-----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, JvOYieWey3RpSVxpBLvEq8792Lfu+JLPFICa1Gl6yGFBwxV2PznXtBTaoa2iCH1V tIrPThO8JnQT2/yBBdAjxA== 0000892569-99-000599.txt : 19990302 0000892569-99-000599.hdr.sgml : 19990302 ACCESSION NUMBER: 0000892569-99-000599 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990301 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990301 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MODTECH INC CENTRAL INDEX KEY: 0000864601 STANDARD INDUSTRIAL CLASSIFICATION: PREFABRICATED WOOD BLDGS & COMPONENTS [2452] IRS NUMBER: 330044888 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-18680 FILM NUMBER: 99554552 BUSINESS ADDRESS: STREET 1: 2830 BARRETT AVE STREET 2: PO BOX 1240 CITY: PERRIS STATE: CA ZIP: 92370 BUSINESS PHONE: 9099434014 MAIL ADDRESS: STREET 1: 2830 BARRETT AVENUE STREET 2: P O BOX 1240 CITY: PERRIS STATE: CA ZIP: 92370 8-K 1 FORM 8-K FOR THE REPORT DATE OF MARCH 1, 1999 1 FORM 8-K Securities and Exchange Commission Washington, D.C. 20549 CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: March 1, 1999 MODTECH HOLDINGS, INC. (Exact name of registrant as specified in its charter) Delaware 0-25161 33-0825386 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 2830 Barrett Avenue Perris, California 92571 (Address of principal executive offices) Registrant's telephone number, including area code: (909) 943-4014 Not Applicable (Former name or former address, if changed since last report) 2 Item 1. Changes in Control of Registrant. None. Item 2. Acquisition or Disposition of Assets. On February 16, 1999, Modtech Holdings, Inc. (the "Company") acquired 100% of the outstanding stock of Modtech, Inc., a California corporation ("Modtech") and 100% of the outstanding stock of SPI Holdings, Inc., a Colorado corporation ("SPI"). The acquisition was consummated pursuant to the terms of the Agreement and Plan of Reorganization and Merger between SPI and Modtech, dated September 28, 1998 (the "Merger Agreement"). Pursuant to the Merger Agreement, subsidiaries of the Company, Modtech Merger Sub, Inc., and SPI Merger Sub, Inc., merged with and into Modtech and SPI, respectively, resulting in Modtech and SPI becoming wholly-owned subsidiaries of the Company. For each share of Modtech Common Stock, Modtech stockholders received $3.7293 cash and 0.8508 of a share of the Company's Common Stock. For each share of SPI Common Stock or SPI Preferred Stock, SPI stockholders received 1.8785 shares of the Company's Common Stock. Modtech stockholders had the right to exchange up to 3.94% of their Common Stock for the Company's Series A Preferred Stock in place of the Company's Common Stock, at the same 0.8508 exchange ratio, and SPI stockholders had the right to elect to receive, in place of the Company's Common Stock, $49.4097 cash per share of SPI Common Stock or SPI Preferred Stock for up to 5.9176% of such Common Stock or Preferred Stock. Modtech option holders received $25.00 cash per share, less the applicable per share exercise price of their options, for 14.6709% of the shares covered by the vested portion of their options. A total of 12,622,158 shares of the Company's Common Stock, 388,939 shares of the Company's Series A Preferred Stock, and $39,923,472 cash was issued and paid by the Company to the stockholders and option holders of SPI and Modtech in connection with the mergers. The mergers were funded from Modtech's cash and the proceeds of a Credit Agreement with NationsBank, N.A. as the agent for several lenders, dated February 16, 1999. The assets acquired in the mergers include manufacturing facilities located at nine production facilities, inventory, machinery, raw materials, and cash. The manufacturing facilities were used by Modtech and SPI to produce modular classrooms and commercial and light industrial buildings. The Company intends to continue the same line of business through Modtech and SPI as operating subsidiaries. The Company's Board of Directors consists of Evan M. Gruber, Charles C. McGettigan, Myron A. Wick III, Daniel J. Donahoe III and Robert W. Campbell (each of whom was a director of Modtech at the time of the merger); and Patrick Van Den Bossche, Charles A. Hamilton and Charles R. Gwirtsman (each of whom was a director of SPI at the time of the merger). Evan M. Gruber, Chief Executive Officer of Modtech serves as the Chief Executive Officer of the Company, and Michael G. Rhodes, Chief Operating Officer of Modtech, serves as the Chief Operating Officer and Chief Financial Officer of the Company. SPI's President, Patrick Van Den Bossche, serves as the President of the Company. Modtech leases its two facilities located in Perris, California, and the land on which the manufacturing facility is located in Lathrop, California from general partnerships in which Mr. Gruber, an officer and director of both Modtech and the Company, is a partner. The leases are standard industrial leases which expire in 2014 and 2019. The current aggregate monthly rent is $36,000 and is subject to upward adjustment each year to market rates based on annual market surveys conducted by the parties. KRG Capital Partners, LLC ("KRG"), Infrastructure and Environmental Private Equity Private Management III, LLC ("IEPEM"), The Argentum Group ("Argentum") and NationsCredit Commercial Corporation ("NationsCredit") will receive a total of $1,250,000 in transaction fees in connection with the mergers. Mr. Gwirtsman, a director of both SPI and the Company, is a principal of KRG. At the closing of the merger, $750,000 2 3 of the transaction fees were paid as follows: KRG--$573,170; IEPEM--$126,525; Argentum--$25,305; and NationsCredit--$25,000. The remaining balance of the fees will be paid to KRG over two years in equal monthly installments. Upon the closing of a business acquisition by the Company during each of the first and second years after the closing of the mergers, all remaining monthly payments of the transactions fee for that year will become immediately due and payable. KRG will also be retained by the Company for a period of three years to provide transaction advisory services in connection with any future acquisitions by the Company following completion of the mergers. This agreement may be renewed by the parties on a year-to-year basis for a maximum of two additional years. The Company may terminate the transaction advisory services agreement at any time after its second anniversary upon 90 days' prior written notice. Under the transaction advisory agreement, KRG will receive a fee of $75,000 for acquisitions under $5 million, a fee of $100,000 for acquisitions greater than $5 million but less than $15 million, and a fee of not less than $100,000 for acquisitions in excess of $15 million. During the third year of the agreement and any subsequent extension, KRG will receive an annual base advisory fee of $250,000. Pursuant to the terms of a financial advisory services agreement entered into in June 1998 and approved by Modtech's Board, McGettigan, Wick & Co., Inc. will receive a $1,250,000 fee for financial advisory services rendered in connection with the mergers. The fee is payable over not more than two years, with $750,000 paid at the completion of the mergers, $250,000 paid upon the earlier of the closing of the first business acquisition following the mergers or the first anniversary of the mergers, and $250,000 paid upon the earlier of the closing of the second business acquisition following the mergers or the second anniversary of the mergers. The principals of McGettigan, Wick & Co., Inc. are Charles C. McGettigan and Myron A. Wick III, who are also principals of Proactive Partners, L.P., which beneficially controlled about 23.6% of the voting power of Modtech prior to the merger and beneficially controls about 13% of the voting power of the Company. Mr. McGettigan and Mr. Wick were directors of Modtech prior to the merger and are currently directors of the Company. The officers and directors of Modtech and SPI at the time of the merger, and the holders of 5% or more of the equity securities of each company at that time, are entitled to have their shares of the Company's Common Stock registered for resale to the public under certain circumstances pursuant to a Registration Rights Agreement. The Company entered into employment agreements, effective on the closing date of the mergers, with Evan M. Gruber, an officer and director of Modtech, Patrick Van Den Bossche, an officer and director of SPI, and Michael G. Rhodes, an officer of Modtech. These agreements are for five years, provide for early severance payments of between one and two years and include, among other provisions, base annual salary of $300,000 for Mr. Gruber, $250,000 for Mr. Van Den Bossche, and $200,000 for Mr. Rhodes. The base salaries are subject to annual percentage increases and each individual is entitled to earn bonuses of up to 100% of annual base salary. The bonuses are based on performance and include a cash component and a stock option component based on performance. Concurrently with the closing of the merger, Mr. Gruber received an option to purchase 50,000 shares of the Company's Common Stock at the closing price of Modtech Common Stock on the day prior to the closing of the mergers. The option is immediately vested for 10,000 shares and will continue to vest at the rate of 10,000 shares per year. The option will be credited against the stock option component of any bonuses earned by Mr. Gruber in the first year of the employment agreement. Mr. Gruber's new employment agreement also includes a buy-out of his prior employment agreement with Modtech. Messrs. Gruber, Van Den Bossche and Rhodes are officers of the Company. Messrs. Gruber and Van Den Bossche are also directors of the Company. Item 3. Bankruptcy or Receivership. None. Item 4. Changes in Registrant's Certifying Accountant. None. 3 4 Item 5. Other Events. None. Item 6. Resignations of Registrant's Directors. None. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements. The financial statements of Modtech, Inc., SPI Holdings, Inc. and the indirect subsidiaries of SPI Holdings, Inc., Office Master of Texas, Inc. and Rosewood Enterprises, Inc. Modular Manufacturing, included in Amendment No. 2 to the Company's Registration Statement on Form S-4, dated January 11, 1999 (Commission File No. 333-69033), are incorporated herein by reference. (b) Unaudited Pro Forma Combined Condensed Financial Statements. The unaudited pro forma combined condensed financial statements of Modtech, Inc. and SPI Holdings, Inc., included in Amendment No. 2 to the Company's Registration Statement on Form S-4, dated January 11, 1999 (Commission File No. 333-69033), are incorporated herein by reference. (c) Exhibits.
Number Name of Exhibit - ------ --------------- 2 Agreement and Plan of Reorganization and Merger, dated as of September 28, 1998, by and between Modtech, Inc. and SPI Holdings, Inc. 99.1 Financial Statements of Modtech, Inc., SPI Holdings, Inc., Office Master of Texas, Inc. and Rosewood Enterprises, Inc. Modular Manufacturing. 99.2 Unaudited Pro Forma Combined Condensed Financial Statements of Modtech, Inc. and SPI Holdings, Inc. 99.3 Press Release dated February 17, 1999.
4 5 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. MODTECH HOLDINGS, INC. By: /s/ Evan M. Gruber ----------------------------- Evan M. Gruber, Chief Executive Officer Date: March 1, 1999. 5 6 EXHIBIT INDEX
Number Name of Exhibit - ------ --------------- 2 Agreement and Plan of Reorganization and Merger, dated as of September 28, 1998, by and between Modtech, Inc. and SPI Holdings, Inc. 99.1 Financial Statements of Modtech, Inc., SPI Holdings, Inc., Office Master of Texas, Inc. and Rosewood Enterprises, Inc. Modular Manufacturing. 99.2 Unaudited Pro Forma Combined Condensed Financial Statements of Modtech, Inc. and SPI Holdings, Inc. 99.3 Press Release dated February 17, 1999.
EX-2 2 AGGREEMENT AND PLAN OF REORGANIZATION AND MERGER 1 EXHIBIT 2 ANNEX I ================================================================================ AGREEMENT AND PLAN OF REORGANIZATION AND MERGER by and between MODTECH, INC. and SPI HOLDINGS, INC. ------------------------------- Dated as of September 28, 1998 ------------------------------- ================================================================================ 2 TABLE OF CONTENTS
ARTICLE I THE MERGERS ............................................................. 2 1.1 Organization of Holdings ....................................... 2 1.2 Directors and Officers of Holdings ............................. 2 1.3 Modtech Sub Merger ............................................. 3 1.4 SPI Sub Merger ................................................. 3 1.5 The Closing .................................................... 3 1.6 Effective Time ................................................. 4 1.7 Effects of the Mergers ......................................... 4 1.8 Directors and Officers of the Surviving Entities ............... 4 ARTICLE II CONVERSION OF SECURITIES ................................................ 5 2.1 Conversion of Securities ....................................... 5 2.2 Conversion of Modtech Shares ................................... 5 2.3 Modtech Election, Allocation and Conversion Procedures ......... 6 2.4 Additional Exchange Procedures ................................. 8 2.5 Dissenting Modtech Shares ...................................... 9 2.6 Modtech Options ................................................ 10 2.7 Conversion of SPI Shares ....................................... 11 2.8 SPI Election, Allocation and Conversion Procedures ............. 12 2.9 Additional Exchange Procedures ................................. 14 2.10 Dissenting SPI Shares .......................................... 16 2.11 SPI Options .................................................... 17 2.12 SPI Warrants ................................................... 18 2.13 Cancellation of Shares ......................................... 18 2.14 No Transfer after the Effective Time ........................... 18 ARTICLE III REPRESENTATIONS AND WARRANTIES OF MODTECH ............................... 18 3.1 Existence; Good Standing; Corporate Authority .................. 18 3.2 Authorization; Validity and Effect of Agreement ................ 19 3.3 Capitalization ................................................. 19 3.4 Subsidiaries ................................................... 20 3.5 Other Interests ................................................ 20 3.6 No Conflict; Required Filings and Consents ..................... 20 3.7 Compliance ..................................................... 21 3.8 SEC Documents .................................................. 21 3.9 Litigation ..................................................... 22
-ii- 3 3.10 Absence of Certain Changes ..................................... 22 3.11 Environmental Matters .......................................... 22 3.12 Real Properties ................................................ 23 3.13 Tangible Personal Property ..................................... 24 3.14 Intellectual Property .......................................... 24 3.15 Absence of Changes in Modtech Benefit Plans .................... 24 3.16 ERISA Compliance ............................................... 25 3.17 Taxes .......................................................... 27 3.18 Contracts; Debt Instruments .................................... 28 3.19 Insurance ...................................................... 30 3.20 Interests of Officers and Directors ............................ 30 3.21 No Brokers ..................................................... 30 3.22 Customers ...................................................... 30 3.23 Suppliers ...................................................... 30 3.24 Employees ...................................................... 30 3.25 Product Liability .............................................. 31 3.26 Information in Joint Proxy Statement/Prospectus and Form S-4.... 31 3.27 Disclosure ..................................................... 31 3.28 Fairness Opinion ............................................... 31 3.29 Year 2000 Matters .............................................. 31 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SPI ................................... 32 4.1 Existence; Good Standing; Authority ............................ 32 4.2 Authorization; Validity and Effect of Agreement ................ 32 4.3 Capitalization ................................................. 33 4.4 Subsidiaries ................................................... 33 4.5 Other Interests ................................................ 33 4.6 No Conflict; Required Filings and Consents ..................... 34 4.7 Compliance ..................................................... 34 4.8 Financial Statements ........................................... 35 4.9 Litigation ..................................................... 35 4.10 Absence of Certain Changes ..................................... 35 4.11 Environmental Matters .......................................... 36 4.12 Real Properties ................................................ 36 4.13 Tangible Personal Property ..................................... 37 4.14 Intellectual Property .......................................... 37 4.15 Absence of Changes in SPI Benefit Plans ........................ 37 4.16 ERISA Compliance ............................................... 38 4.17 Taxes .......................................................... 40 4.18 Contracts; Debt Instruments .................................... 41 4.19 Insurance ...................................................... 43 4.20 Interests of Officers and Directors ............................ 43
-iii- 4 4.21 No Brokers ..................................................... 43 4.22 Customers ...................................................... 43 4.23 Suppliers ...................................................... 44 4.24 Employees ...................................................... 44 4.25 Product Liability .............................................. 44 4.26 Information in Joint Proxy Statement/Prospectus and Form S-4 ... 44 4.27 Disclosure ..................................................... 44 4.28 Year 2000 Matters .............................................. 44 ARTICLE V COVENANTS ............................................................... 45 5.1 Conduct of Business by Modtech or SPI .......................... 45 5.2 Meetings of Stockholders ....................................... 46 5.3 Further Assurance and Cooperation .............................. 47 5.4 Certain Filings and Consents ................................... 47 5.5 Publicity ...................................................... 48 5.6 Joint Proxy Statement/Prospectus and Form S-4 .................. 48 5.7 Listing Application ............................................ 48 5.8 Further Action ................................................. 48 5.9 Lockup Agreements .............................................. 49 5.10 Expenses........................................................ 49 5.11 Notice of Change in Representations and Warranties ............. 49 5.12 Consents ....................................................... 49 5.13 Letter of Modtech's Accountants ................................ 49 5.14 Letter of SPI's Accountants .................................... 50 5.15 Registration Statement on Form S-8 ............................. 50 5.16 Tax Matters Certificates ....................................... 50 5.17 Assumption of Obligations by Holdings, Modtech Sub and SPI Sub.. 50 5.19 Development of Holdings Business Plan .......................... 51 5.20 Payment of Transaction Fees; Transaction Advisory Agreement .... 51 5.21 Retention of Holdings' Financial Advisor ....................... 51 5.22 Deregistration of Modtech Shares ............................... 51 ARTICLE VI CONDITIONS .............................................................. 51 6.1 Conditions to Each of Modtech's and SPI's Obligation to Effect the Mergers ............................... 51 6.2 Conditions to Obligation of Modtech to Effect the Mergers....... 53 6.3 Conditions to Obligation of SPI to Effect the Mergers .......... 54 ARTICLE VII TERMINATION, WAIVER AND AMENDMENT ....................................... 55 7.1 Termination or Abandonment ..................................... 55 7.2 Effect of Termination .......................................... 56
-iv- 5 7.3 Amendment or Supplement ........................................ 57 7.4 Extension of Time; Waiver, Etc ................................. 57 ARTICLE VIII INDEMNIFICATION ......................................................... 58 8.1 Indemnification ................................................ 58 ARTICLE IX GENERAL PROVISIONS ...................................................... 59 9.1 Non-survival of Representations and Warranties ................. 59 9.2 Notices ........................................................ 59 9.3 Assignment; Binding Effect ..................................... 60 9.4 Entire Agreement ............................................... 60 9.5 Governing Law .................................................. 61 9.6 Counterparts ................................................... 61 9.7 Headings 61 .................................................... 9.8 Interpretation ................................................. 61 9.9 Incorporation of Schedules ..................................... 61 9.10 Severability ................................................... 61 9.11 Enforcement of Agreement ....................................... 61 ARTICLE X DEFINITIONS ............................................................. 62 10.1 Defined Terms ................................................. 62
SCHEDULES Schedule I Schedule of Modtech Shareholders to be Allocated Holdings Preferred Stock DISCLOSURE SCHEDULES Modtech Disclosure Schedule SPI Disclosure Schedule LIST OF EXHIBITS Exhibit A Form of Certificate of Incorporation of Holdings Exhibit B Form of Bylaws of Holdings Exhibit C Form of Certificate of Designation for Holdings Preferred Stock Exhibit D Form of Voting Agreement Exhibit E Form of Certificate of Merger to be filed in California Exhibit F Form of Articles of Merger to be filed in Colorado Exhibit G Form of Transaction Advisory Agreement Exhibit H Form of Registration Rights Agreement -v- 6 AGREEMENT AND PLAN OF REORGANIZATION AND MERGER Agreement and Plan of Reorganization and Merger (this "Agreement"), dated as of September 28, 1998, by and between Modtech, Inc., a California corporation ("Modtech") and SPI Holdings, Inc., a Colorado corporation ("SPI"). RECITALS A. The Board of Directors of Modtech deems it advisable and in the best interest of Modtech and its stockholders to consummate, and has approved, including for purposes of Section 1101 of the General Corporation Law of the State of California (the "CGCL"), the business combination transactions provided for herein; and the Board of Directors of SPI deems it advisable and in the best interest of SPI and its stockholders to consummate, and has approved, including for purposes of Section 7-111-101 of the Colorado Business Corporation Act (the "CBCA"), the business combination transactions provided for herein, in which: (1) Modtech and SPI will form a Delaware corporation, Modtech Holdings, Inc. ("Holdings"); and (2) Because of a number of operational differences between Modtech and SPI, the Board of Directors of each of Modtech and SPI have deemed it advisable to maintain the separate existence of Modtech and SPI following the consummation of the transactions provided for herein; accordingly, Holdings will form two subsidiaries, a Delaware corporation which will merge with and into Modtech with Modtech continuing as the surviving corporation (the "Modtech Merger"), and a Colorado corporation which will merge with and into SPI with SPI continuing as the surviving corporation (the "SPI Merger" and, together with the Modtech Merger, the "Mergers"), and (i) all issued and outstanding Modtech Shares (as hereinafter defined) and all vested Modtech Options (as hereinafter defined) will be converted into the right to receive, in the aggregate, 9,481,118 shares of common stock, par value $.01 per share, of Holdings ("Holdings Common Stock"), 388,939 shares of Series A Preferred Stock, par value $.01 per share, of Holdings ("Holdings Preferred Stock") and $39,923,472 in cash, and (ii) all issued and outstanding SPI Shares (as hereinafter defined), all vested SPI Options (as hereinafter defined) and all exercisable SPI Warrants (as hereinafter defined) will be converted into the right to receive, in the aggregate, 4,974,462 shares of Holdings Common Stock and $8,076,133 in cash, all as more fully set forth below; B. For federal income tax purposes, it is intended that the SPI Merger shall qualify as a "reorganization" within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"), and the Modtech Merger (together with the SPI Merger) shall qualify as an "exchange" under Section 351 of the Code; and C. Modtech and SPI desire to make certain representations, warranties and agreements in connection with the Mergers and also to prescribe various conditions to the Mergers. Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings set forth in Section 10.1 hereof. 7 ARTICLE I THE MERGERS 1.1 Organization of Holdings. As promptly as practicable following the execution of this Agreement, Modtech and SPI shall cause Holdings to be organized under the laws of the State of Delaware. The initial certificate of incorporation and bylaws of Holdings shall be substantially in the forms attached hereto as Exhibit A and Exhibit B, respectively. The certificate of designation for the Holdings Preferred Stock shall be substantially in the form attached hereto as Exhibit C. The authorized capital stock of Holdings shall consist of 25,000,000 shares of Holdings Common Stock and 5,000,000 shares of Holdings Preferred Stock, of which 680 shares of Holdings Common Stock will be issued to Modtech and 320 shares of Holdings Common Stock will be issued to SPI. Prior to the Effective Time (as hereinafter defined), Modtech and SPI shall cause Holdings to provide for the issuance of Holdings Common Stock pursuant to the Mergers. 1.2 Directors and Officers of Holdings. (a) Upon formation of Holdings, the Board of Directors of Holdings will consist of seven directors. Modtech and SPI shall cause to be elected as initial directors of Holdings Evan M. Gruber, Patrick Van Den Bossche, Charles C. McGettigan, Myron A. Wick III, Daniel Donahoe, Charles A. Hamilton and Charles R. Gwirtsman. Each director shall remain in office until his successor is duly elected or appointed and qualified or until such director's earlier death, resignation or removal in accordance with the certificate of incorporation and bylaws of Holdings. (b) As of the Effective Time, the Board of Directors of Holdings will consist of nine directors, including the individuals set forth in Section 1.2(a), one additional Independent Director to be selected by SPI and one additional Independent Director to be selected by the Board of Directors of Holdings. Each director shall remain in office until his successor is duly elected or appointed and qualified or until such director's earlier death, resignation or removal in accordance with the certificate of incorporation and bylaws of Holdings. In addition, Proactive Partners, LP ("Proactive Partners") and KRG Capital Partners, LLC ("KRG Capital") shall each be permitted to designate one non-voting observer, who may be changed from time to time, and who shall be permitted to attend all meetings of the Board of Directors of Holdings. (c) Upon formation of Holdings and as of the Effective Time, Evan M. Gruber shall be the Chairman and Chief Executive Officer of Holdings, Patrick Van Den Bossche shall be the President of Holdings and Michael G. Rhodes shall be the Chief Operating Officer and Chief Financial Officer of Holdings. (d) At each of the first three stockholder's meetings of Holdings at which directors are elected, the Board of Directors shall, subject to the exercise of its fiduciary duties, use its best efforts to nominate the following persons for election to the Board of Directors for one-year terms; (1) Evan Gruber; (2) Patrick Van Den Bossche; (3) two designees of Proactive Partners; (4) two designees of KRG Capital; and (5) three joint designees of Proactive Partners and KRG Capital, all three of whom shall be Independent Directors. -2- 8 1.3 Modtech Sub Merger . (a) As promptly as practicable after the formation of Holdings, Modtech and SPI shall cause Holdings to form a wholly-owned corporation called Modtech Merger Sub, Inc. ("Modtech Sub") under the laws of the State of Delaware. Modtech and SPI shall cause Holdings to cause Modtech Sub to execute and deliver this Agreement and to merge with and into Modtech. Modtech shall be the surviving corporation in the Modtech Merger and as a result thereof shall become a wholly-owned subsidiary of Holdings. (b) The certificate of incorporation and bylaws of Modtech Sub shall be in such form as shall be determined by Holdings. Upon formation of Modtech Sub, Holdings shall elect Evan M. Gruber, Michael G. Rhodes and Patrick Van Den Bossche as directors of Modtech Sub and such Board of Directors, by unanimous written consent, shall appoint the officers of Modtech Sub. (c) Modtech shall use its best efforts to cause the Modtech Merger to be consummated in accordance with the terms of this Agreement. Modtech and SPI shall cause Holdings to execute a written consent under Section 228 of the Delaware General Corporation Law (the "DGCL"), as the sole stockholder of Modtech Sub, to the execution, delivery and performance of this Agreement by Modtech Sub. 1.4 SPI Sub Merger . (a) As promptly as practicable after the formation of Holdings, Modtech and SPI shall cause Holdings to form a wholly-owned corporation called SPI Merger Sub, Inc. ("SPI Sub") under the laws of the State of Colorado. Modtech and SPI shall cause Holdings to cause SPI Sub to execute and deliver this Agreement and to merge with and into SPI. SPI shall be the surviving corporation in the SPI Merger and as a result thereof shall become a wholly-owned subsidiary of Holdings. (b) The articles of incorporation and bylaws of SPI Sub shall be in such form as shall be determined by Holdings. Upon formation of SPI Sub, Holdings shall elect Evan M. Gruber, Patrick Van Den Bossche and Ronald R. Procunier as directors of SPI Sub and such Board of Directors, by unanimous written consent, shall appoint the officers of SPI Sub. (c) SPI shall use its best efforts to cause the SPI Merger to be consummated in accordance with the terms of this Agreement. Modtech and SPI shall cause Holdings to execute a written consent under Section 7-107-104 of the CBCA, as the sole stockholder of SPI Sub, to the execution, delivery and performance of this Agreement by SPI Sub. 1.5 The Closing . The closing (the "Closing") of the transactions contemplated by this Agreement will take place at the offices of Gibson, Dunn & Crutcher LLP, 4 Park Plaza, Irvine, California, at 10:00 a.m., local time, as soon as practicable following the date on which the last of the conditions set forth in Article 6 is satisfied or waived in accordance herewith or at such other -3- 9 place, time or date as Modtech and SPI may agree. The date on which the Closing occurs is hereinafter referred to as the "Closing Date". 1.6 Effective Time . On the Closing Date, (i) Modtech will cause a certificate of merger in the form attached hereto as Exhibit D to be filed with the Secretary of State of the State of California as provided in Section 1103 of the CGCL in order to effect the Modtech Merger; and (ii) SPI will cause articles of merger in the form attached hereto as Exhibit E to be filed with the Secretary of State of the State of Colorado as provided in Section 7-111-105 of the CBCA in order to effect the SPI Merger. Upon completion of such filings, the respective Mergers will become effective in accordance with the CGCL and CBCA. The time and date on which the Mergers become effective is herein referred to as the "Effective Time". 1.7 Effects of the Mergers . At the Effective Time, (a) The separate existence of Modtech Sub shall cease and Modtech Sub shall be merged with and into Modtech, with Modtech continuing as the surviving corporation (as such, "New Modtech"); (b) The separate existence of SPI Sub shall cease and SPI Sub shall be merged with and into SPI with SPI continuing as the surviving corporation (as such, "New SPI" and, together with New Modtech, the "Surviving Entities"); and (c) The Mergers shall have all the effects of applicable law, including, without limitation, the applicable provisions of the CGCL and the CBCA. 1.8 Directors and Officers of the Surviving Entities . (a) The members of the Board of Directors of New Modtech will be the members of the Board of Directors of Modtech Sub immediately prior to the Effective Time and the members of the Board of Directors of New SPI will be the members of the Board of Directors of SPI Sub immediately prior to the Effective Time. All of the members of the Board of Directors of New Modtech and New SPI will serve until their respective successors are duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the articles of incorporation and bylaws of New Modtech or New SPI, as the case may be. (b) The officers of New Modtech will be the officers of Modtech Sub immediately prior to the Effective Time and the officers of New SPI will be the officers of SPI Sub immediately prior to the Effective Time. Such persons will continue as officers of New Modtech and New SPI until their respective successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the articles of incorporation and bylaws of New Modtech or New SPI, as the case may be. -4- 10 ARTICLE II CONVERSION OF SECURITIES 2.1 Conversion of Securities of Merger Entities. As of the Effective Time, by virtue of the Mergers and without any action on the part of the holder of any securities of the entities involved: (i) each outstanding share of common stock of Modtech Sub, par value $0.01 per share, which is issued and outstanding immediately prior to the Effective Time, shall be converted into and become one (1) share of common stock of New Modtech and (ii) each outstanding share of common stock of SPI Sub, par value $0.01 per share, which is issued and outstanding immediately prior to the Effective Time, shall be converted into and become one (1) share of common stock of New SPI. 2.2. Conversion of Modtech Shares . (a) As of the Effective Time, by virtue of the Modtech Merger and without any action on the part of the holder of any securities of the entities involved, each share of Common Stock, par value $0.01 per share, of Modtech ("Modtech Common Stock" or "Modtech Shares") issued and outstanding immediately prior to the Effective Time (other than (x) Modtech Shares owned by Modtech or any of its Subsidiaries or any other Modtech Shares designated as treasury shares (collectively, the "Modtech Treasury Shares") and (y) any Dissenting Modtech Shares (as defined in Section 2.5(b))) will, by virtue of the Modtech Merger, be converted into: (A) cash in an amount equal to $3.7293, subject to adjustment as hereinafter provided (the "Modtech Per Share Cash Stock Consideration"), and (B) 0.8508 fully paid and nonassessable shares of Holdings Common Stock (the "Modtech Exchange Ratio"), (the "Modtech Per Share Common Stock Consideration"); provided, however, that, subject to the election, allocation and conversion procedures set forth in Section 2.3: (C) the holders of Modtech Shares may elect to receive fully paid and nonassessable shares of Holdings Preferred Stock (the "Modtech Per Share Preferred Stock Consideration") in lieu of receiving an equal number of shares of Holdings Common Stock, provided, that, no holder of Modtech Shares may elect to receive Holdings Preferred Stock for more than 3.94% (rounded down to the nearest whole share) of such Record Holders ownership of Holdings Common Stock, and, provided further, that in the aggregate no greater than 388,939 shares of Holdings Preferred Stock may be issued pursuant to such elections (such aggregate number of shares, the "Modtech Preferred Stock Number"). -5- 11 (D) The maximum number of shares of Holdings Preferred Stock set forth in paragraph (C) above may be adjusted upward or downward by the Exchange Agent on the Closing Date upon receipt by the Exchange Agent of a notice from Modtech specifying the amount of such adjustment necessary to ensure that the Modtech Merger meets the minimum requirements for qualification as a transaction under Section 351 the Code. (b) At the Effective Time, each Modtech Treasury Share shall, by virtue of the Modtech Merger and without any action on the part of the holders of any securities of the entities involved, be canceled and extinguished and shall cease to exist, and no exchange or payment shall be made therefor. 2.3 Modtech Election, Allocation and Conversion Procedures . (a) Subject to the allocation and conversion procedures set forth in Section 2.3(b), each Record Holder of Modtech Shares will be entitled to elect to receive one share of Holdings Preferred Stock in lieu of each share of Holdings Common Stock such Record Holder would otherwise receive, provided, such Holdings Preferred Stock may not exceed 3.94% of the Holdings Common Stock such Record Holder would receive but for such election. All other Modtech Shares held by such Record Holders ("Modtech No-Election Shares") shall be converted into the Modtech Per Share Common Stock Consideration as set forth above. Any Record Holder who delivers to the Exchange Agent an Election Form electing to receive Holdings Preferred Stock for greater than 3.94% of the Holdings Common Stock such Record Holder would receive but for such election shall be deemed to have elected to receive Holdings Preferred Stock for only 3.94% of the Holdings Common Stock such Record Holder would receive but for such election. The percentage of Holdings Common Stock that each Record Holder may convert to Holdings Preferred Stock may be adjusted upward or downward by the Exchange Agent on the Closing Date in accordance with the adjustments, if any, made in the Modtech Preferred Stock Number pursuant to Section 2.2(a)(D) above. If such adjustment is made, each electing Record Holder's election will be adjusted pro rata based on the original percentage elected. (b) Not later than two business days after the Election Deadline, Holdings shall cause the Exchange Agent to effect the allocations and conversions among the Record Holders of Modtech Shares of rights to receive the Modtech Per Share Common Stock Consideration or the Modtech Per Share Preferred Stock Consideration in the Modtech Merger as follows: (i) If the number of Modtech Preferred Stock Election Shares (on the basis of Election Forms received by the Election Deadline) is less than the Modtech Preferred Stock Number, then (A) all Modtech Preferred Stock Election Shares shall be deemed, as of the Effective Time, to have become and been converted into the right to receive the Modtech Per Share Preferred Stock Consideration, -6- 12 (B) the Exchange Agent shall convert (pro rata according to the total number of Modtech No-Election Shares held by each such Record Holder set forth on Schedule I on the Record Date) into Modtech Preferred Stock Election Shares ("Converted Modtech No-Election Shares") a sufficient number of Modtech No-Election Shares such that the remainder of (x) the Modtech Preferred Stock Election Shares plus (y) the Converted Modtech No-Election Shares shall equal as closely as practicable the Modtech Preferred Stock Number, and all Converted Modtech No-Election Shares shall be deemed, as of the Effective Time, to have become and been converted into the right to receive the Modtech Per Share Preferred Stock Consideration, and (C) the Modtech No-Election Shares that are not Converted Modtech No-Election Shares shall be deemed, as of the Effective Time, to have become and been converted into the right to receive the Modtech Per Share Common Stock Consideration. (c) On the Mailing Date, Holdings shall mail an Election Form and a letter of transmittal (the "Letter of Transmittal") to each Record Holder of Modtech Shares. To be effective, an Election Form must be properly completed, signed and actually received by the Exchange Agent not later than the Election Deadline and must be accompanied by the certificates representing all the Modtech Shares ("Modtech Certificates") as to which the Election is being made (or an appropriate guarantee of delivery by an eligible organization). Holdings shall have reasonable discretion, which it may delegate in whole or in part to the Exchange Agent, to determine whether Election Forms have been properly completed, signed and timely submitted or to disregard defects in Election Forms; such decisions of Holdings (or of the Exchange Agent) shall be conclusive and binding. Neither Holdings nor the Exchange Agent shall be under any obligation to notify any person of any defect in an Election Form submitted to the Exchange Agent, except that if Holdings determines not to disregard a defect, Holdings shall notify Modtech of such defect and provide a reasonable opportunity for the defect to be cured by the subject Record Holder. The Exchange Agent shall also make, and Holdings shall verify, all computations contemplated by this Section 2.3, and all such computations shall be conclusive and binding on the Record Holders of Modtech Shares, absent manifest error. The Exchange Agent shall promptly provide Modtech with a copy of the completed computation. Modtech Shares covered by an Election Form which is not effective shall be deemed to be Modtech No-Election Shares. Once an Election is made, it may not be revoked unless such revocation has been communicated in writing to the Exchange Agent prior to the Election Deadline. (d) No fractional interests in shares of Holdings Common Stock or Holdings Preferred Stock, and no certificates representing such fractional interests, shall be issued upon the surrender for exchange of Modtech Certificates or upon the exercise of Modtech Options. In lieu of any fractional share, Holdings shall pay to each Record Holder of Modtech Shares, or to the holder of a Modtech Option upon the exercise thereof, who otherwise would be entitled to receive a fractional interest in a share of Holdings Common Stock or Holdings Preferred Stock, an amount of cash (without interest) determined by multiplying (i) closing price of Modtech Common Stock on the last -7- 13 trading day on Nasdaq prior to the Closing Date by (ii) the fractional interest to which such Record Holder would otherwise be entitled. 2.4 Additional Exchange Procedures . (a) The Letter of Transmittal which accompanies the Election Form (which shall specify that delivery shall be effected and the risk of loss and title to the Modtech Certificates (and the Modtech Shares and consideration therefor represented by such Modtech Certificates) shall pass after the Effective Time only upon proper delivery of such Modtech Certificates to the Exchange Agent) will advise the Record Holders of Modtech Certificates of the procedure for surrendering to the Exchange Agent, Modtech Certificates in exchange for either the certificates representing the Modtech Per Share Cash Consideration, the Modtech Per Share Common Stock Consideration or the Modtech Per Share Preferred Stock Consideration (the "Modtech Merger Consideration"). (b) Each Record Holder of Modtech Shares that have been converted into a right to receive the Modtech Merger Consideration shall, upon surrender to the Exchange Agent of a Modtech Certificate or Certificates together with a properly completed Letter of Transmittal, be entitled to receive the Modtech Merger Consideration as provided herein. (c) Until so surrendered, each Modtech Certificate, and each Modtech Share represented thereby, shall, at and after the Effective Time, represent for all purposes only the right to receive the Modtech Merger Consideration as provided herein, and nothing else, subject to applicable law in the case of Modtech Dissenting Shares. (d) If any of the Modtech Merger Consideration is to be issued to a person other than the Record Holder of the Modtech Shares formerly represented by the Modtech Certificate or Certificates surrendered with respect thereto, it shall be a condition to such issuance that the Modtech Certificate or Certificates so surrendered shall be properly endorsed or otherwise be in proper form for transfer and that the person requesting such issuance shall pay to the Exchange Agent any transfer or other taxes required as a result of such issuance to a person other than the Record Holder of such Modtech Shares or shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. (e) At and after the Record Date, there shall be no further registration or transfers of Modtech Shares (other than transfers by operation of law), and the stock ledgers of Modtech shall be closed. After the Effective Time, Modtech Certificates presented to the Exchange Agent for transfer shall be canceled and exchanged for the Modtech Merger Consideration provided for, without interest, and in accordance with the procedures set forth, in this Article 2. (f) One hundred eighty (180) days after the Effective Time, any Holdings Common Stock or cash made available to the Exchange Agent that remains unclaimed by the Record Holders of Modtech Shares shall be returned to Holdings, upon its demand therefor. Any such Record Holder who has not delivered Modtech Certificates to the Exchange Agent in accordance with this Section -8- 14 2.4 prior to that time shall thereafter look only to the Holdings (and only as general creditors thereof) for the Modtech Merger Consideration in respect of any Modtech Shares formerly requested thereby. Notwithstanding the foregoing, neither Holdings nor the Exchange Agent shall be liable to any Record Holder of Modtech Shares for any securities delivered or any cash paid to a public official pursuant to applicable escheat or abandoned property laws or for any securities or cash retained by Holdings as permitted by any such law. (g) No dividends, interest or other distributions with respect to the Modtech Merger Consideration shall be paid to the holder of any unsurrendered Modtech Certificates until such Modtech Certificates are surrendered as provided in this Section 2.4. Upon such surrender, there shall be paid, without interest, to the person in whose name any Modtech Per Share Common Stock Consideration is registered, all dividends and other distributions payable in respect of such securities on a date subsequent to, and in respect of a record date after, the Effective Time. (h) In the event that any Modtech Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall pay in respect of such lost, stolen or destroyed certificate, upon the making of an affidavit of that fact by the holder thereof, the Modtech Merger Consideration as may be provided pursuant to this Agreement; provided, however, that Holdings may, in its sole discretion and as a condition precedent to the payment thereof, require the owner of such lost, stolen or destroyed certificate to deliver an indemnity agreement or a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Holdings, New Modtech or the Exchange Agent or any other party with respect to the certificate alleged to have been lost, stolen or destroyed. (i) If the Record Holder of any Modtech Shares shall become entitled to receive payment for such shares pursuant to Section 1101 of the CGCL and Section 2.5, such payment shall be made by Holdings in accordance with Section 2.5. (j) (i) Payments of Modtech Per Share Cash Consideration and payments in lieu of fractional shares shall be made by check mailed by the Exchange Agent at the Effective Time, and (ii) certificates representing Modtech Per Share Common Stock Consideration and Modtech Per Share Preferred Stock Consideration shall be delivered by hand or mailed by certified mail, return receipt requested, at the Effective Time; provided the Modtech Certificates have been provided by the surrendering shareholder to the Exchange Agent in compliance with Section 2.4. At the time of such payment or mailing, a statement setting forth in reasonable detail the calculation of the Modtech Merger Consideration being paid to each Record Holder shall also be mailed to each Record Holder. Risk of loss shall remain on Holdings until such certificate for Holdings Common Stock is actually received by the surrendering shareholder. 2.5 Dissenting Modtech Shares . (a) Notwithstanding any provision of this Agreement to the contrary, any Modtech Shares held by a holder who has demanded and perfected his demand for the fair value of his shares in -9- 15 accordance with Chapter 13 of the CGCL and as of the Effective Time has neither effectively withdrawn nor lost his right to demand such fair value (a "Dissenting Modtech Shareholder") shall not represent a right to receive any part of the Modtech Merger Consideration, but in lieu thereof the holder thereof shall be entitled to only such rights as are granted by the CGCL. (b) Notwithstanding any provision of this Agreement to the contrary, if any Dissenting Modtech Shareholder demanding the fair value of such Dissenting Modtech Shareholder's Modtech Shares ("Dissenting Modtech Shares") under the CGCL shall effectively withdraw or lose (through failure to perfect or otherwise) his right to a determination of the fair value of his shares, then as of the Effective Time or the occurrence of such event, whichever later occurs, such Dissenting Modtech Shares shall automatically be converted into and represent only the right to receive the fair market value of such Modtech Shares upon surrender of the certificate or certificates representing such Dissenting Modtech Shares. (c) Modtech shall give SPI prompt notice of any demands by a Dissenting Modtech Shareholder for payment, or notices of intent to demand payment received by Modtech under the CGCL, and SPI shall have the right to participate in all negotiations and proceedings with respect to such demands. Modtech shall not, except with the prior written consent of SPI (which will not be unreasonably withheld or delayed) or as otherwise required by law, make any payment with respect to, or settle, or offer to settle, any such demands. 