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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended DECEMBER 31, 1999
[x] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from N/A to N/A
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Commission File No. 000-25161
MODTECH HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0825386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2830 BARRETT AVENUE, PERRIS, CALIFORNIA 92571
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (909) 943-4014
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 29, 2000 was $64,295,571. As of March 29, 2000, shares
entitled to cast an aggregate of 13,178,368 votes were outstanding, including
13,178,368 shares of registrant's Common Stock.
Certain portions of the registrant's definitive proxy statement to be filed not
later than 120 days after the end of the fiscal year covered hereby are
incorporated by reference in Part III of this Form 10-K report.
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PART I
Item 1. BUSINESS
GENERAL
The Company is one of the leading modular building manufacturers in the country
with substantial product and geographic diversification. The Company is a
leading provider of modular classrooms in the State of California and a
significant provider of commercial and light industrial modular buildings in
California, Nevada, Arizona, New Mexico, Utah, Colorado and Texas and other
neighboring states.
The Company designs, manufactures, markets and installs modular relocatable
classrooms. Based upon 1998 net sales, the Company believes that it is the
largest manufacturer of modular relocatable classrooms in California. The
Company's classrooms are sold primarily to California school districts directly
and to third parties and the State of California primarily for lease to
California's school districts. The Company's products include standardized
classrooms, as well as customized structures for use as libraries, gymnasiums,
computer rooms and bathroom facilities. The Company believes that its modular
structures can be substituted for virtually any part of a school. The Company's
classrooms are engineered and constructed in accordance with structural and
seismic safety specifications adopted by the California Department of State
Architects which regulates all school construction on public land, standards
which are more rigorous than the requirements for other relocatable units.
As a result of net enrollment increases in California schools and budgetary
constraints experienced by the State of California which limit the availability
of funds for the addition of new classrooms, California's schools are reported
to be among the most crowded in the nation. As the State budget deficit has
ameliorated, the legislature has increased funding for new classrooms in an
effort to reduce the average number of students per class. State funding
initiatives include funds from both (i) the State's operating budget, such as
the $200 million allocated for construction or addition of classrooms out of the
total of $822 million spent under the Class Size Reduction Program for the
1996-1997 school year and the $1.5 billion allocated for the 1997-1998 school
year for both general operations and school facilities, and (ii) the sale of
statewide bond issues, such as the $9.2 billion bond issue for school
construction, including the addition of classrooms which was approved in
November 1998. See "Business -- Legislation and Funding."
These factors have combined to increase the demand for modular relocatable
classrooms, which cost significantly less and take much less time to construct
and install than conventional school facilities, and which permit a school
district to relocate the units as student enrollments shift. In addition, the
Company's products provide added flexibility to school districts in financing
the costs of adding classroom space, since modular relocatable classrooms are
considered personal property which can be financed out of a district's operating
budget in addition to its capital budget. In recognition of these advantages,
California legislation currently requires, with certain exceptions, that 20% of
all classroom space in the district, not just new space added, consists of
relocatable classrooms. See "Business -- Legislation and Funding."
The Company is also a designer, manufacturer and wholesaler of commercial and
light industrial modular buildings. The Company designs and builds modular
buildings to customer specifications for a wide array of uses, including
corporate and professional office space; governmental, education, recreational
and religious facilities; and construction site offices. The modular buildings
serve as temporary, semi-permanent and permanent facilities and can function as
free-standing buildings or additions to existing structures. The commercial and
light industrial modular buildings are distributed through national dealers and
through multiple regional and local dealers. These dealers lease or sell modular
buildings to a diverse end-user market.
SPI Merger. On February 16, 1999, Modtech, Inc. ("Modtech") and SPI Holdings,
Inc., a Colorado corporation ("SPI") merged pursuant to the Agreement and Plan
of Reorganization and Merger, dated as of September 28, 1998 (the "Merger
Agreement"), between Modtech and SPI. SPI is a designer, manufacturer and
wholesaler of commercial and light industrial modular buildings. Pursuant to the
Merger Agreement, SPI merged with a subsidiary of Modtech Holdings, Inc.
("Holdings"), a newly formed Delaware corporation (the "SPI Merger").
Concurrently, Modtech merged with a separate subsidiary of Holdings (the
"Modtech Merger"). Pursuant to the mergers, both SPI and Modtech became wholly
owned subsidiaries of Holdings.
In connection with the SPI Merger, SPI stockholders received approximately $8
million in cash and approximately 4.6 million shares of Holdings Common Stock.
Holdings refinanced approximately $32 million of SPI debt. In connection with
the Modtech Merger, Modtech stockholders received approximately $40 million in
cash, approximately 8.3 million shares of Holdings Common Stock and 388,939
shares of Holdings Series A Preferred Stock. In connection with both mergers,
Holdings incurred a total of approximately $51 million of debt.
The purchase price for the SPI Merger, including acquisition costs, was
approximately $89 million. The SPI Merger has been accounted for as a purchase
and, accordingly, the results of operations of SPI are included in the Company's
consolidated statements
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of income from the date of acquisition. The excess of fair value of net assets
acquired was approximately $115.2 million, and is being amortized on a
straight-line basis over 40 years.
Coastal Acquisition. On March 22, 1999, Holdings purchased 100% of the stock of
Coastal Modular Buildings, Inc. ("Coastal"). Coastal designs and manufactures
modular relocatable classrooms and other modular buildings for commercial use.
The acquisition of Coastal has been accounted for as a purchase and,
accordingly, the results of operations of Coastal are included in the Company's
consolidated statements of income from the date of acquisition.
INDUSTRY OVERVIEW
In recent years, the growth in population in California, both from births and
from immigration, has led to increasing school enrollments. As a result,
classrooms in many California school districts currently are reported to be
among the most crowded in the nation, with an average of 29 students per class
compared to a national average class size of 17. The California Department of
Finance has estimated that student enrollment in grades kindergarten through 12
will increase by approximately 18% over the period from 1995 through 2005.
Additionally, changes in population demographics have left many existing
permanent school facilities in older residential areas with excess capacity due
to declining enrollments, while many new residential areas are faced with a
continuing shortage of available classrooms. Consequently, it has become
necessary to add additional classrooms at many existing facilities, and to build
a number of new schools.
The construction of new schools and the addition of classrooms at existing
schools are tied to the sources and levels of funding available to California
school districts. The availability of funding for new school and classroom
additions, in turn, is determined in large measure by the amount of tax revenue
raised by the State, the level of annual allocations for education from the
State's budget which is determined by educational policies that are subject to
political concerns, and the willingness of the California electorate to approve
state and local bond issues to raise money for school facilities.
In 1978, California voters approved Proposition 13, which rolled back local
property taxes (a traditional source of funding for school districts) and
limited the ability of local school districts to raise taxes to finance the
construction of school facilities. The passage of Proposition 13, coupled with
growing student populations, has increased the need for local school districts
to find ways to reduce the cost of adding classrooms. The California legislature
has adopted several statutes designed to alleviate some of the problems
associated with the shortage of classrooms and lack of local funding
alternatives. For example, in 1976, California adopted legislation that through
November 1998 required, with certain exceptions, that at least 30% of all new
classroom space added using State funds must be relocatable structures. This
requirement was satisfied through the purchase or lease of the Company's
classrooms. See "Business -- Legislation and Funding." Additionally, in 1979 the
California legislature adopted legislation that provides for State funding for
the purchase of relocatable classrooms that could be leased to local school
districts.
As the number of students enrolled in California schools continued to increase
throughout the 1990's, the State of California and California school districts
experienced increasing budget shortfalls. The resulting shortage of funding
available at both the State and local level led to declining sales of modular
relocatable classrooms, by the Company and on an industry-wide basis. However,
as the State budget deficit ameliorated, funding for modular relocatable
classrooms began to increase. This growth was accelerated when the California
Class Size Reduction Program was implemented in November 1996, the goal of which
is to reduce class sizes to 20 students in public elementary schools at the
kindergarten through third grade levels. For the 1996-1997 school year, the
State spent $822 million under this program, including $200 million specifically
for facilities, which may be relocatable classrooms. The total State funding
under the Class Size Reduction Program for the 1997-1998 school year was
approximately $1.5 billion for both general operations and school facilities.
See "Business -- Legislation and Funding".
When compared to the construction of a conventionally built classroom, modular
classrooms offer a number of advantages, including, among others:
Lower Cost -- The cost of the Company's standard
classroom may be as low as $29,000
installed, as compared to $80,000
to $100,000 for conventional
construction of a comparable
classroom;
Shorter Construction Time -- A modular classroom can be built
and ready for occupancy in a
shorter period of time than that
required for state approval and
construction of a conventional
facility;
Flexibility of Use -- Modular relocatable classrooms
enable a school district to use the
units for short or long term needs
and to move them if necessary to
meet shifts in student populations;
and
Ease of Financing -- As personal rather than real
property, modular classrooms may be
leased on a long or short-
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term basis from manufacturers and
leasing companies. This allows
school districts to finance modular
classrooms out of both their
operating and capital budgets.
For the Company's commercial and light industrial buildings, the growth in the
nonresidential modular market has resulted from the wide-spread acceptance of
modular structures as an alternative to traditional site construction and the
increasing number of applications for modular buildings across a broad spectrum
of industries. Because modular buildings are constructed in a factory using an
assembly line process, construction is typically not subject to the delays
caused by weather and site conditions. Modular buildings can, therefore,
generally be built faster than conventional buildings, at a lower cost and with
more consistent quality. Modular buildings can generally be relocated more
easily to meet the changing needs of end users and be quickly joined to other
modular buildings to meet increased space requirements.
MODULAR RELOCATABLE CLASSROOMS
The Company's modular relocatable classrooms are designed, engineered and
constructed in accordance with structural and seismic safety specifications
adopted by the California Department of State Architects, standards which are
more rigorous than the requirements for other portable units. The Department of
State Architects, which regulates all school construction on public land, has
prescribed extensive regulations regarding the design and construction of school
facilities, setting minimum qualifications for the preparation of plans and
specifications, and reviews all plans for the construction of material
modifications to any school building. Construction authorization is not given
unless the school district's architect certifies that a proposed project
satisfies construction cost and allowable area standards. The Company
subcontracts with structural engineering firms to interface with each school
district's architect or engineer to process project specifications through the
Department of State Architects. The Company believes that the regulated
environment in which the Company's classrooms are manufactured serves as a
significant barrier to market entry by prospective competitors. See "Business --
Competition."
Conventional school facilities constructed by school districts using funds from
the State Office of Public School Construction typically require two to three
years for approval and funding. By contrast, factory-built school buildings like
the Company's standard classrooms may be pre-approved by the State for use in
school construction. Once plans and specifications for a given classroom have
been pre-approved, school districts can thereafter include in their application
to obtain State funds for new facilities a notification that they intend to use
pre-approved, standardized factory-built classrooms. This procedure reduces the
time required in the State's approval process to as little as 90 days, thereby
providing an additional incentive to use factory-built relocatable classrooms.
In all cases, continuous on-site inspection by a licensed architect or
structural engineer is required during actual manufacture of the classrooms,
with the school district obligated to reimburse the Department for the costs of
such inspection.
The Company's classrooms are manufactured and installed in accordance with the
applicable Department of State Architects building code, which supersedes all
local building codes for purposes of school construction. The classrooms must
comply with accessibility requirements for the handicapped, seismic and fire
code requirements.
