however and whenever acquired and in whatever form. Without limiting the generality of the foregoing, it is hereby specifically understood and agreed that a Pledgor may from time to time hereafter deliver additional shares of stock to the Administrative Agent as collateral security for the Pledgor Obligations. Upon delivery to the Administrative Agent, such additional shares of stock shall be deemed to be part of the Pledged Collateral of such Pledgor and shall be subject to the terms of this Pledge Agreement whether or not Schedule 2(a) is amended to refer to such additional shares. 3. Security for Pledgor Obligations. The security interest created hereby in the Pledged Collateral of each Pledgor constitutes continuing collateral security for all of the Credit 2 158 Party Obligations, now existing or hereafter arising pursuant to the Credit Documents, owing from the Borrower or any other Credit Party to any Lender, any Affiliate of a Lender or the Administrative Agent, howsoever evidenced, created, incurred or acquired, whether primary, secondary, direct, contingent, or joint and several, including, without limitation, all liabilities arising under Hedging Agreements between any Pledgor and any Lender, or any Affiliate of a Lender, and all obligations and liabilities incurred in connection with collecting and enforcing the foregoing (collectively, the "Pledgor Obligations"). 4. Delivery of the Pledged Collateral. Each Pledgor hereby agrees that: (a) Each Pledgor shall deliver to the Administrative Agent (i) simultaneously with or prior to the execution and delivery of this Pledge Agreement, all certificates representing the Pledged Shares of such Pledgor and (ii) promptly upon the receipt thereof by or on behalf of a Pledgor, all other certificates and instruments constituting Pledged Collateral of a Pledgor. Prior to delivery to the Administrative Agent, all such certificates and instruments constituting Pledged Collateral of a Pledgor shall be held in trust by such Pledgor for the benefit of the Administrative Agent pursuant hereto. All such certificates shall be delivered in suitable form for transfer by delivery or shall be accompanied by duly executed instruments of transfer or assignment in blank, substantially in the form provided in Exhibit 4(a) attached hereto. (b) Additional Securities. If such Pledgor shall receive by virtue of its being or having been the owner of any Pledged Collateral, any (i) stock certificate, including without limitation, any certificate representing a stock dividend or distribution in connection with any increase or reduction of capital, reclassification, merger, consolidation, sale of assets, combination of shares, stock splits, spin-off or split-off, promissory notes or other instrument; (ii) option or right, whether as an addition to, substitution for, or an exchange for, any Pledged Collateral or otherwise; (iii) dividends payable in securities; or (iv) distributions of securities in connection with a partial or total liquidation, dissolution or reduction of capital, capital surplus or paid-in surplus, then such Pledgor shall receive such stock certificate, instrument, option, right or distribution in trust for the benefit of the Administrative Agent, shall segregate it from such Pledgor's other property and shall deliver it forthwith to the Administrative Agent in the exact form received together with any necessary endorsement and/or appropriate stock power duly executed in blank, substantially in the form provided in Exhibit 4(a), to be held by the Administrative Agent as Pledged Collateral and as further collateral security for the Pledgor Obligations. (c) Financing Statements. Each Pledgor shall execute and deliver to the Administrative Agent such UCC or other applicable financing statements as may be reasonably requested by the Administrative Agent in order to perfect and protect the security interest created hereby in the Pledged Collateral of such Pledgor. 5. Representations and Warranties. Each Pledgor hereby represents and warrants to the Administrative Agent, for the benefit of the Lenders, that so long as any of the Pledgor Obligations remain outstanding or any Credit Document or any Hedging Agreement between any 3 159 Pledgor and any Lender, or any Affiliate of a Lender, is in effect or any Letter of Credit shall remain outstanding, and until all of the Commitments shall have been terminated: (a) Authorization of Pledged Shares. The Pledged Shares are duly authorized and validly issued, are fully paid and nonassessable and are not subject to the preemptive rights of any Person. All other shares of stock constituting Pledged Collateral will be duly authorized and validly issued, fully paid and nonassessable and not subject to the preemptive rights of any Person. (b) Title. Each Pledgor has good and indefeasible title to the Pledged Collateral of such Pledgor and will at all times be the legal and beneficial owner of such Pledged Collateral free and clear of any Lien, other than Permitted Liens. There exists no "adverse claim" within the meaning of Section 8-302 of the Uniform Commercial Code as in effect in the State of North Carolina as of the date hereof (the "UCC") with respect to the Pledged Shares of such Pledgor. (c) Exercising of Rights. The exercise by the Administrative Agent of its rights and remedies hereunder will not violate any law or governmental regulation or any material contractual restriction binding on or affecting a Pledgor or any of its property. (d) Pledgor's Authority. No authorization, approval or action by, and no notice or filing with any Governmental Authority or with the issuer of any Pledged Stock is required either (i) for the pledge made by a Pledgor or for the granting of the security interest by a Pledgor pursuant to this Pledge Agreement or (ii) for the exercise by the Administrative Agent or the Lenders of their rights and remedies hereunder (except as may be required by laws affecting the offering and sale of securities). (e) Security Interest/Priority. This Pledge Agreement creates a valid security interest in favor of the Administrative Agent for the benefit of the Lenders, in the Pledged Collateral. The taking possession by the Administrative Agent of the certificates representing the Pledged Shares and all other certificates and instruments constituting Pledged Collateral will perfect and establish the first priority of the Administrative Agent's security interest in the Pledged Shares and, when properly perfected by filing or registration, in all other Pledged Collateral represented by such Pledged Shares and instruments securing the Pledgor Obligations. Except as set forth in this Section 5(e), no action is necessary to perfect or otherwise protect such security interest. (f) No Other Shares. No Pledgor owns any shares of stock other than as set forth on Schedule 2(a) attached hereto. 6. Covenants. Each Pledgor hereby covenants, that so long as any of the Pledgor Obligations remain outstanding or any Credit Document or Hedging Agreement between any Pledgor and any Lender, or any Affiliate of a Lender, is in effect or any Letter of Credit shall remain outstanding, and until all of the Commitments shall have been terminated, such Pledgor shall: 4 160 (a) Books and Records. Mark its books and records (and shall cause the issuer of the Pledged Shares of such Pledgor to mark its books and records) to reflect the security interest granted to the Administrative Agent, for the benefit of the Lenders, pursuant to this Pledge Agreement. (b) Defense of Title. Warrant and defend title to and ownership of the Pledged Collateral of such Pledgor at its own expense against the claims and demands of all other parties claiming an interest therein, keep the Pledged Collateral free from all Liens, except for Permitted Liens, and not sell, exchange, transfer, assign, lease or otherwise dispose of Pledged Collateral of such Pledgor or any interest therein, except as permitted under the Credit Agreement and the other Credit Documents. (c) Further Assurances. Promptly execute and deliver at its expense all further instruments and documents and take all further action that may be necessary and desirable or that the Administrative Agent may reasonably request in order to (i) perfect and protect the security interest created hereby in the Pledged Collateral of such Pledgor (including without limitation any and all action necessary to satisfy the Administrative Agent that the Administrative Agent has obtained a first priority perfected security interest in any capital stock); (ii) enable the Administrative Agent to exercise and enforce its rights and remedies hereunder in respect of the Pledged Collateral of such Pledgor; and (iii) otherwise effect the purposes of this Pledge Agreement, including, without limitation and if requested by the Administrative Agent, delivering to the Administrative Agent irrevocable proxies in respect of the Pledged Collateral of such Pledgor. (d) Amendments. Not make or consent to any amendment or other modification or waiver with respect to any of the Pledged Collateral of such Pledgor or enter into any agreement or allow to exist any restriction with respect to any of the Pledged Collateral of such Pledgor other than pursuant hereto or as may be permitted under the Credit Agreement. (e) Compliance with Securities Laws. File all reports and other information now or hereafter required to be filed by such Pledgor with the United States Securities and Exchange Commission and any other state, federal or foreign agency in connection with the ownership of the Pledged Collateral of such Pledgor. 7. Advances by Lenders. On failure of any Pledgor to perform any of the covenants and agreements contained herein, the Administrative Agent may, at its sole option and in its sole discretion, perform the same and in so doing may expend such sums as the Administrative Agent may reasonably deem advisable in the performance thereof, including, without limitation, the payment of any insurance premiums, the payment of any taxes, a payment to obtain a release of a Lien or potential Lien, expenditures made in defending against any adverse claim and all other expenditures which the Administrative Agent or the Lenders may make for the protection of the security hereof or which may be compelled to make by operation of law. All such sums and amounts so expended shall be repayable by the Pledgors on a joint and several basis promptly upon timely notice thereof and demand therefor, shall constitute additional Pledgor Obligations and shall bear interest from the date said amounts are expended at the default rate specified in Section 3.1 of 5 161 the Credit Agreement for Revolving Loans that are Base Rate Loans. No such performance of any covenant or agreement by the Administrative Agent or the Lenders on behalf of any Pledgor, and no such advance or expenditure therefor, shall relieve the Pledgors of any default under the terms of this Pledge Agreement, the other Credit Documents or any Hedging Agreement between any Pledgor and any Lender, or any Affiliate of a Lender. The Lenders may make any payment hereby authorized in accordance with any bill, statement or estimate procured from the appropriate public office or holder of the claim to be discharged without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax assessment, sale, forfeiture, tax lien, title or claim except to the extent such payment is being contested in good faith by a Pledgor in appropriate proceedings and against which adequate reserves are being maintained in accordance with GAAP. 8. Events of Default. The occurrence of an event which under the Credit Agreement would constitute an Event of Default shall be an Event of Default hereunder (an "Event of Default"). 9. Remedies. (a) General Remedies. Upon the occurrence of an Event of Default and during the continuation thereof, the Administrative Agent and the Lenders shall have, in respect of the Pledged Collateral of any Pledgor, in addition to the rights and remedies provided herein, in the Credit Documents, in the Hedging Agreements between any Pledgor and any Lender, or any Affiliate of a Lender, or by law, the rights and remedies of a secured party under the UCC or any other applicable law. (b) Sale of Pledged Collateral. Upon the occurrence of an Event of Default and during the continuation thereof, without limiting the generality of this Section and without notice, the Administrative Agent may, in its sole discretion, sell or otherwise dispose of or realize upon the Pledged Collateral, or any part thereof, in one or more parcels, at public or private sale, at any exchange or broker's board or elsewhere, at such price or prices and on such other terms as the Administrative Agent may deem commercially reasonable, for cash, credit or for future delivery or otherwise in accordance with applicable law. To the extent permitted by law, any Lender may in such event, bid for the purchase of such securities. Each Pledgor agrees that, to the extent notice of sale shall be required by law and has not been waived by such Pledgor, any requirement of reasonable notice shall be met if notice, specifying the place of any public sale or the time after which any private sale is to be made, is personally served on or mailed, postage prepaid, to such Pledgor, in accordance with the notice provisions of Section 11.1 of the Credit Agreement at least 10 days before the time of such sale. The Administrative Agent shall not be obligated to make any sale of Pledged Collateral of such Pledgor regardless of notice of sale having been given. The Administrative Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (c) Private Sale. Upon the occurrence of an Event of Default and during the continuation thereof, the Pledgors recognize that the Administrative Agent may deem it 6 162 impracticable to effect a public sale of all or any part of the Pledged Shares or any of the securities constituting Pledged Collateral and that the Administrative Agent may, therefore, determine to make one or more private sales of any such securities to a restricted group of purchasers who will be obligated to agree, among other things, to acquire such securities for their own account, for investment and not with a view to the distribution or resale thereof. Each Pledgor acknowledges that any such private sale may be at prices and on terms less favorable to the seller than the prices and other terms which might have been obtained at a public sale and, notwithstanding the foregoing, agrees that such private sale shall be deemed to have been made in a commercially reasonable manner and that the Administrative Agent shall have no obligation to delay sale of any such securities for the period of time necessary to permit the issuer of such securities to register such securities for public sale under the Securities Act of 1933. Each Pledgor further acknowledges and agrees that any offer to sell such securities which has been (i) publicly advertised on a bona fide basis in a newspaper or other publication of general circulation in the financial community of New York, New York (to the extent that such offer may be advertised without prior registration under the Securities Act of 1933), or (ii) made privately in the manner described above shall be deemed to involve a "public sale" under the UCC, notwithstanding that such sale may not constitute a "public offering" under the Securities Act of 1933, and the Administrative Agent may, in such event, bid for the purchase of such securities. (d) Retention of Pledged Collateral. In addition to the rights and remedies hereunder, upon the occurrence of an Event of Default, the Administrative Agent may, after providing the notices required by Section 9-505(2) of the UCC or otherwise complying with the requirements of applicable law of the relevant jurisdiction, retain all or any portion of the Pledged Collateral in satisfaction of the Pledgor Obligations. Unless and until the Administrative Agent shall have provided such notices, however, the Administrative Agent shall not be deemed to have retained any Pledged Collateral in satisfaction of any Pledgor Obligations for any reason. (e) Deficiency. In the event that the proceeds of any sale, collection or realization are insufficient to pay all amounts to which the Administrative Agent or the Lenders are legally entitled, the Pledgors shall be jointly and severally liable for the deficiency, together with interest thereon at the default rate specified in Section 3.1 of the Credit Agreement for Revolving Loans that are Base Rate Loans, together with the costs of collection and the reasonable fees of any attorneys employed by the Administrative Agent to collect such deficiency. Any surplus remaining after the full payment and satisfaction of the Pledgor Obligations shall be returned to the Pledgors or to whomsoever a court of competent jurisdiction shall determine to be entitled thereto. 