2.6 Modtech Options . (a) At the Effective Time, adjustments shall be made to the then outstanding options to purchase Modtech Shares (each, a "Modtech Option"), to accelerate the vesting of Modtech Options held by those holders whose Modtech Options are not at least 75% vested. Such Modtech Options shall be accelerated, pro rata on the basis of the number of unvested Modtech Options held by such holders of Modtech Options, with the effect that, in the aggregate, all then outstanding Modtech Options (which theretofore have been granted under Modtech's 1989, 1994 and 1996 Stock Option Plans (the "Modtech Stock Option Plans")) shall be vested to the extent of 75% of the Modtech Shares covered thereby. (b) At the Effective Time, after giving effect to the adjustment contemplated by Section 2.6(a), on an aggregate basis per holder of Modtech Options: (i) 14.6709% of all Modtech Options held by such holder which are vested and exercisable shall be converted into the right to receive $25.00 per share in cash (less the applicable per share exercise price of each such Modtech Option and less applicable withholding taxes); and (ii) each remaining Modtech Option held by such holder, whether vested or unvested, shall be converted into an option to acquire, on substantially the same terms and conditions as were applicable under such Modtech Option immediately prior to the Effective -10- 16 Time, except as otherwise set forth in this Section 2.6, for each Modtech Share subject to such Modtech Option, one (1) share of Holdings Common Stock at a price per share equal to the original exercise price of such Modtech Options. (c) Except as set forth in this Section 2.6, any and all rights under any provisions of the Modtech Stock Option Plans or in any other plan, program or arrangement providing for the issuance or grant of any other interest in respect of the capital stock of Modtech or any Subsidiary thereof shall be canceled as of the Effective Time. As soon as practicable following the date of this Agreement, and, in any event, prior to the Effective Time, the Board of Directors of Modtech (or, if appropriate, the Compensation and Stock Option Committee thereof) and Modtech shall take all action necessary to give effect to the provisions of this Section 2.6 and to ensure that no Person shall have any right under any Modtech Stock Option Plan (or any Modtech Option granted thereunder) following the Effective Time except for the right to exercise Modtech Options for shares of Holdings Common Stock as provided in this Section 2.6. As soon as practicable following the date of this Agreement, and, in any event, prior to the Effective Time, the Board of Directors of Modtech (or, if appropriate, any committee thereof) and Modtech shall take all action necessary to either terminate any other plan, program or arrangement with respect to, including any right to acquire, equity securities of Modtech, or to amend or modify such other plans, programs or arrangements to provide for the issuance of shares of Holdings Common Stock in lieu of equity securities of Modtech or New Modtech. 2.7 Conversion of SPI Shares . To effectuate the SPI Merger and subject to the terms and conditions of this Agreement: (a) At the Effective Time, by virtue of the SPI Merger and without any action on the part of the holder of any securities of the entities involved: (i) Each share of Common Stock, no par value per share, of SPI ("SPI Common Stock"), and each share of Series A-1 Convertible Preferred Stock, no par value per share, of SPI ("SPI Series A-1 Preferred Stock"), Series A-2 Convertible Preferred Stock, no par value per share, of SPI ("SPI Series A-2 Preferred Stock"), Series A-3 Convertible Preferred Stock, no par value per share, of SPI ("SPI Series A-3 Preferred Stock"), Series A-4 Convertible Preferred Stock, no par value per share, of SPI ("SPI Series A-4 Preferred Stock"), Series A-5 Convertible Preferred Stock, no par value per share, of SPI ("SPI Series A-5 Preferred Stock") and Series A-6 Convertible Preferred Stock, no par value per share, of SPI ("SPI Series A-6 Preferred Stock") (shares of SPI Common Stock, SPI Series A-1 Preferred Stock, SPI Series A-2 Preferred Stock, SPI Series A-3 Preferred Stock, SPI Series A-4 Preferred Stock, SPI Series A-5 Preferred Stock and SPI Series A-6 Preferred Stock are collectively referred to herein as "SPI Shares") issued and outstanding immediately prior to the Effective Time (other than (x) SPI Shares owned by SPI or any of its Subsidiaries or any other SPI Shares designated as treasury shares (collectively, the "SPI Treasury Shares") and (y) any SPI Dissenting Shares (as defined in Section 2.10)) shall be canceled and -11- 17 extinguished and be converted into and become a right to receive, at the election of each holder thereof, but subject to the other provisions of this Section 2.7, (A) cash in an amount equal to $49.4097, subject to adjustment as hereinafter provided (the "SPI Per Share Cash Consideration"), or (B) 1.8785 fully paid and nonassessable shares of Holdings Common Stock (the "SPI Exchange Ratio"), subject to adjustment as hereinafter provided (the "SPI Per Share Stock Consideration"); provided, however, that, subject to the election, allocation and conversion procedures set forth in Section 2.8: (C) no Record Holder of SPI Shares may elect to receive the SPI Per Share Cash Consideration for more than 5.9176% of the aggregate number of SPI Shares held by such Record Holder rounded down to the nearest whole share (provided that Record Holders of SPI Shares electing to receive the SPI Per Share Cash Consideration may receive more than 5.9176% pursuant to the allocation procedures set forth in Section 2.8); (D) only 5.9176% of the aggregate number of SPI Shares outstanding on the Record Date shall be converted into the right to receive the SPI Per Share Cash Consideration (such number of shares, the "SPI Cash Number"); and (E) 94.0728% of the aggregate number of SPI Shares outstanding on the Record Date shall be converted into the right to receive the SPI Per Share Stock Consideration (such number of shares, the "SPI Stock Number"). (b) At the Effective Time, each SPI Treasury Share shall, by virtue of the SPI Merger and without any action on the part of the holders of any securities of the entities involved, be canceled and extinguished and shall cease to exist, and no exchange or payment shall be made therefor. 2.8 SPI Election, Allocation and Conversion Procedures . (a) Subject to the allocation and conversion procedures set forth in Section 2.8(b), each Record Holder of SPI Shares will be entitled (i) to elect to receive Holdings Common Stock for some or all of the SPI Shares ("SPI Stock Election Shares") held by such Record Holder, (ii) to elect to receive cash for up to, but not more than, 5.9176% of the SPI Shares ("SPI Cash Election Shares") held by such Record Holder or (iii) to indicate that such Record Holder makes no such election for some or all of the SPI Shares ("SPI No-Election Shares") held by such Record Holder. All Elections pursuant to this Section 2.8(a) shall be made on an Election Form. Any Record Holder who delivers to the Exchange Agent an Election Form electing to receive SPI Cash Election Shares for greater than 5.9176% of the SPI Shares held by such Record Holder shall be deemed to have elected SPI -12- 18 Cash Election Shares for only 5.9176% of the SPI Shares held by such Record Holder. Any SPI Shares with respect to which the Record Holder thereof shall not, as of the Election Deadline, have properly submitted to the Exchange Agent a properly completed Election Form shall be deemed to be SPI No-Election Shares. A Record Holder acting in different capacities or acting on behalf of other Record Holders in any way shall be entitled to submit an Election Form for each capacity in which such Record Holder so acts with respect to each Record Holder for which it so acts. (b) Not later than two business days after the Election Deadline, Holdings shall cause the Exchange Agent to effect the allocations and conversions among the Record Holders of SPI Shares of rights to receive the SPI Per Share Stock Consideration or the SPI Per Share Cash Consideration in the SPI Merger as follows: (i) If the number of SPI Stock Election Shares (on the basis of Election Forms received by the Election Deadline) is greater than the SPI Stock Number, then (A) all SPI Cash Election Shares shall be deemed, as of the Effective Time, to have become and been converted into the right to receive the SPI Per Share Cash Consideration, (B) the Exchange Agent shall convert (pro rata according to the total number of SPI Stock Election Shares held by each Record Holder who has elected to receive the SPI Per Share Cash Consideration) into SPI Cash Election Shares ("Converted SPI Stock Election Shares") a sufficient number of SPI Stock Election Shares held by those Record Holders who have elected to receive the SPI Per Share Cash Consideration such that the remainder of (x) the SPI Stock Election Shares less (y) the Converted SPI Stock Election Shares shall equal as closely as practicable the SPI Stock Number, and all Converted SPI Stock Election Shares shall be deemed, as of the Effective Time, to have become and been converted into the right to receive the SPI Per Share Cash Consideration, (C) if the remainder of the SPI Stock Election Shares less the Converted SPI Stock Election Shares is greater than the SPI Stock Number, the Exchange Agent shall convert (pro rata according to each Record Holder's total number of SPI No-Election Shares) into Cash Election Shares ("Converted SPI No-Election Shares") a sufficient number of SPI No-Election Shares such that the remainder of (x) the SPI Stock Election Shares less (y) the Converted SPI Stock Election Shares and less the Converted SPI No-Election Shares shall equal as closely as practicable the SPI Stock Number, and all Converted SPI No-Election Shares shall be deemed, as of the Effective Time, to have become and been converted into the right to receive the SPI Per Share Cash Consideration, and (D) the SPI No-Election Shares and the SPI Stock Election Shares that are not Converted SPI Stock Election Shares or Converted SPI No-Election Shares shall -13- 19 be deemed, as of the Effective Time, to have become and been converted into the right to receive the SPI Per Share Stock Consideration. (c) On the Mailing Date, Holdings shall mail an Election Form and a Letter of Transmittal to each Record Holder of SPI Shares. To be effective, an Election Form must be properly completed, signed and actually received by the Exchange Agent not later than the Election Deadline and must be accompanied by the certificates representing all the SPI Shares ("SPI Certificates") as to which the Election is being made (or an appropriate guarantee of delivery by an eligible organization). Holdings shall have reasonable discretion, which it may delegate in whole or in part to the Exchange Agent, to determine whether Election Forms have been properly completed, signed and timely submitted or to disregard defects in Election Forms; such decisions of Holdings (or of the Exchange Agent) shall be conclusive and binding. Neither Holdings nor the Exchange Agent shall be under any obligation to notify any person of any defect in an Election Form submitted to the Exchange Agent, except that if Holdings determines not to disregard a defect, Holdings shall notify SPI of such defect and provide a reasonable opportunity for the defect to be cured by the subject Record Holder. The Exchange Agent shall also make, and Holdings shall verify, all computations contemplated by this Section 2.8, and all such computations shall be conclusive and binding on the Record Holders of SPI Shares, absent manifest error. The Exchange Agent shall promptly provide SPI with a copy of the completed computation. SPI Shares covered by an Election Form which is not effective shall be deemed to be SPI No-Election Shares. Once an Election is made, it may not be revoked unless such revocation has been communicated in writing to the Exchange Agent prior to the Election Deadline. (d) No fractional interests in shares of Holdings Common Stock, and no certificates representing such fractional interests, shall be issued upon the surrender for exchange of SPI Certificates or upon the exercise of SPI Options. In lieu of any fractional share, Holdings shall pay to each Record Holder of SPI Shares, or to the holder of an SPI Option upon the exercise thereof, who otherwise would be entitled to receive a fractional interest in a share of Holdings Common Stock an amount of cash (without interest) determined by multiplying (i) the closing price of Modtech Common Stock on the last trading day on Nasdaq prior to the Closing Date by (ii) the fractional interest to which such Record Holder would otherwise be entitled. 2.9 Additional Exchange Procedures. (a) The Letter of Transmittal which accompanies the Election Form (which shall specify that delivery shall be effected and the risk of loss and title to the SPI Certificates (and the SPI Shares and consideration therefor represented by such SPI Certificates) shall pass after the Effective Time only upon proper delivery of such SPI Certificates to the Exchange Agent) will advise the Record Holders of SPI Certificates of the procedure for surrendering to the Exchange Agent, SPI Certificates in exchange for either the certificates representing the SPI Per Share Stock Consideration or the SPI Per Share Cash Consideration (either, "SPI Merger Consideration"). -14- 20 (b) Each Record Holder of SPI Shares that have been converted into a right to receive the SPI Merger Consideration shall, upon surrender to the Exchange Agent of a SPI Certificate or Certificates together with a properly completed Letter of Transmittal, be entitled to receive the SPI Merger Consideration as provided herein. (c) Until so surrendered, each SPI Certificate, and each SPI Share represented thereby, shall, at and after the Effective Time, represent for all purposes only the right to receive the SPI Merger Consideration as provided herein, and nothing else, subject to applicable law in the case of SPI Dissenting Shares. (d) If any of the SPI Merger Consideration is to be issued to a person other than the Record Holder of the SPI Shares formerly represented by the SPI Certificate or Certificates surrendered with respect thereto, it shall be a condition to such issuance that the SPI Certificate or Certificates so surrendered shall be properly endorsed or otherwise be in proper form for transfer and that the person requesting such issuance shall pay to the Exchange Agent any transfer or other taxes required as a result of such issuance to a person other than the Record Holder of such SPI Shares or shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. (e) At and after the Record Date, there shall be no further registration or transfers of SPI Shares (other than transfers by operation of law), and the stock ledgers of SPI shall be closed. After the Effective Time, SPI Certificates presented to the Exchange Agent for transfer shall be canceled and exchanged for the SPI Merger Consideration provided for, without interest, and in accordance with the procedures set forth, in this Article 2. (f) One hundred eighty (180) days after the Effective Time, any Holdings Common Stock or cash made available to the Exchange Agent that remains unclaimed by the Record Holders of SPI Shares shall be returned to Holdings, upon its demand therefor. Any such Record Holder who has not delivered SPI Certificates to the Exchange Agent in accordance with this Section 2.9 prior to that time shall thereafter look only to the Holdings (and only as general creditors thereof) for the SPI Merger Consideration in respect of any SPI Shares formerly requested thereby. Notwithstanding the foregoing, neither Holdings nor the Exchange Agent shall be liable to any Record Holder of SPI Shares for any securities delivered or any cash paid to a public official pursuant to applicable escheat or abandoned property laws or for any securities or cash retained by Holdings as permitted by any such law. (g) No dividends, interest or other distributions with respect to the SPI Merger Consideration shall be paid to the holder of any unsurrendered SPI Certificates until such SPI Certificates are surrendered as provided in this Section 2.9. Upon such surrender, there shall be paid, without interest, to the person in whose name any SPI Per Share Stock Consideration is registered, all dividends and other distributions payable in respect of such securities on a date subsequent to, and in respect of a record date after, the Effective Time. -15- 21 (h) In the event that any SPI Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall pay in respect of such lost, stolen or destroyed certificate, upon the making of an affidavit of that fact by the holder thereof, the SPI Merger Consideration as may be provided pursuant to this Agreement; provided, however, that Holdings may, in its sole discretion and as a condition precedent to the payment thereof, require the owner of such lost, stolen or destroyed certificate to deliver an indemnity agreement or a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Holdings, New SPI or the Exchange Agent or any other party with respect to the certificate alleged to have been lost, stolen or destroyed. (i) If the Record Holder of any SPI Shares shall become entitled to receive payment for such shares pursuant to Sections 7-113-101 through 7-113-302 of the CBCA and Section 2.10, such payment shall be made by Holdings in accordance with Section 2.10. (j) (i) Payments of SPI Per Share Cash Consideration and payments in lieu of fractional shares shall be made by check mailed by the Exchange Agent at the Effective Time, and (ii) certificates representing SPI Per Share Stock Consideration shall be delivered by hand or mailed by certified mail, return receipt requested, at the Effective Time; provided the SPI Certificates have been provided by the surrendering shareholder to the Exchange Agent in compliance with Section 2.9. At the time of such payment or mailing, a statement setting forth in reasonable detail the calculation of the SPI Merger Consideration being paid to each Record Holder shall also be mailed to each Record Holder. Risk of loss shall remain on Holdings until such certificate for Holdings Common Stock is actually received by the surrendering shareholder. 2.10 Dissenting SPI Shares. (a) Notwithstanding any provision of this Agreement to the contrary, any SPI Shares held by a holder who has demanded and perfected his demand for the fair value of his shares in accordance with Sections 7-113-101 through 7-113-302 of the CBCA and as of the Effective Time has neither effectively withdrawn nor lost his right to demand such fair value (a "Dissenting SPI Shareholder") shall not represent a right to receive any part of the SPI Merger Consideration, but in lieu thereof the holder thereof shall be entitled to only such rights as are granted by the CBCA. (b) Notwithstanding any provision of this Agreement to the contrary, if any Dissenting SPI Shareholder demanding the fair value of such Dissenting SPI Shareholder's SPI Shares ("Dissenting SPI Shares") under the CBCA shall effectively withdraw or lose (through failure to perfect or otherwise) his right to a determination of the fair market value of his shares, then as of the Effective Time or the occurrence of such event, whichever later occurs, such Dissenting SPI Shares shall automatically be converted into and represent only the right to receive the fair market value of such Dissenting SPI Shares upon surrender of the certificate or certificates representing such Dissenting SPI Shares. (c) SPI shall give Modtech prompt notice of any demands by a Dissenting SPI Shareholder for payment, or notices of intent to demand payment received by SPI under the CBCA, -16- 22 and Modtech shall have the right to participate in all negotiations and proceedings with respect to such demands. SPI shall not, except with the prior written consent of Modtech (which will not be unreasonably withheld or delayed) or as otherwise required by law, make any payment with respect to, or settle, or offer to settle, any such demands. 2.11 SPI Options. (a) At the Effective Time, adjustments shall be made to the then outstanding options to purchase SPI Shares (each, an "SPI Option"), such that seventy-five percent (75%) of the then outstanding SPI Options (which theretofore have been granted under SPI's Second Amended and Restated 1997 Stock Option Plan (the "SPI Stock Option Plan")) shall become vested. (b) At the Effective Time, after giving effect to the adjustment contemplated by Section 2.10(a), on an aggregate basis per holder of SPI Options: (i) 5.9176% of all SPI Options held by such holder which are vested and exercisable shall be converted into the right to receive $49.4097 per share in cash (less the applicable per share exercise price of each such SPI Option and less applicable withholding taxes); and (ii) each remaining SPI Option held by such holder, whether vested or unvested, shall be converted into an option to acquire, on substantially the same terms and conditions as were applicable under such SPI Option immediately prior to the Effective Time, except as otherwise set forth in this Section 2.10, for each SPI Share subject to such SPI Option, 1.8785 shares of Holdings Common Stock at a price per share (rounded upward to the nearest whole cent) equal to (i) the aggregate exercise price for SPI Shares purchasable pursuant to such SPI Option (without regard to vesting provisions) divided by (ii) the number of full shares of Holdings Common Stock deemed purchasable pursuant to such SPI Option. (c) Except as set forth in this Section 2.11, any and all rights under any provisions of the SPI Stock Option Plans or in any other plan, program or arrangement providing for the issuance or grant of any other interest in respect of the capital stock of SPI or any Subsidiary thereof shall be canceled as of the Effective Time. As soon as practicable following the date of this Agreement, and, in any event, prior to the Effective Time, the Board of Directors of SPI (or, if appropriate, the Compensation and Stock Option Committee thereof) and SPI shall take all action necessary to give effect to the provisions of this Section 2.11 and to ensure that no Person shall have any right under any SPI Stock Option Plan (or any SPI Option granted thereunder) following the Effective Time except for the right to exercise SPI Options for shares of Holdings Common Stock as provided in this Section 2.11. As soon as practicable following the date of this Agreement, and, in any event, prior to the Effective Time, the Board of Directors of SPI (or, if appropriate, any committee thereof) and SPI shall take all action necessary to either terminate any other plan, program or arrangement with respect to, including any right to acquire, equity securities of SPI, or to amend or modify such -17- 23 other plans, programs or arrangements to provide for the issuance of shares of Holdings Common Stock in lieu of equity securities of SPI or New SPI. 2.12 SPI Warrants. (a) All outstanding warrants to purchase SPI Shares (each, an "SPI Warrant"), shall be deemed exercised immediately prior to the Effective Time. (b) At the Effective Time: (i) 5.9176% of all SPI Warrants held by each holder of SPI Warrants shall be converted into the right to receive $49.4097 per share in cash (less the applicable per share exercise price of each such SPI Warrant); and (ii) each remaining SPI Warrant held by such holder, upon the payment by the holder of the exercise price thereof, shall be converted into the right to receive 1.8785 shares of Holdings Common Stock. 2.13 Cancellation of Shares. All shares of Holdings Common Stock outstanding immediately prior to the Effective Time will be canceled. 2.14 No Transfer after the Effective Time. No transfers of Modtech Shares will be made on the stock transfer books of Modtech, and no transfers of SPI Shares will be made on the books of SPI, after the close of business on the day prior to the date of the Effective Time. ARTICLE III REPRESENTATIONS AND WARRANTIES OF MODTECH Modtech hereby represents and warrants to SPI as follows: 3.1 Existence; Good Standing; Corporate Authority. Modtech and each of its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, with the power and authority to own and operate its businesses as presently conducted. Section 3.1 of the Disclosure Schedule sets forth the state of incorporation of Modtech and each of its Subsidiaries, and lists each jurisdiction in which Modtech and each of its Subsidiaries is qualified as a foreign corporation. Modtech and each of its Subsidiaries is duly qualified as a foreign corporation or other entity to do business and is in good standing in each jurisdiction where the character of its Properties or the nature of its activities makes such qualification necessary, except for such failures of Modtech and any of its Subsidiaries to be so qualified as would not have a Material Adverse Effect. Modtech has previously provided SPI with true and correct copies of its articles of incorporation and bylaws and the charter documents and bylaws or other organizational documents of each of its Subsidiaries, as currently in effect. -18- 24 3.2 Authorization; Validity and Effect of Agreement. Modtech has the requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement, every other document or agreement to be executed by Modtech under this Agreement (each a "Modtech Transaction Document") and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement by Modtech and the performance by Modtech of its obligations hereunder, the execution and delivery of each of the Modtech Transaction Documents by Modtech and the performance of its obligations thereunder and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors of Modtech and all other necessary corporate action on the part of Modtech, other than the adoption and approval of this Agreement by the stockholders of Modtech, and no other corporate proceedings on the part of Modtech are necessary to authorize this Agreement, the Modtech Transaction Documents and the transactions contemplated hereby and thereby (assuming due authorization, execution and delivery by the other party or parties thereto). The Board of Directors of Modtech has approved for the purposes of Section 1101 of the CGCL the agreement of merger contained in this Agreement and the Modtech Merger. This Agreement has been duly and validly executed and delivered by Modtech and constitutes a legal, valid and binding obligation of Modtech, enforceable against it in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally or by general principles of equity. Each Modtech Transaction Document has been, or, as of the Effective Time, will have been, duly and validly authorized, executed and delivered by Modtech, and constitutes or will constitute as of such time a legally valid and binding obligation of Modtech, enforceable against it in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally or by general principles of equity. 3.3 Capitalization. The authorized capital stock of Modtech consists of 20,000,000 shares of Modtech Common Stock and 5,000,000 shares of preferred stock having a par value of $0.01 per share ("Modtech Preferred Stock"), none of which shares have been designated. As of the date hereof, 9,871,409 shares of Modtech Common Stock and no shares of Modtech Preferred Stock are issued and outstanding. As of the date hereof, Modtech Options to acquire 1,625,658 Modtech Shares are outstanding, 1,219,244 of which will be vested as of the Effective Time in accordance with Section 2.06. All of the issued and outstanding Modtech Shares are validly issued, fully paid and non-assessable and no class of Modtech stock is entitled to preemptive rights. As of the date hereof, except for Modtech Stock Option Plans, there are no existing options, warrants, calls, subscriptions, convertible securities or other securities, agreements, commitments, or obligations which would require Modtech to issue or sell shares of Modtech Common Stock or any other equity securities, or securities convertible into or exchangeable or exercisable for shares of Modtech Common Stock or any other equity securities of Modtech or any of its Subsidiaries. Modtech has no commitments or obligations to purchase or redeem any shares of Modtech Common Stock. Set forth in Section 3.3 of the Disclosure Schedule is a complete list of the Modtech Options held by the executive officers of Modtech which are outstanding as of the date hereof, which list sets forth, for -19- 25 each such holder of a Modtech Option, the number of Modtech Shares subject thereto, the number of vested options, the exercise price and the expiration date thereof. 3.4 Subsidiaries. Set forth in Section 3.4 of the Disclosure Schedule is a complete list of Modtech's Subsidiaries. All of the outstanding shares of capital stock of each of Modtech's Subsidiaries are validly issued, fully paid, non-assessable and free of preemptive rights or rights of first refusal. Except as set forth in Section 3.4 of the Disclosure Schedule, Modtech owns, directly or indirectly, all of the issued and outstanding capital stock and other ownership interests of each of its Subsidiaries, free and clear of all Encumbrances, and there are no existing options, warrants, calls, subscriptions, convertible securities or other securities, agreements, commitments or obligations of any character relating to the outstanding capital stock or other securities of any Subsidiary of Modtech or which would require any Subsidiary of Modtech to issue or sell any shares of its capital stock, ownership interests or securities convertible into or exchangeable for shares of its capital stock or ownership interests. 3.5 Other Interests. Except as set forth in Section 3.4 of the Disclosure Schedule, neither Modtech nor any of Modtech's Subsidiaries owns, directly or indirectly, any interest or investment (whether equity or debt) in any corporation, partnership, limited liability company, joint venture, business, trust or other Person (other than Modtech Subsidiaries). 3.6 No Conflict; Required Filings and Consents. (a) Except as set forth in Section 3.6(a) of the Disclosure Schedule, neither the execution and delivery of this Agreement and the Modtech Transaction Documents, nor the performance by Modtech of its obligations hereunder and thereunder, nor the consummation of the transactions contemplated hereby or thereby, will: (i) assuming receipt of the Modtech Stockholder Approvals (as defined below), conflict with Modtech's articles of incorporation or bylaws; (ii) assuming satisfaction of the requirements set forth in Section 3.6(b) below, violate any statute, law, ordinance, rule or regulation applicable to Modtech or any of its Subsidiaries or any of their Properties or assets; or (iii) violate, breach, be in conflict with or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or permit the termination of any provision of, or result in the termination of, the acceleration of the maturity of, or the acceleration of the performance of any obligation of Modtech or any of its Subsidiaries, or result in the creation or imposition of any Encumbrance upon any Properties, assets or business of Modtech or any of its Subsidiaries under, any note, bond, indenture, mortgage, deed of trust, lease, franchise, permit, authorization, license, contract, instrument or other agreement or commitment or any order, judgment or decree to which Modtech or any of its Subsidiaries is a party or by which Modtech or any of its Subsidiaries or any of their respective assets or Properties is bound or encumbered, or give any Person the right to require Modtech or any of its Subsidiaries to purchase or repurchase any notes, bonds or instruments of any kind except, in each case, for such violations, conflicts, defaults or other occurrences which would not have, and would not reasonably be expected to have, a Material Adverse Effect. -20- 26 (b) Except (i) for applicable requirements, if any, of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (the "Exchange Act"), the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "Securities Act"), and state securities or "blue sky" laws ("Blue Sky Laws"), (ii) for the pre-merger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder (the "HSR Act"), (iii) for the filing of certificates of merger pursuant to the CGCL, (iv) for the Modtech Stockholder Approvals (as defined below) or (v) with respect to matters set forth in Sections 3.6(a) or 3.6(b) of the Disclosure Schedule, no consent, approval or authorization of, permit from, or declaration, filing or registration with, any governmental or regulatory authority, or any other Person is required to be made or obtained by Modtech or its Subsidiaries in connection with the execution, delivery and performance of this Agreement, the Modtech Transaction Documents and the consummation of the transactions contemplated hereby and thereby except where the failure to obtain such consent, approval, authorization, permit or declaration or to make such filing or registration would not have a Material Adverse Effect. 3.7 Compliance. Modtech and each of its Subsidiaries is in compliance with all foreign, federal, state and local laws and regulations applicable to its operations or with respect to which compliance is a condition of engaging in the business thereof, except to the extent that failure to comply would not have a Material Adverse Effect. Neither Modtech nor any of its Subsidiaries has received any notice asserting a failure, or possible failure, to comply with any such law or regulation, the subject of which notice has not been resolved as required thereby or otherwise to the satisfaction of the party sending the notice, except for such failure as would not have a Material Adverse Effect. Set forth in Section 3.7 of the Disclosure Schedule is a complete list of all material permits, licenses and franchises from governmental agencies held by Modtech and its Subsidiaries. Modtech and its Subsidiaries have all material permits, licenses and franchises from governmental agencies required to conduct their respective businesses as they are now being conducted and all such permits, licenses and franchises will remain in effect after the Effective Time, except for such failures to remain effective that would not have a Material Adverse Effect. 3.8 SEC Documents. (a) Set forth in Section 3.8 of the Disclosure Schedule is a complete list of all registration statements, proxy or information statements, forms, reports and other documents required to be filed by Modtech with the Securities and Exchange Commission (the "SEC") since January 1, 1996 (collectively, the "Modtech SEC Reports"). Modtech has delivered or made available to SPI true and complete copies of each SEC Reports. As of their respective dates, the Modtech SEC Reports and any registration statements, reports, forms, proxy or information statements and other documents filed by Modtech with the SEC after the date of this Agreement (i) complied or, with respect to those not yet filed, will comply, in all material respects with the applicable requirements of the Securities Act and the Exchange Act and (ii) did not or, with respect to those not yet filed, will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. -21- 27 (b) Neither Modtech nor any of its Subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on, or reserved against in, a balance sheet of Modtech or in the notes thereto, prepared in accordance with GAAP consistently applied, except for (i) liabilities or obligations that were so reserved on, or reflected in (including the notes to), the consolidated balance sheet of Modtech as of June 30, 1998 and (ii) liabilities or obligations arising in the ordinary course of business (including trade indebtedness) since June 30, 1998 which would not have a Material Adverse Effect. 3.9 Litigation. Except as set forth in Section 3.9 of the Disclosure Schedule, there is no Action instituted, pending or, to the best knowledge of Modtech, threatened, which, if adversely decided, would, directly or indirectly, have a Material Adverse Effect, nor is there any outstanding judgment, decree, or injunction or any statute, rule or order of any domestic or foreign court, governmental department, commission or agency which has or would have a Material Adverse Effect. 3.10 Absence of Certain Changes. (a) Except for the transactions expressly contemplated hereby, since August 14, 1998, Modtech and its Subsidiaries have conducted their respective businesses only in the ordinary and usual course consistent with past practices and there has not been any change in Modtech's business, operations, condition (financial or otherwise), results of operations, business prospects, assets, liabilities, working capital or reserves, except for changes contemplated hereby or changes which have not had a Material Adverse Effect. From August 14, 1998 through the date of this Agreement, neither Modtech nor any of its Subsidiaries has taken any of the actions prohibited by Section 5.1 hereof. (b) Since December 31, 1997, to the best knowledge of Modtech, there has been no change in (i) the demand in the California public school system for the products manufactured and sold by Modtech and its Subsidiaries, (ii) the competitive environment in which Modtech and its Subsidiaries conduct business, (iii) the regulatory standards or guidelines applicable to the business conducted by Modtech and its Subsidiaries, (iv) the legislation applicable to the business conducted by Modtech and its Subsidiaries, (v) the relationship between Modtech or its Subsidiaries on the one hand, and any customers or suppliers of Modtech or its Subsidiaries or the owners of any Properties utilized by Modtech or its Subsidiaries on the other hand, any of which would have a Material Adverse Effect. 3.11 Environmental Matters. (a) There are no existing uncured notices of noncompliance, notices of violation, administrative actions, or lawsuits against Modtech or any of its Subsidiaries arising under Environmental Laws or relating to the use, handling, storage, treatment, recycling, generation, or release of Hazardous Materials at any of the Properties, nor has Modtech received any uncured notification of any allegation of any responsibility for any disposal, release, or threatened release at -22- 28 any location of any Hazardous Materials, except in any such case which would not be reasonably expected to have a Material Adverse Effect. (b) To the best knowledge of Modtech, there have been no spills or releases of Hazardous Materials at any of the Properties in excess of quantities reportable under Environmental Laws, except in any such case which would not be reasonably expected to have a Material Adverse Effect. (c) There are no consent decrees, consent orders, judgments, judicial or administrative orders, or Encumbrances by any governmental authority relating to any Environmental Law which have not already been fully satisfied and which regulate, obligate, or bind Modtech or any of its Subsidiaries, except in any such case which would not be reasonably expected to have a Material Adverse Effect. (d) Except as set forth in Section 3.11(d) of the Disclosure Schedule, no Properties or Facilities are listed on the federal National Priorities List, the federal Comprehensive Environmental Response Compensation Liability Information System list, or any similar state listing of sites known to be contaminated with Hazardous Materials. 3.12 Real Properties. Section 3.12 of the Disclosure Schedule lists all Properties owned by Modtech and its Subsidiaries and all Leased Real Estate leased by Modtech or any of its Subsidiaries. Except as set forth in Section 3.12 of the Disclosure Schedule, neither Modtech nor any of its Subsidiaries currently owns, and neither Modtech nor any of its Subsidiaries or any of their respective predecessors have ever owned, fee title to any Properties. Modtech has delivered or caused to be delivered to SPI complete and accurate copies of the Leases which relate to the Leased Real Estate, together with all amendments or supplements thereto. Modtech has not received written notice of condemnation or eminent domain proceedings pending or threatened against any Leased Real Estate. Except as disclosed in Section 3.12 of the Disclosure Schedule, Modtech has not received any notice from any city, village or other Person of any zoning, ordinance, building, fire or health code or other legal violation in respect of any Leased Real Estate. The Leases are in full force and effect and are valid, binding and enforceable in accordance with their respective terms; (i) no amount payable under any Lease is past due; (ii) Modtech is in compliance in all material respects with all commitments and obligations on its part to be performed or observed under each Lease and is not aware of the failure by any other party to any Lease to comply in all material respects with all of its commitments and obligations; (iii) Modtech has not received any written notice (A) of a default, offset or counterclaim under any Lease, or, any other communication calling upon it to comply with any provision of any Lease or asserting noncompliance, or asserting Modtech has waived or altered its rights thereunder, and no event or condition has happened or presently exists which constitutes a default or, after notice or lapse of time or both, would constitute a default under any Lease on the part of Modtech or, to the best knowledge of Modtech, any other party, or (B) of any Action against any party under any Lease which if adversely determined would result in such Lease being terminated or cut off; and (iv) Modtech has not assigned, mortgaged, pledged or otherwise encumbered its interest, if any, under any Lease. -23- 29 3.13 Tangible Personal Property. Except as disclosed in Section 3.13 of the Disclosure Schedule, Modtech and its Subsidiaries (i) have good and valid title to all the tangible personal property material to its business and reflected in the latest audited financial statements included in Modtech SEC Reports as being owned by Modtech and its Subsidiaries or acquired after the date thereof (except properties sold or otherwise disposed of in the ordinary course of business since the date thereof), free and clear of all Encumbrances except Permitted Encumbrances, and (ii) are collectively the lessee of all tangible personal property material to Modtech's business and reflected as leased in the latest audited financial statements included in Modtech SEC Reports (or on the books and records of Modtech as of the date thereof) or acquired after the date thereof (except for leases that have expired by their terms or that have been transferred in the ordinary course of business) and are in possession of the properties purported to be leased thereunder, and each such lease is valid and in full force and effect without default thereunder by the lessee or, to Modtech's knowledge, the lessor. Each of Modtech and each of its Subsidiaries enjoys peaceful and undisturbed possession under all such leases. Such owned and leased tangible personal property is in good working order, reasonable wear and tear excepted. 3.14 Intellectual Property. Section 3.14 of the Disclosure Schedule sets forth a listing of all intellectual property rights utilized by Modtech or its Subsidiaries other than intellectual property rights relating to the plans and designs for structures manufactured by Modtech and its Subsidiaries. The ownership, operation and conduct by Modtech and its Subsidiaries of its business, as presently owned, operated, and conducted, does not infringe upon or conflict in any respect with any patent, copyright, trademark, trade name, service mark, brand name, any related regulations or other intellectual property rights of any other Person, and to the knowledge of Modtech no other Person is infringing upon any such rights of Modtech and its Subsidiaries, in each case, other than as set forth in Section 3.14 of the Disclosure Schedule. 3.15 Absence of Changes in Modtech Benefit Plans. Section 3.15 of the Disclosure Schedule sets forth a listing of all Modtech Benefit Plans (as defined below). Except as required under this Agreement, since December 31, 1997, there has not been (i) any acceleration, amendment or change of the period of exercisability or vesting of any Modtech Options under the Modtech Option Plans (including any discretionary acceleration of the exercise periods or vesting by Modtech's Board of Directors or any committee thereof or any other persons administering the Modtech Option Plans) or authorization of cash payments in exchange for any Modtech Options under the Modtech Option Plan, (ii) any adoption or material amendment by Modtech or any of its Subsidiaries of any collective bargaining agreement or any bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, stock appreciation right, retirement, vacation, severance, disability, death benefit, hospitalization, medical, worker's compensation, disability, supplementary unemployment benefits, or other plan, arrangement or understanding (whether or not legally binding) or any employment agreement providing compensation or benefits to any current or former employee, officer, director or independent contractor of Modtech or any of its Subsidiaries or any beneficiary thereof or entered into, maintained or contributed to, as the case may be, by Modtech or any of its Subsidiaries (collectively, "Modtech Benefit Plans"), or (iii) any adoption of, or amendment to, or change in -24- 30 employee participation or coverage under, any Modtech Benefit Plans which would increase materially the expense of maintaining such Modtech Benefit Plans above the level of the expense incurred in respect thereof for the year ended December 31, 1997. 