The Company manufactures and installs standard, largely pre-fabricated modular
relocatable classrooms, as well as customized classrooms, which are modular in
design, but assembled on-site using components manufactured by the Company
together with components purchased from third party suppliers. The Company's
classrooms vary in size from two modular units containing a total of 960 square
feet to 20 units that can be joined together to produce a facility comprising
9,600 square feet. Larger configurations are also possible. Typical prices for
the Company's standard classrooms range from $29,000 to $34,000, while prices
for a custom classroom generally exceed $50,000, depending upon the extent of
customization required.
The two basic structural designs for standard and custom modular classrooms are
a rigid frame structure and a shear wall structure. The rigid frame structure
uses a steel floor and roof system, supported at each corner with square steel
tubing. These buildings have curtain walls to enclose the interior from the
outside, and have the advantage of unlimited width and length. Rigid frame
structures may be used for multipurpose rooms and physical education buildings
as well as standard classrooms. Shear wall classrooms have a maximum width of 48
feet (four 12-foot modules) and a maximum length of 60 feet. These classrooms
use the exterior and interior walls to produce the required structural strength
and can be built at lower costs than rigid frame structures. The Company's most
popular factory-built classroom is a rigid frame design, with two modules
connected side by side to complete a 24 by 40-foot classroom.
Custom built classrooms, libraries and gymnasiums contain design variations and
dimensions such as ceiling height, pitch, overall size and interior
configuration. These units typically are not assembled at the factory but
instead are shipped in pieces, including floors, walls and roofs, and assembled
on-site. Contracts for custom-built units may include the design, engineering
and layout for an entire school or an addition to a school, and involve site
preparation, grading, concrete and asphalt work and landscaping. Customized
classrooms are generally more expensive and take longer to complete than the
Company's standard classrooms.
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The interior and exterior of all of the Company's modular classrooms can be
customized by employing different materials, design features and floor plans.
Most classrooms are open, but the interior of the buildings can be divided into
individual rooms by permanent or relocatable partitions. The floor covering is
usually carpet but may be linoleum or wood depending upon the intended use of
the classroom. Interior wall material is usually vinyl covered firtex over
gypsum board, while other finishes such as porcelain enamel or painted hardboard
may be used in such places as restrooms and laboratories. Electrical wiring, air
conditioning, windows, doors, fire sprinklers and plumbing are installed during
the manufacturing process. The exterior of the units is typically plywood
siding, painted to the customer's specifications, but other common siding
material may also be applied.
CLASSROOM CUSTOMERS
The Company markets and sells its modular classrooms primarily to California
school districts. The Company also sells its classrooms to the State of
California and leasing companies, both of which lease the classrooms principally
to California school districts. Sales of classrooms accounted for 98.1%, 97.7%
and 52.9% of the Company's total net sales for the years ended December 31,
1997, 1998 and 1999. The Company's customers typically pay cash from general
operating funds or the proceeds of local bond issues, or lease classrooms
through banks, leasing companies and other private funding sources. See "
Business -- Legislation and Funding."
Sales of classrooms to individual California school districts accounted for
approximately 71.1%, 72.5% and 38.3%, respectively, of the Company's net sales
during the years ended December 31, 1997, 1998 and 1999, with sales of
classrooms to third party lessors to California school districts during these
periods accounting for approximately 19.1%, 13.9% and 9.1%, respectively, of the
Company's net sales. The mix of school districts to which the Company sells its
products varies somewhat from year to year. Sales of classrooms directly to the
State of California during 1999 represented approximately 5.6% of the Company's
net sales for the period, compared to approximately 11.3% of the Company's 1998
net sales and approximately 7.9% of the Company's 1997 net sales. Sales of
classrooms to private schools, day care providers and out-of-state customers
accounted for less than one percent of the Company's net sales during the years
ended December 31, 1997, 1998 and 1999. One of the lessors to which the Company
sells classrooms for lease to California school districts is affiliated with the
Company through ownership by one of the Company's officers. During the years
ended December 31, 1997, 1998 and 1999, sales of classrooms to this affiliated
leasing company comprised approximately 2.2%, 2.1% and 3.8%, respectively, of
the Company's net sales.
COMMERCIAL AND LIGHT INDUSTRIAL MODULAR BUILDINGS
The Company is also a designer, manufacturer and wholesaler of commercial and
light industrial modular buildings. The Company designs and builds modular
buildings to customer specifications for a wide array of uses, including
governmental, healthcare, educational, airport and correctional facilities;
office and retail space; daycare centers; libraries; churches; construction
trailers; golf clubhouses; police stations; convenience stores; fast food
restaurants; and sales offices. The modular buildings serve as temporary,
semi-permanent and permanent facilities and can function as free-standing
buildings or additions to existing structures. These modular buildings range in
size and complexity from a basic single-unit 720-square foot module to a
50,000-square foot building combining several structures and containing multiple
stories. The price at which the Company's modular buildings are sold to dealers
ranges from $10,000 to $25,000 per module.
SALES AND MARKETING
Classroom Sales Force
At December 31, 1999 the Company's classroom sales force was divided into three
marketing regions: Northern, Central and Southern California. At December 31,
1999 the Company employed four classroom salespersons, each of whom is
compensated on a commission basis. These salespersons maintain contact with the
individual school districts in their respective marketing regions on a quarterly
basis. They are also in contact with architects and building inspectors employed
by the school districts, as well as school officials who may be in a position to
influence purchasing decisions.
Most of the Company's contracts are awarded on an open bid basis. The marketing
process for many of the Company's contracts begins prior to the time the bid
process begins. After the Company selects bids or contracts that it desires to
pursue, the Company's marketing and engineering personnel interface directly
with various school boards, superintendents or architects during the process of
formulating bid or contract specifications. The Company prepares its bids or
proposals using various criteria, including current material prices, historical
overhead costs and a targeted profit margin. Substantially all of the Company's
contracts are turnkey, including engineering and design, manufacturing,
transportation, installation and necessary site work. Open bid contracts are
normally awarded to the lowest responsible bidder.
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Dealer Network
The Company's commercial and light industrial modular buildings are sold to
users through a network of sales and leasing companies to a wide range of end
users. The Company's dealers include national, multiple regional and local
dealers. The Company believes that larger dealers are becoming increasingly more
inclined to do business with fewer manufacturers and to place their orders with
manufacturers who have a history of consistent performance. Certain dealers have
developed stringent quality control programs for the modular buildings they
distribute. The Company believes its products currently meet or exceed existing
dealer quality control standards.
Certain states require the Company's dealers to be licensed to sell or lease the
Company's products Historically, these dealers have had sufficient capital
resources to support the purchase of modular structures and the maintenance of
the structures retained in their lease fleets. Typically, dealers arrange for,
and bear the cost of, transporting and installing structures purchased from the
Company.
Because of its strong dealer relationships, the Company does not maintain an
extensive internal sales force for the sale of commercial and light industrial
modular buildings. Instead, the Company maintains an internal marketing and
estimating staff whose primary responsibility is to maintain contact with the
dealer community and to respond to requests from dealers for price quotations
for production of modular buildings for end-users. The Company has few formal
marketing or other agreements with its dealers, and substantially all of the
Company's dealers also market and sell products of other manufacturers.
MANUFACTURING AND ON-SITE INSTALLATION
The Company uses an assembly-line approach in the manufacture of its
standardized classrooms. The process begins with the fabrication of the steel
floor joists. The floor joists are welded to steel frames to form the floor
sub-assembly, which is covered by plywood flooring. Metal roof trusses and
structural supports are fabricated separately and added as the unit progresses
down the assembly-line. Installation of walls, insulation, suspended grid
ceilings, electrical wiring, air conditioning, windows, doors, fire sprinklers,
plumbing and chalkboards follow, with painting and finishing crews completing
the process. Once construction of a standard classroom commences, the building
can be completed in as little as three days. The construction of custom units
on-site, from pre-manufactured components, is similar to factory-built units in
its progressively-staged assembly process but may involve more extensive
structural connections and finish work depending upon the size and type of
building, and typically takes 30 to 60 days to complete.
The Company is vertically-integrated in the manufacture of its standardized
modular classrooms, in that the Company fabricates substantially all of its own
metal components at its facility in Perris, California, including structural
floor and roof joists, exterior roof panels, gutters, down spouts, vents, ramps,
stairs and railings. The Company believes that the ability to fabricate its own
metal components helps it reduce the costs of its products and to control their
quality and delivery schedules. The Company maintains a quality control system
throughout the manufacturing process, under the supervision of its own quality
control personnel and inspectors engaged by its customers. In addition, the
Company tracks the status of all classrooms from sale through installation.
Completed standard classroom units, or components used in customized units, are
loaded onto specially designed flatbed trailers for towing by trucks to the
school building site. Upon arrival at the site, the units are structurally
connected, or components are assembled, and the classroom is installed on its
foundation. Connection with utilities is completed in the same manner as in
conventional on-site construction. Installation of the modular classrooms may be
on a separate foundation, or several units may be incorporated on a common
foundation under a unified roof, so that upon installation they appear to be an
integral part of an existing school facility or function as a larger building,
such as a gymnasium or cafeteria.
The Company oversees installation of its modular classrooms on-site, using its
own employees for job supervision as a general contractor and, whenever
possible, for utility hook-ups and other tasks. In many custom projects, the
Company performs or supervises subcontracted electrical, plumbing, grading,
paving and foundation work, landscaping and other site preparation work and
services. Sub-contractors are typically used for larger utility, grading,
concrete and landscaping jobs. The Company has a general contractor's license in
the State of California.
In addition to approvals by the Department of State Architects, licensed
inspectors representing various school districts are on-site at each
manufacturing facility of the Company to continuously inspect the construction
of classrooms for structural integrity. On-site inspections after installation
are also made by local fire departments for purposes of determining adequate
accessibility.
The Company's commercial and light industrial modular buildings are also
produced by a continuous flow assembly line process. Multiple structures are
assembled simultaneously at various stations along the assembly line Depending
upon the complexity of the
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design for a particular modular building, the average construction time from
receipt of the order to shipment ranges from 30 to 45 days. Once construction of
a typical modular building commences, the building can be completed in as few as
seven to nine days.
At December 31, 1999 the Company had seven manufacturing facilities. Two are
located in Southern California, in Perris, California, which is approximately 60
miles east of Los Angeles. The Company has another facility near Lathrop,
California. Lathrop is located approximately 75 miles east of San Francisco. The
fourth manufacturing facility is located in Phoenix, Arizona and the fifth
manufacturing facility is located in Glendale, Arizona, which are located in the
Phoenix Metropolitan area. The Company has another facility in Glen Rose, Texas.
Glen Rose is located approximately 75 miles east of Dallas. The seventh
manufacturing facility is located in St. Petersburg, Florida, which is located
in the Tampa area.
The standard contractual warranty for the Company's modular buildings is one
year, although it may be varied by contract specifications. Purchased equipment
installed by the Company, such as air conditioning units, carry the
manufacturers' standard warranty. Warranty costs have not been material in the
past.
The Company believes that there are multiple sources of supplies available for
all raw materials and equipment used in manufacturing its modular buildings,
most of which are standard construction items such as steel, plywood and
wallboard.