10. Rights of the Administrative Agent. (a) Power of Attorney. In addition to other powers of attorney contained herein, each Pledgor hereby designates and appoints the Administrative Agent, on behalf of the Lenders, and each of its designees or agents as attorney-in-fact of such Pledgor, 7 163 irrevocably and with power of substitution, with authority to take any or all of the following actions upon the occurrence and during the continuance of an Event of Default: (i) to demand, collect, settle, compromise, adjust and give discharges and releases concerning the Pledged Collateral of such Pledgor, all as the Administrative Agent may reasonably determine; (ii) to commence and prosecute any actions at any court for the purposes of collecting any of the Pledged Collateral of such Pledgor and enforcing any other right in respect thereof; (iii) to defend, settle or compromise any action brought and, in connection therewith, give such discharge or release as the Administrative Agent may deem reasonably appropriate; (iv) to pay or discharge taxes, liens, security interests, or other encumbrances levied or placed on or threatened against the Pledged Collateral of such Pledgor; (v) to direct any parties liable for any payment under any of the Pledged Collateral to make payment of any and all monies due and to become due thereunder directly to the Administrative Agent or as the Administrative Agent shall direct; (vi) to receive payment of and receipt for any and all monies, claims, and other amounts due and to become due at any time in respect of or arising out of any Pledged Collateral of such Pledgor; (vii) to sign and endorse any drafts, assignments, proxies, stock powers, verifications, notices and other documents relating to the Pledged Collateral of such Pledgor; (viii) to settle, compromise or adjust any suit, action or proceeding described above and, in connection therewith, to give such discharges or releases as the Administrative Agent may deem reasonably appropriate; (ix) execute and deliver all assignments, conveyances, statements, financing statements, renewal financing statements, pledge agreements, affidavits, notices and other agreements, instruments and documents that the Administrative Agent may determine necessary in order to perfect and maintain the security interests and liens granted in this Pledge Agreement and in order to fully consummate all of the transactions contemplated therein; (x) to exchange any of the Pledged Collateral of such Pledgor or other property upon any merger, consolidation, reorganization, recapitalization or other readjustment of the issuer thereof and, in connection therewith, deposit any of the 8 164 Pledged Collateral of such Pledgor with any committee, depository, transfer agent, registrar or other designated agency upon such terms as the Administrative Agent may determine; (xi) to vote for a shareholder resolution, or to sign an instrument in writing, sanctioning the transfer of any or all of the Pledged Shares of such Pledgor into the name of the Administrative Agent or one or more of the Lenders or into the name of any transferee to whom the Pledged Shares of such Pledgor or any part thereof may be sold pursuant to Section 10 hereof; and (xii) to do and perform all such other acts and things as the Administrative Agent may reasonably deem to be necessary, proper or convenient in connection with the Pledged Collateral of such Pledgor. This power of attorney is a power coupled with an interest and shall be irrevocable (i) for so long as any of the Pledgor Obligations remain outstanding, any Credit Document or any Hedging Agreement between any Pledgor and any Lender, or any Affiliate of a Lender, is in effect or any Letter of Credit shall remain outstanding and (ii) until all of the Commitments shall have been terminated. The Administrative Agent shall be under no duty to exercise or withhold the exercise of any of the rights, powers, privileges and options expressly or implicitly granted to the Administrative Agent in this Pledge Agreement, and shall not be liable for any failure to do so or any delay in doing so. The Administrative Agent shall not be liable for any act or omission or for any error of judgment or any mistake of fact or law in its individual capacity or its capacity as attorney-in-fact except acts or omissions resulting from its gross negligence or willful misconduct. This power of attorney is conferred on the Administrative Agent solely to protect, preserve and realize upon its security interest in Pledged Collateral. (b) Performance by the Administrative Agent of Pledgor's Obligations. If any Pledgor fails to perform any agreement or obligation contained herein, the Administrative Agent itself may perform, or cause performance of, such agreement or obligation, and the expenses of the Administrative Agent incurred in connection therewith shall be payable by the Pledgors on a joint and several basis pursuant to Section 13 hereof. (c) Assignment by the Administrative Agent. The Administrative Agent may from time to time assign the Pledgor Obligations and any portion thereof and/or the Pledged Collateral and any portion thereof, and the assignee shall be entitled to all of the rights and remedies of the Administrative Agent under this Pledge Agreement in relation thereto. (d) The Administrative Agent's Duty of Care. Other than the exercise of reasonable care to assure the safe custody of the Pledged Collateral while being held by the Administrative Agent hereunder, the Administrative Agent shall have no duty or liability to preserve rights pertaining thereto, it being understood and agreed that Pledgors shall be responsible for preservation of all rights in the Pledged Collateral of such Pledgor, and the Administrative Agent shall be relieved of all responsibility for 9 165 Pledged Collateral upon surrendering it or tendering the surrender of it to the Pledgors. The Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equal to that which the Administrative Agent accords its own property, which shall be no less than the treatment employed by a reasonable and prudent agent in the industry, it being understood that the Administrative Agent shall not have responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Pledged Collateral, whether or not the Administrative Agent has or is deemed to have knowledge of such matters; or (ii) taking any necessary steps to preserve rights against any parties with respect to any Pledged Collateral. (e) Voting Rights in Respect of the Pledged Collateral. (i) So long as no Event of Default shall have occurred and be continuing, to the extent permitted by law, each Pledgor may exercise any and all voting and other consensual rights pertaining to the Pledged Collateral of such Pledgor or any part thereof for any purpose not inconsistent with the terms of this Pledge Agreement or the Credit Agreement; and (ii) Upon the occurrence and during the continuance of an Event of Default, all rights of a Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to paragraph (i) of this Section shall cease and all such rights shall thereupon become vested in the Administrative Agent which shall then have the sole right to exercise such voting and other consensual rights. (f) Dividend Rights in Respect of the Pledged Collateral. (i) So long as no Event of Default shall have occurred and be continuing and subject to Section 4(b) hereof, each Pledgor may receive and retain any and all dividends (other than stock dividends and other dividends constituting Pledged Collateral which are addressed hereinabove) or interest paid in respect of the Pledged Collateral to the extent they are allowed under the Credit Agreement. (ii) Upon the occurrence and during the continuance of an Event of Default: (A) all rights of a Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to paragraph (i) of this Section shall cease and all such rights shall thereupon be vested in the Administrative Agent which shall then have the sole right to receive and hold as Pledged Collateral such dividends and interest payments; and 10 166 (B) all dividends and interest payments which are received by a Pledgor contrary to the provisions of paragraph (A) of this Section shall be received in trust for the benefit of the Administrative Agent, shall be segregated from other property or funds of such Pledgor, and shall be forthwith paid over to the Administrative Agent as Pledged Collateral in the exact form received, to be held by the Administrative Agent as Pledged Collateral and as further collateral security for the Pledgor Obligations. (g) Release of Pledged Collateral. The Administrative Agent may release any of the Pledged Collateral from this Pledge Agreement or may substitute any of the Pledged Collateral for other Pledged Collateral without altering, varying or diminishing in any way the force, effect, lien, pledge or security interest of this Pledge Agreement as to any Pledged Collateral not expressly released or substituted, and this Pledge Agreement shall continue as a first priority lien on all Pledged Collateral not expressly released or substituted. 11. Rights of Required Lenders. All rights of the Administrative Agent hereunder, if not exercised by the Administrative Agent, may be exercised by the Required Lenders. 12. Application of Proceeds. Upon the occurrence and during the continuance of an Event of Default, any payments in respect of the Pledgor Obligations and any proceeds of any Pledged Collateral, when received by the Administrative Agent or any of the Lenders in cash or its equivalent, will be applied in reduction of the Pledgor Obligations in the order set forth in Section 3.15(b) of the Credit Agreement, and each Pledgor irrevocably waives the right to direct the application of such payments and proceeds and acknowledges and agrees that the Administrative Agent shall have the continuing and exclusive right to apply and reapply any and all such payments and proceeds in the Administrative Agent's sole discretion, notwithstanding any entry to the contrary upon any of its books and records. 13. Costs of Counsel. At all times hereafter, the Pledgors agree to promptly pay upon demand any and all reasonable costs and expenses of the Administrative Agent or the Lenders, (a) as required under Section 11.5 of the Credit Agreement and (b) as necessary to protect the Pledged Collateral or to exercise any rights or remedies under this Pledge Agreement or with respect to any Pledged Collateral. All of the foregoing costs and expenses shall constitute Pledgor Obligations hereunder. 14. Continuing Agreement. (a) This Pledge Agreement shall be a continuing agreement in every respect and shall remain in full force and effect so long as any of the Pledgor Obligations remain outstanding or any Credit Document or Hedging Agreement between any Pledgor and any Lender, or any Affiliate of a Lender, is in effect or any Letter of Credit shall remain outstanding, and until all of the Commitments thereunder shall have terminated (other than any obligations with respect to the indemnities and the representations and warranties set forth in the Credit Documents). Upon such payment and termination, this Pledge Agreement shall be automatically terminated and the Administrative Agent and the 11 167 Lenders shall, upon the request and at the expense of the Pledgors, forthwith release all of its liens and security interests hereunder and shall executed and deliver all UCC termination statements and/or other documents reasonably requested by the Pledgors evidencing such termination. Notwithstanding the foregoing all releases and indemnities provided hereunder shall survive termination of this Pledge Agreement. (b) This Pledge Agreement shall continue to be effective or be automatically reinstated, as the case may be, if at any time payment, in whole or in part, of any of the Pledgor Obligations is rescinded or must otherwise be restored or returned by the Administrative Agent or any Lender as a preference, fraudulent conveyance or otherwise under any bankruptcy, insolvency or similar law, all as though such payment had not been made; provided that in the event payment of all or any part of the Pledgor Obligations is rescinded or must be restored or returned, all reasonable costs and expenses (including without limitation any reasonable legal fees and disbursements) incurred by the Administrative Agent or any Lender in defending and enforcing such reinstatement shall be deemed to be included as a part of the Pledgor Obligations. 15. Amendments; Waivers; Modifications. This Pledge Agreement and the provisions hereof may not be amended, waived, modified, changed, discharged or terminated except as set forth in Section 11.6 of the Credit Agreement. 16. Successors in Interest. This Pledge Agreement shall create a continuing security interest in the Collateral and shall be binding upon each Pledgor, its successors and assigns and shall inure, together with the rights and remedies of the Administrative Agent and the Lenders hereunder, to the benefit of the Administrative Agent and the Lenders and their successors and permitted assigns; provided, however, that none of the Pledgors may assign its rights or delegate its duties hereunder without the prior written consent of each Lender or the Required Lenders, as required by the Credit Agreement. To the fullest extent permitted by law, each Pledgor hereby releases the Administrative Agent and each Lender, and its successors and assigns, from any liability for any act or omission relating to this Pledge Agreement or the Collateral, except for any liability arising from the gross negligence or willful misconduct of the Administrative Agent, or such Lender, or its officers, employees or agents. 17. Notices. All notices required or permitted to be given under this Pledge Agreement shall be in conformance with Section 11.1 of the Credit Agreement. 18. Counterparts. This Pledge Agreement may be executed in any number of counterparts, each of which where so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. It shall not be necessary in making proof of this Pledge Agreement to produce or account for more than one such counterpart. 19. Headings. The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Pledge Agreement. 12 168 20. Governing Law; Submission to Jurisdiction; Venue. (a) THIS PLEDGE AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA. Any legal action or proceeding with respect to this Security Agreement may be brought in the courts of the State of North Carolina, or of the United States for the Western District of North Carolina, and, by execution and delivery of this Security Agreement, each Pledgor hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of such courts. Each Pledgor further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at the address for notices pursuant to Section 11.1 of the Credit Agreement, such service to become effective 30 days after such mailing. Nothing herein shall affect the right of the Administrative Agent to serve process in any other manner permitted by law or to commence legal proceedings or to otherwise proceed against any Pledgor in any other jurisdiction. (b) Each Pledgor hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Pledge Agreement brought in the courts referred to in subsection (a) hereof and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. 21. Waiver of Jury Trial. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES TO THIS PLEDGE AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS PLEDGE AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 22. Severability. If any provision of this Pledge Agreement is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions. 23. Entirety. This Pledge Agreement, the other Credit Documents and the Hedging Agreements between any Pledgor and any Lender, or any Affiliate of a Lender, represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements and understandings, oral or written, if any, including any commitment letters or correspondence relating to the Credit Documents, the Hedging Agreements between any Pledgor and any Lender, or any Affiliate of a Lender, or the transactions contemplated herein and therein. 