3.16 ERISA Compliance. (a) Section 3.16(a) of the Disclosure Schedule contains a list of all "employee pension benefit plans" (defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), "employee welfare benefit plans" (defined in Section 3(l) of ERISA) and all other Modtech Benefit Plans. With respect to each Modtech Benefit Plan, Modtech has delivered or made available to SPI a true, correct and complete copy of: (A) each writing constituting a part of such Modtech Benefit Plan, including without limitation all plan documents, benefit schedules, trust agreements, and insurance contracts and other funding vehicles; (B) the most recent Annual Report (Form 5500 Series) and accompanying schedule, if any; (C) the current summary plan description, if any; (D) the most recent annual financial report, if any; and (E) the most recent determination letter from the United States Internal Revenue Service, if any. (b) Section 3.16(b) of the Disclosure Schedule identifies each Modtech Benefit Plan that is intended to be a "qualified plan" within the meaning of Section 401(a) of the Code ("Qualified Plans"). The Internal Revenue Service has issued a favorable determination letter with respect to each Qualified Plan that has not been revoked, and there are no existing circumstances nor any events that have occurred that could adversely affect the qualified status of any Qualified Plan or the related trust. (c) Modtech and its Subsidiaries have complied, and are now in compliance, in all material respects with all provisions of ERISA, the Code, and all laws and regulations applicable to the Modtech Benefit Plans of which the failure to comply with would have a Material Adverse Effect. No prohibited transaction has occurred with respect to any Modtech Benefit Plan. All contributions required to be made to any Modtech Benefit Plan by applicable law or regulation or by any plan document or other contractual undertaking, and all premiums due or payable with respect to insurance policies funding any Modtech Benefit Plan, for any period through the date hereof have been timely made or paid in full or, to the extent not required to be made or paid on or before the date hereof, have been fully reflected in Modtech SEC Reports. (d) No Modtech Benefit Plan is subject to Title IV or Section 302 of ERISA or Section 412 or 4971 of the Code. None of Modtech, its Subsidiaries and their respective ERISA Affiliates (as defined below) has at any time since September 2, 1974, contributed to or been obligated to contribute to any "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA or any plan with two or more contributing sponsors at least two of whom are not under common control, within the meaning of Section 4063 of ERISA. There does not now exist, nor do any circumstances exist that could result in, any Controlled Group Liability (as defined below) that would be a liability of Modtech or any of its Subsidiaries following the Closing. "ERISA Affiliate" for purposes of this Section means, with respect to any entity, trade or business, any other entity, trade or business that -25- 31 is a member of a group described in Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1) of ERISA that includes the first entity, trade or business, or that is a member of the same "controlled group" as the first entity, trade or business pursuant to Section 4001(a)(14) of ERISA. "Controlled Group Liability" for purposes of this Section means any and all liabilities under (i) Title IV of ERISA, (ii) Section 302 of ERISA, (iii) Sections 412 and 4971 of the Code, (iv) the continuation coverage requirements of Section 601 et seq. of ERISA and Section 4980B of the Code, and (v) corresponding or similar provisions of foreign laws or regulations, other than such liabilities that arise solely out of, or relate solely to, the Modtech Benefit Plans. (e) Except as set forth in Modtech SEC Reports or in Section 3.16(e) of the Disclosure Schedule, neither Modtech nor any of its Subsidiaries has any liability for life, health, medical or other welfare benefits to former employees or beneficiaries or dependents thereof, except for health continuation coverage as required by Section 4980B of the Code or Part 6 of Title I of ERISA and at no expense to Modtech and its Subsidiaries. (f) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (either alone or in conjunction with any other event) result in, cause the accelerated vesting or delivery of, or increase the amount or value of, any payment or benefit to any employee of Modtech or any of its Subsidiaries. Without limiting the generality of the foregoing, no amount paid or payable by Modtech or any of its Subsidiaries in connection with the transactions contemplated hereby (either solely as a result thereof or as a result of such transactions in conjunction with any other event) will be an "excess parachute payment" within the meaning of Section 280G of the Code. (g) No labor organization or group of employees of Modtech or any of its Subsidiaries has made a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or threatened to be brought or filed, with the National Labor Relations Board or any other labor relations tribunal or authority. There are no organizing activities, strikes, work stoppages, slowdowns, lockouts, material arbitrations or material grievances, or other material labor disputes pending or, to the knowledge of Modtech, threatened against or involving Modtech or any of its Subsidiaries. (h) There are no pending or, to Modtech's knowledge, threatened claims, and the fiduciaries of the Modtech Benefit Plans have not advised Modtech that with respect to their duties to the Modtech Benefit Plans or the assets or any of the trusts under any of the Modtech Benefit Plans, there are any pending or threatened claims (other than claims for benefits in the ordinary course), lawsuits or arbitrations which have been asserted or instituted against the Modtech Benefit Plans, which could reasonably be expected to result in any material liability of Modtech or any of its Subsidiaries to the Pension Benefit Guaranty Corporation, the Department of Treasury, the Department of Labor or any multiemployer benefit plan. -26- 32 3.17 Taxes. (a) Modtech and its Subsidiaries have duly prepared and filed federal, state, local and foreign Returns which were required to be filed by or in respect of Modtech and its Subsidiaries, or any of their Properties, income and/or operations. As of the time they were filed, such Returns accurately reflected the material facts regarding the income, business, Assets, operations, activities, status of the entity on whose behalf the Return was filed, and any other information required to be shown thereon. No extension of time within which Modtech or any of its Subsidiaries may file any Return is currently in force. (b) With respect to all amounts in respect of Taxes imposed on Modtech or any of its Subsidiaries or for which Modtech or any of its Subsidiaries is or could be liable, whether to taxing authorities or to other Persons, all material amounts required to be paid by or on behalf of Modtech or any of its Subsidiaries to taxing authorities or others have been paid. (c) Except as set forth in Section 3.17(c) of the Disclosure Schedule, Modtech has not been advised that there is any review or audit in process by any taxing authority of any Tax liability of Modtech or any of its Subsidiaries currently in progress. Modtech and its Subsidiaries have not received any written notice of any pending or threatened audit by the Internal Revenue Service or any state, local or foreign agency of any Returns or Tax liability of Modtech or any of its Subsidiaries for any period. Modtech and its Subsidiaries currently have no unpaid deficiencies assessed by the Internal Revenue Service or any state, local or foreign taxing authority arising out of any examination of any of the Returns of Modtech or any of its Subsidiaries nor, to the knowledge of Modtech, is there reason to believe that any material deficiency will be assessed. (d) No agreements are in force or are currently being negotiated by or on behalf of Modtech or any of its Subsidiaries for any waiver or for the extension of any statute of limitations governing the time of assessments or collection of any Tax. No closing agreements or compromises concerning Taxes of Modtech or any Subsidiaries are currently pending. (e) Modtech and its Subsidiaries have withheld from each payment made to any of their respective officers, directors and employees, the amount of all applicable Taxes, including, but not limited to, income tax, social security contributions, unemployment contributions, backup withholding and other deductions required to be withheld therefrom by any Tax law and have paid the same to the proper Taxing authorities within the time required under any applicable Tax law. (f) There are no Encumbrances for Taxes, whether imposed by any federal, state, local or foreign taxing authority, outstanding against any Assets owned by Modtech or its Subsidiaries, except for Encumbrances for Taxes that are not yet due and payable. None of the Assets owned by Modtech or its Subsidiaries is property that is required to be treated as being owned by any other Person pursuant to the safe harbor lease provisions of former Section 168(f)(8) of the Code. None of the assets owned by Modtech or its Subsidiaries directly or indirectly secures any debt, the interest on which is tax-exempt under Section 103(a) of the Code. None of the Assets owned by Modtech -27- 33 or its Subsidiaries is "tax-exempt use property" within the meaning of Section 168(h) of the Code. None of Modtech or any of its Subsidiaries is a person other than a United States person within the meaning of the Code. (g) Neither Modtech nor any of its Subsidiaries is a party to any agreement, contract, or arrangement for compensating any employee that, individually or collectively, could give rise to the payment of any amount (whether in cash or property, including Modtech Shares or other Equity Interests) that would not be deductible pursuant to the terms of Sections 162(a)(1), 162(m), 162(n) or 280G of the Code. (h) Neither Modtech nor any of its Subsidiaries anticipate the assessment of any additional Taxes against Modtech or any of its Subsidiaries nor is Modtech or any of its Subsidiaries aware of any unresolved questions, claims or disputes concerning the liability for Taxes of Modtech or any of its Subsidiaries which would exceed by more than $1,000,000 the reserves established on the consolidated balance sheet of Modtech as of June 30, 1998. 3.18 Contracts; Debt Instruments. (a) Except as otherwise disclosed in Section 3.18 of the Disclosure Schedule, neither Modtech nor any of its Subsidiaries is a party to or subject to: (i) any collective bargaining or other agreements with labor unions, trade unions, employee representatives, work committees, guilds or associations representing employees of Modtech and its Subsidiaries; (ii) any employment, consulting, severance, termination, or indemnification agreement, contract or arrangement, including any oral agreement, contract or arrangement which requires the payment of over $75,000, with any current or former officer, consultant, director or employee; (iii) any lease for real or personal property in which the amount of payments which Modtech is required to make, or is expected to receive, on an annual basis exceeds $50,000; (iv) any agreement, contract, instrument, arrangement or commitment to repurchase assets previously sold or leased, or to indemnify or otherwise compensate the purchaser in respect thereof; (v) any agreement, contract, policy, license, document, instrument, arrangement or commitment that materially limits the freedom of Modtech or any of its Subsidiaries to compete in any line of business; (vi) any agreement or contract relating to any outstanding commitment for material capital expenditures, or any partially or fully executory agreement or contract -28- 34 relating to the acquisition or disposition of rights or assets other than those entered into in the ordinary course consistent with past practices; (vii) any sale-leaseback, conditional sale, exclusive dealing, brokerage, finder's fee contract or agreement; or (viii) any other agreement, contract, policy, license, document, instrument, arrangement or commitment not made in the ordinary course of business which is material to Modtech and its Subsidiaries taken as a whole and which is not otherwise disclosed in the Disclosure Schedules. (b) None of Modtech, its Subsidiaries and, to the knowledge of Modtech, none of the other parties to any of the contracts and agreements identified in Sections 3.18(a) and (c) of the Disclosure Schedule or otherwise disclosed in Modtech SEC Reports is in default under or has terminated any such contract or agreement, or in any way expressed to Modtech an intent to materially reduce or terminate the amount of its business with Modtech or any of its Subsidiaries in the future. (c) Set forth in Section 3.18(c) of the Disclosure Schedule is (A) a list of all loan or credit agreements, notes, bonds, mortgages, indentures and other agreements and instruments pursuant to which any indebtedness of Modtech or any of its Subsidiaries is outstanding or may be incurred, (B) the respective principal amounts currently outstanding thereunder, and (C) any interest rate swaps, caps, floors or option agreements or similar interest rate risk management agreements. Except as set forth in Section 3.18(c) of the Disclosure Schedule, all such indebtedness is prepayable at any time without penalty, subject to the notice provisions of the agreements governing such indebtedness (which, except as set forth in Section 3.18(c)of the Disclosure Schedule, do not require a notice period of more than thirty days). For purposes of this Section 3.18(c), "indebtedness" shall mean, with respect to any Person, without duplication, (A) all obligations of such Person for borrowed money, or with respect to deposits or advances of any kind to such Person, (B) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (C) all obligations of such Person upon which interest charges are customarily paid, (D) all obligations of such person under conditional sale or other title retention agreements relating to property purchased by such Person, (E) all obligations of such Person issued or assumed as the deferred purchase price of property or services (excluding obligations of such Person to creditors for raw materials, inventory, services and supplies incurred in the ordinary course of such Person's business), (F) all capitalized lease obligations of such Person, (G) all indebtedness of others secured by any Lien on property or assets owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (H) all obligations of such Person under interest rate or currency swap transactions (valued at the termination value thereof), (I) all letters of credit issued for the account of such Person, (J) all obligations of such Person to purchase securities (or other property) which arises out of or in connection with the sale of the same or substantially similar securities or property, and (K) all guarantees and arrangements having the economic effect of a guarantee of such Person of any indebtedness of any other person. -29- 35 3.19 Insurance. Modtech and its Subsidiaries are covered by valid and currently effective insurance policies issued in favor of Modtech that are customary for companies of similar size and financial condition which conduct similar businesses. All such policies are in full force and effect, all premiums due thereon have been paid and Modtech has complied with the provisions of such policies with respect to which the failure to comply with would result in a cancellation of such policies. Neither Modtech nor any of its Subsidiaries has received any written notice from or on behalf of any insurance carrier issuing policies or binders relating to or covering Modtech and its Subsidiaries that there will be a cancellation or non-renewal of existing policies or binders, or material modification of any of the methods of doing business, will be required. 3.20 Interests of Officers and Directors. Except as disclosed in Modtech SEC Reports, neither any of Modtech's or any of its Subsidiaries' officers, directors or material shareholders, nor any member of their respective immediate families or any entity with respect to which any such person is an Affiliate, has any material interest in any property, real or personal, tangible or intangible, used in or pertaining to the business of Modtech or its Subsidiaries, or any other business relationship with Modtech or any of its Subsidiaries. 3.21 No Brokers. Except as set forth in Section 3.21 of the Disclosure Schedule, no broker, finder, investment banker, or other Person or firm is entitled to any brokerage, finder's or other similar fee or commission in connection with this Agreement or the transactions contemplated hereby based upon arrangements made by or on behalf of Modtech, any of its Subsidiaries or any of their respective directors, officers or employees. 3.22 Customers. Section 3.22 of the Disclosure Schedule sets forth a list of the names of the twenty (20) most significant jobs (by revenue) of Modtech and its Subsidiaries for goods or products ordered from Modtech or any of its Subsidiaries and the amount of revenue accrued for each such job completed or in progress during the nine-month period ended September 1, 1998. Neither Modtech nor any of its Subsidiaries has received any notice that any significant customer of Modtech or any of its Subsidiaries has ceased, will cease, or has significantly reduced, or will significantly reduce its ordering of goods or products from Modtech or any of its Subsidiaries, nor are Modtech or any of its Subsidiaries aware of any circumstances that could reasonably be anticipated to cause any such reduction or cessation of orders. 3.23 Suppliers. Section 3.23 of the Disclosure Schedule sets forth a list of the names of the fifteen (15) most significant suppliers of raw materials and other goods to Modtech and its Subsidiaries for the nine-month period ended September 1, 1998. Neither Modtech nor any of its Subsidiaries has received any notice that any such supplier will cease selling raw materials or other goods to them at any time after the Closing or materially alter the terms of such sales (other than normal price increases), nor is Modtech or any of its Subsidiaries aware of any circumstances that could reasonably be anticipated to cause such suppliers to make such changes. 3.24 Employees. To the best knowledge of Modtech, no executive, key employee or group of employees has any plans to terminate employment with Modtech or any of its Subsidiaries. -30- 36 Neither Modtech nor any of its Subsidiaries is a party to or bound by a collective bargaining agreement, nor does Modtech have any knowledge of any organizational effort presently being made or threatened by or on behalf of any labor union with respect to the employees of Modtech or its Subsidiaries. 3.25 Product Liability. Each product manufactured by Modtech or any of its Subsidiaries has been manufactured, sold, delivered and installed in all material respects in accordance with applicable plans, specifications, laws (including building codes and regulations) and applicable industry standards. 3.26 Information in Joint Proxy Statement/Prospectus and Form S-4. Information supplied by Modtech or any of its Subsidiaries for inclusion or incorporation by reference in (i) the Joint Proxy Statement/Prospectus (as hereinafter defined) (or any amendment thereof or supplement thereto), at the date mailed to Modtech stockholders and SPI stockholders and at the time of the respective meetings of the Modtech stockholders and of the SPI stockholders contemplated hereby, and (ii) the Form S-4 (as hereinafter defined) at any time the Form S-4 is filed with the SEC, at any time it is amended or supplemented and at any time it becomes effective under the Securities Act, will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. 3.27 Disclosure. The representative and warranties of Modtech contained in this Agreement are true and correct in all material respects and do not omit any material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. There is no fact known to Modtech which has not been disclosed to SPI in the Disclosure Schedule and Modtech SEC Reports, taken as a whole, which has had, or would reasonably be expected to have, a Material Adverse Effect. 3.28 Fairness Opinion. Modtech has engaged Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") who has rendered an opinion to the effect that, from a financial point of view, the Modtech Merger Consideration to be received by the holders of Modtech Shares pursuant to this Agreement is fair to such holders of Modtech Shares (the "Fairness Opinion"). 3.29 Year 2000 Matters. To the best knowledge of Modtech, the information systems utilized by Modtech and each of its Subsidiaries are capable of properly recognizing date sensitive information when the year changes to 2000, and as such, the year change to 2000, as it relates to the information systems of Modtech and its Subsidiaries, will not result in a material disruption of the business of Modtech or any of its Subsidiaries. -31- 37 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SPI SPI hereby represents and warrants to Modtech as follows: 4.1 Existence; Good Standing; Authority. SPI and each of its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, with the power and authority to own and operate its businesses as presently conducted. Section 4.1 of the Disclosure Schedule sets forth the state of incorporation of SPI and each of its Subsidiaries, and lists each jurisdiction in which SPI and each of its Subsidiaries is qualified as a foreign corporation. SPI and each of its Subsidiaries is duly qualified as a foreign corporation or other entity to do business and is in good standing in each jurisdiction where the character of its Properties or the nature of its activities makes such qualification necessary, except for such failures of SPI and any of its Subsidiaries to be so qualified as would not have a Material Adverse Effect. SPI has previously provided Modtech with true and correct copies of its articles of incorporation and bylaws and the charter documents and bylaws or other organizational documents of each of its Subsidiaries, as currently in effect. 4.2 Authorization; Validity and Effect of Agreement. SPI has the requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement, every other document or agreement to be executed by SPI under this Agreement (each an "SPI Transaction Document") and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement by SPI and the performance by SPI of its obligations hereunder, the execution and delivery of each of the SPI Transaction Documents by SPI and the performance of its obligations thereunder and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors of SPI and all other necessary corporate action on the part of SPI, other than the adoption and approval of this Agreement by the stockholders of SPI, and no other corporate proceedings on the part of SPI are necessary to authorize this Agreement, the SPI Transaction Documents and the transactions contemplated hereby and thereby (assuming due authorization, execution and delivery by the other party or parties thereto). The Board of Directors of SPI has approved for the purposes of Section 7-111-101 of the CBCA the agreement of merger contained in this Agreement and the SPI Merger. This Agreement has been duly and validly executed and delivered by SPI and constitutes a legal, valid and binding obligation of SPI, enforceable against it in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally or by general principles of equity. Each SPI Transaction Document has been, or, as of the Effective Time, will have been, duly and validly authorized, executed and delivered by SPI, and constitutes or will constitute as of such time a legally valid and binding obligation of SPI, enforceable against it in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally or by general principles of equity. -32- 38 4.3 Capitalization. The authorized capital stock of SPI consists of 6,000,000 shares of SPI Common Stock, 1,100,000 shares of Series A-1 Preferred Stock, 1,000,000 shares of Series A-2 Preferred Stock, 400,000 shares of Series A-3 Preferred Stock, 155,000 shares of Series A-4 Preferred Stock, 540,000 shares of Series A-5 Preferred Stock and 67,000 shares of Series A-6 Preferred Stock. As of the date hereof, 333,614 shares of SPI Common Stock, 994,335 shares of Series A-1 Preferred Stock, 272,051 shares of Series A-2 Preferred Stock, no shares of Series A-3 Preferred Stock, 133,334 shares of Series A-4 Preferred Stock, 500,000 shares of Series A-5 Preferred Stock and 62,333 (subject to adjustment as set forth in Section 4.3 of the Disclosure Schedule) shares of Series A-6 Preferred Stock are issued and outstanding. As of the date hereof, SPI Options to acquire 217,085 (subject to adjustment as set forth in Section 4.3 of the Disclosure Schedule) SPI Shares are outstanding, 162,814 of which will be vested as of the Effective Time in accordance with Section 2.11, and warrants to acquire 320,829 SPI Shares are outstanding, all of which are currently exercisable. All of the issued and outstanding SPI Shares are validly issued, fully paid and non-assessable and no class of SPI stock is entitled to preemptive rights. As of the date hereof, except for the SPI Stock Option Plan, and except as set forth in Section 4.3 of the Disclosure Schedule, there are no existing options, warrants, calls, subscriptions, convertible securities or other securities, agreements, commitments, or obligations which would require SPI to issue or sell shares of SPI Common Stock, SPI Preferred Stock or any other equity securities, or securities convertible into or exchangeable or exercisable for SPI Shares or any other equity securities of SPI or any of its Subsidiaries. Except as set forth in Section 4.3 of the Disclosure Schedule, SPI has no commitments or obligations to purchase or redeem any SPI Shares. Set forth in Section 4.3 of the Disclosure Schedule is a complete list of the SPI Options held by the executive officers of SPI which are outstanding as of the date hereof, which list sets forth, for each such holder of an SPI Option, the number of SPI Shares subject thereto, the number of vested options, the exercise price and the expiration date thereof. 4.4 Subsidiaries. Set forth in Section 4.4 of the Disclosure Schedule is a complete list of SPI's Subsidiaries. All of the outstanding shares of capital stock of each of SPI's Subsidiaries are validly issued, fully paid, non-assessable and free of preemptive rights or rights of first refusal. SPI owns, directly or indirectly, all of the issued and outstanding capital stock and other ownership interests of each of its Subsidiaries, free and clear of all Encumbrances, and there are no existing options, warrants, calls, subscriptions, convertible securities or other securities, agreements, commitments or obligations of any character relating to the outstanding capital stock or other securities of any Subsidiary of SPI or which would require any Subsidiary of SPI to issue or sell any shares of its capital stock, ownership interests or securities convertible into or exchangeable for shares of its capital stock or ownership interests. 4.5 Other Interests. Except as set forth in Section 4.4 of the Disclosure Schedule, neither SPI nor any of SPI's Subsidiaries owns, directly or indirectly, any interest or investment (whether equity or debt) in any corporation, partnership, limited liability company, joint venture, business, trust or other Person. -33- 39 4.6 No Conflict; Required Filings and Consents. (a) Except as set forth in Section 4.6(a) of the Disclosure Schedule, neither the execution and delivery of this Agreement and the SPI Transaction Documents, nor the performance by SPI of its obligations hereunder and thereunder, nor the consummation of the transactions contemplated hereby or thereby, will: (i) assuming receipt of the SPI Stockholder Approvals (as defined below), conflict with SPI's articles of incorporation or bylaws; (ii) assuming satisfaction of the requirements set forth in Section 4.6(b) below, violate any statute, law, ordinance, rule or regulation applicable to SPI or any of its Subsidiaries or any of their Properties or assets; or (iii) violate, breach, be in conflict with or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or permit the termination of any provision of, or result in the termination of, the acceleration of the maturity of, or the acceleration of the performance of any obligation of SPI or any of its Subsidiaries, or result in the creation or imposition of any Encumbrance upon any Properties, assets or business of SPI or any of its Subsidiaries under, any note, bond, indenture, mortgage, deed of trust, lease, franchise, permit, authorization, license, contract, instrument or other agreement or commitment or any order, judgment or decree to which SPI or any of its Subsidiaries is a party or by which SPI or any of its Subsidiaries or any of their respective assets or Properties is bound or encumbered, or give any Person the right to require SPI or any of its Subsidiaries to purchase or repurchase any notes, bonds or instruments of any kind except, in each case, for such violations, conflicts, defaults or other occurrences which would not have, and would not reasonably be expected to have, a Material Adverse Effect. (b) Except (i) for applicable requirements, if any, of the Exchange Act, the Securities Act and the Blue Sky Laws, (ii) for the pre-merger notification requirements of the HSR Act, (iii) for the filing of certificates of merger pursuant to the CBCA, (iv) for the SPI Stockholder Approvals (as defined below) or (v) with respect to matters set forth in Sections 4.6(a) or 4.6(b) of the Disclosure Schedule, no consent, approval or authorization of, permit from, or declaration, filing or registration with, any governmental or regulatory authority, or any other Person is required to be made or obtained by SPI or its Subsidiaries in connection with the execution, delivery and performance of this Agreement, the SPI Transaction Documents and the consummation of the transactions contemplated hereby and thereby except where the failure to obtain such consent, approval, authorization, permit or declaration or to make such filing or registration would not have a Material Adverse Effect. 4.7 Compliance. SPI and each of its Subsidiaries is in compliance with all foreign, federal, state and local laws and regulations applicable to its operations or with respect to which compliance is a condition of engaging in the business thereof, except to the extent that failure to comply would not have a Material Adverse Effect. Neither SPI nor any of its Subsidiaries has received any notice asserting a failure, or possible failure, to comply with any such law or regulation, the subject of which notice has not been resolved as required thereby or otherwise to the satisfaction of the party sending the notice, except for such failure as would not have a Material Adverse Effect. Set forth in Section 4.7 of the Disclosure Schedule is a complete list of all material permits, licenses and franchises from governmental agencies held by SPI and its Subsidiaries. SPI and its Subsidiaries -34- 40 have all material permits, licenses and franchises from governmental agencies required to conduct their respective businesses as they are now being conducted and all such permits, licenses and franchises will remain in effect after the Effective Time, except for such failures to remain effective that would not have a Material Adverse Effect. 4.8 Financial Statements. (a) SPI has delivered or made available to Modtech true and complete copies of the financial statements set forth in Section 4.8 of the Disclosure Schedule (collectively, the "SPI Financial Statements"). Each of the consolidated and consolidating balance sheets included in the SPI Financial Statements (including the related notes and schedules) presents fairly, in all material respects, the consolidated financial position of SPI and its Subsidiaries as of its date, and each of the consolidated and consolidating statements of income and cash flows included in the SPI Financial Statements (including any related notes and schedules) presents fairly, in all material respects, the results of operations or cash flows, as the case may be, of SPI and its Subsidiaries for the periods set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments), in each case in accordance with GAAP consistently applied during the periods involved, except as may be noted therein. (b) Neither SPI nor any of its Subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on, or reserved against in, a consolidated balance sheet of SPI or in the notes thereto, prepared in accordance with GAAP consistently applied, except for (i) liabilities or obligations that were so reserved on, or reflected in (including the notes to), the consolidated balance sheet of SPI as of June 30, 1998 and (ii) liabilities or obligations arising in the ordinary course of business (including trade indebtedness) since June 30, 1998 which would not have a Material Adverse Effect. 4.9 Litigation. Except as set forth in Section 4.9 of the Disclosure Schedule, there is no Action instituted, pending or, to the best knowledge of SPI, threatened, which, if adversely decided, would, directly or indirectly, have a Material Adverse Effect, nor is there any outstanding judgment, decree, or injunction or any statute, rule or order of any domestic or foreign court, governmental department, commission or agency which has or would have any Material Adverse Effect. 4.10 Absence of Certain Changes. (a) Except for the transactions expressly contemplated hereby, since March 31, 1998, SPI and its Subsidiaries have conducted their respective businesses only in the ordinary and usual course consistent with past practices and there has not been any change in SPI's business, operations, condition (financial or otherwise), results of operations, business prospects, assets, liabilities, working capital or reserves, except for changes contemplated hereby or changes which have not had a Material Adverse Effect. From March 31, 1998 through the date of this Agreement, neither SPI nor any of its Subsidiaries has taken any of the actions prohibited by Section 5.1 hereof. -35- 41 (b) Since December 31, 1997, to the best knowledge of SPI, there has been no change in (i) the demand for the products manufactured and sold by SPI and its Subsidiaries, (ii) the competitive environment in which SPI and its Subsidiaries conduct business, (iii) the regulatory standards or guidelines applicable to the business conducted by SPI and its Subsidiaries, (iv) the legislation applicable to the business conducted by SPI and its Subsidiaries, (v) the relationship between SPI or its Subsidiaries on the one hand, and any customers or suppliers of SPI or its Subsidiaries or the owners of any Properties utilized by SPI or its Subsidiaries on the other hand, any of which would have a Material Adverse Effect. 4.11 Environmental Matters. (a) There are no existing uncured notices of noncompliance, notices of violation, administrative actions, or lawsuits against SPI or any of its Subsidiaries arising under Environmental Laws or relating to the use, handling, storage, treatment, recycling, generation, or release of Hazardous Materials at any of the Properties, nor has SPI received any uncured notification of any allegation of any responsibility for any disposal, release, or threatened release at any location of any Hazardous Materials, except in any such case which would not be reasonably expected to have a Material Adverse Effect. (b) To the best knowledge of SPI, there have been no spills or releases of Hazardous Materials at any of the Properties in excess of quantities reportable under Environmental Laws, except in any such case which would not be reasonably expected to have a Material Adverse Effect. (c) There are no consent decrees, consent orders, judgments, judicial or administrative orders, or Encumbrances by any governmental authority relating to any Environmental Law which have not already been fully satisfied and which regulate, obligate, or bind SPI or any of its Subsidiaries, except in any such case which would not be reasonably expected to have a Material Adverse Effect. (d) Except as set forth in Section 4.11(d) of the Disclosure Schedule, no Properties or Facilities are listed on the federal National Priorities List, the federal Comprehensive Environmental Response Compensation Liability Information System list, or any similar state listing of sites known to be contaminated with Hazardous Materials. 4.12 Real Properties. Neither SPI nor any of its Subsidiaries currently owns, and neither SPI nor any of its Subsidiaries or any of their respective predecessors have ever owned, fee title to any Properties. Section 4.12 of the Disclosure Schedule lists all Leased Real Estate leased by SPI or any of its Subsidiaries. SPI has delivered or caused to be delivered to Modtech complete and accurate copies of the Leases which relate to the Leased Real Estate, together with all amendments or supplements thereto. SPI has not received written notice of condemnation or eminent domain proceedings pending or threatened against any Leased Real Estate. Except as disclosed in Section 4.12 of the Disclosure Schedule, SPI has not received any notice from any city, village or other Person of any zoning, ordinance, building, fire or health code or other legal violation in respect of -36- 42 any Leased Real Estate. The Leases are in full force and effect and are valid, binding and enforceable in accordance with their respective terms; (i) no amount payable under any Lease is past due; (ii) SPI is in compliance in all material respects with all commitments and obligations on its part to be performed or observed under each Lease and is not aware of the failure by any other party to any Lease to comply in all material respects with all of its commitments and obligations; (iii) SPI has not received any written notice (A) of a default, offset or counterclaim under any Lease, or, any other communication calling upon it to comply with any provision of any Lease or asserting noncompliance, or asserting SPI has waived or altered its rights thereunder, and no event or condition has happened or presently exists which constitutes a default or, after notice or lapse of time or both, would constitute a default under any Lease on the part of SPI or, to the best knowledge of SPI, any other party, or (B) of any Action against any party under any Lease which if adversely determined would result in such Lease being terminated or cut off; and (iv) SPI has not assigned, mortgaged, pledged or otherwise encumbered its interest, if any, under any Lease. 4.13 Tangible Personal Property. Except as disclosed in Section 4.13 of the Disclosure Schedule, SPI and its Subsidiaries (i) have good and valid title to all the tangible personal property material to its business and reflected in the latest audited consolidated financial statements of SPI as being owned by SPI and its Subsidiaries or acquired after the date thereof (except properties sold or otherwise disposed of in the ordinary course of business since the date thereof), free and clear of all Encumbrances except Permitted Encumbrances, and (ii) are collectively the lessee of all tangible personal property material to SPI's business and reflected as leased in the latest audited consolidated financial statements of SPI (or on the books and records of SPI as of the date thereof) or acquired after the date thereof (except for leases that have expired by their terms or that have been transferred in the ordinary course of business) and are in possession of the properties purported to be leased thereunder, and each such lease is valid and in full force and effect without default thereunder by the lessee or, to SPI's knowledge, the lessor. Each of SPI and each of its Subsidiaries enjoys peaceful and undisturbed possession under all such leases. Such owned and leased tangible personal property is in good working order, reasonable wear and tear excepted. 4.14 Intellectual Property. Section 4.14 of the Disclosure Schedule sets forth a listing of all intellectual property rights utilized by SPI or its Subsidiaries other than intellectual property rights relating to the plans and designs for structures manufactured by SPI and its Subsidiaries. The ownership, operation and conduct by SPI and its Subsidiaries of its business, as presently owned, operated, and conducted, does not infringe upon or conflict in any respect with any patent, copyright, trademark, trade name, service mark, brand name, any related regulations or other intellectual property rights of any other Person, and to the knowledge of SPI no other Person is infringing upon any such rights of SPI and its Subsidiaries, in each case. 4.15 Absence of Changes in SPI Benefit Plans. Section 4.15 of the Disclosure Schedule sets forth a listing of all SPI Benefit Plans (as defined below). Except as set forth in Section 4.15 of the Disclosure Schedule, and except as required under this Agreement, since March 31, 1998, there has not been (i) any acceleration, amendment or change of the period of exercisability or vesting of any SPI Options under the SPI Option Plans (including any discretionary acceleration of -37- 43 the exercise periods or vesting by SPI's Board of Directors or any committee thereof or any other persons administering the SPI Option Plans) or authorization of cash payments in exchange for any SPI Options under the SPI Option Plan, (ii) any adoption or material amendment by SPI or any of its Subsidiaries of any collective bargaining agreement or any bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, stock appreciation right, retirement, vacation, severance, disability, death benefit, hospitalization, medical, worker's compensation, disability, supplementary unemployment benefits, or other plan, arrangement or understanding (whether or not legally binding) or any employment agreement providing compensation or benefits to any current or former employee, officer, director or independent contractor of SPI or any of its Subsidiaries or any beneficiary thereof or entered into, maintained or contributed to, as the case may be, by SPI or any of its Subsidiaries (collectively, "SPI Benefit Plans"), or (iii) any adoption of, or amendment to, or change in employee participation or coverage under, any SPI Benefit Plans which would increase materially the expense of maintaining such SPI Benefit Plans above the level of the expense incurred in respect thereof for the fiscal year ended March 31, 1998. 4.16 ERISA Compliance. (a) Section 4.16(a) of the Disclosure Schedule contains a list of all "employee pension benefit plans" (defined in Section 3(2) of ERISA), "employee welfare benefit plans" (defined in Section 3(l) of ERISA) and all other SPI Benefit Plans. With respect to each SPI Benefit Plan, SPI has delivered or made available to Modtech a true, correct and complete copy of: (A) each writing constituting a part of such SPI Benefit Plan, including without limitation all plan documents, benefit schedules, trust agreements, and insurance contracts and other funding vehicles; (B) the most recent Annual Report (Form 5500 Series) and accompanying schedule, if any; (C) the current summary plan description, if any; (D) the most recent annual financial report, if any; and (E) the most recent determination letter from the United States Internal Revenue Service, if any. (b) Section 4.16(b) of the Disclosure Schedule identifies each SPI Benefit Plan that is intended to be a "qualified plan" within the meaning of Section 401(a) of the Code ("Qualified Plans"). The Internal Revenue Service has issued a favorable determination letter with respect to each Qualified Plan that has not been revoked, and, except as set forth in Section 4.16(b) of the Disclosure Schedule, there are no existing circumstances nor any events that have occurred that could adversely affect the qualified status of any Qualified Plan or the related trust. (c) Except as set forth in Section 4.16(c) of the Disclosure Schedule, SPI and its Subsidiaries have complied, and are now in compliance, in all material respects with all provisions of ERISA, the Code, and all laws and regulations applicable to the SPI Benefit Plans of which the failure to comply with would have a Material Adverse Effect. No prohibited transaction has occurred with respect to any SPI Benefit Plan. All contributions required to be made to any SPI Benefit Plan by applicable law or regulation or by any plan document or other contractual undertaking, and all premiums due or payable with respect to insurance policies funding any SPI Benefit Plan, for any period through the date hereof have been timely made or paid in full or, to the -38- 44 extent not required to be made or paid on or before the date hereof, have been fully reflected in the latest audited consolidated financial statements of SPI. (d) No SPI Benefit Plan is subject to Title IV or Section 302 of ERISA or Section 412 or 4971 of the Code. None of SPI, its Subsidiaries and their respective ERISA Affiliates (as defined below) has at any time since September 2, 1974, contributed to or been obligated to contribute to any "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA or any plan with two or more contributing sponsors at least two of whom are not under common control, within the meaning of Section 4063 of ERISA. There does not now exist, nor do any circumstances exist that could result in, any Controlled Group Liability (as defined below) that would be a liability of SPI or any of its Subsidiaries following the Closing. "ERISA Affiliate" for purposes of this Section means, with respect to any entity, trade or business, any other entity, trade or business that is a member of a group described in Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1) of ERISA that includes the first entity, trade or business, or that is a member of the same "controlled group" as the first entity, trade or business pursuant to Section 4001(a)(14) of ERISA. "Controlled Group Liability" for purposes of this Section means any and all liabilities under (i) Title IV of ERISA, (ii) Section 302 of ERISA, (iii) Sections 412 and 4971 of the Code, (iv) the continuation coverage requirements of Section 601 et seq. of ERISA and Section 4980B of the Code, and (v) corresponding or similar provisions of foreign laws or regulations, other than such liabilities that arise solely out of, or relate solely to, the SPI Benefit Plans. (e) Except as set forth the latest audited consolidated financial statements of SPI or in Section 4.16(e) of the Disclosure Schedule, neither SPI nor any of its Subsidiaries has any liability for life, health, medical or other welfare benefits to former employees or beneficiaries or dependents thereof, except for health continuation coverage as required by Section 4980B of the Code or Part 6 of Title I of ERISA and at no expense to SPI and its Subsidiaries. (f) Except as set forth in the latest audited consolidated financial statements of SPI or in Section 4.16(f) of the Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (either alone or in conjunction with any other event) result in, cause the accelerated vesting or delivery of, or increase the amount or value of, any payment or benefit to any employee of SPI or any of its Subsidiaries. Without limiting the generality of the foregoing, no amount paid or payable by SPI or any of its Subsidiaries in connection with the transactions contemplated hereby (either solely as a result thereof or as a result of such transactions in conjunction with any other event) will be an "excess parachute payment" within the meaning of Section 280G of the Code. (g) Except as set forth in Section 4.16(g) of the Disclosure Schedule, no labor organization or group of employees of SPI or any of its Subsidiaries has made a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or threatened to be brought or filed, with the National Labor Relations Board or any other labor relations tribunal or authority. There are no organizing activities, strikes, work stoppages, slowdowns, lockouts, material arbitrations or material -39- 45 grievances, or other material labor disputes pending or, to the knowledge of SPI, threatened against or involving SPI or any of its Subsidiaries. (h) There are no pending or, to SPI's knowledge, threatened claims, and the fiduciaries of the SPI Benefit Plans have not advised SPI that with respect to their duties to the SPI Benefit Plans or the assets or any of the trusts under any of the SPI Benefit Plans, there are any pending or threatened claims (other than claims for benefits in the ordinary course), lawsuits or arbitrations which have been asserted or instituted against the SPI Benefit Plans, which could reasonably be expected to result in any material liability of SPI or any of its Subsidiaries to the Pension Benefit Guaranty Corporation, the Department of Treasury, the Department of Labor or any multiemployer benefit plan. 4.17 Taxes. (a) SPI and its Subsidiaries have duly prepared and filed federal, state, local and foreign Returns which were required to be filed by or in respect of SPI and its Subsidiaries, or any of their Properties, income and/or operations. As of the time they were filed, such Returns accurately reflected the material facts regarding the income, business, Assets, operations, activities, status of the entity on whose behalf the Return was filed, and any other information required to be shown thereon. No extension of time within which SPI or any of its Subsidiaries may file any Return is currently in force. (b) With respect to all amounts in respect of Taxes imposed on SPI or any of its Subsidiaries or for which SPI or any of its Subsidiaries is or could be liable, whether to taxing authorities or to other Persons, all material amounts required to be paid by or on behalf of SPI or any of its Subsidiaries to taxing authorities or others have been paid. (c) SPI has not been advised that there is any review or audit in process by any taxing authority of any Tax liability of SPI or any of its Subsidiaries currently in progress. SPI and its Subsidiaries have not received any written notice of any pending or threatened audit by the Internal Revenue Service or any state, local or foreign agency of any Returns or Tax liability of SPI or any of its Subsidiaries for any period. SPI and its Subsidiaries currently have no unpaid deficiencies assessed by the Internal Revenue Service or any state, local or foreign taxing authority arising out of any examination of any of the Returns of SPI or any of its Subsidiaries nor, to the knowledge of SPI, is there reason to believe that any material deficiency will be assessed. (d) No agreements are in force or are currently being negotiated by or on behalf of SPI or any of its Subsidiaries for any waiver or for the extension of any statute of limitations governing the time of assessments or collection of any Tax. No closing agreements or compromises concerning Taxes of SPI or any Subsidiaries are currently pending. (e) SPI and its Subsidiaries have withheld from each payment made to any of their respective officers, directors and employees, the amount of all applicable Taxes, including, but not -40- 46 limited to, income tax, social security contributions, unemployment contributions, backup withholding and other deductions required to be withheld therefrom by any Tax law and have paid the same to the proper Taxing authorities within the time required under any applicable Tax law. (f) There are no Encumbrances for Taxes, whether imposed by any federal, state, local or foreign taxing authority, outstanding against any Assets owned by SPI or its Subsidiaries, except for Encumbrances for Taxes that are not yet due and payable. None of the Assets owned by SPI or its Subsidiaries is property that is required to be treated as being owned by any other Person pursuant to the safe harbor lease provisions of former Section 168(f)(8) of the Code. None of the assets owned by SPI or its Subsidiaries directly or indirectly secures any debt, the interest on which is tax-exempt under Section 103(a) of the Code. None of the Assets owned by SPI or its Subsidiaries is "tax-exempt use property" within the meaning of Section 168(h) of the Code. None of SPI or any of its Subsidiaries is a person other than a United States person within the meaning of the Code. (g) Neither SPI nor any of its Subsidiaries is a party to any agreement, contract, or arrangement for compensating any employee that, individually or collectively, could give rise to the payment of any amount (whether in cash or property, including SPI Shares or other Equity Interests) that would not be deductible pursuant to the terms of Sections 162(a)(1), 162(m), 162(n) or 280G of the Code. (h) Neither SPI nor any of its Subsidiaries anticipate the assessment of any additional Taxes against SPI or any of its Subsidiaries nor is SPI or any of its Subsidiaries aware of any unresolved questions, claims or disputes concerning the liability for Taxes of SPI or any of its Subsidiaries which would exceed by more than $500,000 the reserves established on the consolidated balance sheet of SPI as of June 30, 1998. 