BACKLOG
The Company manufactures classrooms and other buildings to fill existing orders
only, and not for inventory. As of December 31, 1999, the backlog of sales
orders was approximately $60.0 million, up from approximately $25.0 million at
December 31, 1998 and down from $71.0 million at December 31, 1997. Only orders,
which are scheduled for completion during the following 12-month period, are
included in the Company's backlog. The rate of booking new contracts can vary
from month to month, and customer changes in delivery schedules can occur. For
these reasons, among others, the Company's backlog as of any particular date may
not be representative of actual sales for any succeeding period.
COMPETITION
The Company believes that, based upon 1998 net sales, it is the largest modular
relocatable classroom manufacturer in California. However, the modular
relocatable classroom industry is highly competitive, with the market divided
among a number of privately-owned companies whose share of the market is smaller
than that of the Company. The Company believes that the nature of the bidding
process, the level of performance bonding required, and the industry's regulated
environment serve as barriers to market entry, and that the expertise of its
management gives it an advantage over competitors. Nevertheless, the Company
believes that additional competitors may enter the market in the future, some of
whom may have significantly greater capital and other resources than are
available to the Company, and that competition may therefore increase.
The Company also believes that its expertise in site preparation and on-site
installation gives it a competitive advantage over many manufacturers of
higher-priced, customized modular units, while its vertically integrated,
assembly-line approach to manufacturing enables the Company to be one of the low
cost producers of standardized, modular relocatable classrooms in California.
Unlike many of its competitors, the Company manufactures most of its own metal
components which allows the Company to maintain quality control over these
components and to produce them at a lower average cost than that at which they
could be obtained from outside sources. The Company also believes that the
quality and appearance of its buildings, and its reputation for reliability in
completion of its contracts, enable it to maintain a favorable position among
its competition.
The Company categorizes its current competition based upon the geographic market
served (Northern California versus Southern California), as well as upon the
relative degree of customization of products sold. Beyond a radius of
approximately 300 miles, the Company believes that transportation costs
typically will either significantly increase the prices at which it bids for
given projects, or will substantially erode the Company's gross profit margins.
The primary competitors of the Company for standardized classrooms are believed
to be Aurora Modular Industries in Southern California and American Modular
Systems in Northern California. Profiles Structures, Inc. in Southern California
and Design Mobile Systems in Northern California are the Company's primary
competitors in the market for higher-priced, customized classrooms. Each of
these four competitors is a privately-owned company.
With respect to the commercial and light industrial modular buildings, the
nonresidential modular building industry is highly competitive. For the
Company's highly customized modular buildings, the main competitive factor is
the ability to meet end user requirements in a timely manner, while price is the
main competitive factor for less customized structures. Because the cost of
transporting completed modular buildings is substantial, most manufacturers
limit their distribution to dealers located within a 400-
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mile radius of their manufacturing facility. As a result, the nonresidential
modular building industry is highly fragmented and is composed primarily of
small, regionally-based private companies maintaining a single manufacturing
facility.
The primary competitors of the Company for commercial and light industrial
modular buildings are believed to be Modular Structures International, Walden
Structures, Miller Building Systems and Indicom Building Systems.
PERFORMANCE BONDS
A substantial portion of the Company's sales require that the Company provide
bonds to ensure that the contracts will be performed and completed in accordance
with contract terms and conditions, and to assure that subcontractors and
materialmen will be paid. In determining whether to issue a performance bond on
behalf of the Company, bonding companies consider a variety of factors
concerning the specific project to be bonded, as well as the Company's levels of
working capital, shareholders' equity and outstanding indebtedness. From time to
time the Company has had, and in the future may again encounter, difficulty in
obtaining bonding for a given project. Although it has had no difficulty in
obtaining the necessary bonding in the last twelve months, the Company believes
that its difficulty in obtaining bonding for certain large projects from time to
time in the past has been attributable to the Company's levels of working
capital, shareholders' equity and indebtedness, and not to concerns about the
Company's ability to perform the work required under the contract. To assist the
Company in obtaining performance bonds in certain instances, the Company's
executive officers have been required to indemnify the bonding companies against
all losses they might suffer as a result of providing performance bonds for the
Company.
REGULATION OF CLASSROOM CONSTRUCTION
In 1933, the California Legislature adopted the Field Act, which generally
provides that school facilities must be constructed in accordance with more
rigorous structural and seismic safety specifications than are applicable to
general commercial buildings. Under the Field Act, the Department of General
Services, through the Department of State Architects, has prescribed extensive
regulations regarding the design and construction of school facilities, and
reviews all plans for the construction of material modifications to any school
building. Construction authorization is not given unless the school district's
architect certifies that a proposed project satisfies construction cost and
allowable area standards. In addition, the Field Act provides for the submittal
of complete plans, cost estimates, and filing fees by the school district to the
Department of General Services, for the adoption of regulations setting minimum
qualifications for the preparation of plans and specifications, and the
supervision of school construction by a licensed architect or structural
engineer.
Additionally, California legislation provides that certain factory-built school
buildings may be pre-approved by the State for use in school construction. Once
plans and specifications for a given classroom have been pre-approved by the
Department of General Services, school districts can thereafter include in their
application to obtain State funds for new facilities a notification that they
intend to use pre-approved, standardized factory-built classrooms. This
procedure reduces the time required in the State's approval process thereby
providing additional incentive to use factory-built relocatable classrooms. The
Department of General Services provides for the continuous on-site inspection
during actual manufacturing of the classrooms, with the school districts
obligated to reimburse the Department for the costs of such inspection.
LEGISLATION AND FUNDING
The demand for modular relocatable classrooms in California is affected by
various statutes. These statutes, among other things, prescribe the methods by
which the Company's customers, primarily individual school districts, obtain
funding for the construction of new school facilities, and the manner in which
available funding is to be spent by the school districts.
In 1978, Proposition 13 was approved, which rolled back property taxes and
limited the ability of local school districts to rely upon revenue from such
taxes to finance the construction of school facilities. As a result, financing
for new school construction and rehabilitation of existing schools by California
school districts is currently provided, at the state level, by funds derived
from general revenue sources or statewide bond issues, and, at the local level,
by local bond issues and fees imposed on the developers of residential,
commercial and industrial real property ("Developer Fees"). Historically, the
primary source of financing for the purchase or lease of relocatable classrooms
has been state funding.
STATE FUNDING. In November 1996, California implemented the Class Size Reduction
Program in response to overcrowding in classrooms in the state and its assumed
negative impact on learning. An additional impetus for the program was a study
conducted by Tennessee State University which indicated that students in small
classrooms outperformed their peers from larger classes at least through the
eighth grade on standardized tests in math and reading. The goal of the
California Class Size Reduction Program is to reduce public elementary school
class sizes in kindergarten through the third grade. Under this program, schools
that reduce class size to 20 students in those grades receive additional funds.
For the 1996-1997 school year, a school district was entitled to receive $25,000
for each new
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classroom added which reduced the average class size for a specified grade level
to 20 students or less. Among other ways new classrooms can quickly and
inexpensively be added, school districts may reconfigure existing space to
convert it to classrooms from other uses, or purchase or lease a modular
relocatable classroom.
Until the adoption of the Class Size Reduction Program in 1996, the most
important source of funding at the State level for new school facilities was
through the issuance and sale of statewide general obligation bonds which are
repaid out of the State's General Funds. Proposals to issue such bonds are
placed on statewide ballots from time-to-time in connection with general or
special elections, and require approval by a majority of the votes cast in
connection with such proposals. As in the case of the Class Size Reduction
Program, the State also may annually allocate funds from the State's budget for
the support of school districts and community college districts.
AUTHORITY FOR BOND FINANCING. Under the School Building Lease - Purchase Law of
1976, the State Allocation Board is empowered to purchase or lease school
facilities using funds from the periodic issuance of general obligation bonds of
the State of California. These purchased or leased school facilities may be made
available by the State Allocation Board to school districts. Certain matching
funds, usually derived from Developer Fees, are required to be supplied by the
school districts seeking state funded facilities. If the school districts
acquire relocatable structures using Developer Fees, the amount of the required
matching funds is reduced by the cost of such facilities. This reduction in
matching funds is intended to provide an incentive for school districts to lease
relocatable classrooms. Prior to November 1998, as a condition of funding any
project under this program, at least 30% of new classroom space to be added must
be comprised of relocatable structures, unless relocatable structures are not
available or special conditions of terrain, climate or unavailability of space
make the use of relocatable structures impractical. In addition, State funds
under this program are not available to school districts which are determined to
have an adequate amount of square footage available for their student
population.
Senate Bill 50, which was passed in November 1998 by the California Legislature,
revised the School Building Lease - Purchase Law of 1976 by eliminating the
requirement that at least 30% of all new classroom space being added using
California state funds must be relocatable classrooms. In general, it replaced
this provision with a requirement that, in order for school districts to
increase the amount of funds to be received from developers in excess of the
current statutory level, the school districts must show that 20% of all
classroom space in the district, not just new space added, consists of
relocatable classrooms. The bill also placed a $9.2 billion bond issue on the
November 1998 ballot, which was approved by the voters. The bill allocates from
the bond issue $2.9 billion for growth and new construction, and $2.2 billion
for modernization and reconstruction through the year 2001. In addition, it
allocates $700 million for class-size reductions to fully implement the program
from kindergarten through third grade. The costs to implement the foregoing will
include land acquisition costs, hiring of new teachers, remodeling of existing
structures and construction of new permanent and relocatable structures. The
bill does not designate the specific usage of funds, and the actual amount spent
on relocatable classrooms will vary among school districts. Implementation of
Senate Bill 50 began the third week of January 1999. The Company does not expect
any significant change in its future operating results due to implementation of
Senate Bill 50.
In response to the adoption of Proposition 13, the State of California adopted
the California Emergency Classroom Law of 1979, pursuant to which the State
Allocation Board may spend up to $35 million per year from available funds to
purchase relocatable classrooms to be leased to school districts. Relocatable
classrooms are not available to school districts under this program if the
school district has available local bond proceeds that could be used to purchase
classroom facilities, unless the district has approved projects pending under
the School Building Lease - Purchase Law of 1976. The State has, in the past,
funded this program primarily from the proceeds of statewide bond issues
approved by voters.
BUDGET ALLOCATIONS. Proposition 98, which was approved in 1988, requires the
State to allocate annually from the State's budget, for the support of school
districts and community college districts, a minimum amount equal to the same
percentage of funds as was appropriated for the support of those institutions in
fiscal year 1986-87. While this requirement may be suspended for a given year by
emergency legislation, it has the effect of limiting the ability of the
California legislature to reduce the level of school funding from that in
existence in 1986-87. The State raises the necessary funds through proceeds from
the sale of statewide bond issues, income tax revenues and other revenues. A
recent reduction in California's corporate tax rates, and a proposed reduction
in personal income tax rates, may affect future levels of the State's income tax
revenues.
LOCAL FUNDING. Local school districts in California have the ability to issue
local general obligation bonds for the acquisition and improvement of real
property for school construction. These bond issues require the approval of
two-thirds of the voters in the district and are repaid using the proceeds of
increases in local property taxes. A local school district may also levy
Developer Fees on new development projects in the district, subject to a maximum
rate set by state law. The Developer Fees can only be levied if the project can
be shown to contribute to the need for additional school facilities and the fee
levied is reasonably related to such need. In addition, California law provides
for the issuance of bonds by Community Facilities Districts which can be formed
by a variety of local government agencies, including school districts. These
districts, known as "Mello-Roos" districts, can have flexible boundaries and
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the tax imposed to repay the bonds can be based on property use, acreage,
population density or other factors.
