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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, 2001
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from N/A to N/A
Commission File No. 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
------------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 25, 2002 was $94,736,725. As of March 25, 2002, shares
entitled to cast an aggregate of 13,457,615 votes were outstanding, including
13,457,615 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.
PART I
Item 1. BUSINESS
GENERAL
The Company is one of the leading modular building manufacturers in the country
with a wide array of products. 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, Texas, Florida and other neighboring states.
The Company designs, manufactures, markets and installs modular relocatable
classrooms. 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 proposed $28.3 billion allocated for the 2000-2001 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 site built 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, consist 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, 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.. Pursuant to the Merger Agreement, SPI
merged with a subsidiary of Modtech Holdings, Inc. (Holdings), a 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 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 through December 31, 2001. See
"New Accounting Pronouncements."
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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.
IMS Acquisition. On March 8, 2001, the Company purchased 100% of the stock of
Innovative Modular Structures, Inc. (IMS). IMS designs and manufactures modular
relocatable classrooms and other modular buildings for commercial use. IMS is
based in St. Petersburg, Florida. The acquisition of IMS has been accounted for
as a purchase and, accordingly, the results of operations of IMS 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 - Authority for Bond
Financing." 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.
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 $100,000
to $120,000 for conventional site
built 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
needed for state approval and
construction of a site built
conventional school facility;
Flexibility of Use -- Modular relocatable classrooms
enable a school district to use the
units for short or long term needs
and to move them if necessary to
meet shifts in student populations;
and
Ease of Financing -- As personal rather than real
property, modular classrooms may be
leased on a long or short-term
basis from manufacturers and
leasing companies. This allows
school districts to finance modular
classrooms out of both their
operating and capital budgets.
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.
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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.
CALIFORNIA MODULAR RELOCATABLE CLASSROOMS
The Company's California modular relocatable classrooms are designed, engineered
and constructed in accordance with structural and seismic specifications and
safety regulations adopted by the California Department of State Architects,
standards which are more rigorous than the requirements for other portable
buildings. 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 or 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 interfaces 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 site built 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 inspection by a licensed third
party is required during actual manufacture of the classrooms, with the school
district obligated to hire and pay for such inspection costs.
The Company's California classrooms are manufactured and installed in accordance
with the applicable state building codes and Department of State Architects
interpretive regulations, which supersedes all local building codes for purposes
of school construction. The classrooms must comply with accessibility
requirements for the handicapped, structural, 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, roof 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.
Additionally, the Company has developed and manufactured two-story modular
classroom buildings. A two-story complex may include cantilevered balconies,
soffits, parapets and mansards. They typically include a modular elevator system
as well as stairways. The Company's two-story structures offer a variety of
material and design options such as stucco, brick veneer, fiber cement panels or
traditional wood siding.
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
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or relocatable partitions. The floor covering is usually carpet but may be sheet
vinyl or ceramic tile 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 exterior finishes may
also be applied.
CALIFORNIA 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 to California school
districts, the State of California and leasing companies accounted for 52.9%,
49.9% and 49.0% of the Company's total net sales for the years ended December
31, 1999, 2000 and 2001. 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 38.3%, 36.7% and 36.9%, respectively, of the Company's net sales
during the years ended December 31, 1999, 2000 and 2001, respectively, with
sales of classrooms to third party lessors to California school districts during
these periods accounting for approximately 9.1%, 5.6% and 5.7%, 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 2001 represented approximately 5.7% of the
Company's net sales, compared to approximately 5.6% of the Company's 2000 and
1999 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, 1999, 2000 and 2001. 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, 1999, 2000 and 2001,
sales of classrooms to this affiliated leasing company comprised approximately
3.8%, 1.8% and 0.8%, respectively, of the Company's net sales.
COMMERCIAL, LIGHT INDUSTRIAL MODULAR BUILDINGS AND RELOCATABLE CLASSROOMS FOR
OTHER STATES
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; classrooms 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 100-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 $2,000 to over $25,000 per module.
SALES AND MARKETING
California Classroom Sales Force
At December 31, 2001 the Company's classroom sales force was divided into three
marketing regions: Northern, Central and Southern California. At December 31,
2001 the Company employed five 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 construction management
firms 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 and installation. Open bid contracts are normally awarded to the
lowest responsible bidder.
5
Dealer Network
The Company's commercial and light industrial modular buildings are sold to
users through a dealer network of sales and leasing companies to a wide range of
end users. The Company's dealers include national, 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, 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, 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 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.
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At December 31, 2001 the Company had eight 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 both 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
and eighth manufacturing facilities are 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, 2001 and 2000, the backlog of
sales orders was approximately $80 million, up from approximately $60 million at
December 31, 1999. 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 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. The Company
believes that, based upon 2000 net sales, it is the largest modular relocatable
classroom manufacturer in California. 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-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.
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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. A source of funding at the State level for new school facilities
is 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.
8
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 allocated 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
allocated $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 implementation of
Senate Bill 50 did not significantly change the Company's operating results.
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 of California 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 55%
of the voters in the district and are repaid using the proceeds of increases in
local property taxes. A local school district may also levy Developer Fees on
new development projects in the district, subject to a maximum rate set by state
law. The Developer Fees can only be levied if the project can be shown to
contribute to the need for additional school facilities and the fee levied is
reasonably related to such need. In addition, California law provides for the
issuance of bonds by Community Facilities Districts which can be formed by a
variety of local government agencies, including school districts. These
districts, known as "Mello-Roos" districts, can have flexible boundaries and the
tax imposed to repay the bonds can be based on property use, acreage, population
density or other factors.
OTHER LEGISLATION
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
9
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, 2001, the Company had 1,068 employees. 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 eighth plant consists of approximately 70,000 square
feet of manufacturing area on a 10-acre site in St. Petersburg, Florida that is
owned by the Company.
The Company believes that its facilities are well maintained and in good
operating condition, and meet the requirements for its immediately foreseeable
business needs. The Company also believes it will be able to renew or
renegotiate the leases expiring in 2002 on terms that are acceptable to the
Company. Two of the Company's facilities at December 31, 2001 are leased from an
affiliate.