24. Survival. All representations and warranties of the Pledgors hereunder shall survive the execution and delivery of this Pledge Agreement, the other Credit Documents and the Hedging Agreements between any Pledgor and any Lender, or any Affiliate of a Lender, the 13 169 delivery of the Notes and the making of the Loans and the issuance of the Letters of Credit under the Credit Agreement. 25. Other Security. To the extent that any of the Pledgor Obligations are now or hereafter secured by property other than the Pledged Collateral (including, without limitation, real and other personal property owned by a Pledgor), or by a guarantee, endorsement or property of any other Person, then the Administrative Agent and the Lenders shall have the right to proceed against such other property, guarantee or endorsement upon the occurrence of any Event of Default, and the Administrative Agent and the Lenders have the right, in their sole discretion, to determine which rights, security, liens, security interests or remedies the Administrative Agent and the Lenders shall at any time pursue, relinquish, subordinate, modify or take with respect thereto, without in any way modifying or affecting any of them or any of the Administrative Agent's and the Lenders' rights or the Pledgor Obligations under this Pledge Agreement, under any other of the Credit Documents or under any Hedging Agreement between any Pledgor and any Lender, or any Affiliate of a Lender. 26. Joint and Several Obligations of Pledgors. (a) Each of the Pledgors is accepting joint and several liability hereunder in consideration of the financial accommodation to be provided by the Lenders under the Credit Agreement, for the mutual benefit, directly and indirectly, of each of the Pledgors and in consideration of the undertakings of each of the Pledgors to accept joint and several liability for the obligations of each of them. (b) Each of the Pledgors jointly and severally hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Pledgors with respect to the payment and performance of all of the Pledgor Obligations arising under this Pledge Agreement, the other Credit Documents and the Hedging Agreements between any Pledgor and any Lender, or any Affiliate of a Lender, it being the intention of the parties hereto that all the Pledgor Obligations shall be the joint and several obligations of each of the Pledgors without preferences or distinction among them. (c) Notwithstanding any provision to the contrary contained herein, in any other of the Credit Documents or in any Hedging Agreement between any Pledgor and any Lender, or any Affiliate of a Lender, the obligations of each Guarantor under the Credit Agreement and the other Credit Documents shall be limited to an aggregate amount equal to the largest amount that would not render such obligations subject to avoidance under Section 548 of the Bankruptcy Code or any comparable provisions of any applicable state law. [remainder of page intentionally left blank] 14 170 Each of the parties hereto has caused a counterpart of this Pledge Agreement to be duly executed and delivered as of the date first above written. BORROWER: MODTECH HOLDINGS, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ GUARANTORS: MODTECH, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ SPI HOLDINGS, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ SPI MANUFACTURING, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ OFFICE MASTER OF TEXAS, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ ROSEWOOD ENTERPRISES, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ 15 171 TRAC MODULAR MANUFACTURING, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ A SPACE, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ Accepted and agreed to as of the date first above written. NATIONSBANK, N.A., as Administrative Agent By:_________________________________________ Name:_______________________ Title:______________________ 16 172 Schedule 2(a) to Pledge Agreement dated as of February 16, 1999 in favor of NationsBank, N.A. as Administrative Agent PLEDGED STOCK
PLEDGOR: Modtech Holdings, Inc. Name of Subsidiary Number of Shares Certificate Number Percentage Ownership - ------------------ ---------------- ------------------ -------------------- Modtech, Inc. 100% SPI Holdings, Inc. 100% PLEDGOR: Modtech, Inc. Name of Subsidiary Number of Shares Certificate Number Percentage Ownership - ------------------ ---------------- ------------------ -------------------- A Space, Inc. 100% Trac Modular Manufacturing, Inc. 80% PLEDGOR: SPI Holdings, Inc. Name of Subsidiary Number of Shares Certificate Number Percentage Ownership - ------------------ ---------------- ------------------ -------------------- SPI Manufacturing, Inc. 100%
17 173
PLEDGOR: SPI Manufacturing, Inc. Name of Subsidiary Number of Shares Certificate Number Percentage Ownership - ------------------ ---------------- ------------------ -------------------- Office Master of Texas, Inc. 100% Rosewood Enterprises, Inc. 100%
18 174 Exhibit 4(a) to Pledge Agreement dated as of February 16, 1999 in favor of NationsBank, N.A. as Administrative Agent Irrevocable Stock Power FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers to the following shares of capital stock of _____________________, a ____________ corporation: No. of Shares Certificate No. ------------- --------------- and irrevocably appoints __________________________________ its agent and attorney-in-fact to transfer all or any part of such capital stock and to take all necessary and appropriate action to effect any such transfer. The agent and attorney-in-fact may substitute and appoint one or more persons to act for him. ____________________________________________ By:_________________________________________ Name:_______________________________________ Title:______________________________________ 19 175 EXHIBIT 1.1B FORM OF SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Security Agreement") is entered into as of February 16, 1999 among MODTECH HOLDINGS, INC., a Delaware corporation (the "Borrower"), certain Subsidiaries of the Borrower (individually a "Guarantor" and collectively the "Guarantors"; together with the Borrower, individually an "Obligor", and collectively the "Obligors") and NATIONSBANK, N.A., in its capacity as administrative agent (in such capacity, the "Administrative Agent") for the lenders from time to time party to the Credit Agreement described below (the "Lenders"). RECITALS WHEREAS, pursuant to that certain Credit Agreement, dated as of the date hereof (as amended, modified, extended, renewed or replaced from time to time, the "Credit Agreement"), among the Borrower, the Guarantors, the Lenders and the Administrative Agent, the Lenders have agreed to make Loans and issue Letters of Credit upon the terms and subject to the conditions set forth therein; and WHEREAS, it is a condition precedent to the effectiveness of the Credit Agreement and the obligations of the Lenders to make their respective Loans and to issue Letters of Credit under the Credit Agreement that the Obligors shall have executed and delivered this Security Agreement to the Administrative Agent for the ratable benefit of the Lenders. NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. (a) Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Credit Agreement, and the following terms which are defined in the Uniform Commercial Code in effect in the State of North Carolina on the date hereof are used herein as so defined: Accounts, Chattel Paper, Deposit Accounts, Documents, Equipment, Farm Products, Fixtures, General Intangibles, Instruments, Inventory, Investment Property and Proceeds. For purposes of this Security Agreement, the term "Lender" shall include any Affiliate of any Lender which has entered into a Hedging Agreement with any Credit Party. (b) In addition, the following terms shall have the following meanings: "Copyright Licenses": any written agreement, naming any Obligor as licensor, granting any right under any Copyright, including, without limitation, any thereof referred to in Schedule 1(b) hereto. 176 "Copyrights": (a) all registered United States copyrights in all Works, now existing or hereafter created or acquired, all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, registrations, recordings and applications in the United States Copyright Office, including, without limitation, any thereof referred to in Schedule 1(b) hereto, and (b) all renewals thereof, including, without limitation, any thereof referred to in Schedule 1(b) hereto. "Patent License": all agreements, whether written or oral, providing for the grant by or to an Obligor of any right to manufacture, use or sell any invention covered by a Patent, including, without limitation, any thereof referred to in Schedule 1(b) hereto. "Patents": (a) all letters patent of the United States or any other country and all reissues and extensions thereof, including, without limitation, any thereof referred to in Schedule 1(b) hereto, and (b) all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof, including, without limitation, any thereof referred to in Schedule 1(b) hereto. "Secured Obligations": the collective reference to all of the Credit Party Obligations, now existing or hereafter arising pursuant to the Credit Documents, owing from the Borrower or any other Credit Party to any Lender or the Administrative Agent, howsoever evidenced, created, incurred or acquired, whether primary, secondary, direct, contingent, or joint and several, including, without limitation, all liabilities arising under Hedging Agreements between any Obligor and any Lender, or any Affiliate of a Lender, and all obligations and liabilities incurred in connection with collecting and enforcing the foregoing. "Trademark License": means any agreement, written or oral, providing for the grant by or to an Obligor of any right to use any Trademark, including, without limitation, any thereof referred to in Schedule 1(b) hereto. "Trademarks": (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, and the goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, including, without limitation, any thereof referred to in Schedule 1(b) hereto, and (b) all renewals thereof, including, without limitation, any thereof referred to in Schedule 1(b) hereto. "Work": any work which is subject to copyright protection pursuant to Title 17 of the United States Code. 2. Grant of Security Interest in the Collateral. To secure the prompt payment and performance in full when due, whether by lapse of time, acceleration or otherwise, of the Secured 2 177 Obligations, each Obligor hereby grants to the Administrative Agent, for the benefit of the Lenders, a continuing security interest in, and a right to set off against, any and all right, title and interest of such Obligor in and to the following, whether now owned or existing or owned, acquired, or arising hereafter (collectively, the "Collateral"): (a) all Accounts; (b) all cash and Cash Equivalents maintained on deposit with the Administrative Agent; (c) all Chattel Paper; (d) all Copyrights; (e) all Copyright Licenses; (f) all Deposit Accounts; (g) all Documents; (h) all Equipment; (i) all Fixtures; (j) all General Intangibles; (k) all Instruments; (l) all Inventory; (m) all Investment Property; (n) all Patents; (o) all Patent Licenses; (p) all Trademarks; (q) all Trademark Licenses; (r) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks, and related data processing software (owned by such Obligor or in which it has an interest) that at any time evidence or contain information relating to any Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; 3 178 (s) to the extent not otherwise included, all Proceeds and products of any and all of the foregoing; and (t) all other assets of such Obligor, whether tangible or intangible. The Obligors and the Administrative Agent, on behalf of the Lenders, hereby acknowledge and agree that the security interest created hereby in the Collateral (i) constitutes continuing collateral security for all of the Secured Obligations, whether now existing or hereafter arising and (ii) is not to be construed as an assignment of any Copyrights, Copyright Licenses, Patents, Patent Licenses, Trademarks or Trademark Licenses. 3. Provisions Relating to Accounts. (a) Anything herein to the contrary notwithstanding, each of the Obligors shall remain liable under each of the Accounts to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise to each such Account. Neither the Administrative Agent nor any Lender shall have any obligation or liability under any Account (or any agreement giving rise thereto) by reason of or arising out of this Security Agreement or the receipt by the Administrative Agent or any Lender of any payment relating to such Account pursuant hereto, nor shall the Administrative Agent or any Lender be obligated in any manner to perform any of the obligations of an Obligor under or pursuant to any Account (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any Account (or any agreement giving rise thereto), to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. (b) Once during each calendar year or at any time after the occurrence and during the continuation of an Event of Default, the Administrative Agent shall have the right, but not the obligation, to make test verifications of the Accounts in any manner and through any medium that it reasonably considers advisable, and the Obligors shall furnish all such assistance and information as the Administrative Agent may require in connection with such test verifications. At any time and from time to time, upon the Administrative Agent's request and at the expense of the Obligors, the Obligors shall cause independent public accountants or others satisfactory to the Administrative Agent to furnish to the Administrative Agent reports showing reconciliations, aging and test verifications of, and trial balances for, the Accounts. The Administrative Agent in its own name or in the name of others may communicate with account debtors on the Accounts to verify with them to the Administrative Agent's satisfaction the existence, amount and terms of any Accounts. 4. Representations and Warranties. Each Obligor hereby represents and warrants to the Administrative Agent, for the benefit of the Lenders, that so long as any of the Secured Obligations remain outstanding or any Credit Document or Hedging Agreement between any 4 179 Obligor and any Lender, or any Affiliate of a Lender, is in effect or any Letter of Credit shall remain outstanding, and until all of the Commitments shall have been terminated: (a) Chief Executive Office; Books & Records. Each Obligor's chief executive office and chief place of business is (and for the prior four months have been) located at the locations set forth on Schedule 4(a) hereto, and each Obligor keeps its books and records at such locations. (b) Location of Collateral. The location of all Collateral owned by each Obligor is as shown on Schedule 4(b) hereto. (c) Ownership. Each Obligor is the legal and beneficial owner of its Collateral and has the right to pledge, sell, assign or transfer the same. Each Obligor's legal name is as shown in this Security Agreement and no Obligor has in the past four months changed its name, been party to a merger, consolidation or other change in structure or used any tradename except as set forth in Schedule 4(c) attached hereto. (d) Security Interest/Priority. This Security Agreement creates a valid security interest in favor of the Administrative Agent, for the benefit of the Lenders, in the Collateral of such Obligor and, when properly perfected by filing, shall constitute a valid perfected security interest in such Collateral, to the extent such security can be perfected by filing under the UCC, free and clear of all Liens except for Permitted Liens. (e) Farm Products. None of the Collateral constitutes, or is the Proceeds of, Farm Products. (f) Accounts. (i) Each Account of the Obligors and the papers and documents relating thereto are genuine and in all material respects what they purport to be, (ii) each Account arises out of (A) a bona fide sale of goods sold and delivered by such Obligor (or is in the process of being delivered) or (B) services theretofore actually rendered by such Obligor to, the account debtor named therein, (iii) no Account of an Obligor is evidenced by any Instrument or Chattel Paper unless such Instrument or Chattel Paper has been theretofore endorsed over and delivered to the Administrative Agent and (iv) no surety bond was required or given in connection with any Account of an Obligor or the contracts or purchase orders out of which they arose. (g) Inventory. No Inventory is held by an Obligor pursuant to consignment, sale or return, sale on approval or similar arrangement. (h) Copyrights, Patents and Trademarks. (i) Schedule 1(b) hereto includes all Copyrights, Copyright Licenses, Patents, Patent Licenses, Trademarks and Trademark Licenses owned by the Obligors in their own names as of the date hereof. 