4.18 Contracts; Debt Instruments. (a) Except as otherwise disclosed in Section 4.18(a) of the Disclosure Schedule, neither SPI nor any of its Subsidiaries is a party to or subject to: (i) any collective bargaining or other agreements with labor unions, trade unions, employee representatives, work committees, guilds or associations representing employees of SPI and its Subsidiaries; (ii) any employment, consulting, severance, termination, or indemnification agreement, contract or arrangement, including any oral agreement, contract or arrangement which requires the payment of over $75,000, with any current or former officer, consultant, director or employee; (iii) any lease for real or personal property in which the amount of payments which SPI is required to make, or is expected to receive, on an annual basis exceeds $50,000; -41- 47 (iv) any agreement, contract, instrument, arrangement or commitment to repurchase assets previously sold or leased, or to indemnify or otherwise compensate the purchaser in respect thereof; (v) any agreement, contract, policy, license, document, instrument, arrangement or commitment that materially limits the freedom of SPI or any of its Subsidiaries to compete in any line of business or with any person; (vi) any agreement or contract relating to any outstanding commitment for material capital expenditures, or any partially or fully executory agreement or contract relating to the acquisition or disposition of rights or assets other than those entered into in the ordinary course consistent with past practices; (vii) any sale-leaseback, conditional sale, exclusive dealing, brokerage, finder's fee contract or agreement; or (viii) any other agreement, contract, policy, license, document, instrument, arrangement or commitment not made in the ordinary course of business which is material to SPI and its Subsidiaries taken as a whole and which is not otherwise disclosed in the Disclosure Schedules. (b) None of SPI, its Subsidiaries and, to the knowledge of SPI, none of the other parties to any of the contracts and agreements identified in Sections 4.18(a) and (c) of the Disclosure Schedule is in default under or has terminated any such contract or agreement, or in any way expressed to SPI an intent to materially reduce or terminate the amount of its business with SPI or any of its Subsidiaries in the future. (c) Set forth in Section 4.18(c) of the Disclosure Schedule is (A) a list of all loan or credit agreements, notes, bonds, mortgages, indentures and other agreements and instruments pursuant to which any indebtedness of SPI or any of its Subsidiaries is outstanding or may be incurred, (B) the respective principal amounts currently outstanding thereunder, and (C) any interest rate swaps, caps, floors or option agreements or similar interest rate risk management agreements. Except as set forth in Section 4.18(c) of the Disclosure Schedule, all such indebtedness is prepayable at any time without penalty, subject to the notice provisions of the agreements governing such indebtedness (which, except as set forth in Section 4.18(c) of the Disclosure Schedule, do not require a notice period of more than thirty days). For purposes of this Section 4.18(c), "indebtedness" shall mean, with respect to any Person, without duplication, (A) all obligations of such Person for borrowed money, or with respect to deposits or advances of any kind to such Person, (B) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (C) all obligations of such Person upon which interest charges are customarily paid, (D) all obligations of such person under conditional sale or other title retention agreements relating to property purchased by such Person, (E) all obligations of such Person issued or assumed as the deferred purchase price of property or services (excluding obligations of such Person to creditors for raw materials, inventory, services and -42- 48 supplies incurred in the ordinary course of such Person's business), (F) all capitalized lease obligations of such Person, (G) all indebtedness of others secured by any Lien on property or assets owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (H) all obligations of such Person under interest rate or currency swap transactions (valued at the termination value thereof), (I) all letters of credit issued for the account of such Person, (J) all obligations of such Person to purchase securities (or other property) which arises out of or in connection with the sale of the same or substantially similar securities or property, and (K) all guarantees and arrangements having the economic effect of a guarantee of such Person of any indebtedness of any other person. 4.19 Insurance. SPI and its Subsidiaries are covered by valid and currently effective insurance policies issued in favor of SPI that are customary for companies of similar size and financial condition which conduct similar businesses; provided, that SPI currently does not have in force any directors and officers liability insurance coverage. All such policies are in full force and effect, all premiums due thereon have been paid and SPI has complied with the provisions of such policies with respect to which the failure to comply with would result in a cancellation of such policies. Neither SPI nor any of its Subsidiaries has received any written notice from or on behalf of any insurance carrier issuing policies or binders relating to or covering SPI and its Subsidiaries that there will be a cancellation or non-renewal of existing policies or binders, or material modification of any of the methods of doing business, will be required. 4.20 Interests of Officers and Directors. Except as set forth in Section 4.20 of the Disclosure Schedule, neither any of SPI's or any of its Subsidiaries' officers, directors or material shareholders nor any member of their respective immediate families or any entity with respect to which any such person is an Affiliate, has any material interest in any property, real or personal, tangible or intangible, used in or pertaining to the business of SPI or its Subsidiaries, or any other business relationship with SPI or any of its Subsidiaries. 4.21 No Brokers. Except as set forth in Section 4.21 of the Disclosure Schedule, no broker, finder, investment banker, or other Person or firm is entitled to any brokerage, finder's or other similar fee or commission in connection with this Agreement or the transactions contemplated hereby based upon arrangements made by or on behalf of SPI, any of its Subsidiaries or any of their respective directors, officers or employees. 4.22 Customers. Section 4.22 of the Disclosure Schedule sets forth a list of the names of the twenty (20) most significant customers (by revenue) of SPI and its Subsidiaries that ordered goods or products from SPI or any of its Subsidiaries and the amount for which each such customer was invoiced during the 12-month period ended March 31, 1998. Neither SPI nor any of its Subsidiaries has received any notice that any significant customer of SPI or any of its Subsidiaries has ceased, will cease, or has significantly reduced, or will significantly reduce its ordering of goods or products from SPI or any of its Subsidiaries, nor are SPI or any of its Subsidiaries aware of any circumstances that could reasonably be anticipated to cause any such reduction or cessation of orders. -43- 49 4.23 Suppliers. Section 4.23 of the Disclosure Schedule sets forth a list of the names of the twenty (20) most significant suppliers of raw materials and other goods to SPI and its Subsidiaries for the 12-month period ended March 31, 1998. Neither SPI nor any of its Subsidiaries has received any notice that any such supplier will cease selling raw materials or other goods to them at any time after the Closing or materially alter the terms of such sales (other than normal price increases), nor is SPI or any of its Subsidiaries aware of any circumstances that could reasonably be anticipated to cause such suppliers to make such changes. 4.24 Employees. To the best knowledge of SPI, no executive, key employee or group of employees has any plans to terminate employment with SPI or any of its Subsidiaries. Except as set forth in Section 4.24 of the Disclosure Schedule, neither SPI nor any of its Subsidiaries is a party to or bound by a collective bargaining agreement, nor does SPI have any knowledge of any organizational effort presently being made or threatened by or on behalf of any labor union with respect to the employees of SPI or its Subsidiaries. 4.25 Product Liability. Each product manufactured by SPI and its Subsidiaries has been manufactured, sold, delivered and installed in all material respects in accordance with applicable plans, specifications, laws (including building codes and regulations) and applicable industry standards. 4.26 Information in Joint Proxy Statement/Prospectus and Form S-4. Information supplied by SPI or any of its Subsidiaries for inclusion or incorporation by reference in (i) the Joint Proxy Statement/Prospectus (as hereinafter defined) (or any amendment thereof or supplement thereto), at the date mailed to SPI stockholders and Modtech stockholders and at the time of the respective meetings of the SPI stockholders and of the Modtech stockholders contemplated hereby, and (ii) the Form S-4 (as hereinafter defined) at any time the Form S-4 is filed with the SEC, at any time it is amended or supplemented and at any time it becomes effective under the Securities Act, will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. 4.27 Disclosure. The representations and warranties of SPI contained in this Agreement are true and correct in all material respects and do not omit any material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. There is no fact known to SPI which has not been disclosed to Modtech in the Disclosure Schedule and the latest audited consolidated financial statements of SPI, taken as a whole, which has had, or would reasonably be expected to have, a Material Adverse Effect. 4.28 Year 2000 Matters. To the best knowledge of SPI, the information systems utilized by SPI and each of its Subsidiaries are capable of properly recognizing date sensitive information when the year changes to 2000, and as such, the year change to 2000, as it relates to the information systems of SPI and its Subsidiaries, will not result in a material disruption of the business of SPI or any of its Subsidiaries. -44- 50 ARTICLE V COVENANTS 5.1 Conduct of Business by Modtech or SPI. Commencing the date after the date hereof and at all times prior to the Effective Time or the date, if any, on which this Agreement is earlier terminated pursuant to Article 7 hereof (the "Termination Date"), and except as may be required pursuant to this Agreement, or as disclosed or contemplated in the Disclosure Schedule (including the agreements and contemplated agreements referred to therein, and the consummation of the transactions contemplated by such agreements) or as may be consented to in writing by the other, Modtech and SPI: (a) shall, and shall cause each of their respective Subsidiaries to, conduct their respective operations according to their ordinary and usual course of business; provided, however, that this provision shall not prohibit the acquisition by SPI of a nonresidential modular building manufacturer located in the Southeastern United States or the other transactions contemplated to be consummated in connection therewith on terms substantially similar to those discussed with the chief executive officer of Modtech (the "Proposed Acquisition"); and provided, further, that SPI shall be permitted to update its Disclosure Schedules to reflect the completion of the Proposed Acquisition, and that any such updating shall not constitute a breach of any of the representations or warranties of SPI made herein, or any other provision of this Agreement; (b) shall, and shall cause each of their respective Subsidiaries to, use their best efforts to preserve intact their respective business organizations and good will in all material respects, keep available the services of their respective partners, officers and employees as a group and maintain satisfactory relations with lessees, suppliers, distributors, customers, banks and others having business relationships with them; (c) shall confer on a regular and frequent basis with one or more representatives of the other to report operational matters of a material nature and the general status of ongoing operations, subject to compliance with applicable law; (d) shall notify the other of any emergency or other change in the normal course of their or their respective Subsidiaries' respective businesses or in the operation of their or their respective Subsidiaries' Properties and of any governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated) if such emergency, change, complaint, investigation or hearing or the effect thereof would be material to the business, operations or financial condition of either Modtech or SPI and their respective Subsidiaries, as the case may be, taken as a whole; (e) shall not declare or pay any dividends on their outstanding shares of capital stock; -45- 51 (f) shall not, except as otherwise provided in this Agreement, enter into or amend in any material respect any employment, severance or similar agreement or any agreement or agreement in principle with respect to, any merger, consolidation or business combination (other than the Mergers), any acquisition of a material amount of assets or securities, any disposition of a material amount of assets or securities or any release or relinquishment of any material contract rights not in the ordinary course of business; provided, however, that this provision shall not prohibit the Proposed Acquisition by SPI; (g) shall not propose or adopt any amendments of their respective organizational documents; (h) shall not issue any shares of their capital stock (except upon exercise of warrants and options issued and outstanding on the date hereof), effect any stock split, issue any debt securities or borrow any money (other than bank borrowings in the ordinary course of business consistent with past practice, borrowings by SPI necessary to consummate the Proposed Acquisition), or otherwise change its capitalization as it existed on the date hereof; (i) shall not grant, confer or award any options, warrants, calls, subscriptions, convertible securities or other securities, or enter into any agreements, commitments or obligations which would require Modtech or SPI to acquire any shares of its capital stock except pursuant to employee benefit plans, programs or arrangements in existence on the date hereof, in the ordinary course of business and consistent with past practice; (j) shall not purchase or redeem any shares of their own capital stock, Modtech Shares or SPI Shares; and (k) shall not agree in writing, or otherwise, to take any of the foregoing actions or any action which would make any of their respective representations or warranties in Articles III or IV hereof untrue or incorrect. 5.2 Meetings of Stockholders. Each of Modtech and SPI will take all action necessary in accordance with applicable law and its organizational documents to convene a meeting of its stockholders as promptly as practicable to consider and vote upon the adoption of this Agreement and the transactions contemplated hereby, as required by applicable law. The Boards of Directors of Modtech and SPI will recommend that their respective stockholders vote in favor of such adoption, and Modtech and SPI will each take all lawful action to solicit such approval, including, without limitation, timely mailing the Joint Proxy Statement/Prospectus; provided, however, that nothing contained in this Section 5.2 shall prohibit either Modtech or SPI from taking and disclosing to its stockholders a position contemplated by Rule 14e-2(a) promulgated under the Exchange Act or from making any disclosure to, or having any communication with, their respective stockholders if, in the good faith judgment of the Board of Directors of Modtech or SPI, as applicable, after consultation with outside counsel, failure so to disclose or communicate would be inconsistent with its fiduciary duties under applicable law. The respective meetings of the stockholders of Modtech -46- 52 and SPI shall be held as soon as practicable and in any event (to the extent permissible under applicable law) within twenty (20) days after the date upon which the Joint Proxy Statement/Prospectus shall have been approved for release to the stockholders of Modtech and SPI by the SEC; provided, however, that notwithstanding anything to the contrary contained in this Agreement, Modtech and SPI may adjourn or postpone their respective meetings of stockholders to the extent necessary, in the opinion of their respective counsel, to supplement or amend the Joint Proxy Statement/Prospectus in advance of a vote on this Agreement and the Mergers. Modtech and SPI shall coordinate and cooperate with respect to the timing of such meetings and shall endeavor to hold such meetings on the same day. 5.3 Further Assurance and Cooperation. Subject to the terms and conditions herein provided, Modtech and SPI agree to use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement and to cooperate with each other in connection therewith, (a) to obtain all necessary waivers, consents and approvals from other parties to material loan agreements, leases and other contracts (provided that neither Modtech nor SPI shall agree to any substantial modification to any such agreement, lease or contract or to any payment of funds in order to obtain such waiver, consent or approval without the prior written consent of the other), (b) to defend any lawsuits or other legal proceedings challenging this Agreement or the consummation of the transactions contemplated hereby, (c) to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated thereby, (d) to effect all necessary registrations and filings (including any registrations and filings which may be required to be made by Holdings pursuant to any federal or state securities laws), and (e) to fulfill all conditions to this Agreement. 5.4 Certain Filings and Consents. Each of Modtech and SPI shall (a) promptly make the required filings and submissions under the HSR Act, (b) cooperate with the other in determining whether any other filings are required to be made or consents, approvals, permits or authorizations are required to be obtained under any federal, state, local or foreign law or regulation or whether any consents, approvals or waivers are required to be obtained from other parties to loan agreements, leases or other contracts in connection with the consummation of the Mergers and the other transactions contemplated by this Agreement, and (c) actively assist each other in obtaining any consents, permits, authorizations, approvals or waivers which are required. Each of Modtech and SPI shall promptly inform the other of any material communication between such party and any government or governmental authority regarding the Mergers or the other transactions contemplated by this Agreement. If Modtech or SPI receives a request for additional information or documentary material from any such government or governmental authority, then such party shall endeavor in good faith to make, or cause to be made, as soon as reasonably practicable and after consultation with the other party, an appropriate response to such request. Modtech and SPI shall cooperate in connection with reaching any understandings, undertaking or agreements (oral or written) involving any government or any governmental authority in connection with the transactions contemplated hereby. -47- 53 5.5 Publicity. The initial press release relating to this Agreement and all press releases or public statements thereafter with respect to the transactions contemplated hereby shall be joint press releases or statements. Subject to their respective legal obligations (including requirements of stock exchanges and other similar regulatory bodies), Modtech and SPI shall consult with each other in making any filings with any governmental or regulatory authorities or with any national securities exchange. 5.6 Joint Proxy Statement/Prospectus and Form S-4. (a) Modtech and SPI will cooperate and promptly prepare and file with the SEC as soon as practicable a joint proxy statement/prospectus and necessary forms of proxy in connection with the vote of Modtech's and SPI's stockholders with respect to the Mergers and the offer to such stockholders of the securities to be issued pursuant to the Mergers (the "Joint Proxy Statement/Prospectus") and will cause Holdings to prepare and file with the SEC the registration statement on Form S-4 (the "Form S-4") under the Securities Act, in which the Joint Proxy Statement/Prospectus shall be included as a prospectus. Modtech and SPI will cause the Form S-4 to comply in all material respects with the applicable provisions of the Securities Act and the Exchange Act. Each of Modtech and SPI will use its best efforts to have the Form S-4 declared effective by the SEC as promptly as practicable and to keep the Form S-4 effective as long as is necessary to consummate the Mergers. Modtech and SPI will cause Holdings to take any action required to be taken to obtain, prior to the effective date of the Form S-4, all necessary state securities law or "Blue Sky" permits or approvals required to carry out the transactions contemplated by this Agreement and all expenses incident thereto will be paid 68% by Modtech and 32% by SPI. No amendment or supplement to the Form S-4 or the Joint Proxy Statement/Prospectus will be made by Modtech or SPI without the approval of the other party, such approval not to be unreasonably withheld or delayed. Each of SPI and Modtech shall use reasonable efforts to cause the Joint Proxy Statement/Prospectus to be mailed to its respective stockholders as soon as practicable after the date hereof. 5.7 Listing Application. Each of Modtech and SPI will cause Holdings to promptly prepare and submit to Nasdaq a listing application covering the shares of Holdings Common Stock issuable in the Mergers, and will use its best efforts to obtain, prior to the Effective Time, approval for the listing of such Holdings Common Stock, subject to official notice of issuance. 5.8 Further Action. Each of Modtech and SPI will, subject to the other terms and conditions set forth herein and to the fulfillment at or before the Effective Time of each of the conditions of performance set forth herein or the waiver thereof, perform such further acts and execute such documents as may be reasonably required to effect the Mergers. Each of Modtech and SPI will permit the other and its authorized representatives full access to all of its and its Subsidiaries premises, properties, personnel, books, records, contracts and documents, and each party will use commercially reasonable efforts to cause its representatives to furnish to the other party and its authorized representatives such additional financial and operating data and other information -48- 54 concerning its businesses and properties (and those of its Subsidiaries) as the other or its duly authorized representatives may from time to time reasonably request. 5.9 Lockup Agreements. Each of Modtech and SPI will use all reasonable efforts to deliver or cause to be delivered to the other, prior to the Closing Date, from each of their respective "affiliates" within the meaning of Rule 145 of the rules and regulations promulgated under the Securities Act, a lockup agreement pursuant to which each such affiliate will agree not to sell any shares of Holdings for a period of 90 days following the Effective Time (the "Lockup Agreement"). Holdings will be entitled, to the extent it is so required by applicable law (as advised by outside counsel experienced in such matters) to place legends as specified in such Lockup Agreements on the certificates evidencing any Holdings Common Stock or Holdings Preferred Stock to be received by such affiliates pursuant to the terms of this Agreement, and to issue appropriate stop-transfer instructions to the transfer agent for Holdings Common Stock, consistent with the terms of such Lockup Agreements. 5.10 Expenses. Whether or not the Mergers are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby will be paid by the party incurring such expenses except as expressly provided herein, and except that (i) the filing fee in connection with the HSR Act filings of SPI and Modtech and the affiliates of SPI and Modtech, (ii) the filing fee in connection with the filing of the Form S-4 or Joint Proxy Statement/Prospectus with the SEC, and (iii) the expenses incurred in connection with the preparation, printing and mailing of the Form S-4 and the Joint Proxy Statement/Prospectus, will be paid 68% by Modtech and 32% by SPI. In addition, SPI will reimburse Modtech for 32% of the cost of obtaining the Fairness Opinion. Following consummation of the Mergers, Holdings will reimburse Modtech and SPI for their reasonable expenses payable to third parties and incurred in connection with this Agreement and the transactions contemplated hereby, including amounts paid by SPI to Modtech to reimburse Modtech for 32% of the cost of the Fairness Opinion. The provisions of this Section 5.10 will survive the consummation of the Mergers. 5.11 Notice of Change in Representations and Warranties. Modtech and SPI will each give prompt notice to the other of (i) any change in its condition or any event causing a breach of any of its representations and warranties, (ii) the occurrence or non-occurrence of any event which would, or which would be reasonably likely to, cause any conditions to their obligations to effect the Mergers and other transactions contemplated hereby not to be satisfied in any material respect, and (iii) their failure to satisfy in any material respect any covenant or condition to be complied with by them pursuant to this Agreement. 5.12 Consents. Modtech and SPI will use all reasonable efforts to obtain each of the consents identified in Section 3.6 and 4.6, respectively, of the Disclosure Schedule. 5.13 Letter of Modtech's Accountants. Modtech shall use reasonable efforts to cause to be delivered to SPI and Holdings a letter of KPMG Peat Marwick LLP, Modtech's independent auditors, dated a date within two business days before the date on which the Form S-4 shall become -49- 55 effective and addressed to Holdings, in form reasonably satisfactory to SPI and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Form S-4. 5.14 Letter of SPI's Accountants. SPI shall use reasonable efforts to cause to be delivered to Modtech and Holdings a letter of Arthur Andersen LLP, SPI's independent auditors, dated a date within two business days before the date on which the Form S-4 shall become effective and addressed to Holdings, in form reasonably satisfactory to Modtech and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Form S-4. 5.15 Registration Statement on Form S-8. On or promptly after the 90th day following the Effective Time, Modtech and SPI shall cause Holdings to prepare and file with the SEC a registration statement on Form S-8 (or another appropriate form) registering a number of shares of Holdings Common Stock at least equal to the number of shares of Holdings Common Stock subject to options to be received by the holders of Modtech and SPI options pursuant to Section 2.1(c). Such registration statement shall be kept effective (and the current status of the prospectus or prospectuses required thereby shall be maintained) at least for so long as any options with respect to Holdings Common Stock received by the holders of Modtech or SPI options pursuant to Section 2.1(c) remain outstanding. 5.16 Tax Matters Certificates. In connection with the opinions to be rendered by counsel to Modtech and SPI pursuant to Sections 6.2(e) and 6.3(e), respectively, tax certificates shall be delivered to such counsel which certificates shall be from such parties and in such form and substance as may reasonably be required by such counsel. Such counsel shall, in rendering such opinions, be entitled to rely on the representations contained in such tax certificates. 5.17 Assumption of Obligations by Holdings, Modtech Sub and SPI Sub. As soon as practicable after the formation of Holdings, Modtech and SPI (i) shall cause Holdings to sign and become a party to this Agreement and to assume the obligations applicable to it hereunder, and (ii) shall cause Modtech Sub and SPI Sub to sign and become parties to this Agreement and to assume their respective obligations hereunder and under the agreements of merger contained herein. Upon their execution of this Agreement, Holdings, Modtech Sub and SPI Sub will be bound by the provisions hereof and Modtech and SPI hereby agree that upon such execution such entities shall be parties hereto. 5.18 Representations and Warranties of Holdings. Modtech and SPI shall cause Holdings to deliver, on the Closing Date, a certificate of an executive officer containing representations and warranties substantially to the effect of those representations and warranties set forth in Articles III and IV of this Agreement. -50- 56 5.19 Development of Holdings Business Plan. Promptly following the execution of this Agreement, representatives of Modtech and SPI shall jointly develop a business plan for the operation of Holdings following the Closing. 5.20 Payment of Transaction Fees; Transaction Advisory Agreement. Modtech and SPI shall cause Holdings to pay the fees set forth in Section 3.21 and Section 4.21, respectively, of the Disclosure Schedule. In addition to the payment of the fees described in the preceding sentence, Modtech and SPI shall, in connection with the Closing, cause Holdings, following approval thereof by the Independent Directors, to enter into the Transaction Advisory Agreement with KRG Capital, in substantially the form set forth in Exhibit F (the "Transaction Advisory Agreement"). 5.21 Retention of Holdings' Financial Advisor. Modtech and SPI shall cause Holdings to retain DLJ as financial advisor to Holdings in connection with the Mergers. 5.22 Deregistration of Modtech Shares. Promptly after the Closing, Holdings shall take all necessary steps to deregister the Modtech Shares with the Securities and Exchange Commission and Nasdaq. ARTICLE VI CONDITIONS 6.1 Conditions to Each of Modtech's and SPI's Obligation to Effect the Mergers. The respective obligations of Modtech and SPI to effect the Mergers will be subject to the fulfillment or waiver by both parties at or prior to the Closing Date of the following conditions: (a) The Modtech Merger and this Agreement shall have been validly approved and adopted by the affirmative vote of the holders of at least that number of outstanding shares of Modtech Shares required to approve the Modtech Merger under the CGCL and Modtech's articles of incorporation at the stockholders' meeting referred to in Section 5.2 (the "Modtech Stockholder Approvals"); (b) The SPI Merger and this Agreement shall have been validly approved and adopted by the affirmative vote of the holders of at least that number of outstanding shares of SPI Shares required to approve the SPI Merger under the CBCA and SPI's articles of incorporation at the stockholders' meeting referred to in Section 5.2 (the "SPI Stockholder Approvals"); (c) Neither Modtech nor SPI shall be subject to any order, decree, ruling or injunction of a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, and no law, statute, rule or regulation shall have been promulgated or enacted by a governmental or regulatory authority, which prohibits the consummation of the transactions contemplated by this Agreement or would otherwise impair the ability of Holdings to operate the business of Modtech and SPI on a consolidated basis following the Closing and there shall be no -51- 57 pending action, proceeding or investigation by or before any governmental entity challenging or seeking material damages in connection with the Mergers or otherwise limiting the right of Modtech and SPI to continue their respective operations (and those of their Subsidiaries) following the Closing; (d) The waiting period applicable to the consummation of the Mergers under the HSR Act shall have expired or been terminated; (e) The Form S-4 shall have become effective and shall be effective at the Effective Time, and no stop order suspending effectiveness of the Form S-4 shall have been issued which shall be in effect at the Effective Time, no action, suit, proceeding or investigation by the SEC to suspend the effectiveness thereof shall have been initiated and be continuing or, to the knowledge of Modtech or SPI, be threatened in writing, and all necessary approvals under state securities laws relating to the issuance or trading of Holdings Common Stock to be issued to Modtech and SPI stockholders in connection with the Mergers shall have been received; (f) Holdings shall have successfully negotiated and put into effect a credit facility on terms acceptable to Holdings, which facility shall provide approximately $100 million in available credit, (approximately $45 million of which shall be a term loan, $30 million of which shall be a revolving loan, and $25 million of which shall be an acquisition line of credit); (g) All consents, licenses, permits, authorizations, orders and approvals of (or filings or registrations with) any governmental or regulatory authorities, and all consents, authorizations and approvals of any other entity (including, without limitation, any bank or financial institution) required in connection with the execution, delivery and performance of this Agreement shall have been obtained or made, except for filings in connection with the Mergers and any other documents required to be filed after the Effective Time and except where the failure to have obtained or made any such consent, license, permit, authorization, order, approval, filing or registration would not have a Material Adverse Effect on Holdings and its Subsidiaries, taken as a whole, following the Effective Time; (h) Holdings Common Stock to be issued to Modtech and SPI stockholders in connection with the Mergers shall have been approved for listing on Nasdaq, subject only to official notice of issuance; (i) After the Effective Time and except as set forth in this Agreement, no Person will have any right under any stock option plan (or any option granted thereunder) or other plan, program or arrangement to acquire any securities of Modtech, SPI or any of their respective Subsidiaries; (j) Holders of Modtech Shares representing no more than 5% of the issued and outstanding Modtech Shares shall have exercised, and not withdrawn, their rights to dissent from the Modtech Merger; -52- 58 (k) Holders of SPI Shares representing no more than 5% of the issued and outstanding SPI Shares shall have exercised, and not withdrawn, their rights to dissent from the SPI Merger; (l) All of the parties set forth on the signature page thereof shall have entered into the Registration Rights Agreement substantially in the form of Exhibit G; (m) Holdings and KRG Capital shall each have entered into the Transaction Advisory Agreement substantially in the form of Exhibit F; (n) Such key employees as shall be identified by mutual agreement of Modtech and SPI shall have entered into employment agreements with Holdings on terms acceptable to Holdings; (o) Holdings shall have delivered the certificate described in Section 5.16 of this Agreement; and (p) The affiliates of Modtech and SPI shall have entered into the Lockup Agreements. 6.2 Conditions to Obligation of Modtech to Effect the Mergers. The obligation of Modtech to effect the Mergers will be subject to the fulfillment at or prior to the Closing Date of the following additional conditions, all of which, except paragraph (e), may be waived by Modtech: (a) SPI shall have performed and complied in all material respects with all material obligations and agreements required to be performed and complied with by it under this Agreement at or prior to the Closing Date; (b) The representations and warranties of SPI contained in this Agreement that are qualified as to materiality shall be true and correct, and such representations and warranties of SPI that are not so qualified shall be true and correct in all material respects, in each case both as of the date of this Agreement and on the Closing Date as though made on and as of the Closing Date, except to the extent such representations and warranties are expressly made as of an earlier date, in which case, such representations and warranties shall be true and correct as of such date; (c) Modtech shall have received a certificate from the President or a Vice President of SPI, dated as of the Closing Date, to the effect that the conditions set forth in paragraphs (a) and (b) above have been satisfied; (d) From the date of this Agreement through the Effective Time, a Material Adverse Effect with respect to SPI and its Subsidiaries, taken as a whole, shall not have occurred; -53- 59 (e) Modtech shall have received a tax opinion from Gibson Dunn & Crutcher LLP, in form and substance reasonably satisfactory to Modtech, substantially to the effect that, on the basis of the facts, representations and assumptions set forth in such opinion, the Modtech Merger (together with the SPI Merger) will be treated as an "exchange" under Section 351 of the Code; (f) Modtech shall have received the opinion of Dorsey & Whitney LLP, counsel to SPI, dated the Effective Time, in form and substance reasonably satisfactory to Modtech and its counsel; and (g) The Fairness Opinion received by Modtech in accordance with the provisions of Section 3.28 hereof and shall not have been amended, withdrawn or modified in any adverse manner. 6.3 Conditions to Obligation of SPI to Effect the Mergers. The obligation of SPI to effect the Mergers will be subject to the fulfillment at or prior to the Closing Date of the following additional conditions, all of which, except paragraph (e), may be waived by SPI: (a) Modtech shall have performed and complied in all material respects with all material obligations and agreements required to be performed and complied with by it under this Agreement at or prior to the Closing Date; (b) The representations and warranties of Modtech contained in this Agreement that are qualified as to materiality shall be true and correct, and such representations and warranties of Modtech that are not so qualified shall be true and correct in all material respects, in each case both as of the date of this Agreement and on the Closing Date as though made on and as of the Closing Date, except to the extent such representations and warranties are expressly made as of an earlier date, in which case, such representations and warranties shall be true and correct as of such date; (c) SPI shall have received from Modtech a certificate from the President or a Vice President of Modtech, dated as of the Closing Date, to the effect that the conditions set forth in paragraphs (a) and (b) above have been satisfied; (d) From the date of this Agreement through the Effective Time, a Material Adverse Effect on Modtech and its Subsidiaries, taken as a whole, shall not have occurred; (e) SPI shall have received a tax opinion from Dorsey & Whitney LLP, in form and substance reasonably satisfactory to SPI, substantially to the effect that, on the basis of the facts, representations and assumptions set forth in such opinion, the SPI Merger will be treated as a "reorganization" within the meaning of Section 368 of the Code; and (f) SPI shall have received the opinion of Gibson, Dunn & Crutcher LLP and Haddan & Zepfel LLP, counsel to Modtech, in form and substance reasonably satisfactory to SPI and its counsel. -54- 60 ARTICLE VII TERMINATION, WAIVER AND AMENDMENT 7.1 Termination or Abandonment. Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated and abandoned at any time prior to the Effective Time, whether before or after the Modtech Stockholder Approvals and the SPI Stockholder Approvals: (a) by the mutual written consent of Modtech and SPI; (b) by Modtech or SPI, if the Effective Time shall not have occurred on or before six (6) months from the date of this Agreement; provided, however, that the right to terminate this Agreement under this Section 7.1(b) shall not be available to any party whose breach of this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date; (c) by Modtech or SPI if any court of competent jurisdiction in the United States or other United States governmental body shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the Modtech Merger or the SPI Merger; (d) by Modtech, (i) if SPI shall materially breach any of its representations, warranties or covenants hereunder and such breach shall not have been cured within ten (10) business days after receipt by SPI of written notice of such breach, (ii) if any required approval of the shareholders of SPI has not been obtained, or (iii) if the Board of Directors of SPI shall have withdrawn or modified its recommendation of the approval of this Agreement or the SPI Merger in a manner adverse to Modtech or shall have resolved to do any of the foregoing; (e) by SPI, (i) if Modtech shall materially breach any of its representations, warranties or covenants hereunder and such breach shall not have been cured within ten (10) business days after receipt by Modtech of written notice of such breach, (ii) if any required approval of the shareholders of Modtech has not been obtained, or (iii) if the Board of Directors of Modtech shall have withdrawn or modified its recommendation of the approval of this Agreement or the Modtech Merger in a manner adverse to SPI or shall have resolved to do any of the foregoing; (f) by Modtech, at any time prior to the Effective Time, by action of the Board of Directors of Modtech, if Modtech receives an Acquisition Proposal on terms Modtech's Board of Directors (after consultation with its independent financial advisors) determines in good faith to be more favorable to the Modtech's stockholders than the terms of the Modtech Merger, and Modtech's Board of Directors determines, upon the advice of its legal counsel, that, to continue to recommend that holders of Modtech Shares vote in favor of the Modtech Merger, notwithstanding the receipt of such offer with respect to an Acquisition Proposal, or to fail to recommend or accept the Acquisition Proposal, would not be consistent with the fiduciary duties of Modtech's Board of Directors; -55- 61 provided, however, that Modtech shall not be permitted to terminate this Agreement pursuant to this Section 7.1(f) unless it has provided SPI with three (3) business days' prior written notice of its intent to so terminate this Agreement, together with a detailed summary of the terms and conditions (including proposed financing, if any) of such Acquisition Proposal; or (g) by SPI, at any time prior to the Effective Time, by action of the Board of Directors of SPI, if SPI receives an Acquisition Proposal on terms SPI's Board of Directors (after consultation with its independent financial advisors) determines in good faith to be more favorable to the SPI's stockholders than the terms of the SPI Merger, and SPI's Board of Directors determines, upon the advice of its legal counsel, that, to continue to recommend that holders of SPI Shares vote in favor of the SPI Merger, notwithstanding the receipt of such offer with respect to an Acquisition Proposal, or to fail to recommend or accept the Acquisition Proposal, would not be consistent with the fiduciary duties of SPI's Board of Directors; provided, however, that SPI shall not be permitted to terminate this Agreement pursuant to this Section 7.1(g) unless it has provided Modtech with three (3) business days' prior written notice of its intent to so terminate this Agreement, together with a detailed summary of the terms and conditions (including proposed financing, if any) of such Acquisition Proposal. 7.2 Effect of Termination. (a) Modtech shall pay to SPI, concurrently with any termination pursuant to Sections 7.1(e) or 7.1(f) by wire transfer in same day funds, all documented fees and expenses of SPI related to this Agreement and the transactions contemplated hereby, if SPI shall have satisfied all conditions to the Closing that are or were at the time reasonably within its control and if SPI shall not have taken any action reasonably calculated to prevent or unreasonably delay the Closing, plus an additional fee of $2,000,000. (b) SPI shall pay to Modtech, concurrently with any termination pursuant to Sections 7.1(d) or 7.1(g) by wire transfer in same day funds, all documented fees and expenses of Modtech related to this Agreement and the transactions contemplated hereby, if Modtech shall have satisfied all conditions to the Closing that are or were at the time reasonably within its control and if Modtech shall not have taken any action reasonably calculated to prevent or unreasonably delay the Closing, plus an additional fee of $2,000,000. (c) The parties agree that the payments contemplated by Sections 7.2(a) and 7.2 (b) are intended as liquidated damages to reimburse the other party for all damages it may suffer as a result of termination of this Agreement. The parties acknowledge and agree that such amounts are not a penalty, and that such amounts are reasonable considering all the circumstances existing on the date of this Agreement, including the relationship of the remedy to the range of harm that could reasonably be anticipated and the anticipation that proof of actual damages would be costly or inconvenient. The foregoing payments are each parties' sole and exclusive remedy in the event of a termination of this Agreement pursuant to Section 7.1 and neither party shall have any other remedy at law or in equity as a result of such termination. -56- 62 (d) The parties acknowledge that the agreements contained in this Section 7.2 are an integral part of the transactions contemplated in this Agreement, and that, without these agreements, neither party would enter into this Agreement. Accordingly, if either party fails to pay promptly the amounts due pursuant to this Section 7.2, and, in order to obtain such payments, the other party commences a suit for the fees set forth in this paragraph, the prevailing party shall be reimbursed by the other party its costs and expenses (including attorneys' fees and expenses) in connection with such suit, together with interest on the amount thereof at the prime rate of as quoted in The Wall Street Journal on the date such payment was required to be made. (e) In the event of termination of this Agreement pursuant to Section 7.2, this Agreement shall terminate, and there shall be no other liability on the part of Modtech or SPI to the other, except that the liability on the agreements contained in Section 7.2 shall survive the termination hereof, and except liability arising out of a breach of this Agreement. 7.3 Amendment or Supplement. At any time before or after the Modtech Stockholder Approvals and the SPI Stockholder Approvals and prior to the Effective Time, this Agreement may be amended or supplemented in writing by Modtech and SPI with respect to any of the terms contained in this Agreement, except that following the Modtech Stockholder Approvals and the SPI Stockholder Approvals there shall be no amendment or change to the provisions hereof with respect to the Modtech Exchange Ratio or SPI Exchange Ratio as provided herein, without further approval by the respective stockholders of Modtech and SPI. 7.4 Extension of Time; Waiver, Etc. At any time prior to the Effective Time, Modtech and SPI may: (a) extend the time for the performance of any of the obligations or acts of the other party; (b) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document delivered pursuant hereto; and (c) waive compliance with any of the agreements or conditions of the other party contained herein, except the receipt of the tax opinions set forth in Sections 6.2 and 6.3 above; provided, however, that no failure or delay by Modtech or SPI in exercising any right hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right hereunder. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. -57- 63 ARTICLE VIII INDEMNIFICATION 8.1 Indemnification. (a) From and after the Effective Time, Holdings shall indemnify, defend and hold harmless the present and former directors, officers and employees of Modtech and SPI and their respective Subsidiaries (each, an "Indemnified Party") against all costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities (collectively, "Costs") incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of actions or omissions as directors or officers of Modtech or SPI and their respective Subsidiaries occurring at or prior to the Effective Time, including, without limitation, the transactions contemplated by this Agreement, to the fullest extent that such persons are indemnified under the laws of the States of California or Colorado and the organizational documents, as in effect on the date hereof, of Modtech and SPI and their respective Subsidiaries or any existing indemnification agreement with any of Modtech or SPI (and during such period Holdings shall also advance expenses (including expenses constituting Costs described in Section 8.1(e)) as incurred to the fullest extent permitted under applicable law, provided that the Person to whom expenses are advanced provides a written affirmation of his or her good faith that the standard of conduct necessary for indemnification has been met and an undertaking to repay such advances if it is ultimately determined that such Person is not entitled to indemnification with no bond or security to be required); provided that any determination required to be made with respect to whether an officer's or director's conduct complies with the standards set forth under applicable law and any such organizational documents shall be made by independent counsel (which shall not be counsel that provides material services to Holdings or its Subsidiaries) selected by Holdings and reasonably acceptable to such officer or director; and provided, further, that in the absence of applicable judicial precedent to the contrary, such counsel, in making such determination, shall presume such officer's or director's conduct complied with such standard and Holdings shall have the burden to demonstrate that such officer's or director's conduct failed to comply with such standard. (b) For a period of not less than six (6) years after the Effective Time, Holdings will maintain officers' and directors' liability insurance covering the Indemnified Parties who are currently covered, in their capacities as current or former officers and directors of Modtech and covering similarly situated Indemnified Parties of SPI, by existing officers' and directors' liability insurance policy on terms substantially no less advantageous to the Indemnified Parties than such existing insurance. (c) Any Indemnified Party wishing to claim indemnification under Section 8.1(a), upon learning of any claim, action, suit, proceeding or investigation described above, shall promptly notify Holdings thereof; provided that the failure so to notify shall not affect the obligations of Holdings -58- 64 under Section 8.1(a) unless and to the extent such failure materially increases Holdings' liability under such subsection (a). (d) If Holdings or any of its successors or assigns shall consolidate with or merge with any other entity and shall not be the continuing or surviving entity of such consolidation or merger or shall transfer all or substantially all of its assets to any Person, then and in each case, proper provision shall be made so that the successors and assigns of Holdings or any of its Subsidiaries shall assume the obligations set forth in this Section 8.1. (e) Holdings shall pay all reasonable Costs, including attorneys' fees, that may be incurred by any Indemnified Party in enforcing the indemnity and other obligations provided for in this Section 8.1. The rights of each Indemnified Party hereunder shall be in addition to any other rights such Indemnified Party may have under applicable law. (f) Modtech and SPI will cause Holdings to keep in effect provisions in Holdings', New Modtech's and New SPI's organizational documents providing for exculpation of director and officer liability and its indemnification of the Indemnified Parties to the fullest extent permitted under the Delaware General Corporation Law (the "DGCL"), the CGCL or the CBCA, as applicable, which provisions will not be amended except as required by applicable law or except to make changes permitted by law that would enlarge the Indemnified Parties' right of indemnification. (g) The provisions of this Section 8.1 will survive the consummation of the Mergers and expressly are intended to benefit each Indemnified Party. ARTICLE IX GENERAL PROVISIONS 9.1 Non-survival of Representations and Warranties. All representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement will be deemed to the extent expressly provided herein to be conditions to the Mergers and will not survive the Mergers. This Section 9.1 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time. 9.2 Notices. Any notice required to be given hereunder will be sufficient if in writing, and sent by facsimile transmission and by courier service (with proof of service), hand delivery or certified or registered mail (return receipt requested and first-class postage prepaid), addressed as follows: -59- 65 If to Modtech: If to SPI: Modtech, Inc. SPI Manufacturing, Inc. 2830 Barrett Avenue 9550 Hermosa Avenue P.O. Box 1240 Rancho Cucamonga, California 91730 Perris, California 92572 Attention: Patrick Van Den Bossche Attention: Evan M. Gruber Fax No.: (909) 484-4296 Fax No.: (949) 476-0740 With copies to: With copies to: Proactive Partners, L.P. KRG Capital Partners, LLC 50 Osgood Place 370 17th Street, Suite 2300 San Francisco, California 94133 Denver, CO 80202 Attention: Charles C. McGettigan Attention: Charles R. Gwirtsman Fax No.: (415) 986-3617 Fax No.: (303) 572-5015 With copies to counsel for Modtech: With copies to counsel for SPI: Haddan & Zepfel LLP Dorsey & Whitney LLP 4675 McCarthy Court 370 17th Street, Suite 4400 Suite 710 Denver, Colorado 80202-5644 Newport Beach, California 98660 Attention: Kevin A. Cudney Attention: Jon R. Haddan, Esq. Fax No.: (303) 629-3450 Fax No.: (949) 752-6100 or to such other address as any party shall specify by written notice so given, and such notice shall be deemed to have been delivered as of the date so telecommunicated, personally delivered or mailed. 9.3 Assignment; Binding Effect. Neither this Agreement nor any of the rights, interests or obligations hereunder will be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon and will inure to the benefit of the parties hereto and their respective successors and assigns. Notwithstanding anything contained in this Agreement to the contrary, except for the provisions of Section 8.1, nothing in this Agreement, expressed or implied, is intended to confer on any Person other than the parties hereto or their respective heirs, successors, executors, administrators and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. 9.4 Entire Agreement. This Agreement, the Exhibits, the Disclosure Schedule and any documents delivered by the parties in connection herewith which will survive the execution and delivery of this Agreement, constitute the entire agreement among the parties with respect to the -60- 66 subject matter hereof and supersede all prior agreements and understandings among the parties with respect thereto. No addition to or modification of any provision of this Agreement will be binding upon any party hereto unless made in writing and signed by all parties hereto. 9.5 Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of Delaware without regard to its rules of conflict of laws; provided, however, that all matters covered by the CGCL will be governed by and construed in accordance with the laws of the State of California without regard to its rules of conflict of laws and all matters covered by the CBCA will be governed by and construed in accordance with the laws of the State of Colorado without regard to its rules of conflict of laws. 9.6 Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered will be an original, but all such counterparts will together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. 9.7 Headings. Headings of the Articles and Sections of this Agreement are for the convenience of the parties only, and will be given no substantive or interpretive effect whatsoever. 9.8 Interpretation. In this Agreement, unless the context otherwise requires, words describing the singular number will include the plural and vice versa, and words denoting any gender will include all genders and words denoting natural Persons will include corporations and partnerships and vice versa. 9.9 Incorporation of Schedules. The Disclosure Schedule attached hereto and referred to herein is hereby incorporated herein and made a part hereof for all purposes as if fully set forth herein. 9.10 Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction will, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision will be interpreted to be only so broad as is enforceable. 9.11 Enforcement of Agreement. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement was not performed in accordance with its specific terms or was otherwise breached. It is accordingly agreed that the parties will be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any Delaware court, this being in addition to any other remedy to which they are entitled at law or in equity. -61- 67 ARTICLE X DEFINITIONS 10.1 Defined Terms. As used herein, the terms below shall have the following meanings: "Acquisition Proposal" shall mean any proposal or offer (including, without limitation, any proposal or offer to stockholders) with respect to a merger, consolidation or similar transaction involving, or any purchase of all or any significant portion of the assets or any equity securities of, Modtech or SPI or any of the Subsidiaries of Modtech or SPI. "Action" shall mean any action, order, writ, injunction, judgment or decree outstanding or claim, suit, litigation, proceeding, arbitration or investigation by or before any court, governmental or other regulatory or administrative agency or commission or any other Person. "Affiliate" shall mean, with respect to any Person, any other Person that directly, or through one or more intermediaries, controls or is controlled by or is under common control with such Person. "Assets" shall mean, with respect to any Person, all land, buildings, improvements, leasehold improvements, Fixtures and Equipment and other assets, real or personal, tangible or intangible, owned, leased or licensed by such Person or any of its Subsidiaries. "Disclosure Schedule" means the schedules dated as of the date hereof and delivered by or on behalf of each party hereto to the other party hereto in connection with this Agreement and which set forth exceptions to the representations and warranties contained herein and certain other information called for by other provisions of this Agreement. "Election" shall mean the election contemplated by Section 2.3 hereof with respect to the Record Holders of Modtech Shares, and the election contemplated by Section 2.8 hereof with respect to the Record Holders of SPI Shares. "Election Deadline" shall mean a time not later than the time specified in the Letter of Transmittal, at which time the shareholders of Modtech and SPI must submit their Election Forms to the Exchange Agent. "Election Form" shall mean a form for the purpose of making the Elections, which form shall be delivered to Record Holders in connection with the delivery of the definitive proxy statement for the transaction contemplated by this Agreement. "Encumbrances" shall mean any claim, lien, pledge, option, charge, easement, security interest, deed of trust, mortgage, right-of-way, covenant, condition, restriction, encumbrance or other rights of third parties. -62- 68 "Environmental Laws" shall mean any federal, state or local law, statute, ordinance, order, decree, rule or regulation relating to releases, discharges, emissions or disposals to air, water, land or groundwater of Hazardous Materials; to the withdrawal or use of groundwater; to the use, handling or disposal of polychlorinated biphenyls, asbestos or urea formaldehyde or any other Hazardous Material; to the treatment, storage, disposal or management of Hazardous Materials; to exposure to toxic, hazardous or other controlled, prohibited or regulated substances; and to the transportation, release or any other use of Hazardous Materials, including the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601, et seq. ("CERCLA"), the Resource Conservation and Recovery Act, 42 U.S.C. 6901, et seq. ("RCRA"), the Toxic Substances Control Act, 15 U.S.C. 2601, et seq. ("TSCA"), the Occupational, Safety and Health Act, 29 U.S.C. 651, et seq., the Clean Air Act, 42 U.S.C. 7401, et seq., the Federal Water Pollution Control Act, 33 U.S.C. 1251, et seq., the Safe Drinking Water Act, 42 U.S.C. 300f, et seq., the Hazardous Materials Transportation Act, 49 U.S.C. 1802 et seq. ("HMTA") and the Emergency Planning and Community Right to Know Act, 42 U.S.C. 11001 et seq. ("EPCRA"), and other comparable state laws and all rules, regulations and guidance documents promulgated pursuant thereto or published thereunder. "Equity Interests" means capital stock, partnership interests or warrants, options or other rights to acquire capital stock or partnership interests (including any debt security which is convertible into, or exchangeable for, capital stock or partnership interests). "Exchange Agent" shall mean the Person selected by Modtech and SPI to perform the duties of the exchange agent under this Agreement and shall be a commercial bank having trust powers or a trust company, either of which shall have a reported capital and surplus of not less than $100,000,000. "Facilities" shall mean, with respect to any Person, all of the offices, plants, factories, storage facilities and similar structures owned or leased by such Person. "Fixtures and Equipment" shall mean, with respect to any Person, all of the furniture, fixtures, furnishings, machinery and equipment owned, leased or licensed by such Person and located in, at or upon the Facilities of such Person. "GAAP" shall mean generally accepted accounting principles in the United States of America, as in effect from time to time, consistently applied. "Hazardous Materials" shall mean each and every element, compound, chemical mixture, contaminant, pollutant, material, waste or other substance which is defined, determined or identified as hazardous or toxic under Environmental Laws or the release of which is regulated under Environmental Laws. Without limiting the generality of the foregoing, the term includes: "hazardous substances" as defined in CERCLA; "extremely hazardous substances" as defined in EPCRA; "hazardous waste" as defined in RCRA; "hazardous materials" as defined in HMTA; "chemical substance or mixture" as defined in TSCA; crude oil, petroleum products or any fraction thereof; -63- 69 radioactive materials including source, byproduct or special nuclear materials; asbestos or asbestos-containing materials; and radon. "Independent Director" shall mean a person other than an officer, employee or affiliate of Holdings or its subsidiaries or any other individual having a relationship which, in the opinion of the board of directors of Holdings, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. "Leased Real Estate" shall mean all Properties (including all Facilities) which are leased by any Person as lessee or sublessee. "Leases" shall mean, with respect to any Person, all leases (including subleases, licenses, any occupancy agreement and any other agreement) of real or personal property, in each case to which such Person or any of its Subsidiaries is a party, whether as lessor, lessee, guarantor or otherwise, or by which any of them or their respective Properties or assets are bound, or which otherwise relate to the operation of their respective businesses. "Mailing Date" shall mean the date agreed to by Holdings, Modtech and SPI as the date on which a Letter of Transmittal and Election Form shall be mailed to each Record Holder of Modtech Shares and SPI Shares. "Material Adverse Effect" shall mean, with respect to any of Holdings (following the Mergers), Modtech or SPI, as the context requires, a material adverse change in or effect on the business, results of operations, assets, liabilities or conditions (financial or otherwise) or prospects of such Person and its Subsidiaries taken as a whole or any change which impairs or materially delays the ability of such Person to consummate the transactions contemplated by this Agreement. "Permitted Encumbrances" shall mean any Encumbrances resulting from (i) all statutory or other liens for Taxes or assessments which are not yet due or delinquent or the validity of which are being contested in good faith by appropriate proceedings for which adequate reserves are being maintained in accordance with GAAP; (ii) all workers' and repairers' liens, and other similar liens imposed by law, incurred in the ordinary course of business; (iii) all laws and governmental rules, regulations, ordinances and restrictions; (iv) all leases, subleases or licenses to which any Person or any of its Subsidiaries is a party; (v) Encumbrances identified on title policies or preliminary title reports delivered or made available for inspection to any Person prior to the date hereof; and (vi) all other liens and mortgages (but solely to the extent such liens or mortgages secure indebtedness described in the Disclosure Schedule), covenants, imperfections in title, charges, easements, restrictions and other Encumbrances which, in the case of any such Encumbrances pursuant to clause (i) through (vi), do not materially detract from or materially interfere with the value or present use of the asset subject thereto or affected thereby. "Person" shall mean any individual, corporation, partnership, limited liability company, joint venture, governmental agency or instrumentality, or any other entity. -64- 70 "Properties" shall mean, with respect to any Person, all of the improved and unimproved real property owned or leased by such Person. "Record Date" shall mean the record date established in accordance with applicable charter documents and applicable state law, by Modtech or SPI, as the case may be, for the respective stockholders' meeting to approve the Mergers. "Record Holder" shall mean a holder of record as of the Record Date, of Modtech Shares or SPI Shares, as the case may be. "Returns" shall mean all returns, declarations, reports, statements, and other documents required to be filed with respect to federal, state, local and foreign Taxes or for information purposes. "Subsidiary" shall mean, with respect to any Person, any corporation or other organization, whether incorporated or unincorporated, of which at least a majority of the Equity Interests having ordinary voting power for the election of directors or other governing body of such organization is owned or controlled by such Person directly or indirectly. "Tax" or "Taxes" shall mean all federal, state, local, foreign and other taxes, levies, imposts, assessments, impositions or other similar government charges, including, without limitation, income, estimated income, business, occupation, franchise, real property, payroll, personal property, sales, transfer, stamp, use, employment, commercial rent or withholding, occupancy, premium, gross receipts, profits, windfall profits, deemed profits, license, lease, severance, capital, production, corporation, ad valorem, excise, duty or other taxes, including interest, penalties and additions (to the extent applicable) thereto. -65- 71 IN WITNESS WHEREOF, the parties have executed this Agreement and caused the same to be duly delivered on their behalf on the day and year first written above. MODTECH, INC. By: /s/ EVAN M. GRUBER ------------------------------------- Name: Evan M. Gruber Title: Chief Executive Officer SPI HOLDINGS, INC. By: ------------------------------------- Name: Patrick Van Den Bossche Title: President and Chief Executive Officer -66- 72 MODTECH, INC. By: ------------------------------------- Name: Evan M. Gruber Title: Chief Executive Officer SPI HOLDINGS, INC. By: /s/ PATRICK VAN DEN BOSSCHE ------------------------------------- Name: Patrick Van Den Bossche Title: President and Chief Executive Officer -67- 73 MODTECH HOLDINGS, INC. By: __________________________________ Name: ________________________________ Title: _______________________________ MODTECH MERGER SUB, INC. By: __________________________________ Name: ________________________________ Title: _______________________________ SPI MERGER SUB, INC. By: __________________________________ Name: ________________________________ Title: _______________________________ -68- EX-99.1 3 FINANCIAL STATEMENTS OF MODTECH,INC, AND SPI 1 EXHIBIT 99.1 INDEX TO FINANCIAL STATEMENTS MODTECH, INC.
PAGE ---- Independent Auditors' Report................................ F-3 Balance Sheets as of December 31, 1996 and 1997............. F-4 Statements of Income for the Years ended December 31, 1995, 1996 and 1997............................................. F-5 Statements of Shareholders' Equity for the Years ended December 31, 1995, 1996 and 1997.......................... F-6 Statements of Cash Flows for the Years ended December 31, 1995, 1996 and 1997....................................... F-7 Notes to Financial Statements............................... F-8 Schedule II -- Valuation and Qualifying Accounts............ F-22 Condensed Consolidated Balance Sheets as of December 31, 1997 (audited) and September 30, 1998 (unaudited)......... F-23 Condensed Consolidated Statements of Income for the three months ended and nine months ended September 30, 1997 and 1998 (unaudited).......................................... F-24 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1998 (unaudited)...... F-25 Notes to Condensed Financial Statements..................... F-26
SPI HOLDINGS, INC
PAGE ---- Report of Independent Public Accountants.................... F-31 Consolidated Balance Sheets as of January 31, 1997, March 27, 1997 and March 31,1998................................ F-32 Consolidated Statements of Income for the years ended January 31, 1996 and 1997, the two-month period ended March 31, 1997 and the year ended March 31, 1998.......... F-34 Consolidated Statements of Stockholders' Equity for the years ended January 31, 1996 and 1997, the two-month period ended March 31, 1997 and the year ended March 31, 1998...................................................... F-35 Consolidated Statements of Cash Flows for the years ended January 31, 1996 and 1997, the two-month period ended March 31, 1997 and the year ended March 31, 1998.......... F-36 Notes to Consolidated Financial Statements.................. F-37 Condensed Consolidated Balance Sheet as of September 30, 1998 (unaudited).......................................... F-51 Condensed Consolidated Statements of Income for the six-months ended September 30, 1997 and 1998 (unaudited)............................................... F-52 Condensed Consolidated Cash Flows for the six-months ended September 30, 1997 and 1998 (unaudited)................... F-53 Notes to Condensed Consolidated Financial Statements........ F-54
OFFICE MASTER OF TEXAS, INC.
PAGE ---- Report of Independent Public Accountants.................... F-58 Balance Sheet as of December 31, 1997....................... F-59 Statement of Income and Retained Earnings for the year ended December 31, 1997......................................... F-60 Statement of Cash Flows for the year ended December 31, 1997...................................................... F-61 Notes to Financial Statements............................... F-62
F-1 2 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING
PAGE ---- Report of Independent Public Accountants.................... F-65 Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 and 1997 (unaudited)............................. F-66 Statements of Operations for the years ended December 31, 1995, 1996, 1997 and for the quarters ended March 31, 1997 and 1998 (unaudited)...................................... F-67 Statements of Stockholders' Equity for the years ended December 31, 1995, 1996, 1997 and for the quarters ended March 31, 1997 and 1998 (unaudited)....................... F-68 Statements of Cash Flows for the years ended December 31, 1995, 1996, 1997 and for the quarters ended March 31, 1997 and 1998 (unaudited)...................................... F-69 Notes to Financial Statements............................... F-70
F-2 3 INDEPENDENT AUDITORS' REPORT The Board of Directors Modtech, Inc.: We have audited the accompanying balance sheets of Modtech, Inc. as of December 31, 1996 and 1997 and the related statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. In connection with our audits of the financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Modtech, Inc. as of December 31, 1996 and 1997 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Orange County, California March 18, 1998 F-3 4 MODTECH, INC. BALANCE SHEETS DECEMBER 31, 1996 AND 1997 ASSETS(Note 5)
1996 1997 ----------- ----------- Current assets: Cash................................................ $ 404,981 $11,628,851 Contracts receivable, less allowance for contract adjustments of $413,373 in 1996 and $410,119 in 1997 (note 2).................................... 10,309,861 21,510,146 Costs and estimated earnings in excess of billings on contracts (notes 3 and 8)..................... 9,102,733 16,020,986 Inventories......................................... 4,166,700 3,931,505 Due from affiliates (note 8)........................ 754,067 1,052,634 Note receivable from affiliates (note 8)............ 45,212 45,212 Prepaid assets...................................... 136,960 268,295 Deferred tax asset (note 7)......................... -- 2,094,059 Other current assets................................ 20,305 42,274 ----------- ----------- Total current assets........................ 24,940,819 56,593,962 ----------- ----------- Property and equipment, net (notes 4 and 6)........... 8,552,720 11,229,163 Other assets.......................................... 535,235 298,258 Deferred tax asset (note 7)........................... -- 98,874 ----------- ----------- $34,028,774 $68,220,257 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................... $ 6,409,422 $ 2,421,346 Accrued compensation................................ 1,369,441 3,616,498 Accrued insurance expense........................... 551,580 1,470,725 Other accrued liabilities........................... 1,089,439 3,237,255 Income tax payable.................................. 204,017 1,017,027 Billings in excess of costs and estimated earnings on contracts (notes 3 and 8)..................... 1,148,050 6,997,350 Current note payable (note 5)....................... -- 42,185 Current maturities of long-term debt (notes 6 and 8)............................................... 100,000 1,374,952 ----------- ----------- Total current liabilities................... 10,871,949 20,177,338 Note payable (note 5)................................. 5,943,853 -- Long-term debt, less current maturities (notes 6 and 8).................................................. 1,899,952 -- ----------- ----------- Total liabilities........................... 18,715,754 20,177,338 ----------- ----------- Shareholders' equity: Common stock, $.01 par. Authorized 20,000,000 shares; issued and outstanding 8,649,436 and 9,819,959 in 1996 and 1997 (notes 10 and 11)..... 86,494 98,200 Additional paid-in capital.......................... 19,620,994 39,330,902 (Accumulated deficit) retained earnings............. (4,394,468) 8,613,817 ----------- ----------- Total shareholders' equity.................. 15,313,020 48,042,919 ----------- ----------- Commitments and contingencies (notes 3, 5, 8, and 14) ----------- ----------- $34,028,774 $68,220,257 =========== ===========
See accompanying notes to financial statements. F-4 5 MODTECH, INC. STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997 ----------- ----------- ------------ Net sales (notes 8 and 12)............. $19,386,027 $49,885,858 $134,050,485 Cost of goods sold (note 8)............ 16,400,588 42,628,970 107,367,035 ----------- ----------- ------------ Gross profit...................... 2,985,439 7,256,888 26,683,450 Selling, general, and administrative expenses............................. 1,612,792 2,345,182 5,155,987 ----------- ----------- ------------ Income from operations............ 1,372,647 4,911,706 21,527,463 ----------- ----------- ------------ Other income (expense): Interest expense..................... (486,323) (445,631) (1,004,198) Interest income (note 8)............. 98,510 23,704 95,551 Other -- net......................... (937) (13,116) 92,103 ----------- ----------- ------------ (388,750) (435,043) (816,544) ----------- ----------- ------------ Income before income taxes........ 983,897 4,476,663 20,710,919 Income taxes (note 7).................. (19,098) (207,631) (7,702,634) ----------- ----------- ------------ Net income........................ $ 964,799 $ 4,269,032 $ 13,008,285 ----------- ----------- ------------ 5% Convertible preferred stock dividend (note 11)............................ (166,320) (47,500) -- Net income available for common stock........................... $ 798,479 $ 4,221,532 $ 13,008,285 =========== =========== ============ Basic earnings per share............... $ 0.25 $ 0.77 $ 1.47 =========== =========== ============ Weighted-average shares outstanding.... 3,169,593 5,461,007 8,853,786 =========== =========== ============ Diluted earnings per share............. $ 0.14 $ 0.47 $ 1.31 =========== =========== ============ Weighted-average shares outstanding.... 6,712,155 9,041,084 9,897,935 =========== =========== ============
See accompanying notes to financial statements. F-5 6 MODTECH, INC. STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
5% CONVERTIBLE STOCK (ACCUMULATED PREFERRED STOCK COMMON STOCK PURCHASE ADDITIONAL DEFICIT) ----------------------- ------------------- NOTES PAID-IN RETAINED SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL EARNINGS ---------- ---------- --------- ------- ---------- ----------- ------------ Balance, December 31, 1994.................... 2,850,000 2,685,000 3,209,338 $32,094 $(273,594) $14,989,919 $(9,414,479) Adjustment of stock purchase notes.......... -- -- (155,988) (1,560) 273,594 (346,292) -- receivable Dividend (note 11)........ -- -- -- -- -- -- (166,320) Net income................ -- -- -- -- -- -- 964,799 ---------- ---------- --------- ------- --------- ----------- ----------- Balance, December 31, 1995.................... 2,850,000 2,685,000 3,053,350 30,534 -- 14,643,627 (8,616,000) Conversion of preferred stock................... (2,850,000) (2,685,000) 2,850,000 28,500 -- 2,656,500 -- (note 11) Exercise of options and warrants................ -- -- 2,746,086 27,460 -- 2,320,867 -- Dividend (note 11)........ -- -- -- -- -- -- (47,500) Net income................ -- -- -- -- -- -- 4,269,032 ---------- ---------- --------- ------- --------- ----------- ----------- Balance, December 31, 1996.................... -- -- 8,649,436 86,494 -- 19,620,994 (4,394,468) Exercise of options, including tax benefit of...................... -- -- 170,523 1,706 -- 1,119,890 -- $753,874 (notes 7, 10 and 11) Secondary offering -- Net (note 15)............... -- -- 1,000,000 10,000 -- 18,590,018 Net income................ -- -- -- -- -- -- 13,008,285 ---------- ---------- --------- ------- --------- ----------- ----------- Balance, December 31, 1997.................... -- -- 9,819,959 $98,200 $ -- $39,330,902 $ 8,613,817 ========== ========== ========= ======= ========= =========== ===========
See accompanying notes to financial statements. F-6 7 MODTECH, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997 ----------- ----------- ------------ Cash flows from operating activities: Net income.................................. $ 964,799 $ 4,269,032 $ 13,008,285 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.......... 563,104 540,421 1,344,098 Decrease in allowance for contract adjustments......................... (17,300) (5,283) -- Loss (gain) on sale of equipment....... (20,084) 17,265 (9,177) (Increase) decrease in assets: Contracts receivable................ (65,105) (7,135,702) (11,200,285) Costs and estimated earnings in excess of billings............... 329,641 (7,648,812) (6,918,253) Inventories......................... 337,697 (3,520,404) 235,195 Amounts due from affiliates......... (255,607) 686,774 (298,567) Prepaids and other assets........... 54,088 (12,947) 83,673 Deferred tax asset.................. -- -- (2,192,933) Increase (decrease) in liabilities: Accounts payable.................... (436,234) 5,304,183 (3,988,076) Accrued compensation................ 64,255 1,081,171 2,247,057 Accrued insurance expense........... (214,004) 526,813 919,145 Other accrued liabilities........... 166,102 465,766 2,147,816 Income tax payable.................. 19,098 184,919 813,010 Billings in excess of costs and estimated earnings............... (276,306) 388,448 5,849,300 ----------- ----------- ------------ Net cash provided by (used in) operating activities........... 1,214,144 (4,858,356) 2,040,288 ----------- ----------- ------------ Cash flows from investing activities: Proceeds from sale of equipment............. 46,416 5,550 60,604 Purchase of property and equipment.......... (481,533) (1,958,303) (4,071,968) ----------- ----------- ------------ Net cash used in investing activities..................... (435,117) (1,952,753) (4,011,364) ----------- ----------- ------------ Cash flows from financing activities: Net principal borrowings (payments) under revolving credit lines................... $ (309,990) $ 4,353,843 $ (5,901,668) Principal payments on long-term debt........ (502,735) -- (625,000) (Adjustment of) stock purchase note receivable by exchange of common stock... (74,258) -- -- Net proceeds from issuance of common stock.................................... -- 2,348,327 19,721,614 Declared dividends (note 11)................ (166,320) (47,500) -- ----------- ----------- ------------ Net cash provided by (used in) financing activities............. (1,053,303) 6,654,670 13,194,946 ----------- ----------- ------------ Net increase (decrease) in cash..... (274,276) (156,439) 11,223,870 Cash at beginning of year..................... 835,696 561,420 404,981 ----------- ----------- ------------ Cash at end of year........................... $ 561,420 $ 404,981 $ 11,628,851 =========== =========== ============
See accompanying notes to financial statements. F-7 8 MODTECH, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995, 1996 AND 1997 (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Modtech, Inc. (the Company) designs, manufactures, markets and installs modular relocatable classrooms. The Company's classrooms are sold primarily to California school districts. The Company also sells classrooms to the State of California and to leasing companies, who lease the classrooms principally to California school districts. Effective October 1, 1996, the Company acquired substantially all of the operating assets and assumed certain liabilities of Miller Structure, Inc. -- California. The Company leased the manufacturing facility from Miller Structure (note 18). USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash, contracts receivable and notes receivable, costs and estimated earnings in excess of billings on contracts, prepaid and other assets, accounts payable, accrued liabilities, billings in excess of estimated earnings on contracts and notes payable are measured at cost which approximates their fair value. CONSTRUCTION CONTRACTS The accompanying financial statements have been prepared using the percentage-of-completion method of accounting and, therefore, take into account the costs, estimated earnings and revenue to date on contracts not yet completed. Revenue recognized is that percentage of the total contract price that cost expended to date bears to anticipated final total cost, based on current estimates of costs to complete. Most contracts are completed within one year. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling, general, and administrative costs are charged to expense as incurred. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is recognized in the financial statements. The current asset, "Costs and Estimated Earnings in Excess of Billings on Contracts," represents revenues recognized in excess of amounts billed. The current liability, "Billings F-8 9 MODTECH, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 in Excess of Costs and Estimated Earnings on Contracts," represents billings in excess of revenues recognized. The current contra asset, "Allowance for Contract Adjustments," is management's estimated adjustments to contract amounts due to disputes and or litigation. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Inventories, generally include only raw materials, as any work-in-process or finished goods are accounted for in percentage of completion allocations. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization is provided using the straight-line and accelerated methods over the following estimated useful lives: Leasehold improvements.................................. 15 to 31 years Machinery and equipment................................. 5 to 7 years Trucks and automobiles.................................. 3 to 5 years Office equipment........................................ 5 to 7 years
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of Statement of Financial Accounting Standard No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount of fair value less costs to sell. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity. STOCK OPTION PLAN Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standard No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," which permits entities to recognize as F-9 10 MODTECH, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provision of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. EARNINGS PER SHARE Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). This statement replaces the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts have been restated to conform to the SFAS No. 128 requirements. TAXES ON INCOME Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. RECLASSIFICATION Certain amounts in the 1995 and 1996 financial statements have been reclassified to conform to the 1997 presentation. (2) CONTRACTS RECEIVABLE Contracts receivable consisted of customer billings for:
1996 1997 ----------- ----------- Completed contracts......................... $ 7,722,927 $ 9,226,114 Contracts in progress....................... 2,102,766 9,444,794 Retentions.................................. 897,541 3,249,357 ----------- ----------- 10,723,234 21,920,265 Less allowance for contract adjustments..... (413,373) (410,119) ----------- ----------- $10,309,861 $21,510,146 =========== ===========
F-10 11 MODTECH, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 (3) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON CONTRACTS Net costs and estimated earnings in excess of billings on contracts consisted of:
1996 1997 ------------ ------------ Net costs and estimated earnings on uncompleted contracts................... $ 39,093,050 $105,465,154 Billings to date.......................... (31,173,406) (96,144,454) ------------ ------------ 7,919,644 9,320,700 Net under (over) billed receivables from completed contracts..................... 35,039 (297,064) ------------ ------------ $ 7,954,683 $ 9,023,636 ============ ============
These amounts are shown in the accompanying balance sheets under the following captions:
1996 1997 ------------ ------------ Costs and estimated earnings in excess of billings on uncompleted contracts....... $ 8,971,196 $ 15,832,818 Costs and estimated earnings in excess of billings on completed contracts......... 131,537 188,168 ------------ ------------ Costs and estimated earnings in excess of billings................................ 9,102,733 16,020,986 ------------ ------------ Billings in excess of costs and estimated earnings on uncompleted contracts....... (1,051,552) (6,512,121) Billings in excess of costs and estimated earnings on completed contracts......... (96,498) (485,229) ------------ ------------ Billings in excess of costs and estimated earnings................................ (1,148,050) (6,997,350) ------------ ------------ $ 7,954,683 $ 9,023,636 ============ ============
F-11 12 MODTECH, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 (4) PROPERTY AND EQUIPMENT, NET Property and equipment, net consists of:
1996 1997 ----------- ----------- Leasehold improvements...................... $ 7,580,830 $10,764,783 Machinery and equipment..................... 3,535,623 4,347,692 Trucks and automobiles...................... 107,024 181,001 Office equipment............................ 222,123 364,510 Construction in progress.................... 567,137 354,826 ----------- ----------- 12,012,737 16,012,812 Less accumulated depreciation and amortization.............................. (3,460,017) (4,783,649) ----------- ----------- $ 8,552,720 $11,229,163 =========== ===========
(5) NOTE PAYABLE -- REVOLVING CREDIT AGREEMENT In 1995 the Company entered into a revolving loan commitment that expires in September 1998. The Company is entitled to borrow, from time to time, up to $20,000,000 with actual borrowings limited to specific percentages of eligible contracts receivable, equipment and inventories. Actual outstanding borrowings were $5,943,853 and $42,185 at December 31, 1996 and 1997, respectively. The interest rate is calculated at the prime lending rate (8.5% at December 31, 1997) plus three quarters of a percent (.75%) per annum. The loan is secured by substantially all of the Company's assets. (6) LONG-TERM DEBT Long-term debt consists of:
1996 1997 ---------- ---------- Industrial development bonds.................. $1,999,952 $1,374,952 Less current portion of long-term debt........ (100,000) (1,374,952) ---------- ---------- $1,899,952 $ -- ========== ==========
In June 1990, the Industrial Development Authority of the County of San Joaquin, California issued $4,200,000 of Industrial Development Bonds. The net proceeds of approximately $4,000,000 were used to fund the construction of a manufacturing facility on leased property located in Lathrop, California. The Company fully utilized the bonds at December 31, 1991. The Company has executed financing statements covering the plant and equipment financed, as security for repayment of the bonds. The bonds are secured by a $1,299,275 letter of credit, and bear interest at an initial rate of 6.75% and fluctuate weekly. The interest rate was 3.65% at December 31, 1997. The bond agreement was amended in 1997 requiring repayment of the balance by December 31, 1998. F-12 13 MODTECH, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 (7) INCOME TAXES The components of the 1995, 1996 and 1997 provision for Federal and state income tax (expense) benefit computed in accordance with Financial Accounting Standard No. 109 are summarized below:
1995 1996 1997 -------- --------- ----------- Current: Federal......................... $(14,210) $ (90,483) $(7,874,257) State........................... (4,888) (117,148) (2,021,309) -------- --------- ----------- (19,098) (207,631) (9,895,566) Deferred: Federal......................... -- -- 1,634,085 State........................... -- -- 558,847 -------- --------- ----------- $(19,098) $(207,631) $(7,702,634) ======== ========= ===========
Income tax (expense) benefit attributable to income from operations differed from the amounts computed by applying the U.S. Federal income tax rate to pretax income from operations as a result of the following:
1995 1996 1997 ----- ----- ----- Taxes, U.S. statutory rates.................... (34.0)% (34.0)% (35.0)% State taxes, less Federal benefit.............. -- -- (4.5) Utilization of income tax benefit relating to loss carryover............................... 34.0 34.0 3.8 Other.......................................... (1.9) (4.6) (1.5) ----- ----- ----- Total taxes on income................ (1.9)% (4.6)% (37.2)% ===== ===== =====
F-13 14 MODTECH, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1996 and 1997 are as follows:
1996 1997 ----------- ----------- Deferred tax assets: Reserves and accruals not recognized for income tax purposes........................ $ 1,114,987 $ 2,490,821 Net operating loss carryforwards.............. 209,100 -- State taxes................................... 75,065 474,653 Other......................................... 29,117 368,579 ----------- ----------- Total gross deferred tax assets............ 1,428,269 3,334,053 Less valuation allowance...................... (1,158,714) (1,059,576) ----------- ----------- Net deferred tax assets.................... $ 269,555 $ 2,274,477 =========== =========== Deferred tax liabilities: Revenue recognition........................... $ (171,360) $ (73,589) Prepaids...................................... (98,195) (7,955) ----------- ----------- Totals gross deferred tax liabilities...... (269,555) (81,544) ----------- ----------- Net deferred tax assets.................... $ -- $ 2,192,933 =========== ===========
These amounts have been presented in the balance sheet as follows:
1996 1997 ---------- ---------- Current deferred tax asset........................ $ -- $2,094,059 Noncurrent deferred tax asset..................... -- 98,874 ---------- ---------- Total deferred tax assets.................... $ -- $2,192,933 ========== ==========
The net change in the total valuation allowance for the year ended December 31, 1997 was a decrease of $99,138. The Company's net operating loss carryforward amounted to $615,000 and $0 for the years ended December 31, 1996 and 1997, respectively. (8) TRANSACTIONS WITH RELATED PARTIES SALES The Company sells modular classrooms to certain companies and partnerships, where shareholders and partners are either shareholders or an officer of the Company. The buildings are then leased to various school districts by the related companies and partnerships. F-14 15 MODTECH, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 The table below summarizes the classroom sales to related parties:
1995 1996 1997 -------- ---------- ---------- Sales.................................. $600,228 $1,452,868 $2,942,313 Cost of goods sold..................... 531,152 1,239,425 2,530,803 Gross profit percentage................ 11.51% 14.69% 13.99% ======== ========== ==========
The related party purchases modular relocatable classrooms from the Company, upon standard terms and at standard wholesale prices. Due from affiliates includes a portion of unpaid invoices as a result of the above transactions. As of December 31, 1996 and 1997 these amounts totaled $431,755 and $825,963, respectively. Additional amounts arising from these transactions are included in the following captions:
1996 1997 -------- ---------- Costs and estimated earnings in excess of billings on uncompleted contracts.......................... $417,780 $1,406,897 Billings in excess of costs and estimated earnings on uncompleted contracts.......................... (12,572) (65,405) ======== ==========
NOTE RECEIVABLE At December 31, 1996 and 1997, the Company had one note receivable from a related party partnership in the amount of $45,212. The partnership is composed of an officer and shareholders of the Company. The note bears interest at 10% and is payable upon demand. Unpaid interest related to this note, and two other related party notes with principal repayment in 1996, totaled $322,312 at December 31, 1996 and $226,671 at December 31, 1997 and is included in due from affiliates. The Company has negotiated payment terms on the accrued interest and is receiving regular interest payments. OPERATING LEASES The Company leases various land at its manufacturing facilities. The present manufacturing facility leases are with the Company's Chairman and partnerships composed of an officer and shareholders. All related party leases require monthly payments which aggregate $37,000. In connection with the lease at the Lathrop facility, the Company made an $83,000 security deposit during 1990. In 1994, due to declines in real estate values, the Company's Chairman and partnerships reduced the monthly lease rates for the manufacturing facilities to an aggregate of $37,000. The reduced rents will continue for as long as real estate values remain depressed. F-15 16 MODTECH, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 Future minimum lease payments under these leases are discussed in note 14. Included in cost of sales is $435,000, $447,000 and $444,000 in rent expense paid to related parties for the years ended December 31, 1995, 1996, and 1997, respectively. (9) 401(K) PLAN The Company has a tax deferred savings plan under Section 401(k) of the Internal Revenue Code. Eligible employees can contribute up to 12% of gross annual earnings. Company contributions, made on a 50% matching basis, are determined annually. The Company's contributions were $36,937, $53,031 and $77,016 in 1995, 1996, and 1997, respectively. (10) STOCK OPTIONS In 1989, the Company's shareholders approved a stock option plan (the 1989 Plan). The 1989 Plan provides for the grant of both incentive and non-qualified options to purchase up to 400,000 shares of the Company's common stock. The incentive stock options can be granted only to employees, including officers of the Company, while non-qualified stock options can be granted to employees, non-employee officers and directors, consultants, vendors, customers and others expected to provide significant services to the Company. The exercise price of the stock options cannot be less than the fair market at the date of the grant (110% if granted to an employee who owns 10% or more of the common stock). Stock options outstanding under the 1989 Plan are summarized as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE -------- --------------- December 31, 1994............................. 400,000 $ 1.92 Granted..................................... 45,000 2.125 Terminated.................................. (45,000) 3.00 -------- ------ December 31, 1995............................. 400,000 1.82 Exercised................................... (114,500) 1.87 -------- ------ December 31, 1996............................. 285,500 1.82 Terminated.................................. (1,000) 1.50 Exercised................................... (78,450) 2.12 -------- ------ December 31, 1997............................. 206,050 $ 1.70 ======== ======
As of December 31, 1997, 142,450 options are vested and exercisable at prices ranging from $.625 to $10.00 per share under the 1989 Plan. With respect to options issued pursuant to the Del-Tec acquisition, 50,000 options were exercised during 1997 and 75,000 options remained outstanding as of December 31, 1997. F-16 17 MODTECH, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 In March of 1994, pursuant to a vote of the Board of Directors, a nonqualified option plan was approved (the March 1994 Plan). The March 1994 Plan provides for the grant of 200,000 options to purchase shares of the Company's common stock. The exercise price of the stock options cannot be less than the fair market at the date of the grant. All of these options were granted during 1994. Stock options outstanding at December 31, 1996, under the March 1994 Plan are summarized as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------- -------------- December 31, 1994................................ 200,000 $1.22 Exercised...................................... -- -- ------- ----- December 31, 1995................................ 200,000 1.22 Exercised...................................... (15,000) 1.19 ------- ----- December 31, 1996................................ 185,000 1.22 Exercised...................................... (15,900) 1.40 ------- ----- December 31, 1997................................ 169,100 $1.21 ======= =====
