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UNITED STATES
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, 2002
[_] 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. ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
---
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2002 was $92,432,733. As of March 28, 2003, shares
entitled to cast an aggregate of 13,554,756 votes were outstanding, including
13,554,756 shares of registrant's Common Stock.
Certain portions of the registrant's definitive proxy statement for fiscal year
ended December 31, 2002 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.
In order to support enrollment growth and rectify the nations overcrowded
classrooms, there are several national and state programs focused on funding
public school construction. In California, Assembly Bill #16 (AB16) was created
to provide approximately $25 billion in proposed spending on new classroom and
school construction. AB16 was signed by Governor Gray Davis in April 2002 and
placed a $13 billion bond measure on the November 2002 ballot for voters to
approve, with an additional $12.3 billion allocated for the March 2004 ballot.
In November 2002, California voters overwhelmingly approved the $13 billion
school construction bond. At the national level, America's Better Classroom Act
was created to provide $25 billion in interest free bonds available to state and
local schools to modernize outdated buildings, repair safety problems, build new
schools and connect classrooms to technology. In addition, the U.S. Department
of Education enacted the Class-Size Reduction Program (CSRP) as part of the 1999
Department of Education Appropriations Act. This act will dispense $12 billion
over seven years to help local communities hire 100,000 qualified teachers. CSRP
will also reduce class size in grades 1-3 to a national average of 18 students
per class. Congress approved $1.6 billion in CSRP appropriations for the
2001-2002 school year.
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.
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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 operations from the date of acquisition. The excess
of fair value of net assets acquired was approximately $115.2 million, and
before January 1, 2002 was being amortized on a straight-line basis over 40
years through December 31, 2001. See "New Accounting Pronouncements."
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 operations 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 operations 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
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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.
The Company's commercial and light industrial building revenues in the
nonresidential modular market have resulted from the wide-spread acceptance of
modular structures as an alternative to traditional site construction and the
increasing number of applications for modular buildings across a broad spectrum
of industries. Because modular buildings are constructed in a factory using an
assembly line process, construction is typically not subject to the delays
caused by weather and site conditions. Modular buildings can, therefore,
generally be built faster than conventional buildings, at a lower cost and with
more consistent quality. Modular buildings can generally be relocated more
easily to meet the changing needs of end users and be quickly joined to other
modular buildings to meet increased space requirements.
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
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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 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 49.9%,
49.0% and 58.1% of the Company's total net sales for the years ended December
31, 2000, 2001 and 2002. 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 36.7%, 36.9% and 47.2%, respectively, of the Company's net sales
during the years ended December 31, 2000, 2001 and 2002, respectively, with
sales of classrooms to third party lessors to California school districts during
these periods accounting for approximately 5.6%, 5.7% and 4.5%, 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 2002 represented approximately 6.4% of the
Company's net sales, compared to approximately 5.7% and 5.6%, respectively, of
the Company's 2001 and 2000 net sales, respectively. 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, 2000, 2001 and 2002. 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, 2000, 2001 and 2002, sales of classrooms to this affiliated
leasing company comprised approximately 1.8%, 0.8% and 3.4%, 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, 2002 the Company's classroom sales force was divided into three
marketing regions: Northern, Central and Southern California. At December 31,
2002 the Company employed four classroom salespersons. These salespersons
maintain contact with the individual school districts in their respective
marketing regions on a annual 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.
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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.
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 classrooms.
The process begins with the fabrication of the steel floor joists. The floor
joists are welded to a perimeter steel frame to form the floor sub-assembly,
which is typically covered by plywood flooring. Concurrent with the floor
assembly the roof structure is welded in a similar fashion with joists and a
perimeter frame. The completed roof is then welded to the completed floor
utilizing four tube steel corner posts creating a moment connection. The unit
progresses down the production line with value added at each work station with
the installation of walls, insulation, suspended grid ceilings, electrical
systems, heating and air conditioning, windows, doors, plumbing and chalkboards
follow, with painting and finishing crews completing the process. Once
construction of a 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 modular
classrooms, in that the Company fabricates substantially all of its own metal
components at its facilities in Perris and Lathrop, California, including
structural floor and roof joists, exterior roof panels, gutters, foundation
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
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 independent third party inspectors engaged
by its customers. In addition, the Company tracks the status of all classrooms
from sale through installation and completion.