OTHER LEGISLATION
California legislation adopted in 1989 provides that school districts which
currently lease any building which does not meet the prescribed structural
standards must have replaced nonconforming buildings with conforming ones by
September 1, 1990. However, any district has the right to request a one-time
waiver for a maximum of three years upon presentation of satisfactory evidence
to the State Allocation Board that the district is proceeding in a timely
fashion with a program that will eliminate the need for the nonconforming
facilities within that time period. The State has authorized districts to renew
these waivers through 2000 and may grant further waivers. The Company
understands that a number of school districts have requested and been granted
such waivers. Based upon information received by the State Allocation Board from
school districts and provided to the Company, it is believed that there are
approximately 4,500 trailers currently being used as classrooms by school
districts throughout California that eventually must be replaced with conforming
facilities by these school districts.
California has taken steps to encourage local school districts to adopt
year-round school programs to help increase the use of existing school
facilities and reduce the need for additional school facilities. School
districts requesting state funding under the School Building Lease - Purchase
Law of 1976 or the Emergency Classroom Law of 1979 discussed above must submit a
study examining the feasibility of implementing in the district a year-round
educational program that is designed to increase pupil capacity in the district
or in overcrowded high school attendance areas. The feasibility study
requirement is waived, however, if the district demonstrates that emergency or
urgent conditions exist in the district that necessitate the immediate need for
relocatable buildings. The demand for new school facilities, including
relocatable classrooms, would be adversely affected in the event that a
significant number of California school districts implemented year-round school
programs. In addition, a significant increase in the level of voluntary or
mandatory busing of students from overcrowded schools to schools with excess
capacity could adversely affect demand for new school facilities.
ENVIRONMENTAL MATTERS
The Company is subject to a variety of federal, state and local governmental
regulations related to the storage, use and disposal of any hazardous materials
used by the Company in connection with the manufacture of its products. Both the
governmental regulations and the costs associated with complying with such
regulations are subject to change in the future.
EMPLOYEES
At December 31, 1999, the Company had 1,243 employees, including 1,071 in
manufacturing, 4 in sales, 28 in operations and 140 in general management and
administration. The Company's employees are not represented by a labor union,
and it has experienced no work stoppages. The Company believes that its employee
relations are good.
ITEM 2. PROPERTIES
The Company's principal executive and administrative facilities are located in
approximately 17,000 square feet of modular buildings at its primary
manufacturing facility located in Perris, California. This manufacturing
facility occupies twenty-five acres, with approximately 226,000 square feet of
covered production space under roof, pursuant to a lease expiring in 2014. A
second facility in Perris occupies approximately thirty acres, with
approximately 120,000 square feet of covered production space under roof,
pursuant to a lease expiring in 2014. This second facility also includes
approximately 80,000 square feet under roof used as a metal working facility.
The Company's third plant consists of a 400,000 square foot manufacturing
facility, with approximately 160,000 square feet of covered production space
under roof, on a 30-acre site in Lathrop, California that is leased through
2019.
The fourth plant consists of approximately 50,000 square feet of covered
production space under roof, on a 10-acre site in Phoenix, Arizona, pursuant to
a lease expiring in 2002. The fifth plant consists of approximately 30,000
square feet of covered production space under roof on a 4-acre site in Glendale,
Arizona, pursuant to a lease expiring in 2002. The sixth plant consists of
approximately 80,000 square feet of manufacturing area on a 20-acre site in Glen
Rose, Texas, outside the Dallas-Fort Worth metropolitan area. The Texas lease
expires in 2008. The seventh plant consists of approximately 119,000 square feet
of manufacturing area on a 10-acre site in St. Petersburg, Florida that is
leased through 2003.
The Company believes that its facilities are well maintained and in good
operating condition, and meet the requirements for its immediately foreseeable
business needs. Two of the Company's facilities at December 31, 1999 are leased
from an affiliate.
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The Phoenix facility leased by the Company is located within a 25-square-mile
area listed by the Arizona Department of Environmental Quality on the state
priority list for contaminated sites. According to a recent environmental site
assessment report pertaining to the Phoenix facility and commissioned by the
Company, neither the Company nor the prior operators or owners of the property
have been identified as potentially responsible parties at this site.
Additionally, the environment site assessment report identifies no historical
activity on the property leased by the Company that was likely to have been a
source of the contaminants at the site.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in various lawsuits related to its
ongoing business operations, primarily collection actions or vendor disputes. In
the opinion of management, no pending lawsuit will result in any material
adverse effect upon the Company or its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was traded on the NASDAQ National Market System under
the symbol "MODT" at December 31, 1999. The range of high and low sales prices
for the common stock as reported by the National Association of Securities
Dealers, Inc. for the periods indicated below, are as follows:
Quarter Ended High Low
------------- ---- -----
3/31/99 18.000 8.750
6/30/99 11.500 7.375
9/30/99 14.000 6.750
12/31/99 7.656 4.750
On December 31, 1999, the closing sales price on The NASDAQ National Market for
a share of the Company's Common Stock was $6.00. The approximate number of
holders of record of the Company's Common Stock as of December 31, 1999, was 89.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock since 1990. The
Board of Directors currently intends to follow a policy of retaining all
earnings, if any, to finance the continued growth and development of the
Company's business and does not anticipate paying cash dividends on its Common
Stock in the foreseeable future. Any future determination as to the payment of
cash dividends will be dependent upon the Company's financial condition and
results of operations and other factors deemed relevant by the Board of
Directors.
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ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected income statement and balance sheet data set forth below for the
three years ended December 31, 1997, 1998 and 1999 have been derived from the
audited financial statements of the Company included elsewhere herein. The
selected income statement and balance sheet data set forth below for the years
ended December 31, 1995 and 1996 have been derived from audited financial
statements of the Company that are not included herein. The selected income
statement and balance sheet data set forth below should be read in conjunction
with those financial statements (including the notes thereto) and with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" also included elsewhere herein.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- --------- --------- ---------
INCOME STATEMENT DATA:
Net sales .................................. $ 19,386 $ 49,886 $ 134,050 $ 127,620 $ 167,228
Cost of goods sold ......................... 16,401 42,629 107,367 97,765 138,668
-------- -------- --------- --------- ---------
Gross profit ............................... 2,985 7,257 26,683 29,855 28,560
Selling, general and administrative expenses 1,613 2,345 5,156 4,739 7,500
Goodwill amortization ...................... -- -- -- -- 2,547
Income from operations ..................... 1,372 4,912 21,527 25,116 18,513
Interest income (expense), net ............. (387) (422) (909) 1,097 (3,083)
Other income (expense) ..................... (1) (13) 92 25 85
-------- -------- --------- --------- ---------
Income before income taxes ................. 984 4,477 20,711 26,238 15,515
Provision for income taxes ................. 19 208 (7,703) (9,708) (7,128)
-------- -------- --------- --------- ---------
Net income ................................. 965 4,269 13,008 16,530 8,387
-------- -------- --------- --------- ---------
Net income available for common stock(1) ... $ 799 $ 4,221 $ 13,008 $ 16,530 $ 8,251
-------- -------- --------- --------- ---------
Basic earnings per common share(2) ......... $ 0.25 $ 0.77 $ 1.47 $ 1.68 $ 0.64
Weighted average shares outstanding (in
thousands)(2) ............................ 3,170 5,461 8,854 9,857 12,986
Diluted earnings per common share(2) ....... $ 0.14 $ 0.47 $ 1.31 $ 1.50 $ 0.59
Weighted average shares outstanding (in
thousands)(2) ............................ 6,712 9,041 9,898 10,988 14,204
AS OF DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital ............................ $ 4,383 $ 14,069 $ 36,417 $ 52,129 $ 11,231
Total assets ............................... 15,154 34,029 68,220 82,873 168,723
Total liabilities .......................... 6,411 18,716 20,177 17,777 58,050
Long-term debt, excluding current portion .. 3,590 7,844 -- -- 32,000
Shareholders' equity ....................... 8,743 8,743 48,043 65,097 110,672
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- --------- --------- ---------
SELECTED OPERATING DATA:
Gross margin ............................... 15.4% 14.5% 19.9% 23.4% 17.1%
Operating margin ........................... 7.1% 9.8% 16.1% 19.7% 11.1%
Standard classrooms sold(3) ................ 605 1,610 4,514 3,435 2,445
Backlog at period end(4) ................... $ 4,100 $ 58,000 $ 71,000 $ 25,000 $ 60,000
- ----------
(1) After deduction of preferred stock dividends paid or accrued of $166,000,
$48,000 and $136,000 for the years ended December 31, 1995, 1996 and 1999,
respectively.
(2) Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share". All prior periods have
been restated accordingly.
(3) Determined by dividing the total square footage of classroom floors sold
during the year by 960 square feet, the floor area of a standard classroom.
See "Business -- Modular Relocatable Classrooms."
(4) The Company manufactures classrooms and other buildings to fill existing
orders only, and not for inventory. Backlog consists of sales orders
scheduled for completion during the next 12 months.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
On February 16, 1999, the Company completed the SPI Merger and on March 22,
1999, the Company completed the Coastal Acquisition. The SPI Merger and the
Coastal Acquisition were both accounted for as purchases, and accordingly, the
results of operations of SPI and Coastal are included in the Company's
consolidated statements of income from the date of acquisition. Due to the
magnitude of these acquisitions and the integration of the acquired operations
with the Company, results of operations for prior periods are not necessarily
comparable to or indicative of results of operation for current or future
periods.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages of
net sales represented by certain items in the Company's statements of
operations.
PERCENTAGE OF NET SALES
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------ ------ ------
Net sales ......................... 100.0% 100.0% 100.0%
Cost of sales ..................... 80.1 76.6 82.9
------ ------ ------
Gross profit ...................... 19.9 23.4 17.1
Selling, general and administrative
expenses ........................ 3.8 3.7 4.5
Goodwill amortization ............. -- -- 1.5
------ ------ ------
Income from operations ............ 16.1 19.7 11.1
Interest income (expense), net .... (0.7) 0.9 (1.8)
Other income ...................... -- -- --
------ ------ ------
Income before income taxes ........ 15.4 20.6 9.3
Provision for income taxes ........ 5.7 7.6 4.3
------ ------ ------
Net income ........................ 9.7% 13.0% 5.0%
====== ====== ======
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net sales for the year ended December 31, 1999 increased to $167.2 million, an
increase of $39.6 million, or approximately 31.0%, from $127.6 million in 1998.
The increase in 1999 is attributable to comparing merged results for 1999 to
historical Modtech, Inc. 1998 sales. The increase in net sales as a result of
the acquisitions in 1999 was offset by a delay in allocating the funds from the
$9.2 billion school construction bond issue which was passed in November 1998.
For the year ended December 31, 1999, gross profit was $28.6 million, a decrease
of $1.3 million, or approximately 4.3%, over 1998 gross profit of $29.9 million.
Gross profit percentage of net sales decreased to 17.1% in 1999 from 23.4% in
1998. The decrease in gross profit as a percentage of net sales was primarily
attributable to the shift in product mix for 1999 as a result of the SPI Merger
and the Coastal Acquisition.
In 1999, selling, general and administrative expenses increased to $7.5 million
from $4.7 million, due primarily to the integration of SPI Manufacturing, Inc.
and Coastal Modular Buildings, Inc. with the Company. As a percentage of net
sales, selling, general and administrative expenses increased to 4.5% in 1999
from 3.7% in 1998.