As of December 31, 1997, 126,600 options are vested and exercisable at prices ranging from $1.19 to $1.50 per share under the March 1994 Plan. In May of 1994, in conjunction with the offering of preferred stock (note 11) the Board of Directors voted and approved an additional stock option plan (the May 1994 Plan). The May 1994 Plan provides for the grant of both incentive and non-qualified options to purchase up to 500,000 shares of the Company's common stock. The incentive stock options can be granted only to employees, including officers of the Company, while non-qualified stock options can be granted to employees, non-employee officers and directors, consultants, vendors, customers and others expected to provide significant services to the Company. The exercise price of the stock options cannot be less than the fair market at the date of the grant (110% if granted to an employee who owns 10% or more of the common stock). F-17 18 MODTECH, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 Stock options outstanding under the May 1994 Plan, are summarized as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------- -------------- December 31, 1994...................................... 285,000 $ 1.50 Granted.............................................. 35,000 2.125 Terminated........................................... (35,000) 1.50 ------- ------- December 31, 1995...................................... 285,000 1.60 Granted.............................................. 205,000 2.59 Terminated........................................... (37,500) 1.50 Exercised............................................ (12,500) 1.50 ======= ======= December 31, 1996...................................... 440,000 2.06 Granted.............................................. 7,500 19.50 Exercised............................................ (9,375) 3.86 ------- ------- December 31, 1997...................................... 438,125 $ 2.32 ======= =======
As of December 31, 1997, 216,675 options are vested and exercisable at prices ranging from $1.50 to $4.50 per share under the May 1994 Plan. In July 1996, the Company's Board of Directors authorized the grant of options to purchase up to 500,000 shares of the Company's common stock. The non-statutory options may be granted to employees, non-employee officers and directors, consultants, vendors, customers and others expected to provide significant service to the Company. The exercise price of the stock options cannot be less than the fair market value at the date of the grant (110% if granted to an employee who owns 10% or more of the common stock). Stock options outstanding under the July 1996 Plan, are summarized as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------- -------------- December 31, 1995.............................. -- $ -- Granted...................................... 110,000 4.50 ------- ------ December 31, 1996.............................. 110,000 4.50 Granted...................................... 263,333 8.75 Terminated................................... (4,202) 12.62 Exercised.................................... (16,798) 4.89 ------- ------ December 31, 1997.............................. 352,333 $ 7.56 ======= ======
As of December 31, 1997, 81,500 options are vested and exercisable at prices ranging from $4.50 to $12.62 per share under the July 1996 Plan. All stock options have a maximum term of ten years and become fully exercisable in accordance with a predetermined vesting schedule which varies. F-18 19 MODTECH, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 The per share weighted-average fair value of stock options granted during 1996 and 1997 was $1.94 and $9.05, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions; 1995 -- expected dividend yield 0%, risk-free interest rate of 7.80%, volatility factor of 72.66%, and expected life of four years; 1996 -- expected dividend yield 0%, risk-free interest rate of 7.80%, volatility factor of 72.66%, and an expected life of four years; 1997 -- expected dividend yield 0%, risk-free interest rate of 7.80%, volatility factor of 73.06%, and an expected life of four years. The Company applies APB Opinion No. 25 in accounting for its Plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
1995 1996 1997 -------- ---------- ----------- Net Income As Reported.................. $964,799 $4,269,032 $13,008,285 Pro Forma.................... 862,133 3,657,659 12,044,970 ======== ========== =========== Basic earnings per share As Reported.................. $ 0.25 $ 0.77 $ 1.47 Pro forma.................... 0.27 0.67 1.36 ======== ========== =========== Fully diluted earnings per share As Reported.................. $ 0.14 $ 0.47 $ 1.31 Pro Forma.................... 0.13 0.40 1.22 ======== ========== ===========
Pro forma net income reflects only options granted since January 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of four years and compensation cost for options granted prior to January 1, 1995 is not considered. (11) 5% CONVERTIBLE PREFERRED STOCK In May of 1994, in a private transaction without registration under the Securities Act, the Company sold 2,850,000 shares of Series A 5% Convertible Preferred Stock. The Preferred Stock was sold at $1.00 per share resulting in proceeds before costs and expenses of $2,850,000. All of the Series A 5% Convertible Preferred Stock was converted into Common Stock during 1996. In connection with this private placement of the Series A 5% Preferred Stock, the shareholders were granted warrants to purchase an aggregate of 1,385,000 shares of common stock at $1.50 (subject to adjustment in certain events), as well as warrants to purchase an aggregate of 1,375,000 additional shares at $2.00 per share (subject to adjustments in certain events). All warrants were either exercised or expired during 1996. Dividends in the amount of $166,320 and $47,500 were declared for the years ended December 31, 1995 and 1996, respectively. F-19 20 MODTECH, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 (12) MAJOR CUSTOMER The Company had sales to two major customers which represented the following percentage of net sales:
1995 1996 1997 ---- ---- ---- Customer A......................................... 9% 13% 4% Customer B......................................... 0% 4% 11% == == ==
(13) SUPPLEMENTAL CASH FLOW DISCLOSURES SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1995 1996 1997 -------- -------- ---------- Cash paid during the year for: Interest.............................. $248,443 $470,248 $1,058,256 ======== ======== ========== Income taxes.......................... $ -- $ 24,320 $8,400,000 ======== ======== ==========
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES: During 1995, $273,594 of notes receivable from officer shareholders was repaid by delivery of 155,988 shares of common stock at market value. During 1996, 2,850,000 shares of Series A 5% convertible Preferred Stock were converted into 2,850,000 shares of common stock, in accordance with the private placement (note 11). (14) COMMITMENTS AND CONTINGENCIES LAND LEASES The Company has entered into agreements to lease land at its manufacturing facilities in Perris and Lathrop, California. Minimum lease payments under these noncancelable operating leases for the next five years and thereafter are as follows:
YEAR ENDING DECEMBER 31: ------------------------ 1998................................................... $ 569,000 1999................................................... 515,000 2000................................................... 513,000 2001................................................... 444,000 2002................................................... 444,000 Thereafter............................................. 6,002,000 ---------- $8,487,000 ==========
F-20 21 MODTECH, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 Of the $8,487,000 in future rental payments, substantially all is to related parties (note 8). Rent expense for the years ended December 31, 1995, 1996 and 1997 was $435,000, $447,000 and $522,000, respectively. The manufacturing facility in Patterson, California was purchased in January 1998 (note 18), and is not included above. (15) SECONDARY STOCK OFFERING In November 1997 the Company sold 1,000,000 shares of common stock at $20 per share. The net proceeds to the Company were $18,600,000, after the deduction of underwriting discounts, commissions and offering expenses paid by the Company. The Company used a portion of the proceeds to repay amounts outstanding under the Company's $20,000,000 revolving loan agreement with a bank (note 5). The remaining net proceeds are expected to be used as additions to working capital. (16) WARRANTY The Company provides a one year warranty relating to the workmanship on their modular units. To date, warranty costs incurred on completed contracts have been immaterial. (17) PENDING CLAIMS AND LITIGATION In the normal course of business, the Company has been named in several claims and lawsuits arising out of the failure to pay subcontractors or for alleged breach of assigned security. In the opinion of management, the outcome of the claims will not have a material effect on the Company's financial position or results of operations. (18) SUBSEQUENT EVENTS The manufacturing facility in Patterson, California was leased from Miller Structures, Inc. from October 1996 through December 1997. The lease payments are included in rent expense. The Company purchased the facility in January 1998. On March 2, 1998, the Company announced that it had signed an agreement to purchase a majority interest in Trac Modular Manufacturing, Inc (Trac). Trac is based in Glendale, Arizona. Subsequent to the completion of due diligence, the transaction closed on March 20, 1998. F-21 22 SCHEDULE II MODTECH, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
BALANCE AT BEGINNING CHARGED BALANCE AT DESCRIPTION OF YEAR TO EXPENSE DEDUCTIONS END OF YEAR ----------- ---------- ---------- ---------- ----------- Allowance for contract adjustments: Year ended December 31, 1995........ $425,390 $ -- $(17,300) $408,090 ======== ====== ======== ======== Year ended December 31, 1996........ $408,090 $5,866 $ (583) $413,373 ======== ====== ======== ======== Year ended December 31, 1997........ $413,373 $ -- $ (3,254) $410,119 ======== ====== ======== ========
F-22 23 MODTECH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS
DECEMBER 31, SEPTEMBER 30, 1997 1998 ------------ ------------- AUDITED UNAUDITED Current assets Cash.............................................. $11,629,000 $30,450,000 Contracts receivable, net, including costs in excess of billings of $16,021,000 and $13,738,000 in 1997 and 1998, respectively..... 37,531,000 33,565,000 Inventories....................................... 3,932,000 2,828,000 Due from affiliates............................... 1,098,000 694,000 Deferred tax asset................................ 2,094,000 2,094,000 Other current assets.............................. 310,000 402,000 ----------- ----------- Total current assets...................... 56,594,000 70,033,000 ----------- ----------- Property and equipment, net......................... 11,229,000 12,221,000 Other assets Deferred tax asset................................ 99,000 99,000 Other assets...................................... 298,000 134,000 ----------- ----------- $68,220,000 $82,487,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities.......... $11,763,000 $13,834,000 Billings in excess of costs....................... 6,997,000 6,402,000 Current portion of long-term debt................. 1,417,000 -- ----------- ----------- Total current liabilities................. 20,177,000 20,236,000 Stockholders equity Common stock, shares authorized, $.01 par. Authorized 20,000,000 shares; issued and outstanding 9,856,000 and 9,871,000 in 1997 and 1998, respectively............................. 98,000 100,000 Additional paid-in capital........................ 39,331,000 39,573,000 Retained earnings................................. 8,614,000 22,578,000 ----------- ----------- Total shareholders' equity................ 48,043,000 62,251,000 ----------- ----------- $68,220,000 $82,487,000 =========== ===========
The accompanying notes are an integral part of these financial statements. F-23 24 MODTECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- --------------------------- 1997 1998 1997 1998 ----------- ----------- ----------- ------------ Net sales.............. $39,805,000 $37,243,000 $98,711,000 $113,119,000 Cost of goods sold..... 31,235,000 28,408,000 78,923,000 87,083,000 ----------- ----------- ----------- ------------ Gross profit...... 8,570,000 8,835,000 19,788,000 26,036,000 Selling, general, and administrative expenses............. 1,362,000 1,102,000 3,544,000 3,843,000 ----------- ----------- ----------- ------------ Income from operations...... 7,208,000 7,733,000 16,244,000 22,193,000 ----------- ----------- ----------- ------------ Other income (expense): Interest income (expense), net.... (274,000) 305,000 (823,000) 694,000 Other -- net......... 8,000 3,000 72,000 18,000 ----------- ----------- ----------- ------------ (266,000) 308,000 (751,000) 712,000 ----------- ----------- ----------- ------------ Income before income taxes.... 6,942,000 8,041,000 15,493,000 22,905,000 Income taxes........... (2,456,000) (2,862,000) (5,812,000) (8,511,000) ----------- ----------- ----------- ------------ Net income........ $ 4,486,000 $ 5,179,000 $ 9,681,000 $ 14,394,000 =========== =========== =========== ============ Basic earnings per share................ $ 0.47 $ 0.52 $ 1.01 $ 1.46 =========== =========== =========== ============ Weighted-average shares outstanding.......... 9,611,000 9,871,000 9,611,000 9,871,000 =========== =========== =========== ============ Diluted earnings per share................ $ 0.47 $ 0.48 $ 1.00 $ 1.33 =========== =========== =========== ============ Weighted-average shares outstanding.......... 9,647,000 10,800,000 9,647,000 11,000,000 =========== =========== =========== ============
The accompanying notes are an integral part of these financial statements. F-24 25 MODTECH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 1997 1998 ------------ ----------- Cash flows from operating activities: Net income....................................... $ 9,681,000 $14,394,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............... 866,000 890,000 (Increase) decrease in operating assets and liabilities: Contracts receivable..................... (21,779,000) 3,966,000 Inventories.............................. (1,394,000) 1,104,000 Due from affiliates...................... (490,000) 404,000 Other assets............................. (35,000) 72,000 Deferred tax asset....................... -- -- Accounts payable and accrued liabilities........................... 3,255,000 2,071,000 Billings in excess of costs.............. 4,827,000 (595,000) ------------ ----------- Net cash provided by (used in) operating activities............................ (5,069,000) 22,306,000 ------------ ----------- Cash flows from investing activities: Proceeds from sale of equipment.................. -- -- Purchase of property and equipment............... (981,000) (1,882,000) ------------ ----------- Net cash used in investing activities.... (981,000) (1,882,000) ------------ ----------- Cash flows from financing activities: Net principal borrowings (payments) under revolving credit lines........................ 6,064,000 -- Principal payments on long-term debt............. -- (1,417,000) Investment in affiliate.......................... -- (250,000) Conversion of stock options...................... 96,000 64,000 ------------ ----------- Net cash provided by (used in) financing activities....................................... 6,160,000 (1,603,000) ------------ ----------- Net increase in cash............................... 110,000 18,821,000 Cash at beginning of period........................ 405,000 11,629,000 ------------ ----------- Cash at end of period.............................. $ 515,000 $30,450,000 ============ ===========
The accompanying notes are an integral part of these financial statements. F-25 26 MODTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (1) MANAGEMENT OPINION In the opinion of management, the condensed financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations as of and for the periods presented. The results of operations for the nine months ended September 30, 1998 are not necessarily indicative of the results to be expected for the full fiscal year. Certain statements in this report constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward -- looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements, expressed or implied by such forward -- looking statements. (2) TAXES ON INCOME Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (3) EARNINGS PER SHARE Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). This statement replaces the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike Primary earnings per share, basic earnings per share excludes any dilutive effects of options and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been restated to conform to the SFAS No. 128 requirement. F-26 27 ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth certain items in the Condensed Statements of Income as a percent of net sales.
PERCENT OF PERCENT OF NET SALES NET SALES THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, -------------- -------------- 1997 1998 1997 1998 ----- ----- ----- ----- Net sales..................................... 100.0% 100.0% 100.0% 100.0% Gross profit.................................. 21.5 23.7 20.0 23.0 Selling, general and administrative........... 3.4 3.0 3.6 3.4 Income from operations........................ 18.1 20.8 16.5 19.6 Interest income (expense), net................ (0.7) 0.8 (0.8) 0.6 Income before taxes on income................. 17.4 21.6 15.7 20.2
Net sales decreased by $2,562,000 or 6.4% for the three months and increased by $14,408,000 or 14.6% for the nine months ended September 30, 1998. The overall increase in revenue is attributable to the growth in the school population, the Class Size Reduction program and a diversification of our product line. The three month decrease was primarily due to the delay by the California Legislature in the adoption of the California state fiscal budget for 1998/1999. Gross profit as a percentage of net sales for the three and nine months ended September 30, 1998 increased to 23.7% and 23.0% from 21.5% and 20.0% for the same period in 1997. The increase was due principally to the utilization of the manufacturing facilities and the realization of manufacturing efficiencies and product mix. Selling, general and administrative expenses decreased for the three months ended September 30, 1998 by $260,000 and increased for the nine months ended September 30, 1998 by $299,000, a change of 19.1% and 8.4% respectively. The increase is primarily due to the increase in sales expense as well as the increase in the number of employees. As a percentage of sales, selling, general, and administrative expenses for the three and nine months ended September 30, are 3.0% and 3.4% for 1998. The percentages were 3.4% and 3.6% for the same period in 1997. Due to a higher cash balance and reduced line of credit borrowing, the nine months ended September 30, 1998 reflects net interest income of $712,000 compared to net interest expense of $751,000 for the same period in 1997, a favorable increase of $1,463,000 or 194.8%. On March 20, 1998, the Company purchased an 80% interest in Trac Modular Manufacturing, Inc (Trac). The purchase price approximated the fair value of net assets on the purchase date. Trac is based in Glendale, Arizona. The financial activity for this subsidiary has been included in the Company's financial statements for the second and third quarter of 1998. Modtech, Inc. has announced that it has entered into a definitive agreement to purchase 100% of the equity of SPI Manufacturing, Inc. ("SPI"), a provately held F-27 28 company. SPI is a leading designer, manufacturer and wholesaler of commercial and light industrial modular buildings. The transaction is scheduled to close in December 1998 and is subject to shareholder and regulatory approval. The acquisition will be structured as a merger transaction whereby each of Modtech, Inc. and SPI will become wholly owned subsidiaries of a newly formed public holding company, Modtech Holdings. Modtech holdings will acquire SPI for consideration consisting of approximately $8 million in cash and approximately 5 million shares of holding company common stock. Modtech Holdings will also refinance approximately $32 million of SPI debt. The merger agreement also provides that Modtech, Inc. shareholders will receive approximately $3.66 per share (in the aggregate, approximately $40 million) and that all of the outstanding Modtech, Inc. shares will be converted into Modtech Holdings common stock (approximately 10 million shares) at an effective ratio of approximately 1 Modtech, Inc. share to 0.85 shares of Modtech Holdings. Modtech Holdings shares will be traded on NASDAQ in replacement of the existing Modtech, Inc. shares. SPI had pro forma consolidated net sales of approximately $80 million for the fiscal year ended March 31, 1998, which include the results of its California operations, the Texas operation which was acquired in February 1998 and the Arizona operation which was acquired in April 1998. INFLATION In the past, the Company has not been adversely affected by inflation, because it has been generally able to pass along to its customers increases in the costs of labor and materials. LIQUIDITY AND CAPITAL RESOURCES To date, the Company has generated cash to meet its needs from operations, bank borrowings and public offerings. At September 30, 1998, the Company had $30,450,000 in cash. During the nine months ended September 30, 1998, the Company provided cash in it's operating activities. The Company has a revolving loan commitment that will expire in the year 2000. The Company is entitled to borrow, from time to time up to $20,000,000 with actual borrowings limited to specified percentages of eligible accounts receivables, equipment and inventories. On September 30, 1998, no amounts were outstanding under this loan. During the three and nine months ended September 30, 1998,certain directors, officers or employees exercised 14,575 and 49,575 common stock options for a total of $41,688 and $63,738, respectively. Management believes that the Company's existing product lines and manufacturing capacity will enable the Company to generate sufficient cash through operations, supplemented by periodic use of its existing bank line of credit, to finance the Company's business at current levels over the next 12 months. Additional cash resources may be required if the Company is able to expand its business beyond current levels. For example, it will be necessary for the Company to construct or acquire additional manufacturing facilities in order for the Company to compete effectively in new market areas or states which are beyond a 300 mile radius from one of its production facilities. The construction F-28 29 or acquisition of new facilities would require significant additional capital. For these reasons, among others, the Company may need additional debt or equity financing in the future. There can be, however, no assurance that the Company will be successful in obtaining such additional financing, or that any such financing will be available on terms acceptable to the Company. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS 130 requires all items that are required to be recognized under accounting standards as components of comprehensive income to be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period covered by that financial statement. SFAS 130 requires an enterprise to (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Management has determined the adoption of SFAS 130 will not have a material impact on the Company's combined financial statement or results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise", but retains the requirement to report information about major customers. It amends FASB Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries", to remove the special disclosure requirements for previously unconsolidated subsidiaries. SFAS 131 requires, among other items, that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets, information about the revenues derived from the enterprise's products or services, and major customers. SFAS 131 also requires that the enterprise report descriptive information about the way that the operating segments were determined and the products and services provided by the operating segments. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. SFAS 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. Management has not determined whether the adoption of SFAS 131 will have a material impact on the Company's segment reporting. F-29 30 In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. SFAS 132 is effective for fiscal years beginning after December 15, 1997. SFAS 132, requiring only additional information disclosures, is effective for the Company's fiscal year ending December 31, 1998. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Application of SFAS 133 is not expected to have a material impact on the Company's financial position, results of operations or liquidity. YEAR 2000 The Company is currently working to resolve the potential impact of the Year 2000 on the processing of date-sensitive information by the Company's computerized information systems. The Year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. The Company has investigated the impact of the Year 2000 problem on its business, including the Company's operational, information and financial systems. Based on this investigation, the Company does not expect the Year 2000 problem, including the cost of making the Company's computerized information systems Year 2000 compliant, to have a material adverse impact on the Company's financial position or results of operations in future periods. However, the inability of the Company to resolve all potential Year 2000 problems in a timely manner could have a material adverse impact on the Company. The Company has also initiated communications with significant suppliers and vendors on which the Company relies in an effort to determine the extent to which the Company's business is vulnerable to the failure by these third parties' to remediate their Year 2000 problems. While the Company had not been informed of any material risks associated with the Year 2000 problem on these entities, there can be no assurance that the computerized information systems of these third parties will be Year 2000 compliant on a timely basis. The inability of these third parties to remediate their Year 2000 problems could have a material adverse impact on the Company. To the extent possible, the Company will be developing and executing contingency plans designed to allow continued operation in the event of failure of the Company's or third parties' computer systems. F-30 31 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of SPI Holdings, Inc.: We have audited the accompanying consolidated balance sheets of SPI HOLDINGS, INC. (a Colorado corporation) as of January 31, 1997, March 27, 1997 and March 31, 1998, and the related consolidated statements of income, shareholders' equity and cash flows for the years ended January 31, 1996 and 1997, the period from February 1, 1997 to March 27, 1997, and the year ended March 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SPI Holdings, Inc. as of January 31, 1997, March 27, 1997 and March 31, 1998 and the results of its operations and its cash flows for the years ended January 31, 1996 and 1997, the period from February 1, 1997 to March 27, 1997 and the year ended March 31, 1998 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Orange County, California May 22, 1998 F-31 32 SPI HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS ($ IN THOUSANDS) ASSETS
PREDECESSOR(1) COMPANY ----------------------- --------- JANUARY 31, MARCH 27, MARCH 31, 1997 1997 1998 ----------- --------- --------- CURRENT ASSETS: Cash...................................................... $1,243 $1,991 $ 1,119 Accounts receivable, net of allowance for doubtful accounts of $26 at January 31, 1997 and March 31, 1997 and $122 at March 31, 1998, respectively............... 2,819 3,320 4,034 Accounts receivable from former officers.................. 1,380 1,433 -- Inventories............................................... 918 1,215 2,761 Notes receivable from related parties..................... 470 540 -- Interest receivable....................................... 48 -- -- Income tax receivable..................................... -- -- 166 Deferred tax asset........................................ 25 25 152 Prepaid expenses.......................................... 2 14 380 ------ ------ ------- Total current assets.............................. 6,905 8,538 8,612 ------ ------ ------- EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost: Furniture, fixtures and equipment...................... 338 338 1,194 Vehicles............................................... 239 215 49 Leasehold improvements................................. 375 380 390 Lease assignment and interest.......................... -- -- 566 ------ ------ ------- 952 933 2,199 Less -- Accumulated depreciation.......................... (219) (231) (330) ------ ------ ------- 733 702 1,869 ------ ------ ------- OTHER ASSETS: Deposits.................................................. 10 10 40 Deferred tax asset........................................ -- -- 50 Goodwill, net of accumulated amortization of $239 at March 31, 1998............................................... -- -- 11,934 Deferred loan fees, net of accumulated amortization of $123 at March 31, 1998................................. -- -- 638 Covenants not to compete, net of accumulated amortization of $575 at March 31, 1998.............................. -- -- 2,625 ------ ------ ------- Total assets...................................... $7,648 $9,250 $25,768 ====== ====== =======
- ------------------------- (1) Effective March 28, 1997, SPI Holdings, Inc. acquired Standard Pacific Industries, Inc. ("the Predecessor"). Because the acquisition was accounted for as a purchase, the post-acquisition period is not comparable to the pre-acquisition periods. The accompanying notes are an integral part of these consolidated balance sheets. F-32 33 SPI HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) ($ IN THOUSANDS) LIABILITIES AND SHAREHOLDERS' EQUITY
PRO FORMA PREDECESSOR(1) COMPANY SHAREHOLDERS' ----------------------- --------- EQUITY AT JANUARY 31, MARCH 27, MARCH 31, AT MARCH 31, 1997 1997 1998 1998 ----------- --------- --------- ------------- (UNAUDITED) CURRENT LIABILITIES: Accounts payable..................................... $1,869 $2,021 $ 2,973 Accrued liabilities.................................. 264 533 1,537 Revolving line of credit............................. -- -- 600 Current portion of long-term debt.................... 10 -- 2,332 Income taxes payable................................. 1,091 1,437 -- ------ ------ ------- Total current liabilities.................... 3,234 3,991 7,442 ------ ------ ------- LONG-TERM LIABILITIES: Deferred tax liability............................... 21 21 -- Long-term debt, net of current portion............... 13 -- 11,624 ------ ------ ------- Total long-term liabilities.................. 34 21 11,624 ------ ------ ------- Total liabilities............................ 3,268 4,012 19,066 ------ ------ ------- COMMITMENTS AND CONTINGENCIES (NOTE 11) SHAREHOLDERS' EQUITY: Convertible preferred stock: Class A-1, stated value $2.715 per share: 1,500,000 shares authorized, 994,335 shares issued and outstanding at March 31, 1998............... -- -- 2,628 $ -- Class A-2, stated value $2.863 per share: 1,000,000 shares authorized, 272,051 shares issued and outstanding at March 31, 1998............... -- -- 725 -- Class A-3 warrants, no par value: 400,000 shares authorized, no shares issued at March 31, 1998.... -- -- 647 -- Class A-4, stated value $4.500 per share: 155,000 shares authorized, 133,331 shares issued and outstanding at March 31, 1998............... -- -- 600 -- Common stock of Predecessor, stated value $1 per share: 3,600 shares authorized, issued and outstanding at January 31, 1997 and March 27, 1997.................. 4 4 -- -- Common stock of Company, par value $0.017 per share: 5,000,000 shares authorized, 333,614 shares issued and outstanding at March 31, 1998, 1,733,331 pro forma shares at March 31, 1998....................... -- -- 6 4,606 Retained earnings...................................... 4,376 5,234 2,096 1,396 ------ ------ ------- ------ Total shareholders' equity................... 4,380 5,238 6,702 $6,002 ------ ------ ------- ------ $7,648 $9,250 $25,768 ====== ====== =======
- ------------------------- (1) Effective March 28, 1997, SPI Holdings, Inc. acquired Standard Pacific Industries, Inc. ("the Predecessor"). Because the acquisition was accounted for as a purchase, the post-acquisition period is not comparable to the pre-acquisition periods. The accompanying notes are an integral part of these consolidated balance sheets. F-33 34 SPI HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME ($ IN THOUSANDS, EXCEPT PER SHARE DATA)
PREDECESSOR(1) -------------------------------------- COMPANY YEAR ENDED PERIOD FROM ---------- JANUARY 31, FEBRUARY 1, 1997 YEAR ENDED ------------------ TO MARCH 27, MARCH 31, 1996 1997 1997 1998 ------- ------- ---------------- ---------- Net Sales...................... $13,429 $24,113 $6,033 $42,180 Cost of Sales.................. 10,541 19,035 4,106 32,458 ------- ------- ------ ------- Gross profit............ 2,888 5,078 1,927 9,722 ------- ------- ------ ------- Operating Expenses: Selling and administrative... 2,609 1,644 507 2,667 Management and monitoring fees...................... -- -- -- 225 Depreciation................. 49 78 13 263 Amortization................. -- -- -- 1,488 ------- ------- ------ ------- 2,658 1,722 520 4,643 ------- ------- ------ ------- Income from operations........... 230 3,356 1,407 5,079 ------- ------- ------ ------- Other Income/(Expense): Interest expense............. (5) (1) -- (1,477) Interest income.............. 85 79 21 38 Miscellaneous income......... 34 111 90 36 Penalties and interest on income taxes.............. -- (117) -- -- ------- ------- ------ ------- 114 72 111 (1,403) ------- ------- ------ ------- Income before provision for income taxes..... 344 3,428 1,518 3,676 Provision for Income Taxes..... 141 1,409 660 1,580 ------- ------- ------ ------- Net income.............. $ 203 $ 2,019 $ 858 $ 2,096 ======= ======= ====== ======= Earnings Per Share: Basic........................ $ 1.30 ======= Diluted...................... $ 1.12 =======
- ------------------------- (1) Effective March 28, 1997, SPI Holdings, Inc. acquired the Predecessor entity. Because the acquisition was accounted for as a purchase, the post-acquisition period is not comparable to the pre-acquisition periods. The accompanying notes are an integral part of these consolidated statements. F-34 35 SPI HOLDINGS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
TOTAL COMMON STOCK PREFERRED STOCK SHARE- ---------------- ---------------- RETAINED HOLDERS' SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY ------ ------ ------ ------ -------- -------- PREDECESSOR(1): Balance, January 31, 1995................... 4 $ 4 -- $ -- $2,154 $2,158 Net Income............. -- -- -- -- 203 203 --- --- ----- ------ ------ ------ Balance, January 31, 1996................... 4 4 -- -- 2,357 2,361 Net Income............. -- -- -- -- 2,019 2,019 --- --- ----- ------ ------ ------ Balance, January 31, 1997................... 4 4 -- -- 4,376 4,380 Net Income............. -- -- -- -- 858 858 --- --- ----- ------ ------ ------ Balance, March 27, 1997... 4 $ 4 -- $ -- $5,234 $5,238 === === ===== ====== ====== ====== COMPANY: Balance, March 27, 1997... -- $-- -- $ -- $ -- $ -- Common stock issuance............. 334 6 -- -- -- 6 Series A-1 issuance.... -- -- 994 2,628 -- 2,628 Series A-2 issuance.... -- -- 272 725 -- 725 Series A-3 warrants issuance............. -- -- -- 647 -- 647 Series A-4 issuance.... -- -- 133 600 -- 600 Net Income............. -- -- -- -- 2,096 2,096 --- --- ----- ------ ------ ------ Balance, March 31, 1998... 334 $ 6 1,399 $4,600 $2,096 $6,702 === === ===== ====== ====== ======
- ------------------------- (1) Effective March 28, 1997, SPI Holdings, Inc. acquired the Predecessor entity. Because the acquisition was accounted for as a purchase, the post-acquisition period is not comparable to the pre-acquisition periods. The accompanying notes are an integral part of these consolidated statements. F-35 36 SPI HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS ($ IN THOUSANDS)
PREDECESSOR(1) ------------------------------------ COMPANY YEAR ENDED PERIOD FROM ---------- JANUARY 31, FEBRUARY 1, 1997 YEAR ENDED ----------------- TO MARCH 27, MARCH 31, 1996 1997 1997 1998 ------ ------- ---------------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.......................................... $ 203 $ 2,019 $ 858 $ 2,096 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..................... 49 78 13 1,203 Net gain on disposition of equipment.............. -- (12) -- -- Provision for deferred income taxes............... -- (25) -- (134) Changes in assets and liabilities, net of assets acquired and liabilities assumed: Accounts receivable............................... 271 (1,907) (501) (142) Inventories....................................... (5) (391) (297) (623) Notes receivable from related parties............. (395) (74) (71) -- Interest receivable............................... (7) (41) 48 -- Prepaid expenses.................................. (20) 18 (12) (367) Other assets...................................... (23) 23 -- (30) Accounts payable.................................. (74) 1,271 153 403 Accrued liabilities............................... 727 (671) 269 666 Deferred tax liability............................ -- 21 -- (25) Income taxes payable.............................. 218 504 346 (1,603) ------ ------- ------- ------- Net cash provided by operating activities...... 944 813 806 1,444 ------ ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements... (411) (193) (7) (1,260) Insurance proceeds from theft of equipment.......... -- 21 -- -- (Increase) decrease in accounts receivable from officers.......................................... -- (1,380) (53) 1,600 Investment in Office Master, net of cash received... -- -- -- (3,893) Payments under non-compete agreements............... -- -- -- (600) ------ ------- ------- ------- Net cash used in investing activities.......... (411) (1,552) (60) (4,153) ------ ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable................... -- (33) 2 (6,442) Proceeds from notes payable........................... -- 25 -- -- Additions to notes payable............................ -- -- -- 8,604 Issuance of common stock.............................. -- -- -- 600 Issuance of warrants.................................. -- -- -- 75 ------ ------- ------- ------- Net cash provided by (used in) financing activities................................... -- (8) 2 2,837 ------ ------- ------- ------- Net increase (Decrease) in cash...................................... 533 (747) 748 128 Cash, beginning of period............................... 1,457 1,990 1,243 991 ------ ------- ------- ------- Cash, end of period..................................... $1,990 $ 1,243 $ 1,991 $ 1,119 ====== ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest.............. $ 5 $ 1 $ -- $ 1,303 ====== ======= ======= ======= Cash paid during the period for income taxes.......... $ 201 $ 520 $ 314 $ 2,851 ====== ======= ======= =======
- ------------------------- (1) Effective March 28, 1997, SPI Holdings, Inc. acquired the Predecessor entity. Because the acquisition was accounted for as a purchase, the post-acquisition period is not comparable to the pre-acquisition periods. The accompanying notes are an integral part of these consolidated statements. F-36 37 SPI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 1. COMPANY BACKGROUND AND BUSINESS SPI Holdings, Inc. dba SPI Manufacturing, Inc. (the Company), was incorporated in the state of Colorado in 1996. On March 27, 1997 the Company completed a transaction to acquire all of the then outstanding shares of Ronfran Inc., doing business as Standard Pacific Industries, Inc. (the Predecessor) The acquisition by the Company was accounted for as a purchase. Accordingly, the assets and liabilities were revalued based on relative fair market values as follows: (in thousands) Assets acquired: Cash...................................................... $ 991 Accounts receivable, net.................................. 3,320 Inventory................................................. 1,215 Property, plant and equipment, net........................ 662 Covenant not to compete................................... 2,500 Goodwill.................................................. 9,190 Other..................................................... 49 ------- 17,927 ------- Liabilities assumed: Accounts payable and accrued liabilities.................. 4,034 Long-term liabilities..................................... 21 ------- 4,055 ------- Net purchase price........................................ $13,872 =======
The purchase price above includes related transaction costs of $228,000 and the subsequent payment by the sellers of $1,600,000 for post-closing adjustments to the purchase price pursuant to the purchase agreement. The Company has consummated the following acquisitions: - Leasehold interest in a manufacturing facility and certain assets of a former mobile home manufacturer located in Ontario, California (August, 1997) - Office Master of Texas, Inc. ("Office Master"), a manufacturer of modular buildings located in the Dallas, Texas area (February, 1998) - Rosewood Enterprises, Inc. Modular Manufacturing ("Rosewood"), a Phoenix- based manufacturer of modular buildings (April, 1998 -see Note 16) The acquisitions of Office Master and Rosewood, which consisted of the acquisition of all outstanding shares of common stock, have or will be accounted for under the purchase method. The Company manufactures modular buildings at its four production facilities in Southern California, Texas and Arizona, and distributes to customers throughout the western United States, primarily in California. The Company's customers include dealers and leasing companies who then sell or lease the buildings to third-party end users operating in various industries. F-37 38 SPI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basis of Presentation These consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Office Master. The Company acquired Office Master on February 24, 1998, and the accompanying consolidated financial statements include the period from acquisition through March 31, 1998 for Office Master operations. The effects of operations for the four-day period March 28, 1997 to March 31, 1997 have been included in the year ended March 31, 1998. The Company had sales of approximately $400,000, costs of sales of approximately $251,000 and incurred payroll expenses of approximately $47,000 during the period. There were no other material activities during this four-day period. Because of the effects of purchase accounting, the accounts of the Predecessor are not comparable to those of the Company. b. Office Master Purchase Price Allocation The assets and liabilities were revalued based on relative fair market values as follows: (in thousands) Assets acquired: Cash........................................................ $ 89 Accounts receivable, net.................................... 571 Inventory................................................... 923 Property, plant and equipment, net.......................... 213 Goodwill.................................................... 2,984 Non-compete covenant........................................ 100 ------ 4,880 ------ Liabilities assumed: Accounts payable and accrued liabilities.................... 898 ------ 898 ------ Net purchase price.......................................... $3,982 ======
Included in the purchase price above are related transaction costs of $148,000, including fees to KRG Capital of $50,000. F-38 39 SPI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) c. Inventories Inventories are stated at the lower of cost or market. The following is a summary of inventory by component as of January 31, 1997, March 27, 1997 and March 31, 1998 (in thousands):
JANUARY 31, MARCH 27, MARCH 31, 1997 1997 1998 ------------ ---------- ---------- Raw materials................. $828 $1,138 $2,184 Work-in-process............... 90 77 167 Finished goods................ -- -- 550 ---- ------ ------ 918 1,215 2,901 Inventory reserve........... -- -- (140) ---- ------ ------ $918 $1,215 $2,761 ==== ====== ======
Work-in-process consists of raw materials and labor. Overhead costs are not capitalized due to the short construction period, and in the opinion of management, are not material. Finished goods typically consist of structures manufactured for customers based upon a verbal or preliminary order but for which a signed purchase order was not received as of the balance sheet date. d. Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost. Depreciation is computed using straight-line and accelerated methods over the following estimated useful lives: Furniture and fixtures................ Seven years Vehicles and equipment................ One to seven years Leasehold improvements................ Useful life or life of the lease, whichever is shorter
Upon retirement or disposal of depreciable assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operations. Major renewals or betterments are capitalized while maintenance costs and repairs are expensed in the period incurred. e. Revenue Recognition The Company recognizes revenue under the completed-contract method. In accounting for such contracts, income is recognized when performance is substantially completed and accepted. f. Goodwill The purchase price in excess of the fair market value of net assets acquired for each acquisition is recorded as goodwill and amortized using the straight-line method over a period of 40 years. Accumulated amortization related to goodwill was $239,000 at March 31, 1998. F-39 40 SPI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) g. Covenants not to Compete Covenants not to compete entered into as part of purchase agreements are amortized over the term of the covenant on a straight-line basis. Accumulated amortization related to the covenants not to compete was $575,000 at March 31, 1998. h. Accounting for Equity-based Compensation Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" establishes financial accounting and reporting standards for stock-based employee compensation plans and transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. The adoption of the accounting methodology of SFAS No. 123 related to employees is optional, and as permitted under SFAS No. 123, the Company intends to continue to account for employee stock options using the intrinsic value methodology in accordance with the Accounting Principles Board Opinion No. 25; however, pro forma disclosures as if the Company adopted the accounting methodology of SFAS No. 123 are required to be presented. (see Note 13) i. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. j. Reclassifications Certain reclassifications have been made to the prior year financial statements in order to conform with the current year's presentation. k. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS Nos. 130 and 131 "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 and No. 131 are effective for fiscal years beginning after December 15, 1997, with earlier adoption permitted. The Company does not believe that adoption of these standards will have a material effect on the Company's financial statements. The Company has to date reflected no items of comprehensive income in its statement of shareholders' equity. l. Earnings Per Share The Company accounts for earnings per share in accordance with SFAS No. 128, "Earnings per Share." This Statement requires the presentation of both basic and diluted net income per share for financial statement purposes. Basic net income per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted net income per share includes the effect of the potential shares outstanding, including dilutive stock options using the treasury stock method. F-40 41 SPI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Concurrent with the proposed merger, all outstanding shares of preferred stock will convert into common stock of the acquiring Company or redeemed for cash. (See Note 16 c.) Earnings per share is calculated using the weighted average number of common shares outstanding that would have resulted from the preferred stock conversion to common shares. The following table reconciles the components of the pro forma basic net income per share calculation to pro forma diluted net income per share.