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.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was traded on the NASDAQ National Market System under
the symbol "MODT" at December 31, 2001. 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
- ------------- ------ -----
3/31/00 10.000 5.875
6/30/00 11.875 7.250
9/30/00 11.000 8.000
12/31/00 10.938 6.125
3/31/01 10.500 6.063
6/30/01 12.500 6.760
9/30/01 10.250 7.000
12/31/01 9.800 6.800
On December 31, 2001, the closing sales price on The NASDAQ National Market for
a share of the Company's Common Stock was $8.25. The approximate number of
holders of record of the Company's Common Stock as of December 31, 2001, was 50.
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.
11
ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected income statement and balance sheet data set forth below for the
three years ended December 31, 1999, 2000 and 2001 have been derived from the
audited consolidated 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, 1997 and 1998 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 consolidated 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,
-----------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA:
Net sales .......................................... $ 134,050 $ 127,620 $ 167,228 $ 234,734 $ 201,116
Cost of goods sold ................................. 107,367 97,765 138,668 198,501 165,068
--------- --------- --------- --------- ---------
Gross profit ....................................... 26,683 29,855 28,560 36,233 36,048
Selling, general and administrative expenses ....... 5,156 4,731 6,834 8,011 8,093
Goodwill and covenant amortization ................. -- 8 3,213 3,702 3,751
Income from operations ............................. 21,527 25,116 18,513 24,520 24,204
Interest income (expense), net ..................... (909) 1,097 (3,083) (4,928) (3,067)
Other income (expense) ............................. 92 25 85 61 91
--------- --------- --------- --------- ---------
Income before income taxes ......................... 20,711 26,238 15,515 19,653 21,228
Income taxes ....................................... (7,703) (9,708) (7,128) (9,237) (9,606)
--------- --------- --------- --------- ---------
Net income ......................................... 13,008 16,530 8,387 10,416 11,622
--------- --------- --------- --------- ---------
Net income available for common
Stockholders (1) ................................. $ 13,008 $ 16,530 $ 8,251 $ 10,260 $ 11,466
========= ========= ========= ========= =========
Basic earnings per common share .................... $ 1.47 $ 1.68 $ 0.64 $ 0.78 $ 0.85
Basic weighted-average shares outstanding (in
thousands) ......................................... 8,854 9,857 12,986 13,238 13,411
Diluted earnings per common share .................. $ 1.31 $ 1.50 $ 0.59 $ 0.72 $ 0.82
Diluted weighted-average shares outstanding (in
thousands) ......................................... 9,898 10,988 14,204 14,357 14,422
AS OF DECEMBER 31,
-----------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital ..................................... $ 36,417 $ 52,129 $ 11,231 $ 17,153 $ 25,265
Total assets ........................................ 68,220 82,873 168,723 187,702 186,396
Total liabilities ................................... 20,177 17,777 58,050 65,610 52,099
Long-term debt, excluding current portion ........... -- -- 32,000 23,600 19,000
Shareholders' equity ................................ 48,043 65,097 110,672 122,092 134,297
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
SELECTED OPERATING DATA:
Gross margin ......................................... 19.9% 23.4% 17.1% 15.4% 17.9%
Operating margin ..................................... 16.1% 19.7% 11.1% 10.4% 12.0%
Backlog at period end(2) ............................. $ 71,000 $ 25,000 $ 60,000 $ 80,000 $ 80,000
(1) After deduction of preferred stock dividends accrued of $136,000,
$156,000 and $156,000 for the years ended December 31, 1999, 2000 and
2001, respectively.
(2) 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.
12
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 respective dates 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.
On March 8, 2001, the Company completed the IMS acquisition. The IMS acquisition
was accounted for as a purchase, and accordingly, the results of operations of
IMS are included in the Company's consolidated statements of income from the
date of acquisition. Due to the integration of the acquired operation 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,
----------------------------------
1999 2000 2001
------ ------ ------
Net sales ......................... 100.0% 100.0% 100.0%
Cost of sales ..................... 82.9 84.6 82.1
------ ------ ------
Gross profit ...................... 17.1 15.4 17.9
Selling, general and administrative
expenses ........................ 4.1 3.4 4.0
Goodwill and covenant amortization 1.9 1.6 1.9
------ ------ ------
Income from operations ............ 11.1 10.4 12.0
Interest expense, net ............. (1.8) (2.1) (1.5)
Other income ...................... -- -- --
------ ------ ------
Income before income taxes ........ 9.3 8.4 10.5
Income taxes ...................... 4.3 3.9 4.7
------ ------ ------
Net income ........................ 5.0% 4.4% 5.8%
====== ====== ======
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net sales for the year ended December 31, 2001 decreased to $201.1 million, a
decrease of $33.6 million, or approximately 14.3%, from $234.7 million in 2000.
The decrease in 2001 is attributable to the continuing shift in product mix
toward lower volume, higher gross margin customized buildings, as well as the
general business and economic decline and the resulting slowdown in September of
new orders and customers delaying deliveries.
For the year ended December 31, 2001, gross profit was $36.0 million, a decrease
of $184,000, or approximately 0.5%, over 2000 gross profit of $36.2 million.
Gross profit as a percentage of net sales increased to 17.9% in 2001 from 15.4%
in 2000. The increase in gross profit as a percentage of net sales is the result
of continued improvement in operational efficiencies and a shift in product mix
for 2001.
In 2001, selling, general and administrative expenses increased to $8.1 million
from $8.0 million in 2000. Certain additional costs have been incurred in 2001
in the marketing of a new product for the Florida market, as well as the
integration of IMS with the Company. As a percentage of net sales, selling,
general and administrative expenses increased to 4.0% in 2001 from 3.4% in 2000.
Goodwill and covenant amortization for the year ended December 31, 2001 was
$3.75 million, compared to $3.7 million for 2000. The increase in 2001 is
primarily attributable to goodwill amortization for the IMS acquisition. As a
percentage of net sales, goodwill
13
and covenant amortization increased to 1.9% in 2001 from 1.6% in 2000. Goodwill
was recorded for the SPI Merger, the Coastal acquisition and the IMS acquisition
and is being amortized from the respective dates of acquisition.
In 2001, interest expense, net decreased to $3.1 million from $4.9 million in
2000. The decrease is attributable to decreased line of credit borrowings,
decreased long-term debt due to repayments and decreased interest rates for the
year ended December 31, 2001. As a percentage of net sales, interest expense,
net decreased to 1.5% in 2001 from 2.1% in 2000.