5 180 (ii) To the best of each Obligor's knowledge, each Copyright, Patent and Trademark of such Obligor is valid, subsisting, unexpired, enforceable and has not been abandoned. (iii) Except as set forth in Schedule 1(b) hereto, none of such Copyrights, Patents and Trademarks is the subject of any licensing or franchise agreement. (iv) No holding, decision or judgment has been rendered by any Governmental Authority which would limit, cancel or question the validity of any Copyright, Patent or Trademark. (v) No action or proceeding is pending seeking to limit, cancel or question the validity of any Copyright, Patent or Trademark, or which, if adversely determined, would have a material adverse effect on the value of any Copyright, Patent or Trademark. (vi) All applications pertaining to the Copyrights, Patents and Trademarks of each Obligor have been duly and properly filed, and all registrations or letters pertaining to such Copyrights, Patents and Trademarks have been duly and properly filed and issued, and all of such Copyrights, Patents and Trademarks are valid and enforceable. (vii) No Obligor has made any assignment or agreement in conflict with the security interest in the Copyrights, Patents or Trademarks of each Obligor hereunder. 5. Covenants. Each Obligor covenants that, so long as any of the Secured Obligations remain outstanding or any Credit Document or Hedging Agreement between any Obligor and any Lender, or any Affiliate of a Lender, is in effect or any Letter of Credit shall remain outstanding, and until all of the Commitments shall have been terminated, such Obligor shall: (a) Other Liens. Defend the Collateral against the claims and demands of all other parties claiming an interest therein, keep the Collateral free from all Liens, except for Permitted Liens, and not sell, exchange, transfer, assign, lease or otherwise dispose of the Collateral or any interest therein, except as permitted under the Credit Agreement. (b) Preservation of Collateral. Keep the Collateral in good order, condition and repair and not use the Collateral in violation of the provisions of this Security Agreement or any other agreement relating to the Collateral or any policy insuring the Collateral or any applicable statute, law, bylaw, rule, regulation or ordinance. (c) Instruments/Chattel Paper. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument or Chattel Paper, immediately deliver such Instrument or Chattel Paper to the Administrative Agent, duly endorsed in a manner satisfactory to the Administrative Agent, to be held as Collateral pursuant to this Security Agreement. 6 181 (d) Change in Location. Not, without providing 30 days prior written notice to the Administrative Agent and without filing such amendments to any previously filed financing statements as the Administrative Agent may require, (a) change the location of its chief executive office and chief place of business (as well as its books and records) from the locations set forth on Schedule 4(a) hereto, (b) change the location of its Collateral from the locations set forth for such Obligor on Schedule 4(b) hereto, or (c) change its name, be party to a merger, consolidation or other change in structure or use any tradename other than as set forth on Schedule 4(c) attached hereto. (e) Inspection. Upon reasonable notice, and during reasonable hours, at all times allow the Administrative Agent or its representatives to visit and inspect the Collateral as set forth in Section 7.10 of the Credit Agreement. (f) Perfection of Security Interest. Execute and deliver to the Administrative Agent such agreements, assignments or instruments (including affidavits, notices, reaffirmations and amendments and restatements of existing documents, as the Administrative Agent may reasonably request) and do all such other things as the Administrative Agent may reasonably deem necessary or appropriate (i) to assure to the Administrative Agent its security interests hereunder, including (A) such financing statements (including renewal statements) or amendments thereof or supplements thereto or other instruments as the Administrative Agent may from time to time reasonably request in order to perfect and maintain the security interests granted hereunder in accordance with the UCC, (B) with regard to Copyrights, a Notice of Grant of Security Interest in Copyrights in the form of Schedule 5(f)(i), (C) with regard to Patents, a Notice of Grant of Security Interest in Patents for filing with the United States Patent and Trademark Office in the form of Schedule 5(f)(ii) attached hereto and (D) with regard to Trademarks, a Notice of Grant of Security Interest in Trademarks for filing with the United States Patent and Trademark Office in the form of Schedule 5(f)(iii) attached hereto, (ii) to consummate the transactions contemplated hereby and (iii) to otherwise protect and assure the Administrative Agent of its rights and interests hereunder. To that end, each Obligor agrees that the Administrative Agent may file one or more financing statements disclosing the Administrative Agent's security interest in any or all of the Collateral of such Obligor without, to the extent permitted by law, such Obligor's signature thereon, and further each Obligor also hereby irrevocably makes, constitutes and appoints the Administrative Agent, its nominee or any other person whom the Administrative Agent may designate, as such Obligor's attorney in fact with full power and for the limited purpose to sign in the name of such Obligor any such financing statements, or amendments and supplements to financing statements, renewal financing statements, notices or any similar documents which in the Administrative Agent's reasonable discretion would be necessary, appropriate or convenient in order to perfect and maintain perfection of the security interests granted hereunder, such power, being coupled with an interest, being and remaining irrevocable so long as the Credit Agreement is in effect or any amounts payable thereunder or under any other Credit Document or any Letter of Credit or any Hedging Agreement between any Obligor and any Lender, or any Affiliate of a Lender, shall remain outstanding, and until all of the Commitments thereunder shall have terminated. Each Obligor hereby agrees that a carbon, 7 182 photographic or other reproduction of this Security Agreement or any such financing statement is sufficient for filing as a financing statement by the Administrative Agent without notice thereof to such Obligor wherever the Administrative Agent may in its sole discretion desire to file the same. In the event for any reason the law of any jurisdiction other than North Carolina becomes or is applicable to the Collateral of any Obligor or any part thereof, or to any of the Secured Obligations, such Obligor agrees to execute and deliver all such instruments and to do all such other things as the Administrative Agent in its sole discretion reasonably deems necessary or appropriate to preserve, protect and enforce the security interests of the Administrative Agent under the law of such other jurisdiction (and, if an Obligor shall fail to do so promptly upon the request of the Administrative Agent, then the Administrative Agent may execute any and all such requested documents on behalf of such Obligor pursuant to the power of attorney granted hereinabove). If any Collateral is in the possession or control of an Obligor's agents and the Administrative Agent so requests, such Obligor agrees to notify such agents in writing of the Administrative Agent's security interest therein and, upon the Administrative Agent's request, instruct them to hold all such Collateral for the Lenders' account and subject to the Administrative Agent's instructions. Each Obligor agrees to mark its books and records to reflect the security interest of the Administrative Agent in the Collateral. (g) Treatment of Accounts. Not grant or extend the time for payment of any Account, or compromise or settle any Account for less than the full amount thereof, or release any person or property, in whole or in part, from payment thereof, or allow any credit or discount thereon, other than as normal and customary in the ordinary course of an Obligor's business. (h) Covenants Relating to Copyrights. (i) Employ the Copyright for each Work with such notice of copyright as may be required by law to secure copyright protection. (ii) Not do any act or knowingly omit to do any act whereby any material Copyright may become invalidated and (A) not do any act, or knowingly omit to do any act, whereby any material Copyright may become injected into the public domain; (B) notify the Administrative Agent immediately if it knows, or has reason to know, that any material Copyright may become injected into the public domain or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any court or tribunal in the United States or any other country) regarding an Obligor's ownership of any such Copyright or its validity; (C) take all necessary steps as it shall deem appropriate under the circumstances, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of each material Copyright owned by an Obligor including, without limitation, filing of applications for renewal where necessary; and (D) promptly notify the Administrative Agent of any material infringement of any material Copyright of an Obligor of which it becomes aware and take such actions as it shall reasonably deem appropriate under the circumstances to protect such Copyright, including, where 8 183 appropriate, the bringing of suit for infringement, seeking injunctive relief and seeking to recover any and all damages for such infringement. (iii) Not make any assignment or agreement in conflict with the security interest in the Copyrights of each Obligor hereunder. (i) Covenants Relating to Patents and Trademarks. (i) (A) Continue to use each Trademark on each and every trademark class of goods applicable to its current line as reflected in its current catalogs, brochures and price lists in order to maintain such Trademark in full force free from any claim of abandonment for non-use, (B) maintain as in the past the quality of products and services offered under such Trademark, (C) employ such Trademark with the appropriate notice of registration, (D) not adopt or use any mark which is confusingly similar or a colorable imitation of such Trademark unless the Administrative Agent, for the ratable benefit of the Lenders, shall obtain a perfected security interest in such mark pursuant to this Security Agreement, and (E) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any Trademark may become invalidated. (ii) Not do any act, or omit to do any act, whereby any Patent may become abandoned or dedicated. (iii) Notify the Administrative Agent and the Lenders immediately if it knows, or has reason to know, that any application or registration relating to any Patent or Trademark may become abandoned or dedicated, or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office or any court or tribunal in any country) regarding an Obligor's ownership of any Patent or Trademark or its right to register the same or to keep and maintain the same. (iv) Whenever an Obligor, either by itself or through an agent, employee, licensee or designee, shall file an application for the registration of any Patent or Trademark with the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, an Obligor shall report such filing to the Administrative Agent and the Lenders within five Business Days after the last day of the fiscal quarter in which such filing occurs. Upon request of the Administrative Agent, an Obligor shall execute and deliver any and all agreements, instruments, documents and papers as the Administrative Agent may request to evidence the Administrative Agent's and the Lenders' security interest in any Patent or Trademark and the goodwill and general intangibles of an Obligor relating thereto or represented thereby. (v) Take all reasonable and necessary steps, including, without limitation, in any proceeding before the United States Patent and Trademark Office, 9 184 or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of the Patents and Trademarks, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability. (vi) Promptly notify the Administrative Agent and the Lenders after it learns that any Patent or Trademark included in the Collateral is infringed, misappropriated or diluted by a third party and promptly sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution, or take such other actions as it shall reasonably deem appropriate under the circumstances to protect such Patent or Trademark. (vii) Not make any assignment or agreement in conflict with the security interest in the Patents or Trademarks of each Obligor hereunder. (j) New Patents, Copyrights and Trademarks. Promptly provide the Administrative Agent with (i) a listing of all applications, if any, for new Copyrights, Patents or Trademarks (together with a listing of the issuance of registrations or letters on present applications), which new applications and issued registrations or letters shall be subject to the terms and conditions hereunder, and (ii) (A) with respect to Copyrights, a duly executed Notice of Security Interest in Copyrights, (B) with respect to Patents, a duly executed Notice of Security Interest in Patents, (C) with respect to Trademarks, a duly executed Notice of Security Interest in Trademarks or (D) such other duly executed documents as the Administrative Agent may request in a form acceptable to counsel for the Administrative Agent and suitable for recording to evidence the security interest in the Copyright, Patent or Trademark which is the subject of such new application. (k) Insurance. Insure, repair and replace the Collateral of such Obligor as set forth in the Credit Agreement. All insurance proceeds shall be subject to the security interest of the Administrative Agent hereunder. 6. Advances by Lenders. On failure of any Obligor to perform any of the covenants and agreements contained herein, the Administrative Agent may, at its sole option and in its sole discretion, perform the same and in so doing may expend such sums as the Administrative Agent may reasonably deem advisable in the performance thereof, including, without limitation, the payment of any insurance premiums, the payment of any taxes, a payment to obtain a release of a Lien or potential Lien, expenditures made in defending against any adverse claim and all other expenditures which the Administrative Agent or the Lenders may make for the protection of the security hereof or which may be compelled to make by operation of law. All such sums and amounts so expended shall be repayable by the Obligors on a joint and several basis promptly upon timely notice thereof and demand therefor, shall constitute additional Secured Obligations and shall bear interest from the date said amounts are expended at the default rate specified in Section 3.1 of the Credit Agreement for Revolving Loans that are Base Rate Loans. No such performance of any covenant or agreement by the Administrative Agent or the Lenders on behalf of any Obligor, and 10 185 no such advance or expenditure therefor, shall relieve the Obligors of any default under the terms of this Security Agreement, the other Credit Documents or any Hedging Agreement between any Obligor and any Lender, or any Affiliate of a Lender. The Lenders may make any payment hereby authorized in accordance with any bill, statement or estimate procured from the appropriate public office or holder of the claim to be discharged without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax assessment, sale, forfeiture, tax lien, title or claim except to the extent such payment is being contested in good faith by an Obligor in appropriate proceedings and against which adequate reserves are being maintained in accordance with GAAP. 7. Events of Default. The occurrence of an event which under the Credit Agreement would constitute an Event of Default shall be an Event of Default hereunder (an "Event of Default"). 