INCOME PER SHARE (IN THOUSANDS) SHARES AMOUNT -------------- --------- --------- Basic Net Income per Share.................... $2,096 1,612,785 $ 1.30 Effect of Dilutive Securities................. -- 265,143 (0.18) ------ --------- ------ Diluted Net Loss per share.................... $2,096 1,877,928 $ 1.12 ====== ========= ======
500,000 shares of convertible Series A-5 Preferred stock, 10,000 convertible Series A-6 Preferred stock options, and 63,346 convertible Series A-3 Preferred stock warrants were issued subsequent to year end. Additionally, 62,333 shares of convertible Series A-6 Preferred stock and 28,416 convertible Series A-5 preferred stock options, which are subject to further adjustment based on the final purchase price calculation for Rosewood, were issued subsequent to year end. These subsequent equity issuances are not included in the fiscal 1998 earnings per common share calculation above. 3. RECEIVABLES FROM RELATED PARTIES AND FORMER OFFICERS Notes receivable from related parties and accounts receivable from former officers represent advances to the former shareholders of the Predecessor during the years ended January 31, 1996 and 1997. Interest accrued monthly on the receivables at 6.5 percent. Pursuant to the acquisition of the Predecessor described in Note 1, these receivables were paid following the close of the transaction. 4. EMPLOYEE BENEFIT PLAN The Company sponsors a defined contribution plan (the Plan) under which all employees who have completed one year of service are eligible to participate. Company contributions, if any, are determined annually by the board of directors from net profits or accumulated earnings and may not exceed 15 percent of each employee's eligible compensation, as defined. Vesting under the Plan is at a rate of 20 percent per year beginning after the second year of participation. During the year ended January 31, 1997, the Company made contributions to the Plan totaling $64,000. The Company did not make contributions to the plan during the year ended January 31, 1996 or the period from February 1, 1997 to March 27, 1997. The Company accrued a contribution of $131,000 at March 31, 1998, which was paid after year end. One of the former shareholders was the trustee of the Plan through March 27, 1997. The President of the Company and a member of the Board of Directors are currently the trustees. F-41 42 SPI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. REVOLVING LINE OF CREDIT The Company maintains a working capital note with a bank which matures on the earlier of May 1, 2004 or whenever the Long-Term Debt is paid in full. As of March 31, 1998, borrowings against the line of credit totaled $600,000. The unused amount available under this line of credit was $2,751,000 as of March 31, 1998. Interest accrues at the Commercial Paper Rate, plus 4 percent. The weighted average interest rate for the year ended March 31, 1998 was 9.62 percent. The weighted average amount of borrowings outstanding during the year ended March 31, 1998 was $988,000. This line of credit is secured by a security interest which covers substantially all assets of the Company. This line of credit contains certain restrictive covenants, which, among other things, require the maintenance of certain financial ratios and place limits on other indebtedness. As of March 31, 1998, the Company was in compliance with all of the financial covenants in the credit agreement. 6. LONG-TERM DEBT Long-term debt consists of (in thousands):
JANUARY 31, MARCH 27, MARCH 31, 1997 1997 1998 ----------- --------- --------- Secured note payable to NationsCredit, interest accrues at the Commercial Paper Rate, plus 4.25 percent (9.77 percent at March 31, 1998,) payable in quarterly installments.............. $-- $-- $10,396 Secured note payable to NationsCredit, interest accrues at the Commercial Paper Rate, plus 6.25 percent (11.77 percent at March 31, 1998) payable in quarterly installments.............. -- -- 4,150 Debt discount.................................. -- -- (590) Secured note payable to Bank................... 23 -- -- --- --- ------- 23 -- 13,956 Less -- Current portion........................ 10 -- 2,332 --- --- ------- Long-term portion.............................. $13 $-- $11,624 === === =======
The debt discount represents the value of warrants which were issued in conjunction with the notes payable. The debt is being accreted to face value using the effective interest method. The credit agreements also contain anti-dilution provisions, which require the issuance of additional warrants upon triggering events, such as the issuance of certain equity securities at issuance or exercise prices below specified amounts. Upon the occurrence of those triggering events, the Company records additional debt costs, which are amortized over the remaining life of the debt. F-42 43 SPI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Principal amounts due on notes payable as of March 31, 1998 are as follows(in thousands):
YEAR ENDING MARCH 31, --------------------- 1999..................................... $ 2,332 2000..................................... 2,414 2001..................................... 2,441 2002..................................... 2,551 2003..................................... 2,215 Thereafter.................................. 2,593 ------- $14,546 =======
All of the notes are collateralized by a security interest, which covers substantially all assets of the Company. These credit agreements contain certain restrictive covenants, which, among other things, require the maintenance of certain financial ratios and place limits on other indebtedness. As of March 31, 1998, the Company was in compliance with all of the financial ratio covenants listed in the credit agreement. 7. EMPLOYMENT, CONSULTING, AND NON-COMPETE AGREEMENTS The Company has entered into a five-year employment agreement with its Chief Executive Officer. The agreement provides for an annual base salary of $150,000, all normal employee benefits, and an annual bonus based on earnings before interest, taxes, depreciation and amortization. The Board may, in its sole discretion, grant an additional bonus in cash or stock options in any fiscal year. The agreement also entitles the officer to purchase shares of the Company's Class A-2 convertible preferred stock. Additionally, the agreement granted options to purchase additional shares of such stock pursuant to the Company's 1997 Long Term Incentive Stock Option Plan, and granted warrants to purchase additional shares of such stock. The Company has also entered into a five-year employment agreement with its Senior Vice President Manufacturing. The agreement provides for an annual base salary of $150,000; all normal employee benefits and annual bonuses based on net sales and gross margin. The Board may, in its sole discretion, grant an additional bonus in cash or stock options in any fiscal year. The agreement also entitles the executive to purchase shares of the Company's common stock. Additionally, the agreement granted options to purchase shares of the Company's Class A-2 convertible preferred stock pursuant to the Company's 1997 Long Term Incentive Stock Option Plan. At March 27, 1997, the Company entered into a consulting agreement with a former shareholder for a period of one year. The agreement calls for the payment of $100,000 to the former shareholder over a twelve-month period. Additionally, the Company entered into non-compete agreements with the former shareholders for a period of five years. The Company allocated $2,500,000 of the purchase price to the covenant as determined in the agreement. The asset is recorded in the accompanying consolidated balance sheet in other assets. The covenant is being amortized over the term of the agreement and as of March 31, 1998 accumulated amortization was $500,000. F-43 44 SPI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of August 1997, the Company entered into one-year consulting agreements with certain individuals from whom the Company purchased certain assets and a leasehold interest in a manufacturing facility. The Company paid $600,000 in accordance with these agreements. As of March 31, 1998, accumulated amortization was $400,000. The asset is recorded in the prepaid assets in the accompanying consolidated balance sheet. Additionally, the Company entered into non-compete agreements with these individuals for a period of five years. The Company paid $600,000 for these agreements. The asset is recorded in other assets in the accompanying consolidated balance sheet. The covenant is being amortized over the term of the agreement and as of March 31, 1998 accumulated amortization was $75,000. In February 1998, the Company entered into a non-compete agreement with the former owners of Office Master for a five year period. The Company paid $100,000 for this agreement. The asset is recorded in other assets in the accompanying consolidated balance sheet. This agreement is being amortized over the term of the agreement. As of March 31, 1998, the accumulated amortization was nominal. 8. RELATED PARTY TRANSACTIONS The Predecessor previously sold inventory at normal margins, and provided accounting and management services at no cost to another company, which was also owned by the former shareholders. Sales to this company during the years ended January 31, 1996 and 1997 were $185,000 and $231,000. There were no sales to this company for the period from February 1, 1997 to March 27, 1997 or for the year ended March 31, 1998. Receivables due to this company were $85,000 and 151,000 at January 31, 1996 and 1997, respectively. Accrued interest related to the above receivables were $2,000 and $12,000 at January 31, 1996 and 1997, respectively. Those amounts were subsequently repaid prior to the date of acquisition. As of the date of acquisition, the Company paid $300,000 to one of its shareholders for obtaining debt financing and locating the equity investors for the transaction. The portion related to obtaining debt financing is included in deferred loan fees and the portion relating to locating equity investors is recorded as a reduction to equity on the consolidated balance sheets. Pursuant to certain management agreements, the Company pays monitoring fees to certain of its shareholders. During the year ended March 31, 1998, the Company paid $200,000 and $25,000 to two groups of shareholders in accordance with the management agreement; such amounts are included in operating expenses on the consolidated statements of income. Additionally, the Company maintains a line of credit and all outstanding notes payable with a shareholder of the Company. This lender also received a management fee of $25,000 during the year ended March 31, 1998, which is included in interest expense on the consolidated statements of income. F-44 45 SPI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES The components of the provision for income taxes for the years ended January 31, 1996 and 1997, the period from February 1, 1997 to March 27, 1997 and the year ended March 31, 1998 consist of the following (in thousands):
JANUARY 31, JANUARY 31, MARCH 27, MARCH 31, 1996 1997 1997 1998 ----------- ----------- --------- --------- Current: Federal....................... $117 $1,166 $505 $1,377 State......................... 24 248 155 401 ---- ------ ---- ------ 141 1,414 660 1,778 ---- ------ ---- ------ Deferred: Federal....................... -- 1 -- (162) State......................... -- (6) -- (36) ---- ------ ---- ------ -- (5) -- (198) ---- ------ ---- ------ $141 $1,409 $660 $1,580 ==== ====== ==== ======
Deferred income taxes arise as a result of temporary differences in the methods used to determine income for financial reporting versus income tax reporting purposes. Significant components of the Company's net deferred tax asset and liability at January 31, 1997, March 27, 1997 and March 31, 1998 are as follows: (in thousands)
JANUARY 31, MARCH 27, MARCH 31, 1997 1997 1998 ----------- --------- --------- Depreciation and Amortization................ $(21) $(21) $ 50 ---- ---- ---- Long-term deferred tax asset (liability)... (21) (21) 50 ==== ==== ==== Inventory costs capitalized.................. -- -- 12 Provision for bad debt....................... 12 12 52 Warranty accrual............................. 13 13 88 ---- ---- ---- Current deferred tax asset................. 25 25 152 ==== ==== ==== Net deferred tax asset....................... $ 4 $ 4 $202 ==== ==== ====
F-45 46 SPI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The effective tax rate differs from the Federal statutory rate of 34 percent due to the following:
PERIOD FROM YEARS ENDED FEBRUARY 1, YEAR ------------------------- 1997 TO ENDED JANUARY 31, JANUARY 31, MARCH 27, MARCH 31, 1996 1997 1997 1998 ----------- ----------- ----------- --------- Provision for income taxes at statutory rate..................... 34.0% 34.0% 34.0% 34.0% Increases in tax resulting from: State income taxes, net............ 7.0 7.1 6.7 7.2 Other.............................. -- -- 2.8 1.8 ---- ---- ---- ---- Provision for income taxes........... 41.0% 41.1% 43.5% 43.0% ==== ==== ==== ====
10. COMMITMENTS AND CONTINGENCIES a. Leases The Company leases facilities under noncancelable operating leases. Future minimum lease payments on operating leases as of March 31, 1998 are as follows (in thousands): YEAR ENDING MARCH 31: 1999...................................... $ 830 2000...................................... 807 2001...................................... 805 2002...................................... 771 2003...................................... 356 Thereafter................................ 1,718 ------ Total future minimum lease payments.......................... $5,287 ======
Rent expense for the years ended January 31, 1996 and 1997, the period from February 1, 1997 to March 27, 1997, and the year ended March 31, 1998, were $136,000, $209,000, $40,000 and $391,000, respectively. b. Litigation The Company is, from time to time, a party to litigation arising in the normal course of its business. The Company is not involved in any pending or threatened legal proceeding which the Company believes could reasonably be expected to have a material effect on the Company's financial condition or results of operations. F-46 47 SPI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. ACCRUED LIABILITIES The components of accrued liabilities at January 31, 1997, March 27, 1997 and March 31, 1998 consist of the following (in thousands):
JANUARY 31, MARCH 27, MARCH 31, 1997 1997 1998 ----------- --------- --------- Warranty reserve......................... $ 30 $ 30 $ 206 Income tax penalties..................... 62 113 -- Interest on income taxes................. 55 59 -- Payroll and related...................... 96 212 777 Professional fees........................ -- 49 136 Interest payable......................... -- -- 149 Other.................................... 21 70 269 ---- ---- ------ $264 $533 $1,537 ==== ==== ======
12. SHAREHOLDERS' EQUITY As of March 31, 1998, the Company had four classes of convertible preferred stock, Class A-1, A-2, A-3, and A-4. The holders of Class A-1, A-2 and A-4 convertible preferred stock are entitled to one vote for each share of common stock issuable upon conversion of the preferred stock at the time the vote is taken. Class A-3 stock has no voting privileges, except where mandated by law. All classes of preferred stock share ratably with the common stockholders in dividends and upon liquidation. Shares of convertible preferred stock are convertible to common stock on a one-to-one basis. Preferred stock may be converted to common stock at any time, and the Board of Directors may require conversion of all outstanding preferred shares upon the closing of a Qualified Public Offering. All classes of preferred stock contain anti-dilution privileges whereby the conversion price will be reduced if any shares of common stock are sold for a lower price than the stated conversion price. Prior to March 28, 1997, the Company had 3,600 shares of common stock authorized, issued and outstanding which were owned equally by the former shareholders. As of March 28, 1997 these common stock shares were cancelled and new common stock shares were issued. The new common stock shares have a par value of $0.017 per share. 13. STOCK OPTION PLAN The Company has elected to follow APB 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123 "Accounting for Stock-Based Compensation" requires use of option valuation models that were not developed for use in valuing employee stock options. F-47 48 SPI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The 1997 Long Term Incentive Stock Plan, as amended (the Plan), allows grants of options to purchase up to 200,000 shares of Series A-2 Preferred Stock and 16,667 shares of Series A-4 Preferred Stock. The preferred stock is convertible into common stock at any time. Stock options granted under the Plan are exercisable over a period of ten years and vest over a period of three to five years. As of March 31, 1998, 178,749 stock options have been granted to various employees and approximately 37,918 remained available for grant under the Plan. In addition, an officer of the Company received options to purchase 34,933 shares of Series A-2 Preferred Stock and 2,538 shares of Series A-4 Preferred Stock. These options are in addition to those reserved under the Plan and contain anti-dilution privileges. No options have been exercised. There were no stock options granted, issued or exercised during the years ended January 31, 1996 and 1997, or the period from February 1, 1997 to March 27, 1997. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: (i) no dividend yield, (ii) volatility of effectively zero, (iii) risk-free interest rate of seven percent and (iv) expected life of ten years. The following table summarizes the information regarding stock options as of March 31, 1998: OPTIONS OUTSTANDING Average exercise price of options outstanding............... $ 3.11 Total options granted and outstanding....................... 216,220 Average remaining outstanding life.......................... 8 years Aggregate fair value of options granted..................... $ 307,046 Range of exercise prices.................................... $2.8626 - $4.725 OPTIONS EXERCISABLE Number exercisable.......................................... 40,000 Exercise price.............................................. $ 3.0057
Had compensation expense for the Company's 1998 stock-based compensation been recorded under fair market value principles applicable under SFAS 123, the Company would have recorded $62,000 of additional compensation expense, and net income would have been reduced to $2,034,000 for the year ended March 31, 1998. Basic earnings per share and fully diluted earnings would have been reduced to $0.54 and $0.51, respectively, for the year ended March 31, 1998 had the Company recorded the additional compensation expense. F-48 49 SPI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. CONCENTRATION OF CREDIT RISK The Company had several customers which individually account for greater than ten percent of net sales during the periods presented as follows:
YEARS ENDED FEBRUARY 1, PERIOD FROM JANUARY 31, 1997 TO YEAR ENDED ------------ MARCH 27, MARCH 31, 1996 1997 1997 1999 ---- ---- ----------- ----------- GE Capital Modular Space................ 20% 49% 65% 41% Mobile Modular Management............... 11 * 12 15 Williams Scotsman....................... 36 15 12 14
- ------------------------- * less than 10% 15. DISCLOSURE ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate: Cash -- The carrying amount is a reasonable estimate of fair value. Thus, the fair value is disclosed on the consolidated balance sheets. Note Receivable -- The notes receivable bear interest at a variable rate; therefore fair value is assumed to approximate carrying value. Thus, the fair value is disclosed on the consolidated balance sheets. Long-Term Debt -- The notes payable bear interest at a variable rate; therefore fair value is assumed to approximate carrying value. Thus, the fair value is disclosed on the consolidated balance sheets. 16. SUBSEQUENT EVENTS a. Rosewood Acquisition In April 1998, the Company consummated the acquisition of all outstanding Rosewood shares. The purchase price consisted of cash payments totaling $21,773,000, a 9% subordinated note in the amount of $1.5 million, and a variable number of shares of the Company's Series A-6 preferred stock with a fixed value of $1.0 million. The purchase price also includes $195,000 of transactional costs. The number of shares issued is subject to adjustment based on additional analysis of the value of the Company. The agreement also provides that, in the event an initial public offering, as defined, is not consummated within five years of the purchase, the seller may elect to have the shares repurchased by the Company at a price equal to the then fair market value. Alternately, the Company may elect to acquire the seller's shares at the fair market value. b. Proposed acquisition (unaudited) In June 1998, the Company signed a letter of intent to acquire a modular building manufacturer located in the southeastern United States. The proposed purchase price consists of a base price of $2.0 million plus additional consideration based on future earnings. F-49 50 SPI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) c. Proposed merger (unaudited) The Company has entered into a Plan of Reorganization and Merger dated September 28, 1998 with Modtech, Inc. Under terms of the agreement, all equity instruments will be converted into equity instruments of Modtech Holdings, Inc. or redeemed for cash. F-50 51 SPI HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEET ($ IN THOUSANDS) (UNAUDITED)
SEPTEMBER 30, 1998 ------------- ASSETS Current assets: Cash...................................................... $ 341 Accounts receivable, net of allowance for doubtful accounts of $117....................................... 5,995 Inventories............................................... 4,405 Prepaid and other assets.................................. 542 ------- Total current assets................................. 11,283 ------- Property, plant and equipment, net of accumulated depreciation and amortization............................. 2,087 ------- Other assets: Goodwill, net............................................. 33,773 Deferred loan fees, net................................... 804 Covenants not to compete, net............................. 2,760 Other assets.............................................. 251 ------- Total assets......................................... $50,958 ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 3,333 Accrued liabilities....................................... 1,422 Revolving line of credit.................................. 2,724 Current portion of long-term debt......................... 4,914 ------- Total current liabilities............................ 12,393 ------- Long-term liabilities: Long-term debt, net of current portion.................... 24,860 ------- Total liabilities.................................... 37,253 ------- Shareholders' equity: Convertible preferred stock: Class A-1, stated value $2.715 per share; 1,500,000 shares authorized, 994,335 shares issued and outstanding...... 2,628 Class A-2, stated value $2.863 per share; 1,000,000 shares authorized, 272,051 shares issued and outstanding...... 725 Class A-3 warrants, no par value; 400,000 shares authorized, no shares issued........................... 1,153 Class A-4, stated value $4.500 per share; 155,000 shares authorized, 133,331 shares issued and outstanding...... 600 Class A-5, stated value $8.00 per share; shares authorized, 500,000 shares issued and outstanding...... 4,000 Class A-6, stated value $16.04 per share; shares authorized, 62,333 shares issued and outstanding....... 1,000 Common stock of Company, par value $0.017 per share; 5,000,000 shares authorized, 333,614 shares issued and outstanding............................................... 6 Retained earnings........................................... 3,593 ------- Total shareholders' equity........................... 13,705 ------- $50,958 =======
The accompanying notes are an integral part of this consolidated balance sheet. F-51 52 SPI HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, ------------------ 1997 1998 ------- ------- Net sales................................................ $22,712 $41,540 Cost of sales............................................ 17,078 33,322 ------- ------- Gross profit...................................... 5,634 8,218 ------- ------- Operating expenses: Selling and administrative............................. 1,109 2,325 Management and monitoring fees......................... 112 173 Depreciation and amortization.......................... 728 1,319 ------- ------- 1,949 3,817 ------- ------- Income from operations............................ 3,685 4,401 ------- ------- Other income/(expense): Interest expense, net.................................. (725) (1,766) Miscellaneous income................................... 4 3 ------- ------- (721) (1,763) ------- ------- Income before provision for income taxes.......... 2,964 2,638 Provision for income taxes.................................................. 1,269 1,140 ------- ------- Net income..................................... $ 1,695 $ 1,498 ======= ======= Pro forma per share data- Net income per share: Basic............................................... $ 1.06 $ 0.67 Diluted............................................. $ 0.91 $ 0.56 Weighted average number of shares: Basic............................................... 1,600 2,245 Diluted............................................. 1,861 2,665
The accompanying notes are an integral part of these consolidated statements. F-52 53 SPI HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($ IN THOUSANDS) (UNAUDITED)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, --------------------- 1997 1998 ------- -------- Cash flows from operating activities: Net cash provided by (used in) operating activities.................................. $ 422 $ 916 ------- -------- Cash flows from investing activities: Purchases of equipment and leasehold improvements... (969) (257) Payments under non-compete agreement................ (600) -- Repayment of notes receivable from related party.... 1,600 -- Investment in Rosewood, net of cash received........ -- (24,452) ------- -------- Net cash provided by (used in) investing activities.................................. 31 (24,709) ------- -------- Cash flows from financing activities: Principal payments on notes payable................. (5,120) (3,183) Additions to notes payable.......................... 4,431 21,197 Proceeds from issuance of common stock.............. -- 5,000 ------- -------- Net cash provided by (used in) financing activities.................................. (689) 23,014 ------- -------- Net increase (decrease) in cash....................... (236) (779) Cash, beginning of period............................. 991 1,120 ------- -------- Cash, end of period................................... $ 755 $ 341 ======= ======== Supplemental disclosures of cash flow information: Cash paid during the period for interest............ $ 740 $ 1,870 ======= ======== Cash paid during the period for income taxes........ $ 2,255 $ 1,137 ======= ========
The accompanying notes are an integral part of these consolidated statements. F-53 54 SPI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (IN THOUSANDS) (UNAUDITED) 1. FINANCIAL STATEMENTS The accompanying consolidated financial statements included herein have been prepared by the Company, without audit, and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position as of September 30, 1998, the results of operations and cash flows for the six-month periods ended September 30, 1997 and September 30, 1998, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures in such financial statements are adequate to make the information presented not misleading, these consolidated statements should be read in conjunction with the Company's fiscal 1998 audited consolidated financial statements and notes thereto included in this Form S-4. The results of operations for the six-month periods are not necessarily indicative of the results for a full year. The financial statements include the accounts, from the date of acquisition, of Office Master (acquired in February 1998) and Rosewood (acquired in April 1998 -- see Note 6.) 2. INVENTORIES Inventories consisted of the following at September 30, 1998: Raw materials................................ $3,900 Work-in-process.............................. 463 Finished goods............................... 42 ------ $4,405 ======
3. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". This Statement requires that all items that meet the definition of comprehensive income be reported in a financial statement for the period in which they are recognized. This Statement is effective for fiscal years beginning after December 15, 1997 and was adopted by the Company in the quarter ended June 30, 1998. The Company had no comprehensive income adjustments for the period ended September 30, 1998. F-54 55 SPI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (IN THOUSANDS) (UNAUDITED) 4. EARNINGS PER SHARE The Company accounts for earnings per share in accordance with SFAS No. 128, "Earnings per Share." This Statement requires the presentation of both basic and diluted net income per share for financial statement purposes. Basic net income per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted net income per share includes the effect of the potential shares outstanding, including dilutive stock options using the treasury stock method. Concurrent with the proposed merger, all outstanding shares of preferred stock will convert into common stock. Pro forma earnings per share is calculated using the pro forma weighted average number of common shares outstanding that would have resulted from the preferred stock conversion to common shares. The following table reconciles the components of the pro forma basic net income per share calculation to pro forma diluted net income per share.
PER SHARE INCOME SHARES AMOUNT ------ ------ --------- Six months ended September 30, 1998: Basic net income per share....................... $1,498 2,245 $ 0.67 Effect of dilutive securities.................... -- 420 (0.11) ------ ----- ------ Diluted net income per share..................... $1,498 2,665 $ 0.56 ====== ===== ====== Six months ended September 30, 1997: Basic net income per share....................... $1,695 1,600 $ 1.06 Effect of dilutive securities.................... -- 261 (0.15) ------ ----- ------ Diluted net income per share..................... $1,695 1,861 $ 0.91 ====== ===== ======
5. INCOME TAXES The effective tax rate differs from that computed at the Federal statutory rate of 34 percent principally because of the effect of state income taxes and the non-deductibility of goodwill amortization. F-55 56 SPI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (IN THOUSANDS) (UNAUDITED) 6. ROSEWOOD PURCHASE PRICE ALLOCATION In April 1998, the Company consummated the acquisition of all outstanding Rosewood shares. The assets and liabilities were recorded based on relative fair market values as follows: Assets acquired: Cash........................................................ $ 321 Accounts receivable, net.................................... 1,666 Prepaid and other assets.................................... 60 Notes receivable............................................ 475 Inventory................................................... 1,373 Property, plant and equipment, net.......................... 156 Goodwill.................................................... 22,228 Non-compete covenant........................................ 500 ------- $26,779 ------- Liabilities assumed: Accounts payable and accrued liabilities.................... 2,006 ------- Net purchase price.......................................... $24,773 =======
Included in the purchase price above are related transaction costs of $262,000, including fees to KRG Capital of $75,000. 7. STOCKHOLDERS' EQUITY Stockholders' equity activity consists of the following:
TOTAL COMMON STOCK PREFERRED STOCK SHARE- --------------- ---------------- RETAINED HOLDERS' SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY ------ ------ ------ ------- -------- -------- Balance, March 31, 1998............... 334 $ 6 1,399 $ 4,600 $2,096 $ 6,702 Series A-5 Issuance....... -- -- 500 4,000 -- 4,000 Series A-6 issuance....... -- -- 62 1,000 -- 1,000 Series A-3 warrants issued.................. -- -- -- 506 -- 506 Net income................ -- -- -- -- 1,497 1,497 --- --- ----- ------- ------ ------- Balance, September 30, 1998........... 334 $ 6 1,961 $10,106 $3,593 $13,705 === === ===== ======= ====== =======
At the time Rosewood was purchased, the number of shares of A-5 and A-6 stock were subject to adjustment based on additional analysis of the value of the Company. The value of these shares is fixed. The agreement also provides that, in the event an initial F-56 57 SPI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (IN THOUSANDS) (UNAUDITED) public offering, as defined, is not consummated within five years of the purchase, the seller may elect to have the shares repurchased by the Company at a price equal to the then fair market value. Alternately, the Company may elect to acquire the seller's shares at the fair market value. 8. SUBSEQUENT EVENTS a. Proposed acquisition In June 1998, the Company signed a letter of intent to acquire a modular building manufacturer located in the southeastern United States. The proposed purchase price consists of a base price of $2.0 million plus additional consideration based on future earnings. No assurance can be provided that the transaction will be consummated b. Proposed merger The Company has entered into a Plan of Reorganization and Merger dated September 28, 1998 with Modtech, Inc. Under terms of the agreement, all equity instruments will be converted into equity instruments of Modtech Holdings, Inc. or redeemed for cash. F-57 58 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholder of Office Master of Texas, Inc.: We have audited the accompanying balance sheet of Office Master of Texas, Inc. (a Texas corporation) as of December 31, 1997, and the related statements of income and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Office Master of Texas, Inc. as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed more fully in Note 9 to the financial statements, the Company's shareholder has entered into a letter of intent to sell all shares of common stock currently outstanding. ARTHUR ANDERSEN LLP Dallas, Texas, January 16, 1998 F-58 59 OFFICE MASTER OF TEXAS, INC. BALANCE SHEET DECEMBER 31, 1997 ASSETS Current assets: Cash...................................................... $ 277,996 Accounts receivable....................................... 480,453 Inventories............................................... 839,524 Note receivable from shareholder.......................... 82,000 ---------- Total current assets................................. 1,679,973 Equipment and leasehold improvements, at cost: Buildings................................................. 10,365 Vehicles and equipment.................................... 127,409 Leasehold improvements.................................... 79,238 ---------- Less -- Accumulated depreciation.......................... (62,271) ---------- Total assets......................................... $1,834,714 ========== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable.......................................... $ 295,796 Accrued liabilities....................................... 169,478 Notes payable............................................. 310,162 Note payable to shareholder............................... 46,000 Income taxes payable...................................... 73,670 ---------- Total current liabilities............................ 895,106 Long-term liabilities: Deferred tax liability.................................... 8,573 Notes payable, net of current portion..................... 131,070 ---------- Total long-term liabilities.......................... 139,643 Total liabilities.................................... 1,034,749 Commitments and Contingencies Shareholder's equity: Common stock, par value $1 per share: 1,000 shares authorized, issued and outstanding..................... 1,000 Retained earnings......................................... 798,965 ---------- Total liabilities and shareholder's equity........... $1,834,714 ==========
The accompanying notes are an integral part of this balance sheet. F-59 60 OFFICE MASTER OF TEXAS, INC. STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1997 Net sales................................................... $8,328,105 Cost of sales............................................... 7,468,292 ---------- Gross profit........................................... 859,813 Operating expenses: Selling and administrative expenses....................... 867,154 Depreciation and amortization expense..................... 16,866 ---------- Loss from operations................................... (24,207) Other income (expense): Interest income........................................... 7,884 Miscellaneous income...................................... 4,061 ---------- Loss before benefit from income taxes.................. (12,262) Benefit from income taxes................................... (3,924) ---------- Net loss............................................... (8,338) Retained earnings, beginning of year........................ 807,303 ---------- Retained earnings, end of year.............................. $ 798,965 ==========
The accompanying notes are an integral part of this financial statement. F-60 61 OFFICE MASTER OF TEXAS, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 Cash flows from operating activities: Net loss.................................................. $ (8,338) Adjustments to reconcile net loss to net cash provided by operating activities -- Depreciation and amortization........................ 16,866 Decrease in accounts receivable...................... 522,324 Increase in inventories.............................. (192,165) Decrease in note receivable from related party....... 11,491 Decrease in other assets............................. 10,020 Increase in accounts payable......................... 1,831 Increase in accrued liabilities...................... 125,326 Increase in deferred tax liability................... 1,543 Decrease in income taxes payable..................... (195,958) --------- Net cash provided by operating activities......... 292,940 Cash flows from investing activities: Sale of equipment and leasehold improvements.............. 8,843 --------- Net cash provided by investing activities......... 8,843 Cash flows from financing activities: Principal payments on notes payable....................... (199,585) --------- Net cash used in financing activities............. (199,585) Net increase in cash........................................ 102,198 --------- Cash, beginning of year..................................... 175,798 Cash, end of year........................................... $ 277,996 ========= Supplemental disclosures of cash flow information: Cash paid during the year for interest.................... $ 37,365 ========= Cash paid during the year for income taxes................ $ 192,034 =========
The accompanying notes are an integral part of this financial statement. F-61 62 OFFICE MASTER OF TEXAS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 1. COMPANY OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: Organization and Business Office Master of Texas, Inc. (the "Company"), manufactures modular buildings at its production facility in Glen Rose, Texas, and distributes to customers throughout the United States, primarily in the South. The Company's customers include dealers and leasing companies who then sell or lease the buildings to third parties operating in various industries. The Company is 100% owned by Bertrand Taylor (the "shareholder"). Inventories Inventories consist of raw materials, work-in-process, and finished goods and are stated at the lower of cost or market on first-in first-out basis. The following is a summary of inventory by component: Raw materials................................ $458,228 Work-in-process.............................. 95,669 Finished goods............................... 285,627
Work-in-process consists of raw materials and overhead. Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost. Depreciation is computed using the straight-line method over the following useful lives: Buildings................................ 31.5 years Vehicles and equipment................... Five to ten years Leasehold improvements................... Useful life or life of the lease, whichever is shorter
Major renewals or betterments are capitalized while maintenance costs and repairs are expensed in the period incurred. Revenue Recognition The Company recognizes revenue upon completion of the buildings and transfer of title. Buildings are maintained on the Company's property until the customer arranges for delivery. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-62 63 OFFICE MASTER OF TEXAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 2. NOTE RECEIVABLE FROM SHAREHOLDER: Note receivable from the shareholder represents advances to the shareholder. Interest accrues monthly on the receivable at 6.5%. Pursuant to the agreement entered into as described in Note 9, this receivable will be paid prior to the close of the transaction described therein. 3. NOTES PAYABLE: Notes payable consists of five secured notes payable to two banks. These notes accrue interest at rates ranging from 9.5% to 10.5%. Amounts due on the note payable in future years are as follows:
YEAR ENDING DECEMBER 31, ------------ 1998....................................... $310,162 1999....................................... 53,831 2000....................................... 55,012 2001....................................... 22,227 -------- $441,232
4. NOTE PAYABLE TO SHAREHOLDER: Note payable to the shareholder represents advances from the shareholder. Interest accrues monthly on the payable at 10.95%. Pursuant to the agreement entered into as described in Note 9, this payable will be paid prior to the close of the transaction described therein. 5. INCOME TAXES: Deferred income taxes arise as a result of temporary difference in the methods used to determine income for financial reporting versus income tax reporting purposes. The components of the Company's net deferred tax liability are as follows: Current................................................... $(2,381) Deferred.................................................. (1,543) ------- Benefit from income taxes................................. $(3,924) =======
The provision for income taxes for the year ended December 31, 1997, is comprised of the following: Deferred tax asset- Warranty provision..................................... $ 5,520 Deferred tax liability- Depreciation and amortization.......................... (14,093) -------- Net deferred tax liability................................ $ (8,573) ========
F-63 64 OFFICE MASTER OF TEXAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 6. LEASE COMMITMENTS: The Company conducts its major operations from a building owned by the shareholder and currently pays a monthly rental fee of $3,300 pursuant to an informal agreement. The Company also incurred rental expense during a portion of the year related to a parcel of land adjacent to the Company's facility. Such land was sold to the Company during the year in exchange for an agreement to employ additional county residents. The current year rent expense was $60,906. 7. ACCRUED LIABILITIES: The components of accrued liabilities at December 31, 1997, consist of the following: Sales taxes................................................. $83,108 Warranty reserve............................................ 17,250 Interest.................................................... 11,654 Payroll..................................................... 42,230 Payroll taxes and withheld income taxes..................... 2,785 Property taxes.............................................. 12,451
8. CONCENTRATION OF CREDIT RISK: The Company had six customers which accounted for approximately 88% of net sales during the year, and approximately 93% of accounts receivable at December 31, 1997. 9. SUBSEQUENT EVENT: On December 10, 1997, the shareholder entered into an agreement to sell all of the outstanding shares of the Company for an amount substantially in excess of the net book value of the Company. Pursuant to this agreement, the shareholders agree to, among other things, (1) repay all related party notes and advances, plus accrued interest, (2) enter into one-year consulting agreements, and (3) enter into five-year noncompete agreements. The transaction is expected to close in February 1998. F-64 65 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Rosewood Enterprises, Inc. Modular Manufacturing: We have audited the accompanying balance sheets of ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING (formerly known as Arizona Millwork, Inc.) as of December 31, 1997 and 1996, and the related statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rosewood Enterprises, Inc. Modular Manufacturing as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Phoenix, Arizona, March 17, 1998. F-65 66 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING BALANCE SHEETS ASSETS
YEARS ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, ----------------------- ------------------------- 1997 1996 1998 1997 ---------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents............... $ 108,866 $ 429,692 $ 179,247 $ 864,131 Accounts receivable, net of allowance for doubtful accounts of $20,000...... 1,383,876 1,283,365 2,264,851 1,720,999 Inventories............................. 1,454,520 1,330,076 1,951,692 1,391,726 Prepaid expenses........................ 45,998 249,397 52,301 43,216 ---------- ---------- ---------- ---------- Total current assets............. 2,993,260 3,292,530 4,448,091 4,020,072 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET..................................... 163,722 210,731 139,588 249,340 DEFERRED TAX ASSET........................ 138,774 20,000 157,974 20,000 ---------- ---------- ---------- ---------- Total assets..................... $3,295,756 $3,523,261 $4,745,653 $4,289,412 ========== ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable........................ $ 468,813 $ 590,588 $1,605,090 $ 813,464 Income taxes payable.................... 63,111 20,000 297,094 107,166 Accrued payroll and related liabilities........................... 473,366 281,997 246,731 273,168 Accrued liabilities..................... 106,511 31,000 329,285 70,389 Current portion of notes payable........ 200,000 -- 200,000 -- ---------- ---------- ---------- ---------- Total current liabilities........ 1,311,801 923,585 2,678,200 1,264,187 OTHER LIABILITIES (NOTE 7)................ 762,771 -- 566,937 -- NOTES PAYABLE, NET OF CURRENT PORTION..... 1,275,437 -- 1,211,260 -- NOTE PAYABLE TO RELATED PARTY............. 600,000 -- 600,000 -- ---------- ---------- ---------- ---------- Total liabilities................ 3,950,009 923,585 5,056,397 1,264,187 ---------- ---------- ---------- ---------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY (DEFICIT): Nonvoting common stock, $.001 par value, 10,000 shares authorized, 1,011 and 4,049 shares issued and outstanding at December 31, 1997 and 1996, respectively.......................... 1 4 1 4 Voting common stock, $.001 par value, 1,000 shares authorized, 101 and 405 shares issued and outstanding at December 31, 1997 and 1996, respectively.......................... -- -- -- -- Additional paid-in capital.............. 338,423 338,423 338,423 338,423 Treasury stock.......................... (4,884,599) -- (4,884,599) -- Retained earnings....................... 3,891,922 2,261,249 4,235,431 2,686,798 ---------- ---------- ---------- ---------- Total shareholders' equity (deficit)...................... (654,253) 2,599,676 (310,744) 3,025,225 ---------- ---------- ---------- ---------- Total liabilities and shareholders' equity (deficit)...................... $3,295,756 $3,523,261 $4,745,653 $4,289,412 ========== ========== ========== ==========
The accompanying notes are an integral part of these balance sheets. F-66 67 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31, --------------------------------------- ------------------------- 1997 1996 1995 1998 1997 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) NET SALES................ $31,875,003 $18,361,747 $19,859,641 $6,724,383 $6,368,789 COST OF SALES............ 26,482,353 15,965,611 16,573,200 5,632,444 5,258,207 ----------- ----------- ----------- ---------- ---------- Gross profit........ 5,392,650 2,396,136 3,286,441 1,091,939 1,110,582 OPERATING EXPENSES: General and administrative expenses............ 2,551,986 1,767,241 1,890,964 478,392 412,364 Professional fees...... 250,000 300,000 375,000 -- -- ----------- ----------- ----------- ---------- ---------- Income from operations........ 2,590,664 328,895 1,020,477 613,547 698,218 ----------- ----------- ----------- ---------- ---------- OTHER INCOME (EXPENSE): Interest expense....... (81,482) -- (53) (42,655) -- Interest income........ 46,980 50,667 47,528 3,503 8,675 Other income........... 180,650 213 29,404 3,046 -- Loss on sale of assets, net................. (28,802) -- -- -- -- ----------- ----------- ----------- ---------- ---------- 117,346 50,880 76,879 (36,106) 8,675 ----------- ----------- ----------- ---------- ---------- Income before provision for income taxes...... 2,708,010 379,775 1,097,356 577,441 706,893 PROVISION FOR INCOME TAXES.................. 1,077,337 143,422 453,647 233,932 281,344 ----------- ----------- ----------- ---------- ---------- Net income.......... $ 1,630,673 $ 236,353 $ 643,709 $ 343,509 $ 425,549 =========== =========== =========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-67 68 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