Goodwill amortization for the year ended December 31, 1999 was $2.5 million. As
a percentage of net sales, goodwill amortization for the year was 1.5%. Goodwill
was recorded for both the SPI Merger and the Coastal Acquisition. There was no
goodwill amortization in 1998.
Due to the combination of a reduced cash balance and debt incurred as a result
of the SPI Merger and Coastal Acquisition, the year ended December 31, 1999
reflects net interest expense of $3.1 million compared to net interest income of
$1.1 million for the year ended December 31, 1998.
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The provision for income taxes was $7.1 million for the year ended December 31,
1999, compared to $9.7 million for 1998. The Company's effective tax rate
increased to 46.0% for the year ended December 31, 1999 from 37.0% for the year
ended December 31, 1998. The effective tax rate in 1999 was negatively impacted
by the non-deductibility of goodwill amortization as a result of the SPI Merger
and Coastal Acquisition. The effective tax rate in 1998 was positively impacted
by a reduction in the federal valuation allowance.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales for the year ended December 31, 1998 decreased to $127.6 million, a
decrease of $6.4 million, or approximately 4.8%, from $134.0 million in 1997.
The decrease in 1998 was due in part to the fact that the California Legislature
was more than two months late in passing the state budget. Additionally, there
was a delay in allocating the funds from the $9.2 billion school construction
bond issue which was passed in November 1998.
For the year ended December 31, 1998, gross profit was $29.9 million, an
increase of $3.2 million, or approximately 11.9%, over 1997 gross profit of
$26.7 million. Gross profit percentage of net sales increased to 23.4% in 1998
from 19.9% in 1997. The increase in gross profit as a percentage of net sales
was primarily attributable to the realization of manufacturing efficiencies.
In 1998, selling, general and administrative expenses decreased to $4.7 million
from $5.2 million, due to decreases in the number of employees and a decrease in
selling costs. As a percentage of net sales, selling, general and administrative
expenses decreased to 3.7% in 1998 from 3.8% in 1997.
Due to higher cash balance and reduced line of credit borrowing, the year ended
December 31, 1998 reflects net interest income of $1,097,000, compared to net
interest expense of $909,000 for the same period in 1997, a favorable increase
of $2,006,000 or 220.7%.
The provision for income taxes was $9.7 million for the year ended December 31,
1998, compared to $7.7 million for 1997. The Company's effective tax rate
decreased to 37.0% for the year ended December 31, 1998 from 37.2% for the year
ended December 31, 1997. The effective tax rate in 1998 was positively impacted
by a reduction in the federal valuation allowance. The effective tax rate in
1997 was positively impacted by the utilization for federal income tax purposes
of net operating loss carryforwards generated in prior years.
LIQUIDITY AND CAPITAL RESOURCES
Since the 1994 Financing described below, the Company has funded its operations
and capital expenditures with cash generated internally by operations,
supplemented by borrowings under various credit facilities. During the years
ended December 31, 1997, 1998 and 1999, the Company's operations provided cash
in the amounts of approximately $2.0 million, $32.8 million and $14.4 million,
respectively. At December 31, 1999, the Company had approximately $1.2 million
in cash.
The Company obtained a new $100 million credit facility with a bank in February
1999. The credit facility provides for a $30 million revolving loan. The credit
facility is secured by all the Company's assets, as well as the Company's stock
ownership in its subsidiaries. The credit facility expires in February 2004. No
amounts were outstanding under the revolving loan commitment at December 31,
1999.
The Company had working capital of $36.4 million, $52.1 million and $11.2
million at December 31, 1997, 1998 and 1999, respectively. In 1999, current
assets decreased by $32.6 million, with a decrease of $38.9 million in cash, a
decrease of $1.4 million in due from affiliates and a decrease of $2.4 million
in income tax receivable, offset by an increase of $6.0 million in contracts
receivable, an increase of $2.5 million in costs and estimated earnings in
excess of billings and an increase of $2.2 million in inventories. Current
liabilities increased by $8.3 million, with accounts payable and accrued
liabilities and current maturities of long-term debt increasing by $3.3 million
and $7.0 million, respectively, offset by a $2.0 million decrease in billings in
excess of costs and estimated earning on contracts. In 1998, current assets
increased by $13.2 million, with an increase of $28.5 million in cash, an
increase of $1.4 million in deferred tax assets and an increase of $1.3 million
in due from affiliates, offset by a decrease of $8.6 million in contracts
receivable and a decrease of $12.2 million in costs and estimated earnings in
excess of billings. Current liabilities decreased by $2.5 million, with various
accrued liabilities and current maturities of long-term debt decreasing by $1.9
million and $1.4 million, respectively, offset by a $0.7 million increase in
accounts payable.
Capital expenditures amounted to $4.1 million, $2.1 million and $2.3 million
during the years ended December 31, 1997, 1998 and 1999, respectively. In 1997
and 1998, the majority of expenditures were related to the construction of an
additional production line at one
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of its Perris, California facilities. In 1999, the majority of expenditures were
as a result of construction of a production line at one of its Perris,
California facilities and the addition of metal fabrication machinery at its
Glendale, Arizona and St. Petersburg, Florida facilities.
The Company had a $4.0 million Industrial Development Bond issued by the
Industrial Development Authority of the County of San Joaquin, California, the
net proceeds of which were used to partially finance the $6.0 million cost of
construction of the Company's Lathrop, California facility. The loan was paid in
full during 1998.
In May 1994, the Company raised net proceeds of approximately $2.7 million
through the sale of 2,850,000 shares of Series A Preferred Stock to several
private investors who are Selling Shareholders in this Offering (the "1994
Financing"). In April 1996, all of the Series A Preferred Stock was converted
into 2,850,000 shares of Common Stock. In December 1996, warrants issued to the
investors in connection with the 1994 Financing were exercised, resulting in
cash proceeds to the Company of approximately $1.6 million and the issuance of
2,204,000 additional shares of Common Stock.
Management believes that the Company's existing product lines and manufacturing
capacity will enable the Company to generate sufficient cash through operations,
supplemented the Company's bank line of credit, to finance the Company's
business over the next twelve months. However, additional cash resources may be
required if the Company's rate of growth exceeds currently anticipated levels.
Moreover, it may prove necessary for the Company to construct or acquire
additional manufacturing facilities in order for the Company to compete
effectively in new market areas or states which are beyond a 300 mile radius
from one of its production facilities. The construction or acquisition of new
facilities could require significant additional capital. For these reasons,
among others, the Company may need additional debt or equity financing in the
future. There can be, however, no assurance that the Company will be successful
in obtaining such additional financing, or that any such financing will be
available on terms acceptable to it.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting
and reporting standards for derivative instruments embedded in other contracts,
and hedging activities. SFAS 133, as amended, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Application of SFAS 133
is not expected to have a material impact on the Company's financial position,
results of operations or liquidity.
SEASONALITY
Historically, the Company's quarterly revenues have been highest in the second
and third quarters of each calendar year because a large number of orders for
modular classrooms placed by school districts require that classrooms be
constructed, delivered and installed in time for the upcoming new school year
which generally commences in September. The Company has typically been able to
add employees as needed to respond to the corresponding increases in
manufacturing output required by such seasonality to meet currently foreseeable
increases in this seasonal demand. The Company's first and fourth quarter
revenues are typically lower due to greater number of holidays and days of
inclement weather during such periods. In addition, the Company's operating
margins may vary on a quarterly basis depending upon the mix of revenues between
standardized classrooms and higher margin customized classrooms and the timing
of the completion of large, higher margin customized contracts.
INFLATION
During the past three years, the Company has not been adversely affected by
inflation, because it has been generally able to pass along to its customers
increases in the costs of labor and materials. However, there can be no
assurance that the Company's business will not be affected by inflation in the
future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, along with the notes thereto and the
report of Independent Certified Public Accountants thereon, required to be filed
in response to this Item 8 are attached hereto as exhibits under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
16
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item will be set forth in the Proxy Statement and
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item will be set forth in the Proxy Statement and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item will be set forth in the Proxy Statement and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item will be set forth in the Proxy Statement and
is incorporated herein by reference.
17
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits and Financial Statement Schedules
1 & 2. Index to Financial Statements
The following financial statements and financial statement schedules of the
Company, along with the notes thereto and the Independent Auditors' Reports, are
filed herewith, as required by Part II, Item 8 hereof.
Financial Statements
Independent Auditors' Reports
Consolidated Balance Sheets - December 31, 1998 and 1999
Consolidated Statements of Income - For the Years Ended December 31,
1997, 1998 and 1999
Consolidated Statements of Shareholders' Equity - For the Years Ended
December 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows - For the Years Ended December
31, 1997, 1998 and 1999
Summary of Significant Accounting Policies
Notes to Consolidated Financial Statements
Schedule Included - For the Years Ended December 31, 1997, 1998 and
1999
Schedule II - Valuation and Qualifying Accounts
All other Financial Statement Schedules have been omitted because the required
information is shown in the financial statements or notes thereto, the amounts
involved are not significant, or the schedules are not applicable.
3. Exhibits
Exhibit
Number Name of Exhibit
------ ---------------
3.1(1) Certificate of Incorporation of Modtech Holdings, Inc.
3.2(1) Bylaws of Modtech Holdings, Inc.
10.1(2) Modtech, Inc.'s 1996 Stock Option Plan.
10.2(3) Transaction Advisory Agreement.
10.3(4) Employment Agreement between the Company and Evan M.
Gruber.
10.4(4) Employment Agreement between the Company and Patrick
Van Den Bossche.
10.5(4) Employment Agreement between the Company and Michael
G. Rhodes.
10.6(5) Amendment to Loan and Security Agreement (paid off
December 4, 1998).
10.7(6) Industrial Development Bond agreements (paid off June
1, 1998).
18
19
10.8(6) Lease between the Company and Pacific Continental
Modular Enterprises, relating to the Barrett Street
property in Perris, California.
10.9(6) Lease between the Company and Gerald Bashaw, relating
to the Morgan Street property in Perris, California.
10.10(6) Lease between the Company and BMG, relating to the
property in Lathrop, California.
10.11(6) Form of Indemnity Agreement between the Company and
its executive officers and directors.
10.12(3) Financial Advisory Services Agreement.
10.13(7) Credit Agreement
23.1 Independent Auditors' Consent
27 Financial Data Schedule
- ----------
(1) Incorporated by reference to Modtech Holdings, Inc.'s Registration
Statement on Form S-4 filed with the Commission on October 27, 1998
(Commission File No. 333-69033).
(2) Incorporated by reference to Modtech, Inc.'s Registration Statement on
form S-8 filed with the Commission on December 11, 1996 (Commission
File No. 333-17623).
(3) Incorporated by reference to Amendment No. 2 to Modtech Holdings,
Inc.'s Registration Statement on Form S-4, filed with the Commission on
January 11, 1999 (Commission File No. 333-69033).
(4) Incorporated by reference to Amendment No. 1 to Modtech Holdings,
Inc.'s Registration Statement on Form S-4, filed with the Commission on
December 15, 1998 (Commission File No. 333-69033).
(5) Incorporated by reference to Modtech, Inc.'s Registration Statement on
Form S-1 filed with the Commission on October 9, 1997 (Commission File
No. 333-37473).
(6) Incorporated by reference to Modtech, Inc.'s Registration Statement on
Form S-1 filed with the Commission on June 6, 1990 (Commission File No.
033-35239).