8. Remedies. (a) General Remedies. Upon the occurrence of an Event of Default and during continuation thereof, the Lenders shall have, in addition to the rights and remedies provided herein, in the Credit Documents, in the Hedging Agreements between any Obligor and any Lender, or any Affiliate of a Lender, or by law (including, but not limited to, the rights and remedies set forth in the Uniform Commercial Code of the jurisdiction applicable to the affected Collateral), the rights and remedies of a secured party under the UCC (regardless of whether the UCC is the law of the jurisdiction where the rights and remedies are asserted and regardless of whether the UCC applies to the affected Collateral), and further, the Administrative Agent may, with or without judicial process or the aid and assistance of others, (i) enter on any premises on which any of the Collateral may be located and, without resistance or interference by the Obligors, take possession of the Collateral, (ii) dispose of any Collateral on any such premises, (iii) require the Obligors to assemble and make available to the Administrative Agent at the expense of the Obligors any Collateral at any place and time designated by the Administrative Agent which is reasonably convenient to both parties, (iv) remove any Collateral from any such premises for the purpose of effecting sale or other disposition thereof, and/or (v) without demand and without advertisement, notice, hearing or process of law, all of which each of the Obligors hereby waives to the fullest extent permitted by law, at any place and time or times, sell and deliver any or all Collateral held by or for it at public or private sale, by one or more contracts, in one or more parcels, for cash, upon credit or otherwise, at such prices and upon such terms as the Administrative Agent deems advisable, in its sole discretion (subject to any and all mandatory legal requirements). In addition to all other sums due the Administrative Agent and the Lenders with respect to the Secured Obligations, the Obligors shall pay the Administrative Agent and each of the Lenders all reasonable documented costs and expenses incurred by the Administrative Agent or any such Lender, including, but not limited to, reasonable attorneys' fees and court costs, in obtaining or liquidating the Collateral, in enforcing payment of the Secured Obligations, or in the prosecution or defense of any action or proceeding by or against the Administrative Agent or the Lenders or the Obligors concerning any matter arising out of or connected with this Security 11 186 Agreement, any Collateral or the Secured Obligations, including, without limitation, any of the foregoing arising in, arising under or related to a case under the Bankruptcy Code. To the extent the rights of notice cannot be legally waived hereunder, each Obligor agrees that any requirement of reasonable notice shall be met if such notice is personally served on or mailed, postage prepaid, to the Borrower in accordance with the notice provisions of Section 11.1 of the Credit Agreement at least 10 days before the time of sale or other event giving rise to the requirement of such notice. The Administrative Agent and the Lenders shall not be obligated to make any sale or other disposition of the Collateral regardless of notice having been given. To the extent permitted by law, any Lender may be a purchaser at any such sale. To the extent permitted by applicable law, each of the Obligors hereby waives all of its rights of redemption with respect to any such sale. Subject to the provisions of applicable law, the Administrative Agent and the Lenders may postpone or cause the postponement of the sale of all or any portion of the Collateral by announcement at the time and place of such sale, and such sale may, without further notice, to the extent permitted by law, be made at the time and place to which the sale was postponed, or the Administrative Agent and the Lenders may further postpone such sale by announcement made at such time and place. (b) Remedies relating to Accounts. Upon the occurrence of an Event of Default and during the continuation thereof, whether or not the Administrative Agent has exercised any or all of its rights and remedies hereunder, each Obligor will promptly upon request of the Administrative Agent instruct all account debtors to remit all payments in respect of Accounts to a mailing location selected by the Administrative Agent. In addition, the Administrative Agent or its designee may notify any Obligor's customers and account debtors that the Accounts of such Obligor have been assigned to the Administrative Agent or of the Administrative Agent's security interest therein, and may (either in its own name or in the name of an Obligor or both) demand, collect (including without limitation by way of a lockbox arrangement), receive, take receipt for, sell, sue for, compound, settle, compromise and give acquittance for any and all amounts due or to become due on any Account, and, in the Administrative Agent's discretion, file any claim or take any other action or proceeding to protect and realize upon the security interest of the Lenders in the Accounts. Each Obligor acknowledges and agrees that the Proceeds of its Accounts remitted to or on behalf of the Administrative Agent in accordance with the provisions hereof shall be solely for the Administrative Agent's own convenience and that such Obligor shall not have any right, title or interest in such Accounts or in any such other amounts except as expressly provided herein. The Administrative Agent and the Lenders shall have no liability or responsibility to any Obligor for acceptance of a check, draft or other order for payment of money bearing the legend "payment in full" or words of similar import or any other restrictive legend or endorsement or be responsible for determining the correctness of any remittance. Each Obligor hereby agrees to indemnify the Administrative Agent and the Lenders from and against all liabilities, damages, losses, actions, claims, judgments, costs, expenses, charges and reasonable attorneys' fees suffered or incurred by the Administrative Agent or the Lenders (each, an "Indemnified Party") because of the maintenance of the foregoing arrangements except as relating to or arising out of the gross negligence or willful misconduct of an Indemnified Party or its officers, employees or agents. In the case of any investigation, litigation or other proceeding, the foregoing 12 187 indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by an Obligor, its directors, shareholders or creditors or an Indemnified Party or any other Person or any other Indemnified Party is otherwise a party thereto. (c) Access. In addition to the rights and remedies hereunder, upon the occurrence of an Event of Default and during the continuance thereof, the Administrative Agent shall have the right to enter and remain upon the various premises of the Obligors without cost or charge to the Administrative Agent, and use the same, together with materials, supplies, books and records of the Obligors for the purpose of collecting and liquidating the Collateral, or for preparing for sale and conducting the sale of the Collateral, whether by foreclosure, auction or otherwise. In addition, the Administrative Agent may remove Collateral, or any part thereof, from such premises and/or any records with respect thereto, in order to effectively collect or liquidate such Collateral. (d) Nonexclusive Nature of Remedies. Failure by the Administrative Agent or the Lenders to exercise any right, remedy or option under this Security Agreement, any other Credit Document, any Hedging Agreement between any Obligor and any Lender, or any Affiliate of a Lender, or as provided by law, or any delay by the Administrative Agent or the Lenders in exercising the same, shall not operate as a waiver of any such right, remedy or option. No waiver hereunder shall be effective unless it is in writing, signed by the party against whom such waiver is sought to be enforced and then only to the extent specifically stated, which in the case of the Administrative Agent or the Lenders shall only be granted as provided herein. To the extent permitted by law, neither the Administrative Agent, the Lenders, nor any party acting as attorney for the Administrative Agent or the Lenders, shall be liable hereunder for any acts or omissions or for any error of judgment or mistake of fact or law other than their gross negligence or willful misconduct hereunder. The rights and remedies of the Administrative Agents and the Lenders under this Security Agreement shall be cumulative and not exclusive of any other right or remedy which the Administrative Agent or the Lenders may have. (e) Retention of Collateral. The Administrative Agent may, after providing the notices required by Section 9-505(2) of the UCC or otherwise complying with the requirements of applicable law of the relevant jurisdiction, to the extent the Administrative Agent is in possession of any of the Collateral, retain the Collateral in satisfaction of the Secured Obligations. Unless and until the Administrative Agent shall have provided such notices, however, the Administrative Agent shall not be deemed to have retained any Collateral in satisfaction of any Secured Obligations for any reason. (f) Deficiency. In the event that the proceeds of any sale, collection or realization are insufficient to pay all amounts to which the Administrative Agent or the Lenders are legally entitled, the Obligors shall be jointly and severally liable for the deficiency, together with interest thereon at the default rate specified in Section 3.1 of the Credit Agreement for Revolving Loans that are Base Rate Loans, together with the costs of collection and the reasonable fees of any attorneys employed by the Administrative Agent to collect such deficiency. Any surplus remaining after the full payment and satisfaction of 13 188 the Secured Obligations shall be returned to the Obligors or to whomsoever a court of competent jurisdiction shall determine to be entitled thereto. 9. Rights of the Administrative Agent. (a) Power of Attorney. In addition to other powers of attorney contained herein, each Obligor hereby designates and appoints the Administrative Agent, on behalf of the Lenders, and each of its designees or agents, as attorney-in-fact of such Obligor, irrevocably and with power of substitution, with authority to take any or all of the following actions upon the occurrence and during the continuance of an Event of Default: (i) to demand, collect, settle, compromise, adjust, give discharges and releases, all as the Administrative Agent may reasonably determine; (ii) to commence and prosecute any actions at any court for the purposes of collecting any Collateral and enforcing any other right in respect thereof; (iii) to defend, settle or compromise any action brought and, in connection therewith, give such discharge or release as the Administrative Agent may deem reasonably appropriate; (iv) receive, open and dispose of mail addressed to an Obligor and endorse checks, notes, drafts, acceptances, money orders, bills of lading, warehouse receipts or other instruments or documents evidencing payment, shipment or storage of the goods giving rise to the Collateral of such Obligor on behalf of and in the name of such Obligor, or securing, or relating to such Collateral; (v) sell, assign, transfer, make any agreement in respect of, or otherwise deal with or exercise rights in respect of, any Collateral or the goods or services which have given rise thereto, as fully and completely as though the Administrative Agent were the absolute owner thereof for all purposes; (vi) adjust and settle claims under any insurance policy relating thereto; (vii) execute and deliver all assignments, conveyances, statements, financing statements, renewal financing statements, security agreements, affidavits, notices and other agreements, instruments and documents that the Administrative Agent may determine necessary in order to perfect and maintain the security interests and liens granted in this Security Agreement and in order to fully consummate all of the transactions contemplated therein; 14 189 (viii) institute any foreclosure proceedings that the Administrative Agent may deem appropriate; and (ix) do and perform all such other acts and things as the Administrative Agent may reasonably deem to be necessary, proper or convenient in connection with the Collateral. This power of attorney is a power coupled with an interest and shall be irrevocable (i) for so long as any of the Secured Obligations remain outstanding, any Credit Document or any Hedging Agreement between any Obligor and any Lender, or any Affiliate of a Lender, is in effect or any Letter of Credit shall remain outstanding and (ii) until all of the Commitments shall have been terminated. The Administrative Agent shall be under no duty to exercise or withhold the exercise of any of the rights, powers, privileges and options expressly or implicitly granted to the Administrative Agent in this Security Agreement, and shall not be liable for any failure to do so or any delay in doing so. The Administrative Agent shall not be liable for any act or omission or for any error of judgment or any mistake of fact or law in its individual capacity or its capacity as attorney-in-fact except acts or omissions resulting from its gross negligence or willful misconduct. This power of attorney is conferred on the Administrative Agent solely to protect, preserve and realize upon its security interest in the Collateral. (b) Performance by the Administrative Agent of Obligations. If any Obligor fails to perform any agreement or obligation contained herein, the Administrative Agent itself may perform, or cause performance of, such agreement or obligation, and the expenses of the Administrative Agent incurred in connection therewith shall be payable by the Obligors on a joint and several basis pursuant to Section 11 hereof. (c) Assignment by the Administrative Agent. The Administrative Agent may from time to time assign the Secured Obligations and any portion thereof and/or the Collateral and any portion thereof, and the assignee shall be entitled to all of the rights and remedies of the Administrative Agent under this Security Agreement in relation thereto. (d) The Administrative Agent's Duty of Care. Other than the exercise of reasonable care to assure the safe custody of the Collateral while being held by the Administrative Agent hereunder, the Administrative Agent shall have no duty or liability to preserve rights pertaining thereto, it being understood and agreed that the Obligors shall be responsible for preservation of all rights in the Collateral, and the Administrative Agent shall be relieved of all responsibility for the Collateral upon surrendering it or tendering the surrender of it to the Obligors. The Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Administrative Agent accords its own property, which shall be no less than the treatment employed by a reasonable and prudent agent in the industry, it being understood that the Administrative Agent shall not have responsibility for taking any necessary steps to preserve rights against any parties with respect to any of the Collateral. 15 190 10. Application of Proceeds. Upon the occurrence and during the continuance of an Event of Default, any payments in respect of the Secured Obligations and any proceeds of the Collateral, when received by the Administrative Agent or any of the Lenders in cash or its equivalent, will be applied in reduction of the Secured Obligations in the order set forth in Section 3.15(b) of the Credit Agreement, and each Obligor irrevocably waives the right to direct the application of such payments and proceeds and acknowledges and agrees that the Administrative Agent shall have the continuing and exclusive right to apply and reapply any and all such payments and proceeds in the Administrative Agent's sole discretion, notwithstanding any entry to the contrary upon any of its books and records. 