Completed classroom units, or components used in customized units, are loaded
onto specially designed flatbed trailers for towing by trucks to the school
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, 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
multi-purpose room or cafeteria.
The Company oversees installation of its modular classrooms on-site, using its
own employees for project supervision as the general contractor and, whenever
possible, for utility hook-ups and other tasks. In many projects, the Company
performs or supervises
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subcontracted electrical, plumbing, grading, paving, concrete work, and other
site preparation work and services. The Company has general contractor's
licenses in the State of California and the State of Florida.
In addition to approvals by the Department of State Architects, licensed
inspectors representing school district customers are present at each California
manufacturing facility of the Company to continuously inspect the construction
of classrooms for compliance to the approved plans. On-site inspections after
installation are also made by independent third party inspectors for purposes of
determining compliance with the approved plans and all applicable codes.
A continuous flow assembly line process also produces the Company's commercial
and light industrial modular buildings. 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 ten days.
At December 31, 2002 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 in 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. Both Arizona locations
are in the Phoenix metropolitan area. The Company has another facility in Glen
Rose, Texas. Glen Rose is located approximately 75 miles southwest of Dallas.
The seventh and eighth manufacturing facilities are located in St. Petersburg,
Florida, which is located in the Tampa bay area. In January 2003, the Company
purchased its ninth manufacturing facility which is located in Plant City,
Florida, northeast of Tampa.
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
dimensional lumber.
BACKLOG
The Company manufactures classrooms and other buildings to fill existing orders
only, and not for inventory. As of December 31, 2002, the backlog of sales
orders was approximately $85 million, up from approximately $80 million at
December 31, 2001 and 2000. Only orders, which are scheduled for completion
during the following 18-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
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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.
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 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.
8
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.
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
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.
California, Assembly Bill #16 (AB16) was created to provide approximately $25
billion in proposed spending on new classroom and school construction. AB16 was
signed by Governor Gray Davis in April 2002 and placed a $13 billion bond
measure on the November 2002 ballot for voters to approve, with an additional
$12.3 billion allocated for the March 2004 ballot. In November 2002, California
voters overwhelmingly approved the $13 billion school construction bond.
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 1998 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. Currently, California has incurred a budget
9
deficit estimated to be as much as $35 billion. This may drastically effect
allocations to support the California school districts and community college
districts.
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 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, 2002, the Company had 1,273 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 2007. 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 2003. 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 purchased its ninth facility in January 2003 for approximately $2.5
million. This facility, including office space, consists of 106,000 square feet
on a 17-acre site in Plant City, Florida, northeast of Tampa.
10
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 2003 or acquire additional properties to meet
production needs on terms that are acceptable to the Company. Two of the
Company's facilities at December 31, 2002 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.
11
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, 2002. 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
------------- ---- ---
3/31/01 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
3/31/02 11.490 8.200
6/30/02 12.896 9.950
9/30/02 12.880 9.600
12/31/02 11.739 8.800
On December 31, 2002, the closing sales price on The NASDAQ National Market for
a share of the Company's Common Stock was $9.70. The approximate number of
holders of record of the Company's Common Stock as of December 31, 2002, was 47.
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.