(7) Incorporated by reference to Modtech Holdings, Inc.'s Form 10-K filed
with the Commission on April 15, 1999 (Commission File No. 000-25161).
19
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2000 MODTECH HOLDINGS, INC.,
a Delaware corporation
By: /s/ SHARI L. WALGREN
--------------------------------------
Shari L. Walgren
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by he following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Name Capacities Date
- ---- ---------- ----
/s/ EVAN M. GRUBER Director, Chairman of the March 29, 2000
- ------------------ Board, Chief Executive Officer
Evan M. Gruber
/s/ ROBERT W. CAMPBELL Director March 29, 2000
- ----------------------
Robert W. Campbell
/s/ DANIEL J. DONAHOE Director March 29, 2000
- ---------------------
Daniel J. Donahoe
/s/ CHARLES R. GWIRTSMAN Director March 29, 2000
- ------------------------
Charles R. Gwirtsman
/s/ CHARLES A. HAMILTON Director March 29, 2000
- -----------------------
Charles A. Hamilton
/s/ CHARLES C. McGETTIGAN Director March 29, 2000
- --------------------------
Charles C. McGettigan
/s/ PATRICK VAN DEN BOSSCHE Director, President March 29, 2000
- ---------------------------
Patrick Van Den Bossche
/s/ MYRON A. WICK III Director March 29, 2000
- ---------------------
Myron A. Wick III
20
21
MODTECH HOLDINGS, INC.
Annual Report - Form 10-K
Consolidated Financial Statements and Schedule
December 31, 1997, 1998 and 1999
(With Independent Auditors' Report Thereon)
22
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Modtech Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Modtech
Holdings, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1999. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule for the three-year period ended
December 31, 1999. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Modtech Holdings,
Inc. and subsidiaries as of December 31, 1998 and 1999 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Orange County, California
March 10, 2000
23
MODTECH HOLDINGS, INC.
Consolidated Balance Sheets
December 31, 1998 and 1999
ASSETS (NOTE 8) 1998 1999
------------ ------------
Current assets:
Cash and cash equivalents $ 40,142,355 $ 1,197,583
Contracts receivable, less allowance for contract adjustments of
$429,107 in 1998 and $728,119 in 1999 (note 3) 12,923,491 18,891,918
Costs and estimated earnings in excess of billings on contracts
(notes 4 and 10) 3,823,364 6,277,776
Inventories (note 5) 4,441,537 6,639,055
Due from affiliates (note 10) 2,343,968 962,908
Note receivable from affiliates (note 10) 45,212 45,212
Prepaid assets 261,525 443,954
Income tax receivable 2,367,924 --
Deferred tax assets (note 9) 3,440,199 2,636,515
Other current assets 18,502 120,648
------------ ------------
Total current assets 69,808,077 37,215,569
------------ ------------
Property and equipment, net (note 6) 12,313,675 13,872,324
Goodwill, net (note 7) -- 114,072,403
Covenants not to compete, net 42,500 1,974,067
Debt issuance costs, net -- 1,429,938
Other assets 709,017 158,367
------------ ------------
$ 82,873,269 $168,722,668
============ ============
See accompanying notes to consolidated financial statements.
24
MODTECH HOLDINGS, INC.
Consolidated Balance Sheets
December 31, 1998 and 1999
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1999
------------ ------------
Current liabilities:
Accounts payable $ 3,126,185 $ 6,258,625
Accrued compensation 2,665,231 3,193,523
Accrued insurance expense 1,410,887 369,590
Other accrued liabilities 3,338,717 4,013,869
Billings in excess of costs and estimated earnings on contracts
(notes 4 and 10) 7,138,142 5,148,486
Current maturities of long-term debt (note 8) -- 7,000,000
------------ ------------
Total current liabilities 17,679,162 25,984,093
------------ ------------
Deferred tax liabilities (note 9) 97,366 66,195
Long-term debt, excluding current portion (note 8) -- 32,000,000
------------ ------------
Total liabilities 17,776,528 58,050,288
------------ ------------
Shareholders' equity:
Series A preferred stock, $.01 par. Authorized 5,000,000 shares;
issued and outstanding 388,939 in 1999 (note 13) -- 3,889
Common stock, $.01 par. Authorized 25,000,000 shares; issued and
outstanding 9,871,409 and 13,134,360 in 1998 and 1999 (note 12) 98,714 131,344
Additional paid-in capital 39,854,127 77,006,238
Retained earnings 25,143,900 33,530,909
------------ ------------
Total shareholders' equity 65,096,741 110,672,380
Commitments and contingencies (notes 4, 10, 17 and 20)
------------ ------------
$ 82,873,269 $168,722,668
============ ============
See accompanying notes to consolidated financial statements.
25
MODTECH HOLDINGS, INC.
Consolidated Statements of Income
Years ended December 31, 1997, 1998 and 1999
1997 1998 1999
------------- ------------- -------------
Net sales (notes 10 and 15) $ 134,050,485 $ 127,620,102 $ 167,227,690
Cost of goods sold (note 10) 107,367,035 97,765,554 138,667,671
------------- ------------- -------------
Gross profit 26,683,450 29,854,548 28,560,019
Selling, general, and administrative expenses 5,155,987 4,738,884 7,500,488
Goodwill amortization (note 7) -- -- 2,546,570
------------- ------------- -------------
Income from operations 21,527,463 25,115,664 18,512,961
------------- ------------- -------------
Other income (expense):
Interest expense (1,004,198) (204,535) (3,512,499)
Interest income 95,551 1,301,952 429,599
Other, net 92,103 25,146 85,243
------------- ------------- -------------
(816,544) 1,122,563 (2,997,657)
------------- ------------- -------------
Income before income taxes 20,710,919 26,238,227 15,515,304
Income taxes (note 9) (7,702,634) (9,708,144) (7,128,295)
------------- ------------- -------------
Net income $ 13,008,285 $ 16,530,083 $ 8,387,009
------------- ------------- -------------
Series A preferred stock dividend (note 13) -- -- 136,128
Net income available to common stock $ 13,008,285 $ 16,530,083 $ 8,250,881
============= ============= =============
Basic earnings per common share (note 14) $ 1.47 $ 1.68 $ 0.64
============= ============= =============
Basic weighted-average shares outstanding (note 14) 8,853,786 9,857,422 12,986,067
============= ============= =============
Diluted earnings per common share (note 14) $ 1.31 $ 1.50 $ 0.59
============= ============= =============
Diluted weighted-average shares outstanding (note 14) 9,897,935 10,988,302 14,204,478
============= ============= =============
See accompanying notes to consolidated financial statements.
26
MODTECH HOLDINGS, INC.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997, 1998 and 1999
(ACCUMULATED
SERIES A PREFERRED STOCK COMMON STOCK ADDITIONAL DEFICIT)
------------------------ ------------------------ PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
----------- ---------- ---------- ---------- ----------- ------------
Balance, December 31, 1996 -- -- 8,649,436 86,494 19,620,994 (4,394,468)
Exercise of options, including tax benefit of
$753,874 (notes 9 and 12) -- -- 170,523 1,706 1,119,890 --
Secondary offering - Net (note 18) -- -- 1,000,000 10,000 18,590,018 --
Net income -- -- -- -- -- 13,008,285
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 -- -- 9,819,959 98,200 39,330,902 8,613,817
Exercise of options, including tax benefit of
$451,563 (notes 9 and 12) -- -- 51,450 514 523,225 --
Net income -- -- -- -- -- 16,530,083
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 -- -- 9,871,409 98,714 39,854,127 25,143,900
Exercise of options, including tax benefit of
$770,648 (notes 9 and 12) -- -- 268,149 2,682 1,368,040 --
Issuance of preferred stock (note 13) 388,939 3,889 -- -- -- --
Issuance of common stock in connection with
acquisition (note 2) -- -- 4,587,824 45,878 75,694,171 --
Modtech Merger distribution (note 2) -- -- (1,593,022) (15,930) (39,910,100) --
Net income -- -- -- -- -- 8,387,009
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 388,939 $ 3,889 13,134,360 $ 131,344 $77,006,238 $33,530,909
========== ========== ========== ========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
MODTECH HOLDINGS, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1998 and 1999
1997 1998 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 13,008,285 $ 16,530,083 $ 8,387,009
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 1,344,098 1,247,557 5,270,027
Provision for contract adjustments -- -- 280,000
Loss (gain) on sale of equipment (9,177) (1,500) 32,112
(Increase) decrease in assets, net of
effects from acquisitions:
Contracts receivable (11,200,285) 8,922,813 (1,987,086)
Costs and estimated earnings in excess
of billings (6,918,253) 12,197,622 (2,454,412)
Inventories 235,195 54,579 3,167,029
Amounts due from affiliates (298,567) (1,291,334) 1,381,060
Prepaids and other assets 83,673 (543,045) 948,173
Income tax receivable -- (2,183,214) 3,185,950
Deferred tax assets (2,192,933) (960,702) 803,684
Increase (decrease) in liabilities, net of effects from acquisitions:
Accounts payable (3,988,076) 186,075 (1,207,346)
Accrued compensation 2,247,057 (974,453) 138,376
Accrued insurance expense 919,145 (59,838) (1,052,549)
Other accrued liabilities 2,147,816 271,805 (497,875)
Income tax payable 813,010 (852,028) --
Deferred tax liabilities -- 97,366 (31,171)
Billings in excess of costs and earnings 5,849,300 140,792 (1,989,656)
------------ ------------ ------------
Net cash provided by operating
activities 2,040,288 32,782,578 14,373,325
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 60,604 1,500 649,669
Purchase of property and equipment (4,071,968) (2,125,613) (2,268,112)
Purchase of covenants not to compete -- (50,000) (122,500)
Acquisition of subsidiaries -- (750,000) (49,515,499)
------------ ------------ ------------
Net cash used in investing
activities (4,011,364) (2,924,113) (51,256,442)
------------ ------------ ------------
(Continued)
28
MODTECH HOLDINGS, INC.
Consolidated Statements of Cash Flows, Continued
1997 1998 1999
------------ ------------ ------------
Cash flows from financing activities:
Net principal payments under revolving credit
lines $ (5,901,668) $ (42,185) $ --
Net principal borrowings (payments) on
long-term debt (625,000) (1,374,952) 39,000,000
Payment of debt issuance costs -- -- (1,733,258)
Net proceeds from issuance of common stock 19,721,614 72,176 600,074
Modtech Merger distribution -- -- (39,928,471)
------------ ------------ ------------
Net cash provided by (used in)
financing activities 13,194,946 (1,344,961) (2,061,655)
------------ ------------ ------------
Net increase (decrease) in cash 11,223,870 28,513,504 (38,944,772)
Cash at beginning of year 404,981 11,628,851 40,142,355
------------ ------------ ------------
Cash at end of year $ 11,628,851 $ 40,142,355 $ 1,197,583
============ ============ ============
See accompanying notes to consolidated financial statements.
29
MODTECH HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Modtech Holdings, Inc. and its subsidiaries (the Company) design,
manufacture, market and install modular relocatable classrooms and other
modular buildings for commercial use.
The Company's classrooms are sold primarily to California school
districts. The Company also sells classrooms to the State of California
and to leasing companies, who lease the classrooms principally to
California school districts. The Company's modular classrooms include
standardized units prefabricated at its manufacturing facilities, as well
as customized units that are modular in design but constructed on site
using components manufactured by the Company.