11. Costs of Counsel. If at any time hereafter, whether upon the occurrence of an Event of Default or not, the Administrative Agent employs counsel to prepare or consider amendments, waivers or consents with respect to this Security Agreement, or to take action or make a response in or with respect to any legal or arbitral proceeding relating to this Security Agreement or relating to the Collateral, or to protect the Collateral or exercise any rights or remedies under this Security Agreement or with respect to the Collateral, then the Obligors agree to promptly pay upon demand any and all such reasonable documented costs and expenses of the Administrative Agent or the Lenders, all of which costs and expenses shall constitute Secured Obligations hereunder. 12. Continuing Agreement. (a) This Security Agreement shall be a continuing agreement in every respect and shall remain in full force and effect so long as any of the Secured Obligations remain outstanding or any Credit Document or any Hedging Agreement between any Obligor and any Lender, or any Affiliate of a Lender, is in effect or any Letter of Credit shall remain outstanding, and until all of the Commitments thereunder shall have terminated (other than any obligations with respect to the indemnities and the representations and warranties set forth in the Credit Documents). Upon such payment and termination, this Security Agreement shall be automatically terminated and the Administrative Agent and the Lenders shall, upon the request and at the expense of the Obligors, forthwith release all of its liens and security interests hereunder and shall execute and deliver all UCC termination statements and/or other documents reasonably requested by the Obligors evidencing such termination. Notwithstanding the foregoing all releases and indemnities provided hereunder shall survive termination of this Security Agreement. (b) This Security Agreement shall continue to be effective or be automatically reinstated, as the case may be, if at any time payment, in whole or in part, of any of the Secured Obligations is rescinded or must otherwise be restored or returned by the Administrative Agent or any Lender as a preference, fraudulent conveyance or otherwise under any bankruptcy, insolvency or similar law, all as though such payment had not been made; provided that in the event payment of all or any part of the Secured Obligations is rescinded or must be restored or returned, all reasonable costs and expenses (including without limitation any reasonable legal fees and disbursements) incurred by the Administrative Agent or any Lender in defending and enforcing such reinstatement shall be deemed to be included as a part of the Secured Obligations. 16 191 13. Amendments; Waivers; Modifications. This Security Agreement and the provisions hereof may not be amended, waived, modified, changed, discharged or terminated except as set forth in Section 11.6 of the Credit Agreement. 14. Successors in Interest. This Security Agreement shall create a continuing security interest in the Collateral and shall be binding upon each Obligor, its successors and assigns and shall inure, together with the rights and remedies of the Administrative Agent and the Lenders hereunder, to the benefit of the Administrative Agent and the Lenders and their successors and permitted assigns; provided, however, that none of the Obligors may assign its rights or delegate its duties hereunder without the prior written consent of each Lender or the Required Lenders, as required by the Credit Agreement. To the fullest extent permitted by law, each Obligor hereby releases the Administrative Agent and each Lender, and its successors and assigns, from any liability for any act or omission relating to this Security Agreement or the Collateral, except for any liability arising from the gross negligence or willful misconduct of the Administrative Agent, or such Lender, or its officers, employees or agents. 15. Notices. All notices required or permitted to be given under this Security Agreement shall be in conformance with Section 11.1 of the Credit Agreement. 16. Counterparts. This Security Agreement may be executed in any number of counterparts, each of which where so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. It shall not be necessary in making proof of this Security Agreement to produce or account for more than one such counterpart. 17. Headings. The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Security Agreement. 18. Governing Law; Submission to Jurisdiction; Venue. (a) THIS SECURITY AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA. Any legal action or proceeding with respect to this Security Agreement may be brought in the courts of the State of North Carolina, or of the United States for [the Western District of North Carolina], and, by execution and delivery of this Security Agreement, each Obligor hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of such courts. Each Obligor further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at the address for notices pursuant to Section 11.1 of the Credit Agreement, such service to become effective 30 days after such mailing. Nothing herein shall affect the right of the Administrative Agent to serve process in 17 192 any other manner permitted by law or to commence legal proceedings or to otherwise proceed against any Obligor in any other jurisdiction. (b) Each Obligor hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Security Agreement brought in the courts referred to in subsection (a) hereof and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. 19. Waiver of Jury Trial. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES TO THIS SECURITY AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 20. Severability. If any provision of any of the Security Agreement is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions. 21. Entirety. This Security Agreement, the other Credit Documents and the Hedging Agreements between any Obligor and any Lender, or any Affiliate of a Lender, represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements and understandings, oral or written, if any, including any commitment letters or correspondence relating to the Credit Documents, the Hedging Agreements between any Obligor and any Lender, or any Affiliate of a Lender, or the transactions contemplated herein and therein. 22. Survival. All representations and warranties of the Obligors hereunder shall survive the execution and delivery of this Security Agreement, the other Credit Documents and the Hedging Agreements between any Obligor and any Lender, or any Affiliate of a Lender, the delivery of the Notes and the making of the Loans and the issuance of the Letters of Credit under the Credit Agreement. 23. Other Security. To the extent that any of the Secured Obligations are now or hereafter secured by property other than the Collateral (including, without limitation, real property and securities owned by an Obligor), or by a guarantee, endorsement or property of any other Person, then the Administrative Agent and the Lenders shall have the right to proceed against such other property, guarantee or endorsement upon the occurrence of any Event of Default, and the Administrative Agent and the Lenders have the right, in their sole discretion, to determine which rights, security, liens, security interests or remedies the Administrative Agent and the Lenders shall at any time pursue, relinquish, subordinate, modify or take with respect thereto, without in any way modifying or affecting any of them or any of the Administrative Agent's and the Lenders' rights or the Secured Obligations under this Security Agreement or under any other of the Credit Documents or under any Hedging Agreement between any Obligor and any Lender, or any Affiliate of a Lender. 18 193 24. Joint and Several Obligations of Obligors. (a) Each of the Obligors is accepting joint and several liability hereunder in consideration of the financial accommodation to be provided by the Lenders under the Credit Agreement, for the mutual benefit, directly and indirectly, of each of the Obligors and in consideration of the undertakings of each of the Obligors to accept joint and several liability for the obligations of each of them. (b) Each of the Obligors jointly and severally hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Obligors with respect to the payment and performance of all of the Secured Obligations arising under this Security Agreement, the other Credit Documents and the Hedging Agreements between any Obligor and any Lender, or any Affiliate of a Lender, it being the intention of the parties hereto that all the Obligations shall be the joint and several obligations of each of the Obligors without preferences or distinction among them. (c) Notwithstanding any provision to the contrary contained herein, in any other of the Credit Documents or in any Hedging Agreement between any Obligor and any Lender, or any Affiliate of a Lender, the obligations of each Guarantor under the Credit Agreement and the other Credit Documents shall be limited to an aggregate amount equal to the largest amount that would not render such obligations subject to avoidance under Section 548 of the Bankruptcy Code or any comparable provisions of any applicable state law. 19 194 25. Rights of Required Lenders. All rights of the Administrative Agent hereunder, if not exercised by the Administrative Agent, may be exercised by the Required Lenders. [remainder of page intentionally left blank] 20 195 Each of the parties hereto has caused a counterpart of this Security Agreement to be duly executed and delivered as of the date first above written. BORROWER: MODTECH HOLDINGS, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ GUARANTORS: MODTECH, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ SPI HOLDINGS, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ SPI MANUFACTURING, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ OFFICE MASTER OF TEXAS, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ ROSEWOOD ENTERPRISES, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ TRAC MODULAR MANUFACTURING, INC. 21 196 By:_________________________________________ Name:_______________________________________ Title:______________________________________ A SPACE, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ Accepted and agreed to as of the date first above written. NATIONSBANK, N.A., as Administrative Agent By:____________________________ Name:__________________________ Title:_________________________ 22 197 SCHEDULE 1(b) INTELLECTUAL PROPERTY 198 SCHEDULE 4(a) CHIEF EXECUTIVE OFFICE 199 SCHEDULE 4(b) LOCATIONS OF COLLATERAL 200 SCHEDULE 4(c) MERGERS, CONSOLIDATIONS, CHANGE IN STRUCTURE OR USE OF TRADENAMES 201 SCHEDULE 5(f)(i) NOTICE OF GRANT OF SECURITY INTEREST IN COPYRIGHTS United States Copyright Office Gentlemen: Please be advised that pursuant to the Security Agreement dated as of February 16, 1999 (as the same may be amended, modified, extended or restated from time to time, the "Security Agreement") by and among the Obligors party thereto (each an "Obligor" and collectively, the "Obligors") and NationsBank, N.A., as Administrative Agent (the "Administrative Agent") for the Lenders referenced therein (the "Lenders"), the undersigned Obligor has granted a continuing security interest in and continuing lien upon, the copyrights and copyright applications shown below to the Administrative Agent for the ratable benefit of the Lenders: COPYRIGHTS
Date of Copyright No. Description of Copyright Copyright - ------------- ------------------------ ---------
Copyright Applications
Copyright Description of Copyright Date of Copyright Applications No. Applied For Applications - ---------------- ------------------------ -----------------
202 The Obligors and the Administrative Agent, on behalf of the Lenders, hereby acknowledge and agree that the security interest in the foregoing copyrights and copyright applications (i) may only be terminated in accordance with the terms of the Security Agreement and (ii) is not to be construed as an assignment of any copyright or copyright application. Very truly yours, ____________________________________________ [Obligor] By:_________________________________________ Name:_______________________________________ Title:______________________________________ Acknowledged and Accepted: NATIONSBANK, N.A., as Administrative Agent By:____________________________ Name:__________________________ Title:_________________________ 203 SCHEDULE 5(f)(ii) NOTICE OF GRANT OF SECURITY INTEREST IN PATENTS United States Patent and Trademark Office Gentlemen: Please be advised that pursuant to the Security Agreement dated as of February 16, 1999 (the "Security Agreement") by and among the Obligors party thereto (each an "Obligor" and collectively, the "Obligors") and NationsBank, N.A., as Administrative Agent (the "Administrative Agent") for the Lenders referenced therein (the "Lenders"), the undersigned Obligor has granted a continuing security interest in and continuing lien upon, the patents and patent applications shown below to the Administrative Agent for the ratable benefit of the Lenders: PATENTS
Description of Patent Date of Patent No. Item Patent - ---------- --------------------- -------
Patent Applications
Patent Description of Patent Date of Patent Applications No. Applied For Applications - ---------------- --------------------- --------------
204 The Obligors and the Administrative Agent, on behalf of the Lenders, hereby acknowledge and agree that the security interest in the foregoing patents and patent applications (i) may only be terminated in accordance with the terms of the Security Agreement and (ii) is not to be construed as an assignment of any patent or patent application. Very truly yours, ____________________________________________ [Obligor] By:_________________________________________ Name:_______________________________________ Title:______________________________________ Acknowledged and Accepted: NATIONSBANK, N.A., as Administrative Agent By:_____________________________ Name:___________________________ Title:__________________________ 205 SCHEDULE 5(f)(iii) NOTICE OF GRANT OF SECURITY INTEREST IN TRADEMARKS United States Patent and Trademark Office Gentlemen: Please be advised that pursuant to the Security Agreement dated as of February 16, 1999 (the "Security Agreement") by and among the Obligors party thereto (each an "Obligor" and collectively, the "Obligors") and NationsBank, N.A., as Administrative Agent (the "Administrative Agent") for the Lenders referenced therein (the "Lenders"), the undersigned Obligor has granted a continuing security interest in and continuing lien upon, the trademarks and trademark applications shown below to the Administrative Agent for the ratable benefit of the Lenders: TRADEMARKS
Description of Trademark Date of Trademark No. Item Trademark - ---------------- ------------------------ ---------
Trademark Applications
Trademark Description of Trademark Date of Trademark Applications No. Applied For Applications - ---------------- ------------------------ -----------------