The provision for income taxes was $9.6 million for the year ended December 31,
2001, compared to $9.2 million for 2000. The Company's effective tax rate
decreased to 45.3% for the year ended December 31, 2001 from 47.0% for the year
ended December 31, 2000.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net sales for the year ended December 31, 2000 increased to $234.7 million, an
increase of $67.5 million, or approximately 40.4%, from $167.2 million in 1999.
The increase in 2000 is attributable to increased sales from the public school
system in California where funds from the 1998 California School Construction
Bond have begun and continue to flow. Sales outside of California increased,
spurred by the growth of the national economy. Additionally, net sales for the
year ended December 31, 2000 increased as the year ended December 31, 1999 only
included net sales for SPI and Coastal from their respective dates of
acquisition.
For the year ended December 31, 2000, gross profit was $36.2 million, an
increase of $7.7 million, or approximately 26.9%, over 1999 gross profit of
$28.6 million. Gross profit as a percentage of net sales decreased to 15.4% in
2000 from 17.1% in 1999. The decrease in gross profit as a percentage of net
sales was primarily attributable to the shift in product mix for 2000.
In 2000, selling, general and administrative expenses increased to $8.0 million
from $6.8 million, due primarily to the increase in net sales for the year, as
well as an increase in the number of employees. Selling, general and
administrative expenses for the year ended December 31, 2000 also increased as
the year ended December 31, 1999 only included selling, general and
administrative expenses for SPI and Coastal from their respective dates of
acquisition. As a percentage of net sales, selling, general and administrative
expenses decreased to 3.4% in 2000 from 4.1% in 1999.
Goodwill and covenant amortization for the year ended December 31, 2000 was $3.7
million, compared to $3.2 million for 1999. As a percentage of net sales,
goodwill and covenant amortization decreased to 1.6% in 2000 from 1.9% in 1999.
Goodwill was recorded for both the SPI Merger and the Coastal acquisition and is
being amortized from the respective dates of acquisition.
In 2000, interest expense, net increased to $4.9 million from $3.1 million, due
primarily to debt incurred as a result of the SPI Merger; which occurred in
February 1999, increased line of credit borrowings and higher interest rates. As
a percentage of net sales, interest expense, net increased to 2.1% in 2000 from
1.8% in 1999.
The provision for income taxes was $9.2 million for the year ended December 31,
2000, compared to $7.1 million for 1999. The Company's effective tax rate
increased to 47.0% for the year ended December 31, 2000 from 46.0% for the year
ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded its operations and capital expenditures with
cash generated internally by operations, supplemented by borrowings under
various credit facilities and public offerings. During the years ended December
31, 1999, 2000 and 2001, the Company's operations provided cash in the amounts
of approximately $14.4 million, $2.1 million and $8.1 million, respectively. At
December 31, 2001, the Company had approximately $130,000 in cash and cash
equivalents.
The Company has a $66 million credit facility with a bank. The credit facility
provides for a $40 million revolving credit line. 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 December 2006. At December 31,
2001, $9,100,000 was outstanding under the revolving credit line.
The Company had working capital of $11.2 million, $17.2 million and $25.3
million at December 31, 1999, 2000 and 2001, respectively. In 2001, current
assets decreased by $0.8 million, with a decrease of $1.1 million in
inventories, a decrease of $0.3 million in cash and cash equivalents and a
decrease of $0.2 million in due from affiliates, offset by an increase of $0.4
million in costs and estimated earnings in excess of billings on contracts, an
increase in contract receivables, net of $0.1 million, an increase of $0.2
million in deferred tax assets and an increase of $0.2 million in prepaid and
other assets. Current liabilities decreased by $8.9 million, with a decrease of
$8.3 million in accounts payable and accrued liabilities, a $1.8 million
decrease in billings in excess of costs and
14
estimated earning on contracts, a decrease of $1.4 million in current maturities
of long-term debt, offset by an increase of $2.6 million in current revolving
credit line. In 2000, current assets increased by $21.9 million, with an
increase of $15.2 million in contracts receivable, an increase of $3.4 million
in costs and estimated earnings in excess of billings and an increase of $3.2
million in inventories. Current liabilities increased by $16.0 million, with an
increase of $6.5 million in accounts payable and accrued liabilities, an
increase of $6.5 million in current revolving credit line, an increase of $2.7
million in income tax payable and an increase of $1.4 million in current
maturities of long-term debt, offset by a $1.1 million decrease in billings in
excess of costs and estimated earning on contracts.
Capital expenditures amounted to $2.3 million, $2.6 million and $1.2 million
during the years ended December 31, 1999, 2000 and 2001, respectively. In 1999,
the majority of expenditures were as a result of construction of a production
line at one of the Perris, California facilities and the addition of metal
fabrication machinery at the Glendale, Arizona and St. Petersburg, Florida
facilities. In 2000 and 2001, the majority of expenditures were as a result of
expanding production capacity at the Company's various facilities.
Management believes that the Company's existing product lines and manufacturing
capacity will enable the Company to generate sufficient cash through operations,
supplemented by 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.
COMMITMENTS AND CONTINGENCIES
The following table represents a comprehensive list of the Company's contractual
obligations and commitments as of December 31, 2001:
PAYMENTS DUE BY YEAR
-------------------------------------------------------------------------------------------
(amounts in thousands)
TOTAL 2002 2003 2004 2005 2006 THEREAFTER
------- ------- ------- ------- ------- ------- ----------
Long-term debt ................... $26,000 $ 7,000 $ 7,000 $ 6,000 $ 4,000 $ 2,000
Operating leases ................. 12,133 1,788 1,379 941 941 941 $ 6,143
------- ------- ------- ------- ------- ------- --------
Total contractual cash obligations $38,133 $ 8,788 $ 8,379 $ 6,941 $ 4,941 $ 2,941 $ 6,143
======= ======= ======= ======= ======= ======= ========
CRITICAL ACCOUNTING POLICIES
In December 2001, the Securities and Exchange Commission (SEC) requested that
all registrants list their most "critical accounting policies" in Management's
Discussion and Analysis of Financial Condition and Results of Operations. The
SEC indicated that a "critical accounting policy" is one which is both important
to the portrayal of the Company's financial condition and results of operations
and requires management's most difficult, subjective or complex judgements,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain. We believe our most critical accounting policies
related to:
- - Allowance for Contract Adjustments
- - Revenue Recognition on Construction Contracts
We use a combination of historical results and anticipated future events to
estimate and make assumptions relating to our critical accounting policies.