The Company also designs and manufactures modular, portable buildings to
customer specifications for a wide array of uses, including governmental,
healthcare, educational, airport and correctional facilities; office and
retail space; daycare centers; libraries; churches; construction
trailers; golf clubhouses; police stations; convenience stores; fast food
restaurants; and sales offices. The buildings are sold primarily through
a network of sales and leasing companies to a wide range of end users.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Modtech Holdings, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, contracts receivable and
note receivable, costs and estimated earnings in excess of billings on
contracts, prepaid and other assets, accounts payable, accrued
liabilities, billings in excess of estimated earnings on contracts and
long-term debt are measured at cost which approximates their fair value.
REVENUE RECOGNITION
Construction Contracts
Contracts are recognized using the percentage-of-completion method of
accounting and, therefore, take into account the costs, estimated
earnings and revenue to date on contracts not yet completed. Revenue
recognized is that percentage of the total contract price that cost
expended to date bears to anticipated final total cost, based on current
estimates of costs to complete.
30
MODTECH HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general, and
administrative costs are charged to expense as incurred. At the time a
loss on a contract becomes known, the entire amount of the estimated
ultimate loss is recognized in the financial statements.
The current asset, "Costs and Estimated Earnings in Excess of Billings on
Contracts," represents revenues recognized in excess of amounts billed.
The current liability, "Billings in Excess of Costs and Estimated
Earnings on Contracts," represents billings in excess of revenues
recognized.
The current contra asset, "Allowance for Contract Adjustments," is
management's estimated adjustments to contract amounts due to disputes
and or litigation.
Other Products
Sales of other products are recorded upon completion and transfer of
title to the customer.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are calculated using the straight-line and accelerated methods over the
following estimated useful lives:
Leasehold improvements 15 to 31 years
Machinery and equipment 5 to 7 years
Trucks and automobiles 3 to 5 years
Office equipment 5 to 7 years
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS HELD FOR DISPOSAL
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
costs to sell.
GOODWILL
The costs 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. The Company evaluates the
recoverability of these costs based upon expectations of non-discounted
cash flows.
DEBT ISSUANCE COSTS
Debt issuance costs have been deferred and are being amortized over the
term of the credit facility of five years.
31
MODTECH HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
STOCK OPTION PLANS
Prior to January 1, 1996, the Company accounted for stock option plans in
accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recognized on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standard No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation," which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provision of
APB Opinion No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
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 common shares outstanding.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
RECLASSIFICATION
Certain amounts in the 1997 and 1998 financial statements have been
reclassified to conform to the 1999 presentation.
(2) ACQUISITIONS
SPI Merger
On February 16, 1999, Modtech, Inc. ("Modtech") and SPI Holdings, Inc., a
Colorado corporation ("SPI") merged pursuant to the Agreement and Plan of
Reorganization and Merger, dated as of September 28, 1998 (the "Merger
Agreement"), between Modtech and SPI. SPI is a designer, manufacturer and
wholesaler of commercial and light industrial modular buildings. Pursuant
to the Merger Agreement, SPI merged with a subsidiary of Modtech
Holdings, Inc. ("Holdings"), a newly formed Delaware corporation (the
"SPI Merger"). Concurrently, Modtech merged with a separate subsidiary of
Holdings (the "Modtech Merger"). Pursuant to the mergers, both SPI and
Modtech became wholly owned subsidiaries of Holdings.
32
MODTECH HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
In connection with the SPI Merger, SPI stockholders received
approximately $8 million in cash and approximately 4.6 million shares of
Holdings Common Stock. Holdings refinanced approximately $32 million of
SPI debt. In connection with the Modtech Merger, Modtech stockholders
received approximately $40 million in cash, approximately 8.3 million
shares of Holdings Common Stock and 388,939 shares of Holdings Series A
Preferred Stock. In connection with both mergers, the Company incurred a
total of approximately $51 million of debt (see note 8).
The following unaudited pro forma operating results for the Company
assume the SPI Merger had been completed as of the beginning of the years
presented. The pro forma operating results are adjusted to give effect to
the mergers. Additionally, pro forma adjustments have been made for the
acquisitions consummated by SPI prior to the merger. Pro forma net sales,
in thousands, are $200,260 and $172,870 for 1998 and 1999, respectively.
Pro forma net income, in thousands, are $14,480 and $7,930 for 1998 and
1999, respectively. Pro forma diluted earnings per share are $1.03 and
$0.57 for 1998 and 1999, respectively.
The purchase price for the SPI Merger, including acquisition costs, was
approximately $89 million. The SPI Merger has been accounted for as a
purchase and, accordingly, the results of operations of SPI are included
in the Company's consolidated statements of income from the date of
acquisition. The excess of fair value of net assets acquired was
approximately $115.2 million, and is being amortized on a straight-line
basis over 40 years.
The purchase price allocation of the SPI Merger is as follows:
Current assets $ 8,636,887
Property and equipment 1,499,721
Other tangible assets 189,278
Identifiable intangible assets 2,476,814
Current liabilities (4,724,118)
Current portion of long-term debt (10,787,419)
Long-term debt (23,462,179)
-------------
Net liabilities assumed (26,171,016)
Total Aggregate Purchase Price (89,017,553)
-------------
Goodwill $ 115,188,569
=============
Coastal Acquisition
On March 22, 1999, the Company purchased 100% of the stock of Coastal
Modular Buildings, Inc. ("Coastal"). Coastal designs and manufactures
modular relocatable classrooms and other modular buildings for commercial
use. Coastal is based in St. Petersburg, Florida. The acquisition of
Coastal has been accounted for as a purchase and, accordingly, the
results of operations of Coastal are included in the Company's
consolidated statements of income from the date of acquisition. Pro forma
amounts for the Coastal Acquisition are not included, as the effect is
not material to the Company's consolidated financial statements.
33
MODTECH HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
(3) CONTRACTS RECEIVABLE
Contracts receivable consisted of customer billings for:
1998 1999
------------ ------------
Completed contracts $ 5,936,682 $ 14,032,792
Contracts in progress 5,134,815 3,402,813
Retentions 2,281,101 2,184,432
------------ ------------
13,352,598 19,620,037
Less allowance for contract adjustments (429,107) (728,119)
------------ ------------
$ 12,923,491 $ 18,891,918
============ ============
(4) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON CONTRACTS Net costs
and estimated earnings in excess of billings on contracts consisted of:
1998 1999
------------ ------------
Net costs and estimated earnings on
uncompleted contracts $ 96,036,279 $ 97,439,346
Billings to date (99,722,520) (96,381,190)
------------ ------------
(3,686,241) 1,058,156
Net under billed receivables from completed
contracts 371,463 71,134
------------ ------------
$ (3,314,778) $ 1,129,290
============ ============
34
MODTECH HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
These amounts are shown in the accompanying balance sheets under the
following captions:
1998 1999
----------- -----------
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 3,372,864 $ 6,125,424
Costs and estimated earnings in excess of billings on
completed contracts 450,500 152,352
----------- -----------
Costs and estimated earnings in excess of billings 3,823,364 6,277,776
----------- -----------
Billings in excess of costs and estimated earnings on
uncompleted contracts (7,059,106) (5,067,267)
Billings in excess of costs and estimated earnings on
completed contracts (79,036) (81,219)
----------- -----------
Billings in excess of costs and estimated earnings (7,138,142) (5,148,486)
----------- -----------
$(3,314,778) $ 1,129,290
=========== ===========
(5) INVENTORIES
Inventories consist of:
1998 1999
---------- ----------
Raw Materials $4,441,537 $5,403,931
Work in process -- 1,075,149
Finished Goods -- 159,975
---------- ----------
$4,441,537 $6,639,055
========== ==========
(6) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of:
1998 1999
------------ ------------
Leasehold improvements $ 11,528,459 $ 12,365,370
Machinery and equipment 4,508,908 5,331,095
Office equipment 651,436 1,401,475
Construction in progress 293,860 1,073,738
Trucks and automobiles 191,402 415,447
Land 451,281 --
------------ ------------
17,625,346 20,587,125
Less accumulated depreciation and
amortization (5,311,671) (6,714,801)
------------ ------------
$ 12,313,675 $ 13,872,324
============ ============
35
MODTECH HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
(7) GOODWILL
Goodwill and accumulated amortization consists of the following:
1998 1999
------------- -------------
Goodwill $ -- $ 116,618,973
Less accumulated amortization -- (2,546,570)
------------- -------------
$ -- $ 114,072,403
============= =============
(8) LONG-TERM DEBT AND REVOLVING LOAN
The Company obtained a new $100 million credit facility with a bank in
February 1999. The credit facility provides for a $30 million revolving
loan, a 5-year term loan of $45 million and a delayed draw 5-year term
loan of $25 million. The credit facility is secured by all the Company's
assets, as well as the Company's stock ownership in its subsidiaries. The
credit facility expires in February 2004. No amounts were outstanding
under the revolving loan commitment at December 31, 1999. The Company has
one standby letter of credit issued under the credit facility for
$552,477 on which no amounts were outstanding as of December 31, 1999.
Indebtedness under the credit facility bears interest at the lower of (1)
LIBOR plus additional interest of between 1.5% and 2.25%, or (2) a rate
equal to the greater of (i) the Federal funds rate plus 0.5% or (ii) the
bank's prime rate, plus in either case an additional interest of between
0.25% to 1.0%. The additional interest charge is based upon certain
financial ratios.
The credit facility contains various financial covenants for which the
Company was in compliance at December 31, 1999, including restrictions on
additional borrowings. The term loans are subject to mandatory repayment
in certain events, including from the proceeds of any securities
offerings by the Company.
Long-term debt consists of:
1998 1999
------------ ------------
Term Loan $ -- $ 37,000,000
Delayed Draw Term Loan -- 2,000,000
------------ ------------
39,000,000
Less current portion of long-term debt -- (7,000,000)
------------ ------------
$ -- $ 32,000,000
============ ============
Long-term debt maturities for the next four years are as follows:
$7,000,000 in 2000, $8,400,000 in 2001, $9,600,000 in 2002 and
$14,000,000 in 2003.
36
MODTECH HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
(9) INCOME TAXES
The components of the 1997, 1998 and 1999 provision for Federal and state
income tax (expense) benefit computed in accordance with Financial
Accounting Standard No. 109 are summarized below:
1997 1998 1999
------------ ------------ ------------
Current:
Federal $ (7,874,257) $ (8,585,201) $ (4,968,324)
State (2,021,309) (2,272,844) (1,387,457)
------------ ------------ ------------
(9,895,566) (10,858,045) (6,355,781)
Deferred:
Federal 1,634,085 593,693 (640,252)
State 558,847 556,208 (132,262)
------------ ------------ ------------
$ (7,702,634) $ (9,708,144) $ (7,128,295)
============ ============ ============
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:
1997 1998 1999
---------- ---------- ----------
Taxes, U.S. statutory rates (35.0%) (35.0%) (35.0%)
State taxes, less Federal benefit (4.5) (4.0) (4.5)
Effect of non-deductible expenses -- -- (5.8)
Reduction in Federal valuation
allowance -- 2.0 --
Utilization of income tax benefit
relating to loss carryover 3.8 -- --
Other (1.5) -- (0.7)
---------- ---------- ----------
Total taxes on income (37.2%) (37.0%) (46.0%)
========== ========== ==========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1998 and 1999 are as follows:
1998 1999
---------- ----------
Deferred tax assets:
Reserves and accruals not recognized for
income tax purposes $2,672,468 $2,063,717
State taxes 578,535 295,588
Other 265,732 379,736
---------- ----------
Total gross deferred tax assets 3,516,735 2,739,041
========== ==========
37
MODTECH HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Deferred tax liabilities:
Prepaids $ (165,720) $ (80,192)
Depreciation -- (78,813)
Revenue recognition (8,182) (9,716)
----------- -----------
Total gross deferred tax liabilities (173,902) (168,721)
----------- -----------
Net deferred tax assets $ 3,342,833 $ 2,570,320
=========== ===========
These amounts have been presented in the balance sheet as follows:
1998 1999
----------- -----------
Current deferred tax assets $ 3,440,199 $ 2,636,515
Noncurrent deferred tax liabilities (97,366) (66,195)
----------- -----------
Total deferred tax assets $ 3,342,833 $ 2,570,320
=========== ===========
Management believes the existing net deductible temporary differences
will reverse during periods in which the Company will have the ability to
utilize the deductions to offset other reversing temporary differences
which give rise to taxable income.