206 The Obligors and the Administrative Agent, on behalf of the Lenders, hereby acknowledge and agree that the security interest in the foregoing trademarks and trademark applications (i) may only be terminated in accordance with the terms of the Security Agreement and (ii) is not to be construed as an assignment of any trademark or trademark application. Very truly yours, ____________________________________________ [Obligor] By:_________________________________________ Name:_______________________________________ Title:______________________________________ Acknowledged and Accepted: NATIONSBANK, N.A., as Administrative Agent By:_____________________________ Name:___________________________ Title:__________________________ 207 EXHIBIT 1.1C TERMS OF SUBORDINATION o The documents evidencing or governing Subordinated Indebtedness shall not contain any affirmative or negative covenants the breach of which would allow the holders to exercise remedies while Credit Party Obligations are outstanding. o Subordinated Indebtedness shall not be secured by any collateral or guaranteed by any entity. o Subordinated Indebtedness shall not be cross-defaulted to the Credit Agreement or any of the other Credit Documents. o No payments or prepayments of principal or interest on Subordinated Indebtedness may be made or received at any time that such payments are prohibited to be made under the Credit Agreement. o As long as any of the Credit Party Obligations are outstanding, holders of Subordinated Indebtedness shall have no right to exercise remedies (other than acceleration and demand for payment). o Until the date 91 days after Credit Party Obligations have been paid in full in cash and the Credit Agreement and the other Credit Document shall have terminated, holders of Subordinated Indebtedness shall not take any action to initiate an involuntary bankruptcy proceeding in respect of the Borrower. o The Agent (on behalf of the Lenders) shall have the right, if not exercised by any holder of Subordinated Indebtedness, to file proofs of claim (and any notice of assignment of the right to receive payments) in respect of the Subordinated Indebtedness of such holder to the extent not filed by such holder in any bankruptcy proceeding in respect of the Borrower. o In any bankruptcy proceeding in respect of the Borrower, the Lenders shall be entitled to payment in full in cash before holders of the Subordinated Indebtedness shall be entitled to receive any payments, property or assets (other than (i) debt securities that are subordinated at least to the extent of such Subordinated Indebtedness and (ii) equity securities that are not redeemable for cash, and in respect of which no cash dividends are payable, until the Credit Party Obligations have been paid in full in cash and the Credit Agreement and the other Credit Document shall have terminated). o Any payments received by a holder of the Subordinated Indebtedness in contravention of the foregoing subordination provisions shall be held in trust for the benefit of, and immediately turned over to, the Agent (on behalf of the Lenders). 208 o In any reorganization proceeding in respect of the Borrower, the Agent (on behalf of the Lenders) shall be entitled to approve (on behalf of holders of Subordinated Indebtedness) the use of cash collateral by Borrower. o Holders of Subordinated Indebtedness shall agree that, in the event that such holder for any reason shall be entitled shall vote consistently with the Lenders on any plan of reorganization or liquidation. o In any bankruptcy proceeding in respect of the Borrower, holders of the Subordinated Indebtedness shall not (i) file any motion, application or other pleading seeking affirmative relief, including without limitation for the appointment of a trustee or examiner, for the conversion of the case to a liquidation proceeding, for the substantive consolidation of the Borrower's bankruptcy case with the case of any other entity, for the creation of a separate official committee representing only holders of Subordinated Indebtedness or any other form of affirmative relief of any other kind or nature nor (ii) file any objection or other responsive pleading opposing any relief requested by the Lenders. o Holders of Subordinated Indebtedness shall not exercise any right of subrogation in respect of any of the Credit Party Obligations until the Credit Party Obligations have been paid in full in cash and the Credit Agreement and the other Credit Document shall have terminated. o Until the Credit Party Obligations have been paid in full in cash and the Credit Agreement and the other Credit Document shall have terminated, no material amendment or modification of the documents evidencing or governing Subordinated Indebtedness (including without limitation any amendment or modification to the subordination provisions thereof) shall be effective unless such amendment or modification has been approved by a requisite number of the Lenders. o Holders of Subordinated Indebtedness shall not assign any interests in respect of the Subordinated Indebtedness. 209 EXHIBIT 2.1(b)(i) FORM OF NOTICE OF BORROWING NationsBank, N. A., as Administrative Agent for the Lenders 101 North Tryon Street Independence Center, 15th Floor NC1-001-15-04 Charlotte, North Carolina 28255 Attention: Agency Services Ladies and Gentlemen: The undersigned, MODTECH HOLDINGS, INC. (the "Borrower"), refers to the Credit Agreement dated as of February 16, 1999 (as amended, modified, restated or supplemented from time to time, the "Credit Agreement"), among the Borrower, the Guarantors, the Lenders and NationsBank, N. A., as Administrative Agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. [The Borrower hereby gives notice pursuant to Section 2.1 of the Credit Agreement that it requests a Revolving Loan advance under the Credit Agreement, and in connection therewith sets forth below the terms on which such Loan advance is requested to be made:]* [The Borrower hereby gives notice pursuant to Section 2.4 of the Credit Agreement that it requests the Tranche A Term Loan under the Credit Agreement on the Closing Date, and in connection therewith sets forth below the terms on which such Loan advance is requested to be made:]** [The Borrower hereby gives notice pursuant to Section 2.5 of the Credit Agreement that it requests a Delayed Draw Term Loan under the Credit Agreement, and in connection therewith sets forth below the terms on which such Loan advance is requested to be made:]* [(A) Date of Borrowing (which is a Business Day) ____________________]* [(B) Principal Amount of Borrowing ____________________]* (C) Interest rate basis ____________________ (D) Interest Period and the last day thereof ____________________ 210 In accordance with the requirements of Section 5.2, the Borrower hereby reaffirms the representations and warranties set forth in the Credit Agreement as provided in subsection (b) of such Section, and confirms that the matters referenced in subsections (c), (d), (e) and (f) of such Section, are true and correct. MODTECH HOLDINGS, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ *For all Revolving Loans and for Delayed Draw Term Loans prior to the second anniversary of the Closing Date **For the initial advance of the Tranche A Term Loan on the Closing Date 211 EXHIBIT 2.1(e) FORM OF REVOLVING NOTE $_________________ February 16, 1999 FOR VALUE RECEIVED, MODTECH HOLDINGS, INC., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of __________________________, its successors and assigns (the "Lender"), at the office of NationsBank, N. A., as Administrative Agent (the "Administrative Agent"), at 101 North Tryon Street, Independence Center, NC1-001-15-04, Charlotte, North Carolina 28255 (or at such other place or places as the holder hereof may designate), at the times set forth in the Credit Agreement dated as of the date hereof among the Borrower, the Guarantors, the Lenders and the Administrative Agent (as it may be as amended, modified, restated or supplemented from time to time, the "Credit Agreement"; all capitalized terms not otherwise defined herein shall have the meanings set forth in the Credit Agreement), but in no event later than the Maturity Date, in Dollars and in immediately available funds, the principal amount of ________________________DOLLARS ($____________) or, if less than such principal amount, the aggregate unpaid principal amount of all Revolving Loans made by the Lender to the Borrower pursuant to the Credit Agreement, and to pay interest from the date hereof on the unpaid principal amount hereof, in like money, at said office, on the dates and at the rates selected in accordance with Section 2.1(d) of the Credit Agreement. Upon the occurrence and during the continuance of an Event of Default, the balance outstanding hereunder shall bear interest as provided in Section 3.1 of the Credit Agreement. Further, in the event the payment of all sums due hereunder is accelerated under the terms of the Credit Agreement, this Note, and all other indebtedness of the Borrower to the Lender shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Borrower. In the event this Note is not paid when due at any stated or accelerated maturity, the Borrower agrees to pay, in addition to the principal and interest, all costs of collection, including reasonable attorneys' fees. This Note and the Loans evidenced hereby may be transferred in whole or in part only by registration of such transfer on the Register maintained by or on behalf of the Borrower as provided in Section 11.3(c) of the Credit Agreement. 212 IN WITNESS WHEREOF, the Borrower has caused this Note to be duly executed by its duly authorized officer as of the day and year first above written. MODTECH HOLDINGS, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ 213 EXHIBIT 2.3(d) FORM OF SWINGLINE NOTE $2,000,000 February 16, 1999 FOR VALUE RECEIVED, MODTECH HOLDINGS, INC., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of NationsBank, N. A. (the "Swingline Lender"), at 101 North Tryon Street, Independence Center, NC1-001-15-04, Charlotte, North Carolina 28255 (or at such other place or places as the holder hereof may designate), at the times set forth in the Credit Agreement dated as of the date hereof among the Borrower, the Guarantors, the Swingline Lender and other Lenders and the Administrative Agent (as it may be amended, modified, extended or restated from time to time, the "Credit Agreement"; all capitalized terms not otherwise defined herein shall have the meanings set forth in the Credit Agreement), but in no event later than the Maturity Date, in Dollars and in immediately available funds, the principal amount of TWO MILLION DOLLARS ($2,000,000) or, if less than such principal amount, the aggregate unpaid principal amount of all Swingline Loans made by the Swingline Lender to the Borrower pursuant to the Credit Agreement, and to pay interest from the date hereof on the unpaid principal amount hereof, in like money, at said office, on the dates and at the rate specified in Section 2.3(c) of the Credit Agreement. Upon the occurrence and during the continuance of an Event of Default, the balance outstanding hereunder shall bear interest as provided in Section 3.1 of the Credit Agreement. Further, in the event the payment of all sums due hereunder is accelerated under the terms of the Credit Agreement, this Note, and all other indebtedness of the Borrower to the Swingline Lender shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Borrower. In the event this Note is not paid when due at any stated or accelerated maturity, the Borrower agrees to pay, in addition to the principal and interest, all costs of collection, including reasonable attorneys' fees. This Note and the Loans evidenced hereby may be transferred in whole or in part only by registration of such transfer on the Register maintained by or on behalf of the Borrower as provided in Section 11.3(c) of the Credit Agreement. 214 IN WITNESS WHEREOF, the Borrower has caused this Note to be duly executed by its duly authorized officer as of the day and year first above written. MODTECH HOLDINGS, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ 215 EXHIBIT 2.4(f) FORM OF TRANCHE A TERM NOTE $_________________ February 16, 1999 FOR VALUE RECEIVED, MODTECH HOLDINGS, INC., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of __________________________, its successors and assigns (the "Lender"), at the office of NationsBank, N. A., as Administrative Agent (the "Administrative Agent"), at 101 North Tryon Street, Independence Center, NC1-001-15-04, Charlotte, North Carolina 28255 (or at such other place or places as the holder hereof may designate), at the times set forth in the Credit Agreement dated as of the date hereof among the Borrower, the Guarantors, the Lenders and the Administrative Agent (as it may be as amended, modified, restated or supplemented from time to time, the "Credit Agreement"; all capitalized terms not otherwise defined herein shall have the meanings set forth in the Credit Agreement), but in no event later than the Maturity Date, in Dollars and in immediately available funds, the principal amount of ________________________DOLLARS ($____________), and to pay interest from the date hereof on the unpaid principal amount hereof, in like money, at said office, on the dates and at the rates selected in accordance with Section 2.4(e) of the Credit Agreement. Upon the occurrence and during the continuance of an Event of Default, the balance outstanding hereunder shall bear interest as provided in Section 3.1 of the Credit Agreement. Further, in the event the payment of all sums due hereunder is accelerated under the terms of the Credit Agreement, this Note, and all other indebtedness of the Borrower to the Lender shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Borrower. In the event this Note is not paid when due at any stated or accelerated maturity, the Borrower agrees to pay, in addition to the principal and interest, all costs of collection, including reasonable attorneys' fees. This Note and the Loans evidenced hereby may be transferred in whole or in part only by registration of such transfer on the Register maintained by or on behalf of the Borrower as provided in Section 11.3(c) of the Credit Agreement. 216 IN WITNESS WHEREOF, the Borrower has caused this Note to be duly executed by its duly authorized officer as of the day and year first above written. MODTECH HOLDINGS, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ 217 EXHIBIT 2.5(f) FORM OF DELAYED DRAW TERM NOTE $_________________ February 16, 1999 FOR VALUE RECEIVED, MODTECH HOLDINGS, INC., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of __________________________, its successors and assigns (the "Lender"), at the office of NationsBank, N. A., as Administrative Agent (the "Administrative Agent"), at 101 North Tryon Street, Independence Center, NC1-001-15-04, Charlotte, North Carolina 28255 (or at such other place or places as the holder hereof may designate), at the times set forth in the Credit Agreement dated as of the date hereof among the Borrower, the Guarantors, the Lenders and the Administrative Agent (as it may be as amended, modified, restated or supplemented from time to time, the "Credit Agreement"; all capitalized terms not otherwise defined herein shall have the meanings set forth in the Credit Agreement), but in no event later than the Maturity Date, in Dollars and in immediately available funds, the principal amount of ________________________DOLLARS ($____________), and to pay interest from the date hereof on the unpaid principal amount hereof, in like money, at said office, on the dates and at the rates selected in accordance with Section 2.5(e) of the Credit Agreement. Upon the occurrence and during the continuance of an Event of Default, the balance outstanding hereunder shall bear interest as provided in Section 3.1 of the Credit Agreement. Further, in the event the payment of all sums due hereunder is accelerated under the terms of the Credit Agreement, this Note, and all other indebtedness of the Borrower to the Lender shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Borrower. In the event this Note is not paid when due at any stated or accelerated maturity, the Borrower agrees to pay, in addition to the principal and interest, all costs of collection, including reasonable attorneys' fees. This Note and the Loans evidenced hereby may be transferred in whole or in part only by registration of such transfer on the Register maintained by or on behalf of the Borrower as provided in Section 11.3(c) of the Credit Agreement. 