Actual results could differ from our estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141),
and Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS
15
142). SFAS 141 requires that all business combinations be accounted for under a
single method - the purchase method. Use of the pooling-of-interests method is
no longer permitted. SFAS 141 requires that the purchase method be used for
business combinations initiated after June 30, 2001. SFAS 142 requires that
goodwill no longer be amortized to earnings, but instead reviewed for
impairment. Under SFAS 142, the amortization of goodwill ceases upon adoption of
the Statement and is effective for fiscal years beginning after December 15,
2001, which for calendar year-end companies, will be January 1, 2002.
The Company has historically amortized its goodwill over its estimated useful
lives. Beginning with the adoption of SFAS 142, the Company will cease
amortizing its goodwill. The Company recorded goodwill amortization expense in
the amount of $2,916,000 and $2,945,000 for the years ended December 31, 2000
and 2001, respectively. To the extent that no impairment charges are recorded
upon adoption or application of SFAS 142, similar amounts of amortization will
not be recorded in future periods. The Company is currently analyzing the impact
of adopting SFAS 142 and has not determined whether the adoption will have a
material impact on the Company's financial position.
In September 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 is
effective for fiscal years beginning after June 15, 2002, which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. Management has not assessed whether the application of this standard will
have a material effect on the Company's financial position, results of
operations or liquidity.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144). SFAS 144 is effective for fiscal years beginning after December 15, 2001.
SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. Management has not assessed whether the
application of this standard will have a material effect 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to fluctuation in interest rates on our
$66 million credit facility. During 2001, we did not use interest rate swaps or
other types of derivative financial instruments. The carrying value of the
credit facility approximates fair value as the interest rate is variable and
resets frequently. Indebtedness under the credit facility bears interest at
LIBOR plus additional interest of between 1.25% and 1.75%, or the Federal funds
rate plus additional interest of between 0% to 0.5%. The additional interest
charge is based upon certain financial ratios. We estimate that the average
amount of debt outstanding under the credit facility for 2002 will be $40
million. Therefore, a one percentage point increase in interest rates would
result in an increase in interest expense of $400,000 for the year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, along with the notes thereto and the
Independent Auditors' Report 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
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
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 schedule 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, 2000 and 2001
Consolidated Statements of Income - For the Years Ended December 31,
1999, 2000 and 2001
Consolidated Statements of Shareholders' Equity - For the Years Ended
December 31, 1999, 2000 and 2001
Consolidated Statements of Cash Flows - For the Years Ended December
31, 1999, 2000 and 2001
Notes to Consolidated Financial Statements
Schedule Included - For the Years Ended December 31, 1999, 2000 and 2001
Schedule II - Valuation and Qualifying Accounts
All other Financial Statement Schedules have been omitted because the required
information is shown in the consolidated 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) Lease between the Company and Pacific Continental Modular
Enterprises, relating to the Barrett Street property in Perris,
California.
10.7(5) Lease between the Company and BMG, relating to the property in
Lathrop, California.
10.8(5) Form of Indemnity Agreement between the Company and its
executive officers and directors.
18
10.9(3) Financial Advisory Services Agreement.
10.10(6) Credit Agreement, dated February 16, 1999
10.11 Credit Agreement, dated December 26, 2001
23.1 Independent Auditors' Consent
_________________________
(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 June 6, 1990 (Commission File No.
033-35239).
(6) 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
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, 2002 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, 2002
- ------------------------- Board, Chief Executive Officer
Evan M. Gruber
/s/ ROBERT W. CAMPBELL Director March 29, 2002
- -------------------------
Robert W. Campbell
/s/ DANIEL J. DONAHOE Director March 29, 2002
- -------------------------
Daniel J. Donahoe
/s/ STANLEY GAINES Director March 29, 2002
- -------------------------
Stanley Gaines
/s/ CHARLES R. GWIRTSMAN Director March 29, 2002
- -------------------------
Charles R. Gwirtsman
/s/ CHARLES A. HAMILTON Director March 29, 2002
- -------------------------
Charles A. Hamilton
/s/ CHARLES C. McGETTIGAN Director March 29, 2002
- -------------------------
Charles C. McGettigan
/s/ MICHAEL G. RHODES Director, President, March 29, 2002
- ------------------------- Chief Operating Officer
Michael G. Rhodes
/s/ MYRON A. WICK III Director March 29, 2002
- -------------------------
Myron A. Wick III
20
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Annual Report - Form 10-K
Consolidated Financial Statements and Schedule
December 31, 1999, 2000 and 2001
(With Independent Auditors' Report Thereon)
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, 2000 and 2001, 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, 2001. In
connection with our audits of the consolidated financial statements, we have
also audited the accompanying financial statement schedule for the three-year
period ended December 31, 2001. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 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, 2000 and 2001 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. 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
February 28, 2002
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 2001
ASSETS (NOTE 8) 2000 2001
---- ----
Current assets:
Cash and cash equivalents $ 415,965 $ 129,772
Contracts receivable, less allowance for
contract adjustments of $703,119 in 2000 and
$1,425,000 in 2001 (note 3) 34,088,649 34,195,202
Costs and estimated earnings in excess of
billings on contracts (notes 4 and 10) 9,724,089 10,110,110
Inventories (note 5) 9,814,587 8,667,555
Due from affiliates (note 10) 657,314 478,809
Note receivable from affiliates (note 10) 45,212 --
Prepaid assets 691,486 857,540
Deferred tax assets (note 9) 3,406,756 3,574,631
Other current assets 319,092 349,751
------------ ------------
Total current assets 59,163,150 58,363,370
------------ ------------
Property and equipment, net (note 6) 14,538,234 15,292,051
Goodwill, net (notes 2 and 7) 111,156,928 109,612,025
Covenants not to compete, net 1,187,910 505,903
Debt issuance costs, net (note 8) 1,204,908 1,413,604
Deferred tax assets (note 9) 55,991 557,934
Other assets 395,055 651,010
------------ ------------
$187,702,176 $186,395,897
============ ============
See accompanying notes to consolidated financial statements.
