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
========== ========== ========== ==========
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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.
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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
==========
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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
======== =======
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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.
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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.
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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