(10) TRANSACTIONS WITH RELATED PARTIES
SALES
The Company sells modular classrooms to certain companies and
partnerships, the shareholders and partners of which are either
shareholders or an officer of the Company. The buildings are then leased
to various school districts by the related companies and partnerships.
The table below summarizes the classroom sales to related parties:
1997 1998 1999
---------- ---------- ----------
Sales $2,942,313 $2,675,457 $6,271,813
Cost of goods sold 2,530,803 2,116,691 5,128,455
Gross profit percentage 13.99% 20.90% 18.23%
========== ========== ==========
The related party purchases modular relocatable classrooms from the
Company, upon standard terms and at standard wholesale prices.
38
MODTECH HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Due from affiliates includes a portion of unpaid invoices as a result of
the above transactions. As of December 31, 1998 and 1999 these amounts
totaled $2,171,896 and $786,315, respectively. Additional amounts arising
from these transactions are included in the following captions:
1998 1999
----------- -----------
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 492,418 $ 1,888,141
Billings in excess of costs and estimated
earnings on uncompleted contracts (90,838) (31,388)
=========== ===========
NOTE RECEIVABLE
At December 31, 1998 and 1999, the Company had a note receivable from a
related party partnership in the amount of $45,212. The partnership is
composed of an officer and shareholders of the Company. The note bears
interest at 10% and is payable upon demand. Unpaid interest related to
this note and two other related party notes with principal repayment in
1996 totaled $160,590 at December 31, 1998 and $165,111 at December 31,
1999 and is included in due from affiliates.
OPERATING LEASES
Certain manufacturing facilities are leased from the Company's Chairman
and partnerships composed of an officer and certain shareholders. These
related party leases require monthly payments which aggregate $31,000. In
connection with the lease at the Lathrop facility, the Company made an
$83,000 security deposit during 1990.
Future minimum lease payments under these leases are discussed in note
17. Included in cost of goods sold is $444,000, $478,000 and $376,000 in
rent expense paid to related parties for the years ended December 31,
1997, 1998, and 1999, respectively.
(11) 401(k) PLANS
The Company has tax deferred savings plans under Section 401(k) of the
Internal Revenue Code. Eligible employees can contribute up to 12% of
gross annual earnings. Company contributions are made on a 50% matching
basis of eligible contributions. The Company's contributions were
$77,016, $100,452 and $179,861 in 1997, 1998, and 1999, respectively.
(12) 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). All of these options were granted prior to 1999.
39
MODTECH HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
In March of 1994, pursuant to a vote of the Board of Directors, a
non-qualified 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.
In May of 1994, 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). All of these options were granted prior to
1999.
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). All of these options were granted prior to
1999.
In 1999, the Company's shareholders approved a stock option plan (the
1999 Plan). The 1999 Plan provides for the grant of non-statutory options
to purchase up to 1,250,000 shares of the Company's common stock. The
non-statutory options may be granted to employees, officers, directors,
consultants, independent contractors and others expected to provide
significant service 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 Company's Stock Option Plans are
summarized as follows:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------------- --------------
December 31, 1995 960,000 $ 1.63
Granted 315,000 3.26
Exercised (142,000) 1.77
Terminated (37,500) 1.50
------------- -------------
December 31, 1996 1,095,500 2.08
Granted 270,833 9.05
Exercised (120,523) 2.55
Terminated (5,202) 10.48
------------- -------------
December 31, 1997 1,240,608 3.52
Granted 170,869 19.69
Exercised (51,450) 1.40
------------- -------------
December 31, 1998 1,360,027 5.63
Granted 438,631 9.00
40
MODTECH HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
SPI Merger 389,909 2.26
Modtech Merger (178,864) 4.61
Exercised (268,149) 2.24
Terminated (71,513) 7.27
---------- ----------
December 31, 1999 1,670,041 $ 6.32
========== ==========
As of December 31, 1999, 1,064,542 options are vested and exercisable at
prices ranging from $1.19 to $20.57 per share.
All stock options have a maximum term of ten years and become fully
exercisable in accordance with a predetermined vesting schedule which
varies.
The per share weighted-average fair value of stock options granted during
1997, 1998 and 1999 was $9.05, $11.27 and $5.06, respectively, on the
date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions:
1997 1998 1999
------- ------- -------
Expected dividend yield 0% 0% 0%
Average risk-free interest rate 7.8% 5.6% 5.5%
Volatility factor 73.06% 71.15% 69.40%
Expected life 4 years 4 years 4 years
======= ======= =======
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income would have been
reduced to the pro forma amounts indicated below:
1997 1998 1999
------------- ------------- -------------
Net Income
As Reported $ 13,008,285 $ 16,530,083 $ 8,387,009
Pro Forma 12,044,970 15,424,671 8,054,385
============= ============= =============
Basic earnings per share
As Reported $ 1.47 $ 1.68 $ 0.64
Pro forma 1.36 1.57 0.61
============= ============= =============
Diluted earnings per share
As Reported $ 1.31 $ 1.50 $ 0.59
Pro Forma 1.22 1.40 0.57
============= ============= =============
(13) SERIES A PREFERRED STOCK
In conjunction with the Modtech Merger, 388,939 shares of Series A
Preferred Stock were issued in February 1999. The Series A Preferred
Stock has no voting rights, including, without limitation, the right to
vote on the election of directors, mergers, reorganization or a sale of
all or substantially all of the
41
MODTECH HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Company's assets. Dividends will accrue on each share of Series A
Preferred Stock at the rate of $0.40 per annum. Dividends may not be paid
on the Company's common stock until all accrued dividends on the Series A
Preferred Stock are paid or declared and set aside for payment.
Subject to proportional adjustments due to stock splits, reverse stock
splits and similar transactions, each share of Series A Preferred Stock
is convertible into one share of the Company's common stock at any time
following two years after their date of issuance. Each outstanding share
of Series A Preferred Stock will automatically be converted into the
Company's common stock upon the fourth anniversary date of its issuance
or upon a change in control.
(14) EARNINGS PER SHARE
The following table illustrates the calculation of basic and diluted
earnings per common share under the provisions of SFAS No. 128:
1997 1998 1999
------------- ------------- -------------
BASIC
Net income $ 13,008,285 $ 16,530,083 $ 8,387,009
Dividends on preferred stock (note 11) -- -- 136,128
------------- ------------- -------------
Net income available to common stock $ 13,008,285 $ 16,530,083 $ 8,250,881
============= ============= =============
Weighted-average common shares outstanding 8,853,786 9,857,422 12,986,067
============= ============= =============
Basic earnings per common share $ 1.47 $ 1.68 $ 0.64
============= ============= =============
DILUTED
Net income $ 13,008,285 $ 16,530,083 $ 8,387,009
============= ============= =============
Weighted-average common shares outstanding 8,853,786 9,857,422 12,986,067
Add:
Conversion of preferred stock -- -- 388,939
Exercise of options 1,044,149 1,130,880 829,472
------------- ------------- -------------
Adjusted weighted-average common shares
outstanding 9,897,935 10,988,302 14,204,478
============= ============= =============
Diluted earnings per common share $ 1.31 $ 1.50 $ 0.59
============= ============= =============
Options to purchase 551,096 shares of common stock were outstanding
during 1999 but were not included in the computation of diluted earnings
per shares because the option exercise price was greater than the average
market price of the common shares and therefore, the effect would be
anti-dilutive.
(15) MAJOR CUSTOMER
Sales to two major customers represented the following percentage of net
sales:
1997 1998 1999
---- ---- ----
Customer A 4% 11% 6%
Customer B 11% 5% 4%
==== ==== ====
42
MODTECH HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
(16) SUPPLEMENTAL CASH FLOW DISCLOSURES
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1997 1998 1999
----------- ----------- -----------
Cash paid during the year for:
Interest $ 1,058,256 $ 209,677 $ 3,209,179
=========== =========== ===========
Income taxes $ 8,400,000 $13,755,000 $ 2,320,000
=========== =========== ===========
(17) COMMITMENTS AND CONTINGENCIES
LAND LEASES
The Company has entered into agreements to lease land at its
manufacturing facilities. Minimum lease payments under these
noncancelable operating leases for the next five years and thereafter are
as follows:
Year ending December 31:
2000 $ 1,894,000
2001 1,845,000
2002 1,583,000
2003 1,236,000
2004 839,000
Thereafter 6,577,000
-----------
$13,974,000
===========
Of the $13,974,000 in future rental payments, $6,600,000 is payable to
related parties (note 10). Rent expense for the years ended December 31,
1997, 1998 and 1999 was $552,000, $713,000 and $2,139,000, respectively.
(18) SECONDARY STOCK OFFERING
In November 1997 the Company held a secondary offering of 1,000,000
shares of common stock, which were sold at $20 per share. The net
proceeds to the Company were $18,600,000, after the deduction of
underwriting discounts, commissions and offering expenses paid by the
Company.
The Company used a portion of the proceeds to repay amounts outstanding
under the Company's $20,000,000 revolving loan agreement with a bank. The
remaining net proceeds were used as additions to working capital.
43
MODTECH HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
(19) WARRANTY
The standard contractual warranty for the Company's modular buildings is
one year, although it may be varied by contract specifications. Purchased
equipment installed by the Company, such as air conditioning units, carry
the manufacturers' standard warranty. To date, warranty costs incurred
have been immaterial.
(20) PENDING CLAIMS AND LITIGATION
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
outcome of the claims will not have a material adverse effect on the
Company's consolidated financial position, results of operations or
liquidity.
44
Schedule II
MODTECH HOLDINGS, INC.
Valuation and Qualifying Accounts
Years ended December 31, 1997, 1998, and 1999
BALANCE AT ACQUIRED AMOUNTS
BEGINNING THROUGH CHARGED BALANCE AT
DESCRIPTION OF YEAR ACQUISITION TO EXPENSE DEDUCTIONS END OF YEAR
- ------------------------------------------------------------------------------------------------------------------------------
Allowance for contract adjustments:
Year ended December 31, 1997 $ 413,373 $ -- $ -- $ (3,254) $ 410,119
============ ============ ============ ============ ============
Year ended December 31, 1998 $ 410,119 $ 30,988 $ -- $ (12,000) $ 429,107
============ ============ ============ ============ ============
Year ended December 31, 1999 $ 429,107 $ 50,000 $ 280,000 $ (30,988) $ 728,119
============ ============ ============ ============ ============
45
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
23.1 Independent Auditors' Consent
27 Financial Data Schedule