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 2001
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 2001
---- ----
Current liabilities:
Accounts payable $ 10,442,194 $ 4,860,957
Accrued compensation 3,921,475 3,784,782
Accrued insurance expense 2,550,467 2,663,607
Income tax payable (note 9) 3,064,003 475,506
Other accrued liabilities 3,128,920 2,992,458
Billings in excess of costs and estimated
earnings on contracts (notes 4 and 10) 4,003,065 2,221,449
Current revolving credit line (note 8) 6,500,000 9,100,000
Current maturities of long-term debt (note 8) 8,400,000 7,000,000
------------ ------------
Total current liabilities 42,010,124 33,098,759
------------ ------------
Long-term debt, excluding current portion (note 23,600,000 19,000,000
------------ ------------
Total liabilities 65,610,124 52,098,759
------------ ------------
Shareholders' equity:
Series A preferred stock, $.01 par
Authorized 5,000,000 shares; issued and
outstanding 388,939 in 2000 and 2001 (note 13) 3,889 3,889
Common stock, $.01 par. Authorized
25,000,000 shares; issued and outstanding
13,348,015 and 13,456,365 in 2000 and 2001,
respectively (note 12) 133,480 134,564
Additional paid-in capital 78,007,740 78,589,720
Retained earnings 43,946,943 55,568,965
------------ ------------
Total shareholders' equity 122,092,052 134,297,138
Commitments and contingencies (notes 4, 10, 17, 18 and 19) ------------ ------------
$187,702,176 $186,395,897
============ ============
See accompanying notes to consolidated financial statements.
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1999, 2000 and 2001
1999 2000 2001
---- ---- ----
Net sales (notes 10 and 15) $167,227,690 $234,733,693 $201,116,076
Cost of goods sold (note 10) 138,667,671 198,501,243 165,067,663
------------ ------------ ------------
Gross profit 28,560,019 36,232,450 36,048,413
Selling, general, and administrative
expenses 6,833,608 8,010,917 8,092,780
Goodwill and covenant amortization
(notes 2 and 7) 3,213,450 3,701,632 3,751,642
------------ ------------ ------------
Income from operations 18,512,961 24,519,901 24,203,991
------------ ------------ ------------
Other income (expense):
Interest expense (note 8) (3,512,499) (4,987,629) (3,094,658)
Interest income 429,599 59,324 27,049
Other, net 85,243 61,296 91,349
------------ ------------ ------------
(2,997,657) (4,867,009) (2,976,260)
------------ ------------ ------------
Income before income taxes 15,515,304 19,652,892 21,227,731
Income taxes (note 9) (7,128,295) (9,236,858) (9,605,709)
------------ ------------ ------------
Net income
$ 8,387,009 $ 10,416,034 $ 11,622,022
------------ ------------ ------------
Series A preferred stock dividend
(note 13) 136,128 155,576 155,576
Net income available to
common stock $ 8,250,881 $ 10,260,458 $ 11,466,446
============ ============ ============
Basic earnings per common share
(note 14) $ 0.64 $ 0.78 $ 0.85
============ ============ ============
Basic weighted-average shares
outstanding (note 14) 12,986,067 13,237,867 13,411,368
============ ============ ============
Diluted earnings per common share
(note 14) $ 0.59 $ 0.72 $ 0.82
============ ============ ============
Diluted weighted-average shares
outstanding (note 14) 14,204,478 14,357,341 14,422,201
============ ============ ============
See accompanying notes to consolidated financial statements.
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1999, 2000 and 2001
ADDITIONAL
SERIES A PREFERRED STOCK COMMON STOCK PAID-IN RETAINED
---------------- -------------------- ------- --------
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------ ------ ------ ------ ------- --------
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
Exercise of options, including
tax benefit of
$645,714 (notes 9 and 12) -- -- 213,655 2,136 1,001,502 --
Net income -- -- -- -- -- 10,416,034
------- ------ ---------- --------- ------------ -----------
Balance, December 31, 2000 388,939 3,889 13,348,015 133,480 78,007,740 43,946,943
Exercise of options, including
tax benefit of
$254,070 (notes 9 and 12) -- -- 108,350 1,084 581,980 --
Net income -- -- -- -- -- 11,622,022
------- ------ ---------- --------- ------------ -----------
Balance, December 31, 2001 388,939 $3,889 13,456,365 $ 134,564 $ 78,589,720 $55,568,965
------- ------ ---------- --------- ------------ -----------
See accompanying notes to consolidated financial statements.
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 2000 and 2001
1999 2000 2001
------------ ----------- -----------
Cash flows from operating activities:
Net income
$ 8,387,009 $ 10,416,034 $ 11,622,022
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 5,270,027 5,968,290 6,417,154
Provision for contract adjustments 280,000 -- 683,363
Loss (gain) on sale of equipment 32,112 11,957 (41,101)
(Increase) decrease in assets, net of effects from acquisitions
Contracts receivable (1,987,086) (15,196,731) (263,710)
Costs and estimated earnings in excess of billings on contracts (2,454,412) (3,446,313) (386,021)
Inventories 3,167,029 (3,175,532) 1,991,816
Due from affiliates 1,381,060 305,594 223,717
Prepaids and other assets 948,173 (682,664) (400,233)
Income tax receivable 3,185,950 -- --
Deferred tax assets 803,684 (826,232) (669,818)
Increase (decrease) in liabilities, net of effects from acquisitions:
Accounts payable (1,207,346) 4,183,569 (6,579,351)
Accrued compensation 138,376 727,952 (136,693)
Accrued insurance expense (1,052,549) 2,180,877 113,140
Income tax payable -- 3,374,343 (2,588,497)
Other accrued liabilities (497,875) (549,575) (126,449)
Billings in excess of costs estimated earnings on contracts (1,989,656) (1,145,421) (1,781,616)
Deferred tax liabilities (31,171) (66,195) --
------------ ----------- -----------
Net cash provided by operating activities 14,373,325 2,079,953 8,077,723
------------ ----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment 649,669 2,400 99,276
Purchase of property and equipment (2,268,112) (2,566,609) (1,237,209)
Purchase of covenants not to compete (122,500) -- (125,000)
Acquisition of subsidiaries (49,515,499) -- (3,406,224)
------------ ----------- -----------
Net cash used in investing activities (51,256,442) (2,564,209) (4,669,157)
------------ ----------- -----------
(Continued)
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
1999 2000 2001
------------ ----------- -----------
Cash flows from financing activities:
Net principal borrowings under
revolving credit lines $ -- $ 6,500,000 $ 2,900,000
Net principal borrowings
(payments) on long-term debt 39,000,000 (7,000,000) (6,300,000)
------------ ----------- -----------
Payment of debt issuance costs (1,733,258) (155,286) (623,753)
Net proceeds from issuance of
common stock 600,074 357,924 328,994
Modtech Merger distribution (39,928,471) -- --
Net cash used in
financing activities (2,061,655) (297,362) (3,694,759)
------------ ----------- -----------
Net decrease in cash
and cash equivalents (38,944,772) (781,618) (286,193)
Cash and cash equivalents at
beginning of year 40,142,355 1,197,583 415,965
------------ ----------- -----------
Cash and cash equivalents at end
of year $ 1,197,583 $ 415,965 $ 129,772
============ =========== ===========
See accompanying notes to consolidated financial statements.