218 IN WITNESS WHEREOF, the Borrower has caused this Note to be duly executed by its duly authorized officer as of the day and year first above written. MODTECH HOLDINGS, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ 219 EXHIBIT 3.2 FORM OF NOTICE OF EXTENSION/CONVERSION NationsBank, N. A., as Administrative Agent for the Lenders 101 North Tryon Street Independence Center, 15th Floor NC1-001-15-04 Charlotte, North Carolina 28255 Attention: Agency Services Ladies and Gentlemen: The undersigned, MODTECH HOLDINGS, INC. (the "Borrower"), refers to the Credit Agreement dated as of February 16, 1999 (as amended, modified, restated or supplemented from time to time, the "Credit Agreement"), among the Borrower, the Guarantors, the Lenders and NationsBank, N. A., as Administrative Agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. The Borrower hereby gives notice pursuant to Section 3.2 of the Credit Agreement that it requests an extension or conversion of a [Revolving Loan] [Tranche A Term Loan] [Delayed Draw Term Loan] outstanding under the Credit Agreement, and in connection therewith sets forth below the terms on which such extension or conversion is requested to be made: (A) Loan Type (Revolving, Tranche A or Delayed Draw/Eurodollar or Base Rate) ____________________ (B) Date of Extension or Conversion (which is the last day of the the applicable Interest Period) ____________________ (C) Principal Amount of Extension or Conversion ____________________ (D) Interest rate basis ____________________ (E) Interest Period and the last day thereof ____________________ 220 In accordance with the requirements of Section 5.2, the Borrower hereby reaffirms the representations and warranties set forth in the Credit Agreement as provided in subsection (b) of such Section, and confirms that the matters referenced in subsections (c), (d), (e) and (f) of such Section, are true and correct. MODTECH HOLDINGS, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ 221 EXHIBIT 7.1(c) FORM OF OFFICER'S COMPLIANCE CERTIFICATE For the fiscal quarter ended _________________, 19___. I, ______________________, [Title] of MODTECH HOLDINGS, INC. (the "Borrower") hereby certify that, to the best of my knowledge and belief, with respect to that certain Credit Agreement dated as of February 16, 1999 (as amended, modified, restated or supplemented from time to time, the "Credit Agreement"; all of the defined terms in the Credit Agreement are incorporated herein by reference) among the Borrower, the Guarantors, the Lenders and NationsBank, N. A., as Administrative Agent: a. The company-prepared financial statements which accompany this certificate are true and correct in all material respects and have been prepared in accordance with GAAP applied on a consistent basis, subject to changes resulting from normal year-end audit adjustments. b. Since ___________ (the date of the last similar certification, or, if none, the Closing Date) no Default or Event of Default has occurred under the Credit Agreement. Delivered herewith are detailed calculations demonstrating compliance by the Credit Parties with the financial covenants contained in Section 7.11 of the Credit Agreement as of the end of the fiscal period referred to above. This ______ day of ___________, 19__. MODTECH HOLDINGS, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ 222 Attachment to Officer's Certificate COMPUTATION OF FINANCIAL COVENANTS 223 EXHIBIT 7.12 FORM OF JOINDER AGREEMENT THIS JOINDER AGREEMENT (the "Agreement"), dated as of _____________, 19__, is by and between _____________________, a ___________________ (the "Subsidiary"), and NATIONSBANK, N. A., in its capacity as Administrative Agent under that certain Credit Agreement (as it may be amended, modified, restated or supplemented from time to time, the "Credit Agreement"), dated as of February 16, 1999, by and among MODTECH HOLDINGS, INC. a Delaware corporation (the "Borrower"), the Guarantors, the Lenders and NationsBank, N. A., as Administrative Agent. All of the defined terms in the Credit Agreement are incorporated herein by reference. The Credit Parties are required by Section 7.12 of the Credit Agreement to cause the Subsidiary to become a "Guarantor". Accordingly, the Subsidiary hereby agrees as follows with the Administrative Agent, for the benefit of the Lenders: 1. The Subsidiary hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Subsidiary will be deemed to be a party to the Credit Agreement and a "Guarantor" for all purposes of the Credit Agreement, and shall have all of the obligations of a Guarantor thereunder as if it had executed the Credit Agreement. The Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions applicable to the Guarantors contained in the Credit Agreement. Without limiting the generality of the foregoing terms of this paragraph 1, the Subsidiary hereby (i) jointly and severally together with the other Guarantors, guarantees to each Lender and the Administrative Agent, as provided in Section 4 of the Credit Agreement, the prompt payment and performance of the Credit Party Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration or otherwise) strictly in accordance with the terms thereof. 2. The Subsidiary hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Subsidiary will be deemed to be a party to the Security Agreement, and shall have all the obligations of an "Obligor" (as such term is defined in the Security Agreement) thereunder as if it had executed the Security Agreement. The Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions contained in the Security Agreement. Without limiting generality of the foregoing terms of this paragraph 2, the Subsidiary hereby grants to the Administrative Agent, for the benefit of the Lenders, a continuing security interest in, and a right of set off against any and all right, title and interest of the Subsidiary in and to the Collateral (as such term is defined in Section 2 of the Security Agreement) of the Subsidiary. The Subsidiary hereby represents and warrants to the Administrative Agent that: 224 (i) The Subsidiary's chief executive office and chief place of business are (and for the prior four months have been) located at the locations set forth on Schedule 1 attached hereto and the Subsidiary keeps its books and records at such locations. (ii) The type of Collateral owned by the Subsidiary and the location of all Collateral owned by the Subsidiary is as shown on Schedule 2 attached hereto. (iii) The Subsidiary's legal name is as shown in this Agreement and the Subsidiary has not in the past four months changed its name, been party to a merger, consolidation or other change in structure or used any tradename except as set forth in Schedule 3 attached hereto. (iv) The patents and trademarks listed on Schedule 4 attached hereto constitute all of the registrations and applications for the patents and trademarks owned by the Subsidiary. 3. The Subsidiary hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Subsidiary will be deemed to be a party to the Pledge Agreement, and shall have all the obligations of a "Pledgor" thereunder as if it had executed the Pledge Agreement. The Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound by, all the terms, provisions and conditions contained in the Pledge Agreement. Without limiting the generality of the foregoing terms of this paragraph 3, the Subsidiary hereby pledges and assigns to the Administrative Agent, for the benefit of the Lenders, and grants to the Administrative Agent, for the benefit of the Lenders, a continuing security interest in any and all right, title and interest of the Subsidiary in and to Pledged Shares (as such term is defined in Section 2 of the Pledge Agreement) listed on Schedule 5 attached hereto and the other Pledged Collateral (as such term is defined in Section 2 of the Pledge Agreement). 4. The address of the Subsidiary for purposes of all notices and other communications is ____________________, ____________________________, Attention of ______________ (Facsimile No. ____________). 5. The Subsidiary hereby waives acceptance by the Administrative Agent and the Lenders of the guaranty by the Subsidiary under Section 4 of the Credit Agreement upon the execution of this Agreement by the Subsidiary. 6. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute one contract. 7. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of North Carolina. 225 IN WITNESS WHEREOF, the Subsidiary has caused this Joinder Agreement to be duly executed by its authorized officers, and the Administrative Agent, for the benefit of the Lenders, has caused the same to be accepted by its authorized officer, as of the day and year first above written. [SUBSIDIARY] By:_________________________________________ Name:_______________________________________ Title:______________________________________ Acknowledged and accepted: NATIONSBANK, N. A., as Administrative Agent By:_________________________________________ Name:_______________________________________ Title:______________________________________ 226 SCHEDULE 1 TO FORM OF JOINDER AGREEMENT [Chief Executive Office and Chief Place of Business of Subsidiary] 227 SCHEDULE 2 TO FORM OF JOINDER AGREEMENT [Types and Locations of Collateral] 228 SCHEDULE 3 TO FORM OF JOINDER AGREEMENT [Tradenames] 229 SCHEDULE 4 TO FORM OF JOINDER AGREEMENT [Patents and Trademarks] 230 SCHEDULE 5 TO FORM OF JOINDER AGREEMENT [Pledged Shares] 231 EXHIBIT 11.3(b) FORM OF ASSIGNMENT AND ACCEPTANCE Reference is made to the Credit Agreement dated as of February 16, 1999, as amended and modified from time to time thereafter (the "Credit Agreement") among MODTECH HOLDINGS, INC. the other Credit Parties party thereto, the Lenders party thereto and NationsBank, N.A., as Administrative Agent. Terms defined in the Credit Agreement are used herein with the same meanings. The "Assignor" and the "Assignee" referred to on Schedule 1 agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, without recourse and without representation or warranty except as expressly set forth herein, and the Assignee hereby purchases and assumes from the Assignor, an interest in and to the Assignor's rights and obligations under the Credit Agreement and the other Credit Documents as of the date hereof equal to the percentage interest specified on Schedule 1 of all outstanding rights and obligations under the Credit Agreement and the other Credit Documents. After giving effect to such sale and assignment, the Assignee's Commitment and the amount of the Loans owing to the Assignee will be as set forth on Schedule 1. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Documents or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Credit Party or the performance or observance by any Credit Party of any of its obligations under the Credit Documents or any other instrument or document furnished pursuant thereto; and (iv) attaches the Notes held by the Assignor and requests that the Administrative Agent exchange such Notes for new Notes payable to the order of the Assignee in an amount equal to the Commitment assumed by the Assignee pursuant hereto and to the Assignor in an amount equal to the Commitment retained by the Assignor, if any, as specified on Schedule 1. 232 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 7.1 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Credit Agreement are required to be performed by it as a Lender; and (vi) attaches any U.S. Internal Revenue Service or other forms required under Section 3.11. 4. Following the execution of this Assignment and Acceptance, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date for this Assignment and Acceptance (the "Effective Date") shall be the date of acceptance hereof by the Administrative Agent, unless otherwise specified on Schedule 1. 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 6. Upon such acceptance and recording by the Administrative Agent, from and after the Effective Date, the Administrative Agent shall make all payments under the Credit Agreement and the Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Notes for periods prior to the Effective Date directly between themselves. 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of North Carolina. 8. This Assignment and Acceptance may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of Schedule 1 to this Assignment and Acceptance by telecopier shall be effective as delivery of a manually executed counterpart of this Assignment and Acceptance. 233 IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Assignment and Acceptance to be executed by their officers thereunto duly authorized as of the date hereof. _______________________________, as Assignor By:_________________________________________ Name:_______________________________________ Title:______________________________________ _______________________________, as Assignee By:_________________________________________ Name:_______________________________________ Title:______________________________________ Notice address of Assignee: <> ____________________________________________ ____________________________________________ Attn: _________________________ Telephone: (___) _____________ Telecopy: (___) ____________ CONSENTED TO: NATIONSBANK, N.A., * as Administrative Agent By:_____________________________ Name:___________________________ Title:__________________________ MODTECH HOLDINGS, INC.* By:_____________________________ Name:___________________________ Title:__________________________ - -------- * Required if the Assignee is an Eligible Assignee solely by reason of clause (iii) of the definition of "Eligible Assignee." * Required if the Assignee is an Eligible Assignee solely by reason of clause (iii) of the definition of "Eligible Assignee." 234 SCHEDULE 1 to ASSIGNMENT AND ACCEPTANCE (a) Date of Assignment: (b) Legal Name of Assignor: (c) Legal Name of Assignee: (d) Effective Date of Assignment* : (e) Revolving Commitment Percentage Assigned (expressed as a percentage set forth to at least 8 decimals) % (f) Revolving Commitment Percentage of Assignee after giving effect to this Assignment and Acceptance as of the Effective Date (set forth to at least 8 decimals) % (g) Revolving Commitment Percentage of Assignor after giving effect to this Assignment and Acceptance as of the Effective Date (set forth to at least 8 decimals) % (h) Revolving Committed Amount as of Effective Date $_____________ (i) Dollar Amount of Assignor's Revolving Commitment Percentage as of the Effective Date (the amount set forth in (h) multiplied by the percentage set forth in (g)) $_____________ (j) Dollar Amount of Assignee's Revolving Commitment Percentage as of the Effective Date (the amount set forth in (h) multiplied by the percentage set forth in (f)) $_____________ (k) Tranche A Term Loan Commitment Percentage Assigned (expressed as a percentage set forth to at least 8 decimals) % (l) Tranche A Term Loan Commitment Percentage of Assignee after giving effect to this Assignment and Acceptance on the Effective Date (set forth to at least 8 decimals) % (m) Tranche A Term Loan Commitment Percentage of Assignor after giving effect to this Assignment and Acceptance on the Effective Date (set forth to at least 8 decimals) % (n) Outstanding Balance of Tranche A Term Loan as of
- ---------- * This date should be no earlier than five Business Days after delivery of this Assignment and Acceptance to the Administrative Agent. 235 Effective Date $_____________ (o) Principal Amount of Assignor's portion of the Tranche A Term Loan after giving effect to this Assignment and Acceptance on Effective Date (the amount set forth in (n) multiplied by the percentage set forth in (m)) $_____________ (p) Principal Amount of Assignee's portion of the Tranche A Term Loan after giving effect to this Assignment and Acceptance on Effective Date (the amount set forth in (n) multiplied by the percentage set forth in (l)) $_____________ (q) Delayed Draw Term Loan Commitment Percentage Assigned (expressed as a percentage set forth to at least 8 decimals) % (r) Delayed Draw Term Loan Commitment Percentage of Assignee after giving effect to this Assignment and Acceptance on the Effective Date (set forth to at least 8 decimals) % (s) Delayed Draw Term Loan Commitment Percentage of Assignor after giving effect to this Assignment and Acceptance on the Effective Date (set forth to at least 8 decimals) % (t) Outstanding Balance of Delayed Draw Term Loan as of Effective Date $_____________ (u) Principal Amount of Assignor's portion of the Tranche B Term Loan after giving effect to this Assignment and Acceptance on Effective Date (the amount set forth in (t) multiplied by the percentage set forth in (s)) $_____________ (v) Principal Amount of Assignee's portion of the Tranche B Term Loan after giving effect to this Assignment and Acceptance on Effective Date (the amount set forth in (t) multiplied by the percentage set forth in (q)) $_____________
EX-27 3 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1998 DEC-31-1998 40,142,355 0 16,746,855 0 4,441,537 69,808,077 17,625,346 5,311,671 82,873,269 17,679,162 0 0 0 65,096,741 0 82,873,269 127,620,102 127,620,102 97,765,554 97,765,554 4,738,884 0 204,535 26,238,227 9,708,144 16,530,083 0 0 0 16,530,083 1.68 1.50
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