VOTING NONVOTING ADDITIONAL COMMON STOCK COMMON STOCK PAID-IN TREASURY RETAINED SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK EARNINGS TOTAL ------------ ------ ------------ ------ ---------- ----------- ---------- ----------- BALANCE, December 31, 1994......... 405 $-- 4,049 $ 4 $338,423 $ -- $1,381,187 $ 1,719,614 Net income................ -- -- -- -- -- -- 643,709 643,709 ---- --- ------ --- -------- ----------- ---------- ----------- BALANCE, December 31, 1995......... 405 -- 4,049 4 338,423 -- 2,024,896 2,363,323 Net income................ -- -- -- -- -- -- 236,353 236,353 ---- --- ------ --- -------- ----------- ---------- ----------- BALANCE, December 31, 1996......... 405 -- 4,049 4 338,423 -- 2,261,249 2,599,676 Purchase of common stock................. (304) -- (3,038) (3) -- (4,884,599) -- (4,884,602) Net income................ -- -- -- -- -- -- 1,630,673 1,630,673 ---- --- ------ --- -------- ----------- ---------- ----------- BALANCE, December 31, 1997......... 101 -- 1,011 1 338,423 (4,884,599) 3,891,922 (654,253) Net income (unaudited).... -- -- -- -- -- -- 343,509 343,509 ---- --- ------ --- -------- ----------- ---------- ----------- BALANCE, (unaudited) March 31, 1998............ 101 $-- 1,011 $ 1 $338,423 $(4,884,599) $4,235,431 $ (310,744) ==== === ====== === ======== =========== ========== ===========
The accompanying notes are an integral part of these financial statements. F-68 69 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------- ------------------------- 1997 1996 1995 1998 1997 ----------- ---------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income.................................. $ 1,630,673 $ 236,353 $ 643,709 $ 343,509 $ 425,549 Adjustments to reconcile net income to net cash provided by (used in) operating activities- Depreciation............................. 109,317 92,097 71,284 24,134 24,144 Deferred income taxes.................... (118,774) -- (20,000) (19,200) -- Loss on sale of assets................... 28,802 -- -- -- -- Changes in assets and liabilities: Increase in accounts receivable..... (100,511) (384,175) (298,420) (880,975) (437,634) Decrease (increase) in inventories....................... (124,444) (489,682) 422,957 (497,172) (61,650) Decrease (increase) in prepaid expenses.......................... 203,399 (150,868) (50,940) (6,303) 206,181 Increase (decrease) in income tax payables.......................... 43,111 (432,634) 404,871 233,983 87,166 Increase (decrease) in accounts payable........................... (121,775) 329,942 (599,092) 1,136,277 222,876 Increase in accrued payroll and related liabilities............... 191,369 75,980 120,781 (226,635) (8,829) Increase (decrease) in accrued liabilities....................... 75,511 (11,887) (126,776) 222,774 39,389 Increase in other liabilities....... 183,771 -- -- (195,834) -- ----------- ---------- ---------- ---------- --------- Net cash provided by (used in) operating activities........... 2,000,449 (734,874) 568,374 134,558 497,192 ----------- ---------- ---------- ---------- --------- Cash flows for investing activities: Purchases of equipment and leasehold improvements............................. (103,110) (82,965) (111,601) -- (62,753) Proceeds from sale of equipment............. 12,000 -- -- -- -- ----------- ---------- ---------- ---------- --------- Net cash used in investing activities..................... (91,110) (82,965) (111,601) -- (62,753) ----------- ---------- ---------- ---------- --------- Cash flows from financing activities: Purchase of common stock.................... (3,305,602) -- -- -- -- Proceeds from notes payable................. 1,600,000 -- -- -- -- Principal payments on notes payable......... (524,563) -- -- (64,177) -- ----------- ---------- ---------- ---------- --------- Net cash used in financing activities..................... (2,230,165) -- -- (64,177) -- ----------- ---------- ---------- ---------- --------- Net increase (decrease) in cash and cash equivalents................................. (320,826) (817,839) 456,773 70,381 434,439 Cash and cash equivalents, beginning of year........................................ 429,692 1,247,531 790,758 108,866 429,692 ----------- ---------- ---------- ---------- --------- Cash and cash equivalents, end of year...... $ 108,866 $ 429,692 $1,247,531 $ 179,247 $ 864,131 Supplemental disclosures of cash flow information: Cash paid during the year for interest...... $ 94,982 $ -- $ -- $ 42,655 $ -- =========== ========== ========== ========== ========= Cash paid during the year for income taxes.................................... $ 1,153,000 $ 336,000 $ 21,300 $ -- $ -- =========== ========== ========== ========== ========= Supplemental disclosures of Noncash transactions: Common stock purchased through issuance of a note payable...................... $ 1,000,000 $ -- $ -- $ -- $ -- =========== ========== ========== ========== ========= Common stock purchased through other long-term liabilities.................. $ 579,000 $ -- $ -- $ -- $ -- =========== ========== ========== ========== =========
The accompanying notes are an integral part of these financial statements. F-69 70 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 (1) COMPANY OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS Rosewood Enterprises, Inc. Modular Manufacturing, formerly known as Arizona Millwork, Inc. (the Company), manufactures modular buildings at its production facility in Phoenix, Arizona, and distributes to customers throughout the western United States. The Company's customers include dealers and leasing companies who sell or lease the buildings to third parties operating in various industries. FINANCIAL STATEMENTS The accompanying consolidated financial statements included herein have been prepared by the Company. Quarterly results have been prepared, without audit, and include all adjustments, which are, in the opinion of Management, necessary for a fair presentation of the financial position as of March 31, 1998, the results of operations and cash flows for the three-month period ended March 31, 1997 and March 31, 1998 pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted for the quarterly results pursuant to such rules and regulations. Although the Company believes that the disclosures in such financial statements are adequate to make the information presented not misleading, these consolidated statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included herein. The results of operations for the three-month periods are not necessarily indicative of the results for a full year. CASH AND CASH EQUIVALENTS The Company considers all cash and highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Cash equivalents consist of investments in a money market account. Cash equivalents are recorded at cost of $17,048 and $363,314 at December 31, 1997 and 1996, respectively, which approximates market value. INVENTORIES Inventories consist of raw materials and work-in-process and are stated at the lower of cost (first-in first-out) or market. Work-in-process consists of raw materials and overhead. Inventories consist of the following:
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, 1997 1996 1997 1998 ------------ ------------ ---------- ---------- Raw materials................... $1,193,530 $ 971,772 $1,053,374 $1,532,992 Insignias....................... -- -- 1,284 -- Work-in-process................. 260,990 358,304 337,068 418,700 ---------- ---------- ---------- ---------- Total inventories............. $1,454,520 $1,330,076 $1,391,726 $1,951,692 ========== ========== ========== ==========
F-70 71 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are stated at cost. Depreciation is computed using the straight-line method over the assets' useful lives or life of the lease, whichever is shorter. Equipment and leasehold improvements at December 31 is comprised of the following:
USEFUL LIFE 1997 1996 ------ --------- --------- Automotive equipment.................. 3-5 $ 199,855 $ 164,162 Furniture and fixtures................ 5-10 208,691 208,691 Leasehold improvements................ 5-10 33,545 33,545 Warehouse equipment................... 5-7 202,911 187,205 ---- --------- --------- 645,002 593,603 Less -- accumulated depreciation...... (481,280) (382,872) --------- --------- $ 163,722 $ 210,731 ========= =========
Major renewals or betterments are capitalized while maintenance costs and repairs are expensed in the period incurred. Upon retirement or disposal of depreciable assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operations. Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of, requires that long-lived assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on the estimated future cash flows. In management's opinion, no such events or changes in circumstances have occurred. PRODUCT WARRANTY The Company provides a one-year parts and labor warranty on units sold. The Company provides, by a current charge to income, an amount it estimates will be needed to cover future warranty obligations for products sold during the year. The accrued liability for warranty costs of $71,600 and $31,000 at December 31, 1997 and 1996, respectively, is included in accrued liabilities in the accompanying balance sheets. REVENUE RECOGNITION The Company recognizes revenue upon completion of the buildings and transfer of title to the customer. Customer-owned buildings are often maintained on the Company's premises until the customer arranges for pickup and delivery. F-71 72 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. OTHER INCOME Other income for the year ended December 31, 1997 included approximately $130,000 of bad debt recovery and a dividend of approximately $50,000 received from the Company's workers' compensation carrier. (2) NOTES PAYABLE Notes payable consist of the following:
DECEMBER ------------------ 1997 1996 ---------- ---- Note payable to bank, payments of principal and interest due monthly, interest at base rate (9.5% at December 31, 1997) plus 1% per annum, guaranteed by the Company's president, due August 27, 2002, secured by receivables, inventories, and equipment. ........................................... $ 475,437 $-- Note payable to a former shareholder, monthly payments of interest only for the first 24 months, monthly payments of principal and interest thereafter, interest at 11% per annum, guaranteed by the Company's president, due August 28, 2004, secured by all of the Company's assets. ........ $1,000,000 $-- ---------- --- $1,475,437 $-- Less -- current portion..................................... (200,000) -- ---------- --- $1,275,437 -- ========== ===
Amounts due on the note payable in future years are as follows:
YEAR ENDING DECEMBER 31, ------------ 1998...................................................... $ 200,000 1999...................................................... 251,000 2000...................................................... 240,080 2001...................................................... 183,700 2002...................................................... 204,963 Thereafter................................................ 395,694 ---------- $1,475,437 ==========
F-72 73 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 Additionally, the Company has a note payable to the Company's president. Payments of interest are due quarterly at 9%; with principal due August 29, 2006. The note is secured by all the Company's assets. (3) LINE OF CREDIT In August 1997, the Company obtained a bank revolving line of credit for borrowings in an amount that is the lower of $500,000 or 80% of eligible accounts receivable and 20% of raw materials inventory as defined in the line of credit agreement. Interest accrues at the bank's base rate (9.5% at December 31, 1997) plus 1% on the outstanding balance and is payable monthly. The line of credit is guaranteed by the president and is secured by all of the Company's assets. The line of credit expires May 1998 and contains certain financial covenants. The Company had no borrowings under the line of credit during the year ended December 31, 1997. (4) INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities at the tax rates in effect when these differences are expected to reverse. The deferred provision for income taxes results from timing differences in the recognition of certain revenue and expense items for financial reporting and income tax reporting purposes. The provision for income taxes for the years ended December 31 is comprised of the following:
1997 1996 1995 ---------- -------- -------- Current............................. $1,196,069 $143,422 $453,647 Deferred............................ (118,732) -- -- ---------- -------- -------- Provision for income taxes........ $1,077,337 $143,422 $453,647 ========== ======== ========
The components of the Company's net deferred tax asset are as follows:
1997 1996 -------- ------- Reserves.......................................... $ 36,774 $20,000 Deferred compensation............................. 97,000 -- Depreciation and amortization..................... 5,000 -- -------- ------- Net deferred tax asset.......................... $138,774 $20,000 ======== =======
F-73 74 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 A reconciliation of the federal statutory rate to the Company's effective tax rate for the years ended December 31 is as follows:
1997 1996 1995 ---- ---- ---- Statutory federal rate............................ 34% 34% 34% State taxes, net of federal benefit............... 6 6 6 Other............................................. -- (2) 1 -- -- -- 40% 38% 41% == == ==
(5) LEASE COMMITMENTS OPERATING LEASE The Company conducts its major operations from a facility owned by a former shareholder and currently pays a monthly rental fee of $16,300 plus taxes, maintenance fees and insurance. The Company also incurred month-to-month rental expense for storage during a portion of 1997, 1996 and 1995 related to a parcel of land adjacent to the Company's facility. Rent expense was approximately $245,000, $233,000, and $234,000 for the years ended December 31, 1997, 1996, and 1995, respectively. As of December 31, 1997, future minimum lease payments required under noncancellable operating leases are as follows:
YEAR ENDING DECEMBER 31, ------------ 1998.................................... $206,148 1999.................................... 204,390 2000.................................... 195,600 2001.................................... 195,600 2002.................................... 130,400 -------- $932,138 ========
(6) CONCENTRATION OF CREDIT RISK The Company is a wholesale manufacturer that sells its products to dealers, who in turn, sell or lease the products to end-users. Financial instruments which potentially expose the Company to concentrations of credit risk, as defined by SFAS No. 105, Disclosure of Information About Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk consist primarily of trade accounts receivable. The Company's trade accounts receivable are not secured. The Company generally does not require collateral upon delivery of its products. F-74 75 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 The percentage of total sales to customers that in aggregate exceed 10% of total sales are as follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------- 1997 1996 1995 ---- ---- ---- Customer #1....................................... 50% 44% 61% Customer #2....................................... 29 11 18 Customer #3....................................... -- 12 --
(7) COMMITMENTS AND CONTINGENCIES LITIGATION In the normal course of its business, the Company is subject to certain contractual guarantees and litigation. In management's opinion, upon consultation with legal counsel, there is no current, pending, or threatened litigation that will materially affect the Company's financial position or results of operations. DEFERRED COMPENSATION AND CONSULTING AGREEMENTS On August 29, 1997, the Company entered into a deferred compensation agreement with a former shareholder. For services provided from January 1997 to August 1997, the shareholder earned $200,000, payable quarterly over the next twelve years. The Company recorded $200,000 of professional fees for the year ended December 31, 1997 related to the deferred compensation agreement in the accompanying statements of operations. On August 29, 1997, the Company entered into a consulting agreement with the same shareholder to provide consulting services to the Company for three years. Under the consulting agreement, the former shareholder earns $150,000 in year one, $100,000 in year two, and $75,000 in year three for these services. The fees are paid quarterly over twelve years. The Company recognizes the expense straight-line in each of the three years earned and recorded professional fees of $50,000 for the year ended December 31, 1997, in the accompanying statements of operations. Professional fees for 1996 and 1995 of $300,000 and $375,000, respectively, were paid to this same former shareholder for management and consulting services. PROFIT SHARING PLAN AND 401(k) SALARY SAVINGS PLAN In 1987, the Company adopted a profit sharing plan and a 401(k) salary savings plan (the Plan). All of the Company's employees are eligible to participate after completing three months of service with the Company. The Company matches 25% of the employee's contribution up to an annual maximum of 6% of the employee's annual compensation. In addition, the Company, at its discretion, may make a profit sharing contribution. To be eligible for a profit sharing contribution, the employee must work at least 1,000 hours during the Plan year and be employed by the Company on the last day of the Plan year. The Company's matching contributions and profit sharing contributions vest over a seven F-75 76 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 year period. The Company contributed approximately $141,000, $48,000, and $94,000 to the Plan for the years ended December 31, 1997, 1996, and 1995, respectively. (8) STOCK PURCHASE On August 29, 1997, the Company entered into an agreement to purchase 303 shares of voting common stock and 3,034 shares of nonvoting common stock (approximately 75% of the Company's outstanding voting and nonvoting common stock) for $1,462 per share from the then, majority shareholder, for $4,879,000. The transaction was financed with cash from operations of $1,700,000, a loan from a bank for $1,000,000, a note from the seller in the amount of $1,000,000 and a note from the Company's president in the amount of $600,000. In connection with this agreement, the Company entered into a non-compete agreement with this shareholder. Under the agreement, the shareholder agreed not to compete with the Company for twelve years in exchange for a total of $579,000, paid quarterly over twelve years. The Company recorded the value of this agreement in the accompanying balance sheets as additional consideration paid to acquire his outstanding common stock. The corresponding liability is recorded in other long-term liabilities in the accompanying balance sheets. In addition, the Company purchased fractional shares from various minority shareholders for approximately $6,000. (9) DESCRIPTION OF SECURITIES REVERSE STOCK SPLIT Information in the accompanying financial statements and notes to financial statements gives retroactive effect to a reverse stock split effected October 31, 1997. Each holder of record of the Company's common stock received one share of newly created nonvoting common stock and one-tenth of a share of the newly created voting common stock for each 10,000 shares of common stock. COMMON STOCK The Company's capital stock consists of 10,000 shares of $.001 par value nonvoting common stock and 1,000 shares of $.001 par value of voting common stock. No holders of any shares of common stock have preemptive or preferential right to acquire any additional shares. Holders of common stock will be entitled to receive such dividends, if any, as may be declared by the board of directors from time to time out of legally available funds. Holders of the voting common stock are entitled to one vote for each share on all matters submitted to a vote of shareholders. Holders of the nonvoting common stock have no voting rights. Upon any liquidation, dissolution or winding up of the Company, and after paying or adequately providing for the payment of all its obligations, the remainder of the assets of the Company shall be distributed, either in cash or in kind, pro rata to the holders of common stock. F-76 77 ROSEWOOD ENTERPRISES, INC. MODULAR MANUFACTURING NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 (10) SUBSEQUENT EVENT In February 1998, the shareholders entered into an agreement to sell all of the outstanding shares of the Company for an amount in excess of the net book value of the Company. Pursuant to this agreement, the shareholders agree to, among other things, enter into noncompete, consulting and employment agreements. The transaction is expected to close in April 1998. F-77 EX-99.2 4 UNAUDITED PRO FORMA 1 EXHIBIT 99.2 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS The following unaudited pro forma combined condensed financial statements are based on the historical consolidated financial statements of Modtech and SPI, combined, and are adjusted to give effect to the mergers. In addition, pro forma adjustments have been made, as discussed below, for the acquisitions consummated by SPI prior to the mergers (the "Pre-Mergers Acquisitions"). Certain reclassifications have been made to the historical financial statements to conform with this pro forma presentation. These statements should be read in conjunction with such historical financial statements and notes thereto, which are included elsewhere in this Joint Proxy Statement/Prospectus. See "Where You Can Find More Information." The unaudited pro forma combined condensed statements of income for the year ended December 31, 1997 and for the nine months ended September 30, 1998 present the results for Modtech and SPI as if the Mergers and Pre-Mergers Acquisitions had occurred at the beginning of each period presented. The accompanying unaudited pro forma combined condensed balance sheet as of September 30, 1998 gives effect to the mergers as of that date. The pro forma adjustments are based upon preliminary estimates, information currently available and certain assumptions that management believes are reasonable under the circumstances. Holdings' actual consolidated financial statements will reflect the effects of the mergers on and after the Closing Date rather than the dates indicated above. The unaudited pro forma combined condensed financial statements neither purport to represent what the combined results of operations or financial condition actually would have been had the mergers, in fact, occurred on the assumed dates, nor to project the combined results of operations and financial position for any future period. The SPI Merger will be accounted for by the purchase method and, therefore, assets and liabilities of SPI will be recorded at their fair values. The excess of the purchase cost over the fair value of net assets acquired on the Closing Date will be recorded as goodwill. The cost to acquire SPI will be allocated to the assets acquired and the liabilities assumed according to their estimated fair values as of the date of acquisition. The allocation is dependent upon certain valuations and other studies that have not yet progressed to a stage where there is sufficient information to make a definitive allocation. Accordingly, the purchase allocation adjustments made in connection with the preparation of the unaudited pro forma combined condensed financial information are preliminary, and have been made solely for the purpose of preparing such unaudited pro forma combined financial information; however, no material effect on the statements of operations is anticipated. The final value of the purchase price and its allocation may differ, perhaps significantly, from the amounts included in these pro forma statements. Goodwill arises when an acquirer pays more for a business than the fair value of the tangible and separately measurable intangible net assets. General accepted accounting principles ("GAAP") requires that this and all other intangible assets be amortized over the period benefitted. Management has determined that period to be no less than 40 years, based on its determination that the anticipated future cash flows associated with the intangible assets recognized in the SPI Merger will be sufficient to recover those assets over a 40-year period. If management were not to separately recognize a material intangible asset having a benefit period less than 40 years, or were not to give effect to shorter benefit period of factors giving rise to a material portion of the goodwill, earnings reported in periods immediately following the acquisition would be overstated. In later years, the Company would be burdened by a continuing charge against earnings without the associated benefit to income value by management in arriving at the consideration paid for the business. Earnings in later years also could be significantly affected if management determined then that the remaining balance of goodwill was impaired. 1 2 The conversion of Modtech Common Stock into Holdings Common Stock and Series A Preferred Stock will be treated as a reorganization with no change in the recorded amount of Modtech's assets and liabilities. At the Closing Date, each issued and outstanding share of SPI Common Stock and SPI Preferred Stock will be converted into the right to receive 1.8785 shares of Holdings Common Stock. Each SPI stockholder may elect to receive $49.4097 per share of SPI Common Stock and SPI Preferred Stock instead of shares of Holdings Common Stock and elections will be adjusted, if necessary, to ensure that 164,735 shares of SPI Common Stock and SPI Preferred Stock are converted into $8,076,133 in cash. At the Closing Date, each issued and outstanding share of Modtech Common Stock will be converted into the right to receive $3.7293 and 0.8508 shares of Holdings Common Stock. The total cash to be received by Modtech stockholders will equal $39,923,472. Modtech stockholders will have the right to elect to receive 388,939 shares of Holdings Series A Preferred Stock in place of Holdings Common Stock at the same 0.8508 exchange ratio for up to 3.94% of their Modtech Common Stock. To the extent Modtech stockholders do not elect to receive 388,939 of Holdings Series A Preferred Stock, two Modtech stockholders, Proactive Partners, L.P. and Lagunitas Partners, will accept such shares pro rata between them. The number of shares of Holdings Series A Preferred Stock may be adjusted upward or downward in order to meet the minimum requirements of Section 351 of the Internal Revenue Code. The total value of the common stock and stock options in the SPI Merger to be received by SPI stockholders in the SPI Merger was determined using the average closing price of Modtech Common Stock on the Nasdaq National Market for the five-day trading period before and after September 28, 1998. The total purchase price, including estimated transaction costs, was $105,648,000. 2 3 UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1998 (AMOUNTS IN THOUSANDS) ASSETS
HISTORICAL ------------------ PRO FORMA PRO FORMA MODTECH SPI NOTES ADJUSTMENTS COMBINED ------- ------- ------- ----------- --------- Current assets: Cash and cash equivalents...... $30,450 $ 341 (B) $(25,748) $ 5,043 Contracts receivable, net...... 19,827 5,995 25,822 Costs in excess of billings.... 13,738 -- 13,738 Inventories.................... 2,828 4,405 7,233 Due from affiliates............ 694 -- 694 Deferred tax asset............. 2,094 135 (C) (135) 2,094 Other current assets........... 402 407 809 ------- ------- -------- -------- Total current assets............ 70,033 11,283 (25,883) 55,433 Property and equipment, net.... 12,221 2,087 14,308 Other assets: Deferred tax asset........... 99 62 (C) (62) 99 Other assets................. 134 3,753 (D,E) 1,445 5,332 Costs in excess of net assets of business acquired, net....................... -- 33,773 (F,G) 92,945 126,718 ------- ------- -------- -------- $82,487 $50,958 $ 68,445 $201,890 ======= ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities............... $13,834 $ 4,755 (H) $ 750 $ 19,339 Billings in excess of costs..................... 6,402 -- 6,402 Revolving credit facility.... -- 2,724 (I,J) 13,276 16,000 Current portion of long-term debt...................... -- 4,914 (J,K) 1,086 6,000 ------- ------- -------- -------- Total current liabilities....... 20,236 12,393 15,112 47,741 Long-term debt................. -- 24,860 (J,K) 14,140 39,000 ------- ------- -------- -------- Total liabilities.... 20,236 37,253 29,252 86,741 ------- ------- -------- -------- Stockholders' equity: Common stock................. 100 6 (L,M) 40 146 Preferred stock.............. -- 10,106 (L,M) (10,102) 4 Additional paid-in capital... 39,573 -- (A,M,N) 52,848 92,421 Retained earnings............ 22,578 3,593 (L) (3,593) 22,578 ------- ------- -------- -------- Total stockholders' equity............ 62,251 13,705 39,193 115,149 $82,487 $50,958 $ 68,445 $201,890 ======= ======= ======== ========
See the accompanying notes to the unaudited pro forma combined condensed financial statements. 3 4 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) 2,324 14,804 -------- ------- ------- --------- Income from operations........ 21,527 7,852 (2,324) 27,055 Interest expense, net....... (908) (4,041) (D,E,J,O,P) (809) (5,758) Other income................ 92 195 287 -------- ------- ------- --------- Income before income taxes............. 20,711 4,006 (3,133) 21,584 Income tax expense.......... 7,703 1,950 (Q) (324) 9,329 -------- ------- ------- --------- Net income........... $ 13,008 $ 2,056 $(2,809) $ 12,255 ======== ======= ======= ========= Basic earnings per share.... $ 1.47 $ 0.96 (R) ======== ========= Number of shares used in computing basic earnings per share................. 8,854 12,622 (R) ======== ========= Diluted earnings per share..................... $ 1.31 $ 0.83 (S) ======== ========= Number of shares used in computing diluted earnings per share................. 9,898 14,845 (S) ======== =========
See the accompanying notes to the unaudited pro forma combined condensed financial statements. 4 5 UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO FORMA PRO FORMA PRO FORMA MODTECH SPI NOTES ADJUSTMENTS COMBINED NOTES ---------- --------- ----------- ----------- --------- ----- Net sales....................... $113,119 $62,541 $ $175,660 Cost of goods sold.............. 87,083 51,462 138,545 -------- ------- ------- -------- Gross profit............. 26,036 11,079 -- 37,115 -------- ------- ------- -------- Selling, general and administrative expenses....... 3,843 5,351 (F,G) 1,743 10,937 -------- ------- ------- -------- Income from operations... 22,193 5,728 (1,743) 26,178 Interest income (expense), net........................... 694 (2,907) (D,E,J,O,P) (741) (2,954) Other income.................... 18 38 56 -------- ------- ------- -------- Income before income taxes................. 22,905 2,859 (2,484) 23,280 Income taxes.................... 8,511 1,370 (Q) (296) 9,585 -------- ------- ------- -------- Net income............... $ 14,394 $ 1,489 $(2,188) $ 13,695 ======== ======= ======= ======== Basic earnings per share........ $ 1.46 $ 1.08 (R) ======== ======== Number of shares used in computing basic earnings per share......................... 9,871 12,622 (R) ======== ======== Diluted earnings per share...... $ 1.31 $ 0.92 (S) ======== ======== Number of shares used in computing diluted earnings per share......................... 11,000 14,845 (S) ======== ========
See the accompanying notes to the unaudited pro forma combined condensed financial statements. 5 6 NOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS A. The unaudited pro forma combined condensed balance sheet has been prepared to reflect the acquisition of SPI for an estimated aggregate purchase price, including estimated transaction costs, of $105,648,000, which is subject to adjustment and is summarized as follows: 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........ 16,000,000 Cash paid to SPI Stockholders............................ (8,076,000) Cash distribution to Modtech Stockholders................ (39,924,000) Retirement of SPI Indebtedness........................... (32,498,000) Payment of Estimated Debt Issuance Costs................. (2,250,000) Payment of Estimated Merger Costs........................ (4,000,000) ------------ Net cash distribution............................... $(25,748,000) ============
C. To eliminate current deferred tax assets of $135,000 and non-current deferred tax assets of $62,000 not available to the Company. D. To eliminate unamortized SPI debt issuance costs of $805,000 and the related amortization expense of debt issuance costs of $170,000 and $128,000 for the year ended December 31, 1997 and the nine months ended September 30, 1998, respectively. E. To record (i) estimated debt issuance costs of $2,250,000 to be amortized over the term of the New Term Loan and (ii) amortization of debt issuance costs of $450,000 and $338,000 for the fiscal year ended December 31, 1997 and the nine months ended September 30, 1998, respectively. 6 7 F. To record (i) $126,718,000 for the excess of the consideration paid over the preliminary estimate of the fair value of net liabilities assumed, to be amortized over 40 years and (ii) to record goodwill amortization of $3,168,000 and $2,376,000 for the year ended December 31, 1997 and the nine months ended September 30, 1998, respectively. The preliminary purchase price allocation of the SPI acquisition is as follows: Current assets.......................................... $ 11,147,000 Property, plant and equipment........................... 2,087,000 Other tangible assets................................... 189,000 Identifiable intangible assets.......................... 2,760,000 Current liabilities..................................... (4,755,000) Current portion of long-term debt....................... (7,638,000) Long-term debt.......................................... (24,860,000) ------------- Net liabilities assumed............................ (21,070,000) Total Estimated Aggregate Purchase Price...... (105,648,000) Goodwill................................................ $ 126,718,000 =============
G. To eliminate $33,773,000 of goodwill previously recorded by SPI and the related amortization expense of $844,000 and $633,000 for the year ended December 31, 1997 and the nine months ended September 30, 1998, respectively. H. To record the recognition of liabilities related to certain merger costs. I. To record the assumed incurrence of $16,000,000 of indebtedness under a New Revolving Credit Facility, with an assumed effective interest rate of 7.5%, utilized to partially finance the cash portion of the Merger Consideration and pay certain transaction costs. J. To eliminate the $32,498,000 of SPI indebtedness, including $4,914,000 classified as current and $2,724,000 under the revolving credit facility, which will be retired by Modtech, and to eliminate the related interest expense of $4,046,000 and $2,900,000 for the year ended December 31, 1997 and the nine months ended September 30, 1998. K. To record the assumed incurrence of $45,000,000 of indebtedness, including $6,000,000 classified as current under a New Term Loan, with an assumed effective interest rate of 7.5%, utilized to partially finance the cash portion of the Merger Consideration, retire SPI indebtedness and to pay certain related transaction costs. L. To eliminate the equity of SPI, which includes common stock of $6,000, preferred stock of $10,106,000 and retained earnings of $3,593,000. M. To reflect the equity adjustments necessary to reflect the acquisition of SPI under the purchase method of accounting. Such adjustment had the effect of increasing common stock by $46,000 to record the common stock par value and increasing additional paid-in capital by $92,776,000 and preferred stock by $4,000. N. To record the repurchase of Modtech common stock for $39,924,000 cash in connection with the Modtech Merger. O. To record interest expense on borrowings under the New Term Loan of $3,375,000 and $2,531,000 for the fiscal year ended December 31, 1997 and the nine 7 8 months ended September 30, 1998, respectively, using an assumed effective interest rate of 7.5%. A 0.125% increase/decrease in the estimated interest rate incrementally increases/decreases income before income taxes by $56,000 and $42,000 for the year ended December 31, 1997 and the nine months ended September 30, 1998, respectively. P. To record interest expense on borrowings under the New Revolving Credit Facility of $1,200,000 and $900,000 for the year ended December 31, 1997 and the nine months ended September 30, 1998, respectively, using an assumed effective interest rate of 7.5%. A 0.125% increase/decrease in the estimated interest rate incrementally increases/decreases income before income taxes by $20,000 and $15,000 for the year ended December 31, 1997 and the nine months ended September 30, 1998, respectively. Q. To record the income tax effects of the pro forma adjustments at a pro forma effective tax rate of 40%. R. Basic shares include 8,034,334 common shares assumed issued to former Modtech stockholders and 4,587,824 common shares assumed issued to former SPI stockholders. Net income is reduced by preferred dividends of $104,000 and $78,000 for the year ended December 31, 1997 and the nine months ended September 30, 1998, respectively. S. Diluted shares include basic shares, preferred shares converted into common shares on a one-to-one basis and exercise of stock options reduced by number of shares purchased with proceeds. 8 9 RECONCILIATION OF CERTAIN ADJUSTMENTS TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENT ADJUSTMENTS BALANCE SHEET: (1) Other assets: (D) $(805,000); (E) $2,250,000 = $1,445,000 (2) Costs in excess of net assets of business acquired, net: (G) $(33,773,000); (F) $126,718,000 = $92,945,000 (3) Revolving credit facility: (I) $16,000,000; (J) $(2,724,000) = $13,276,000 (4) Current portion of long-term debt: (J) $(4,914,000); (K) $6,000,000 = $1,086,000 (5) Long-term debt, less current portion: (J) $(24,860,000); (K) $39,000,000 = $14,140,000 (6) Additional paid-in-capital: (A) $87,627,000; (M) $(46,000); (A) $5,195,000; (N) $(39,924,000), (M) ($4,000) = $52,848,000 (7) Common stock: (L) $(6,000); (M) $46,000 = $40,000 (8) Preferred stock: (L) $(10,106,000); (M) $4,000 = $(10,102,000) INCOME STATEMENT (YEAR ENDED DECEMBER 31, 1997): (1) Selling, general and administrative expenses: (F) $3,168,000; (G) $(844,000) = $2,324,000 (2) Interest expense, net: (D) $170,000; (E) $(450,000); (J) $4,046,000; (O) $(3,375,000); (P) $(1,200,000) = $(809,000) INCOME STATEMENT (NINE MONTHS ENDED SEPTEMBER 30, 1998): (1) Selling, general and administrative expenses: (F) $2,376,000; (G) $(633,000) = $1,743,000 (2) Interest income (expense), net: (D) $128,000; (E) $(338,000); (J) $2,900,000; (O) $(2,531,000); (P) $(900,000) = $(741,000) 9 10 SPI HOLDINGS, INC. UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1997 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL ------------------------------------------------------ SPI ACQUISITION PREDECESSOR SPI AND NOTES PRO FORMA 1/1-3/27/97 3/28-12/31/97 OFFICE MASTER ROSEWOOD CONSOLIDATION (A,I) CONSOLIDATED ----------- ------------- ------------- -------- ------------- ----- ------------ Net sales............. $9,039 $31,255 $8,328 $31,875 $ -- $80,497 Cost of goods sold.... 6,490 23,792 7,466 26,482 1,091 (G) 65,321 ------ ------- ------ ------- ------- ------- Gross profit........ 2,549 7,463 862 5,393 (1,091) 15,176 Selling, general and administrative expenses............ 611 1,837 819 2,704 (901) (G,H) 5,070 Management and monitoring fees..... -- 168 -- -- -- 168 Depreciation and amortization........ 19 1,230 17 98 722 (B,G) 2,086 ------ ------- ------ ------- ------- ------- Income (loss) from operations........ 1,919 4,228 26 2,591 (912) 7,852 Interest income (expense), net...... 42 (1,051) (40) (35) (2,957) (C) (4,041) Other income.......... 34 5 4 152 -- 195 ------ ------- ------ ------- ------- ------- Income (loss) before provision for income taxes...... 1,995 3,182 (10) 2,708 (3,869) 4,006 Provision (benefit) for income taxes.... 851 1,424 (3) 1,077 (1,399) (F) 1,950 ------ ------- ------ ------- ------- ------- Net income (loss)..... $1,144 $ 1,758 $ (7) $ 1,631 $(2,470) $ 2,056 ====== ======= ====== ======= ======= ======= Basic earnings per share............... (D) $ 0.90 ======= Number of shares used in computing basic earnings per share............... (E) 2,296 ======= Diluted earnings per share............... (D) $ 0.78 ======= Number of shares used in computing diluted earnings per share............... (E) 2,643 =======
See notes on following page. 10 11 Notes: (A) Acquisition adjustments assume the acquisitions occurred as of the beginning of the period presented and the application of purchase accounting to each of the acquisitions. (B) Represents the purchase accounting impact of approximately $56,000, $75,000 and $556,000 for SPI, Office Master and Rosewood, respectively, primarily for goodwill amortization, as well as approximately $118,000, $20,000, and $100,000, for SPI, Office Master and Rosewood, respectively, for amortization of covenants not to compete which were entered into in connection with each such acquisition. (C) Represents interest on the increased borrowings that financed a portion of the purchase price of the acquisitions, and assumes payment of interest only on indebtedness, with no reduction in principal during the period. (D) Pro forma earnings per share is computed in accordance with SFAS No. 128. See Note 2 to the SPI Consolidated Financial Statements. (E) The weighted average number of shares includes actual weighted average number of shares outstanding, as well as common stock equivalents resulting from options and warrants outstanding (applicable to diluted amounts only). (F) Represents an adjustment made to income tax provision as a result of the pro forma adjustments in order to provide income tax expense at the effective tax rate. (G) Represents reclassification of certain salaries and production-related depreciation expense totaling $888,000 and $203,000 respectively, from operating expenses to cost of goods sold in order to conform with Modtech's presentation. (H) Represents elimination of non-recurring transaction-related expenses related to the acquisition of SPI by management and an investor group. (I) The pro forma adjustments do not reflect other anticipated reductions in costs and expenses expected to result from the mergers. Such anticipated savings would include but not be limited to, approximately $555,000 in non-recurring compensation expense paid to former owners of acquired entities. 11 12 SPI HOLDINGS, INC. UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL -------------------------------------------- ACQUISITION SPI OFFICE MASTER ROSEWOOD AND NOTES PRO FORMA CONSOLIDATED 1/1-2/24/98 1/1-4/17/98 CONSOLIDATION (A,I) CONSOLIDATED ------------ ------------- ------------- ------------- ----- ------------ Net sales........................ $52,465 $1,206 $8,870 $ -- $62,541 Cost of goods sold............... 41,989 1,039 7,532 902 (G) 51,462 ------- ------ ------ ------- ------- Gross profit............... 10,476 167 1,338 (902) 11,079 ------- ------ ------ ------- ------- Selling, general and administrative expenses........ 3,154 155 1,098 (1,205) (G,H) 3,202 Management and monitoring fees... 229 -- -- -- 229 Depreciation and amortization.... 1,840 -- 26 54 (B,G) 1,920 ------- ------ ------ ------- ------- Income from operations..... 5,253 12 214 249 5,728 Interest income (expense), net... (2,150) 5 (61) (701) (C) (2,907) Other income..................... 35 -- 3 -- 38 ------- ------ ------ ------- ------- Income (loss) before provision for income taxes............... 3,138 17 156 (452) 2,859 Provision (benefit) for income taxes.......................... 1,466 (5) 64 (155) (F) 1,370 ------- ------ ------ ------- ------- Net income................. $ 1,672 $ 22 $ 92 $ (297) $ 1,489 ======= ====== ====== ======= ======= Pro forma earnings per share..... (D) $ 0.65 ======= Pro forma number of shares used in computing earnings per share.......................... (E) 2,296 ======= Pro forma diluted earnings per share.......................... (D) $ 0.55 ======= Pro forma number of shares used in computing diluted earnings per share...................... (E) 2,722 =======
See notes on following page. 12 13 Notes: (A) Acquisition adjustments assume the acquisitions occurred as of the beginning of the period presented and the application of purchase accounting to each of the acquisitions. The SPI historical consolidated amounts include the operations of Office Master and Rosewood from the respective dates of acquisitions. (B) Represents the purchase accounting impact of approximately $11,000 and $161,000, for Office Master and Rosewood, respectively, primarily for goodwill amortization, as well as approximately $3,000 and $29,000 for Office Master and Rosewood, respectively, for amortization of covenants not to compete which were entered into in connection with the acquisitions. (C) Represents interest on the increased borrowings that financed a portion of the purchase price of the acquisitions, and assumes payment of interest only on indebtedness, with no reduction in principal during the period. (D) Pro forma earnings per share is computed in accordance with SFAS No. 128. See Note 2 to the Consolidated Financial Statements. (E) The weighted average number of shares includes actual weighted average number of shares outstanding, as well as common stock equivalents resulting from options and warrants outstanding (applicable to diluted amounts only). (F) Represents an adjustment made to income tax provision as a result of the pro forma adjustments. The effective tax rate reflects non-deductible goodwill amortization arising from the acquisitions. (G) Represents reclassification of certain salaries and production-related depreciation expense, totaling $752,000 and $150,000, respectively, from operating expense to cost of goods sold in order to conform with Modtech's presentation of these items. (H) Represents elimination of non-recurring transaction related expenses related to the acquisition of Office Master and Rosewood by SPI. (I) The pro forma adjustments do not reflect other anticipated reductions in costs and expenses expected to result from the Office Master and Rosewood acquisitions. Such anticipated savings would include, but not be limited to, approximately $135,000 in non-recurring compensation expense paid to former owners of acquired entities. 13 EX-99.3 5 PRESS RELEASE 1 EXHIBIT 99.3 Modtech Announces Closing of Merger Transaction PERRIS, Calif., Feb. 17/PRNewswire/ -- Modtech, Inc. (Nasdaq: MODJ) today announced the closing of its previously announced merger transaction pursuant to which Modtech has acquired SPI Manufacturing, Inc and formed a new holding company, Modtech Holdings, Inc. Evan M. Gruber, CEO of Modtech, announced that the transaction closed at the end of business on Tuesday, February 16th. Modtech Holdings has entered into a new $100 million credit facility to finance the merger, to provide working capital needs and to provide up to $25 million to fund future acquisitions. Shareholders at the close of business on February 16th, will be entitled to receive shares of Modtech Holdings, Inc. and cash, as detailed in Modtech's Proxy Statement for the merger transaction. New share certificates and cash will be distributed by the Exchange Agent, ChaseMellon Shareholder Services. Shareholders with questions concerning the distribution of cash and share certificates can call the Exchange agent at 800-414-2879. Shares of Modtech Holdings, Inc. will begin trading on Nasdaq on Wednesday, February 17th. For a limited period of time, they will trade under the symbol MODTD, and thereafter under Modtech's old symbol, MODT. Mr. Gruber said, "We are pleased to announce the merger closing and look forward to continuing to provide the highest level of service to Modtech and SPI's customer base through our new combined company. We believe our company is now well positioned as a leading provider of relocatable classrooms and commercial modular structures throughout the Western and Southwestern United States." This release may include "forward-looking statements" with the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations reflected in such forward-looking statements will prove to have been correct. The Company's actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors including sales levels, distribution and competition trends and other market factors. Modtech Holdings, Inc. designs, manufactures and installs modular relocatable classrooms and other modular buildings for commercial use. SOURCE Modtech, Inc. -0- 2/17/99 /CONTACT: Evan M. Gruber, CEO of Modtech Holdings, Inc., 909-943-4014/ (MODT MODTD) -----END PRIVACY-ENHANCED MESSAGE-----