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(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
commercial and light industrial modular buildings.
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 consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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, revolving credit
line 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.
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
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 consolidated 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:
Buildings 15 to 39 years
Land improvements 7 to 39 years
Leasehold improvements 15 to 31 years
Machinery and equipment 5 to 15 years
Office equipment 3 to 7 years
Trucks and automobiles 3 to 5 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. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds.
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
DEBT ISSUANCE COSTS
Debt issuance costs have been deferred and are being amortized over the
term of the credit facility of five years.
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 (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 of SFAS
No. 109, "Accounting for Income Taxes". 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.
SEGMENT INFORMATION
The Company applies the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for reporting financial and descriptive information
about an enterprise's operating segments in its annual financial statements
and selected segment information in interim financial reports. In 2000 and
2001, the Company operated in one industry segment and in accordance with
No. SFAS 131, only enterprise-wide disclosures have been provided.
RECLASSIFICATION
Certain amounts in the 1999 and 2000 consolidated financial statements have
been reclassified to conform to the 2001 presentation.
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) ACQUISITIONS
SPI Merger
In 1999, Modtech, Inc. (Modtech) and SPI Holdings, Inc., a Colorado
corporation (SPI) merged pursuant to the Agreement and Plan of
Reorganization and Merger (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, 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 year
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
and net income, in thousands, are $172,870 and $7,930 for 1999,
respectively. Pro forma diluted earnings per share are $0.57 for 1999.
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
=============
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Coastal Acquisition
In 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.
IMS Acquisition
On March 8, 2001, the Company purchased 100% of the stock of Innovative
Modular Structures, Inc. (IMS). IMS designs and manufactures modular
relocatable classrooms and other modular buildings for commercial use.
IMS is based in St. Petersburg, Florida. The acquisition of IMS has been
accounted for as a purchase and, accordingly, the results of operations
of IMS are included in the Company's consolidated statements of income
from the date of acquisition. Pro forma amounts for the IMS acquisition
are not included, as the effect is not material to the Company's
consolidated financial statements.
(3) CONTRACTS RECEIVABLE
Contracts receivable consisted of customer billings for:
2000 2001
----------- -----------
Completed contracts $22,750,678 $16,722,192
Contracts in progress 8,538,451 16,010,780
Retentions 3,502,639 2,887,230
----------- -----------
34,791,768 35,620,202
Less allowance for contract adjustments (703,119) (1,425,000)
----------- -----------
$34,088,649 $34,195,202
=========== ===========
(4) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON CONTRACTS
Net costs and estimated earnings in excess of billings on contracts
consisted of:
2000 2001
------------- ------------
Net costs and estimated earnings on
uncompleted contracts $ 117,567,782 $ 99,216,210
Billings to date (112,324,879) (91,236,754)
------------- ------------
5,242,903 7,979,456
Net under (over) billed receivables from
completed contracts 478,121 (90,795)
------------- ------------
$ 5,721,024 $ 7,888,661
============= ============
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
These amounts are shown in the accompanying consolidated balance sheets
under the following captions:
2000 2001
----------- -----------
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 9,217,246 $10,076,529
Costs and estimated earnings in excess of billings
on completed contracts 506,843 33,581
----------- -----------
Costs and estimated earnings in excess of
billings on contracts 9,724,089 10,110,110
----------- -----------
Billings in excess of costs and estimated earnings
on uncompleted contracts (3,974,344) (2,097,073)
Billings in excess of costs and estimated earnings
on completed contracts (28,721) (124,376)
----------- -----------
Billings in excess of costs and estimated
earnings on contracts (4,003,065) (2,221,449)
----------- -----------
$ 5,721,024 $ 7,888,661
=========== ===========
(5) INVENTORIES
Inventories consist of:
2000 2001
------------ ------------
Raw Materials $ 8,393,568 $ 7,691,781
Work in process 1,413,381 968,136
Finished Goods 7,638 7,638
------------ ------------
$ 9,814,587 $ 8,667,555
============ ============
(6) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of:
2000 2001
------------ ------------
Leasehold improvements $ 13,944,566 $ 14,217,751
Machinery and equipment 6,330,923 6,638,119
Office equipment 1,617,383 1,855,283
Land -- 923,484
Construction in progress 516,866 975,474
Trucks and automobiles 626,407 587,769
Buildings -- 392,690
Land improvements -- 303,667
------------ ------------
23,036,145 25,894,237
Less accumulated depreciation and
amortization (8,497,911) (10,602,186)
------------ ------------
$ 14,538,234 $ 15,292,051
============ ============
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) GOODWILL
Goodwill and accumulated amortization consists of the following:
2000 2001
------------- -------------
Goodwill $ 116,618,973 $ 118,018,705
Less accumulated amortization
(5,462,045) (8,406,680)
------------- -------------
$ 111,156,928 $ 109,612,025
============= =============
(8) LONG-TERM DEBT AND REVOLVING CREDIT LINE
The Company has a $66 million credit facility with a bank. The credit
facility provides for a $40 million revolving credit line and a 5-year
term loan of $26 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 December 2006. As of
December 31, 2000 and 2001, $6,500,000 and $9,100,000, respectively, was
outstanding on the revolving credit line. The Company has one standby
letter of credit issued under the credit facility for $3,016,000 on which
no amounts were outstanding as of December 31, 2001.
Indebtedness under the credit facility bears interest at LIBOR plus
additional interest of between 1.25% and 1.75%, or the Federal funds rate
plus additional interest of between 0% to 0.5%. 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, 2001, 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:
2000 2001
------------ ------------
Term Loan $ 30,000,000 $ 26,000,000
Delayed Draw Term Loan 2,000,000 --
------------ ------------
32,000,000 26,000,000
Less current portion of long-term debt (8,400,000) (7,000,000)
------------ ------------
$ 23,600,000 $ 19,000,000
============ ============
Long-term debt maturities for the next five years are as follows:
$7,000,000 in 2002, $7,000,000 in 2003, $6,000,000 in 2004, $4,000,000 in
2005 and $2,000,000 in 2006.
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) INCOME TAXES
The components of the 1999, 2000 and 2001 provision for Federal and state
income tax (expense) benefit computed in accordance with SFAS No. 109 are
summarized below:
1999 2000 2001
------------- ------------- -------------
Current:
Federal $ (4,968,324) $ (8,704,450) $ (8,445,508)
State (1,387,457) (1,424,835) (1,830,019)
-------------- -------------- --------------
(6,355,781) (10,129,285) (10,275,527)
Deferred:
Federal (640,252) 755,446 507,114
State (132,262) 136,981 162,704
------------- ------------- -------------
$ (7,128,295) $ (9,236,858) $ (9,605,709)
============= ============= =============
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:
1999 2000 2001
------ ------ ------
Taxes, U.S. statutory rates (35.0%) (35.0%) (35.0%)
State taxes, less Federal benefit (4.5) (5.2) (5.1)
Effect of non-deductible expenses (5.8) (5.3) (4.9)
Other (0.7) (1.5) (0.3)
------ ------ ------
Total taxes on income (46.0%) (47.0%) (45.3%)
====== ====== ======
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, 2000 and 2001 are as follows:
2000 2001
----------- -----------
Deferred tax assets:
Reserves and accruals not recognized for
income tax purposes $ 2,605,029 $ 2,987,514
State taxes 418,134 657,886
Other 878,195 847,703
----------- -----------
Total gross deferred tax assets 3,901,358 4,493,103
Less valuation allowance -- --
----------- -----------
Net deferred tax assets $ 3,901,358 $ 4,493,103
----------- -----------
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Deferred tax liabilities:
Prepaids $ (84,525) $ (116,842)
Depreciation (308,209) (194,966)
Revenue recognition (45,877) (48,730)
----------- -----------
Total gross deferred tax liabilities (438,611) (360,538)
----------- -----------
Total net deferred tax assets $ 3,462,747 $ 4,132,565
=========== ===========
These amounts have been presented in the consolidated balance sheets as follows:
2000 2001
----------- -----------
Current deferred tax assets $ 3,406,756 $ 3,574,631
Noncurrent deferred tax assets 55,991 557,934
----------- -----------
Total net deferred tax assets $ 3,462,747 $ 4,132,565
=========== ===========
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
One of the companies to which the Company sells modular classrooms is
affiliated with the Company through ownership by one of the Company's
officers. The buildings are then leased to various school districts by
the related company.
The table below summarizes the related party classroom sales:
1999 2000 2001
----------- ----------- -----------
Sales $ 6,271,813 $ 4,128,935 $ 1,604,099
Cost of goods sold 5,128,455 3,213,731 1,258,635
Gross profit percentage 18.23% 22.17% 21.54%
=========== =========== ===========
The related party purchases modular relocatable classrooms from the
Company on standard terms and at standard wholesale prices.
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
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, 2000 and 2001 these amounts
totaled $476,200 and $478,809, respectively. Additional amounts arising
from these transactions are included in the following captions:
2000 2001
--------- ---------
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 800,756 $ 161,623
Billings in excess of costs and estimated
earnings on uncompleted contracts (21,312) (32,998)
========= =========
NOTE RECEIVABLE
At December 31, 2000, the Company had a note receivable from a related
party partnership in the amount of $45,212. An officer of the Company is
a partner in the partnership. Unpaid interest related to this note and
two other related party notes with principal repayment in 1996 totaled
$169,632 at December 31, 2000 and is included in due from affiliates. The
note and interest were paid in full in 2001.
OPERATING LEASES
Certain manufacturing facilities are leased from related party
partnerships under noncancellable operating leases through 2019. An
officer of the Company is a partner in the partnerships. These related
party leases require monthly payments which aggregate approximately
$38,000. 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 $376,000, $409,000 and $457,000 in
rent expense paid to related parties for the years ended December 31,
1999, 2000, and 2001, 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
$179,861, $369,430 and $342,018 in 1999, 2000, and 2001, respectively.
(12) STOCK OPTIONS
In 1989, the Company's shareholders approved a stock option plan (the
1989 Plan). The 1989 Plan provided 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 were granted only to employees,
including officers of the Company, while non-qualified stock options were
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 value of the underlying stock at the date of the grant
(110% if granted to an employee who owns 10% or more of the Company's
common stock). All of these options were granted prior to 1999.
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 provided 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 value of the underlying stock at the
date of the grant. All of these options were granted during 1994.
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In May of 1994, the Board of Directors voted and approved an additional
stock option plan (the May 1994 Plan). The May 1994 Plan provided 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
were granted only to employees, including officers of the Company, while
non-qualified stock options were 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 value of
the underlying stock at the date of the grant (110% if granted to an
employee who owns 10% or more of the Company's 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 were 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 of
the underlying stock at the date of the grant (110% if granted to an
employee who owns 10% or more of the Company's 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 value of the underlying stock
at the date of the grant (110% if granted to an employee who owns 10% or
more of the Company's common stock). In 2000 and 2001, 368,747 and
577,809 shares were granted, respectively.
Stock options outstanding under the Company's Stock Option Plans are
summarized as follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
December 31, 1998 1,360,027 $ 5.63
Granted 438,631 9.00
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
--------- --------
Granted 368,747 6.86
Exercised (213,655) 1.68
Terminated (3,532) 13.11
--------- --------
December 31, 2000 1,821,601 6.96
--------- --------
Granted 577,809 6.91
Exercised (108,350) 3.04
Terminated (85,326) 7.00
--------- --------
December 31, 2001 2,205,734 $ 7.14
========= ========
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
All stock options have a maximum term of ten years and become fully
exercisable in accordance with a predetermined vesting schedule which
varies.
The following information applies to options outstanding at December 31,
2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
----------- ------------ -------- ----------- --------
Range of exercise prices
$1.19 - $4.50 571,752 3.8 $ 2.17 517,752 $ 2.17
$6.00 - $10.00 1,436,341 8.1 7.56 466,002 8.15
$12.62 - $20.57 197,641 6.1 18.41 165,368 18.16
---------- ---------
2,205,734 $ 7.14 1,203,122 $ 6.69
========== =========
The per share weighted-average fair value of stock options granted during
1999, 2000 and 2001 was $5.06, $3.81 and $3.53, respectively, on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1999 2000 2001
---- ---- ----
Expected dividend yield 0% 0% 0%
Average risk-free interest rate 5.5% 6.2% 4.4%
Volatility factor 69.40% 66.56% 61.56%
Expected life 4 years 4 years 4 years
======= ======= =======
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recognized for its
stock options in the consolidated 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 and
earnings per share would have been reduced to the pro forma amounts
indicated below:
1999 2000 2001
----------- ------------ ------------
Net Income
As Reported $ 8,387,009 $ 10,416,034 $ 11,622,022
Pro Forma 8,054,385 9,872,535 10,772,591
=========== ============ ============
Basic earnings per share
As Reported $ 0.64 $ 0.78 $ 0.85
Pro forma 0.61 0.73 0.79
=========== ============ ============
Diluted earnings per share
As Reported $ 0.59 $ 0.72 $ 0.82
Pro Forma 0.57 0.69 0.75
=========== ============ ============
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(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 Company's assets. Dividends accrue on
each share of Series A Preferred Stock at the rate of $0.40 per annum as
declared. 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 represents the calculation of basic and diluted
earnings per common share under the provisions of SFAS No. 128:
1999 2000 2001
----------- ----------- -----------
BASIC
Net income $ 8,387,009 $10,416,034 $11,622,022
Dividends on preferred stock (note 13) 136,128 155,576 155,576
----------- ----------- -----------
Net income available to common stock $ 8,250,881 $10,260,458 $11,466,446
=========== =========== ===========
Basic weighted-average shares outstanding 12,986,067 13,237,867 13,411,368
=========== =========== ===========
Basic earnings per common share $ 0.64 $ 0.78 $ 0.85
=========== =========== ===========
DILUTED
Net income $ 8,387,009 $10,416,034 $11,622,022
=========== =========== ===========
Basic weighted-average shares outstanding 12,986,067 13,237,867 13,411,368
Add:
Conversion of preferred stock 388,939 388,939 388,939
Exercise of stock options 829,472 730,535 621,894
----------- ----------- -----------
Diluted weighted-average shares outstanding 14,204,478 14,357,341 14,422,201
=========== =========== ===========
Diluted earnings per common share $ 0.59 $ 0.72 $ 0.82
=========== =========== ===========
Options to purchase 620,351 and 606,698 shares of common stock were
outstanding during 2000 and 2001, respectively, but were not included in
the computation of diluted earnings per share because the option exercise
price was greater than the average market price of the common shares and
therefore, the effect would be anti-dilutive.
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15) MAJOR CUSTOMER
Sales to two major customers represented the following percentage of net
sales:
1999 2000 2001
---- ---- ----
Customer A 1% 6% 11%
Customer B 8% 11% 11%
==== ==== ====
(16) SUPPLEMENTAL CASH FLOW DISCLOSURES
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1999 2000 2001
----------- ----------- ------------
Cash paid during the year for:
Interest $ 3,209,179 $ 4,587,398 $ 2,684,021
=========== =========== ============
Income taxes $ 2,320,000 $ 6,766,998 $ 12,160,000
=========== =========== ============
(17) COMMITMENTS AND CONTINGENCIES
LAND LEASES
The Company has entered into various noncancellable agreements to lease
land at its manufacturing facilities through 2019. Minimum lease payments
under these noncancellable operating leases for the next five years and
thereafter are as follows:
Year ending December 31:
2002 $ 1,788,000
2003 1,379,000
2004 941,000
2005 941,000
2006 941,000
Thereafter 6,143,000
-----------
$12,133,000
===========
Of the $12,133,000 in future rental payments, $7,122,000 is payable to
related parties (note 10). Rent expense for the years ended December 31,
1999, 2000 and 2001 was $2,139,000, $2,380,000 and $2,318,000,
respectively.
(18) 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.
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(19) 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.
(20) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
In thousands, except per share amounts:
FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER
-------------- ------------- -------------- -------------
2001:
Net sales $33,793 $63,559 $61,084 $42,680
Gross profit 6,498 12,453 11,025 6,072
Net income 1,821 4,725 3,720 1,356
Earnings per
common share:
Basic $ 0.13 $ 0.35 $ 0.27 $ 0.10
Diluted 0.13 0.33 0.26 0.10
2000:
Net sales $49,380 $76,450 $65,182 $43,722
Gross profit 7,381 13,310 9,719 5,822
Net income 1,747 4,530 3,032 1,107
Earnings per
common share:
Basic $ 0.13 $ 0.34 $ 0.23 $ 0.08
Diluted 0.12 0.31 0.21 0.08
Schedule II
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1999, 2000, and 2001
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, 1999 $ 429,107 $ 50,000 $ 280,000 $ (30,988) $ 728,119
========= ========= ========= ========== ==========
Year ended December 31, 2000 $ 728,119 $ -- $ -- $ (25,000) $ 703,119
========= ======== ======== ========== ==========
Year ended December 31, 2001 $ 703,119 $ 50,000 $ 683,363 $ (11,482) $1,425,000
========= ========= ========= ========== ==========
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) Lease between the Company and Pacific Continental Modular
Enterprises, relating to the Barrett Street property in Perris,
California.
10.7(5) Lease between the Company and BMG, relating to the property in
Lathrop, California.
10.8(5) Form of Indemnity Agreement between the Company and its executive
officers and directors.
10.9(3) Financial Advisory Services Agreement.
10.10(6) Credit Agreement, dated February 16, 1999
10.11 Credit Agreement, dated December 26, 2001
23.1 Independent Auditors' Consent
(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 June 6, 1990 (Commission File No.
033-35239).
(6) Incorporated by reference to Modtech Holdings, Inc.'s Form 10-K filed
with the Commission on April 15, 1999 (Commission File No. 000-25161).