12
ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected statement of operations 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,
-------------------------------------------------------------
1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- -----------
Statement of Operations Data:
Net sales ........................................................ $127,620 $167,228 $234,734 $201,116 $167,973
Cost of goods sold ............................................... 97,765 138,668 198,501 165,068 144,782
----------- ----------- ----------- ----------- -----------
Gross profit ..................................................... 29,855 28,560 36,233 36,048 23,191
Selling, general and administrative expenses ..................... 4,731 6,834 8,011 8,093 7,488
Goodwill and covenant amortization ............................... 8 3,213 3,702 3,751 369
Income from operations ........................................... 25,116 18,513 24,520 24,204 15,334
Interest income (expense), net ................................... 1,097 (3,083) (4,928) (3,067) (1,628)
Other income ..................................................... 25 85 61 91 40
----------- ----------- ----------- ----------- -----------
Income before income taxes and cumulative effect of a
change in an accounting principle .............................. 26,238 15,515 19,653 21,228 13,746
Income taxes ..................................................... (9,708) (7,128) (9,237) (9,606) (5,773)
----------- ----------- ----------- ----------- -----------
Income before cumulative effect of a change in an accounting
principle ...................................................... 16,530 8,387 10,416 11,622 7,973
----------- ----------- ----------- ----------- -----------
Cumulative effect of a change in an accounting principle ......... -- -- -- -- (37,288)
----------- ----------- ----------- ----------- -----------
Net income (loss) ................................................ 16,530 8,387 10,416 11,622 (29,316)
----------- ----------- ----------- ----------- -----------
Net income (loss) available for common stockholders (1) .......... $ 16,530 $ 8,251 $ 10,260 $ 11,466 $(29,471)
----------- ----------- ----------- ----------- -----------
Basic earnings per common share before cumulative effect of
a change in an accounting principle ............................ $ 1.68 $ 0.64 $ 0.78 $ 0.85 $ 0.58
Cumulative effect of a change in an accounting principle per
common share - basic ........................................... -- -- -- -- $ (2.77)
----------- ----------- ----------- ----------- -----------
Basic earnings (loss) per common share ........................... $ 1.68 $ 0.64 $ 0.78 $ 0.85 $ (2.19)
Basic weighted-average shares outstanding (in thousands) ......... 9,857 12,986 13,238 13,411 13,479
Diluted earnings per common share before cumulative effect of a
change in an accounting principle .............................. $ 1.50 $ 0.59 $ 0.72 $ 0.82 $ 0.54
Cumulative effect of a change in an accounting principle per
common share - diluted ......................................... -- -- -- -- $ (2.53)
----------- ----------- ----------- ----------- -----------
Diluted earnings (loss) per common share ......................... $ 1.50 $ 0.59 $ 0.72 $ 0.82 $ (1.99)
Diluted weighted-average shares outstanding
(in thousands) ................................................. 10,988 14,204 14,357 14,422 14,723
As of December 31,
-------------------------------------------------------------
1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Working capital .................................................. $ 52,129 $ 11,231 $ 17,153 $ 25,265 $ 28,001
Total assets ..................................................... 82,873 168,723 187,702 186,396 154,542
Total liabilities ................................................ 17,777 58,050 65,610 52,099 49,277
Long-term debt, excluding current portion ........................ -- 32,000 23,600 19,000 12,000
Shareholders' equity ............................................. 65,097 110,672 122,092 134,297 105,265
Year Ended December 31,
-------------------------------------------------------------
1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- -----------
Selected Operating Data:
Gross margin ..................................................... 23.4% 17.1% 15.4% 17.9% 13.8%
Operating margin ................................................. 19.7% 11.1% 10.4% 12.0% 9.1%
Backlog at period end(2) ......................................... $ 25,000 $ 60,000 $ 80,000 $ 80,000 $ 85,000
- ------------
(1) After deduction of preferred stock dividends of $156,000 for each of the
years ended December 31, 2000, 2001 and 2002, 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 18 months.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
This annual report contains statements which, to the extent that they are not
recitations of historical fact, such as our belief that we have sufficient
liquidity to meet our near-term operating needs and that adoption of Statement
of Financial Accounting Standards No. 145 is not expected to have a material
effect on our results of operations or financial position constitute
forward-looking statements within the meaning of the Securities Act of 1933 and
the Securities Exchange Act of 1934. The words "believe," "estimate,"
"anticipate," "project," "intend," "expect," "plan," "outlook," "forecast"
"may," "will," "should," "continue," "predict" and similar expressions are
intended to identify forward-looking statements. Such forward-looking statements
are intended to be subject to the safe harbor protection within the meaning of
that term in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements. Statements in this annual report, including the
Notes to the Consolidated Financial Statements and in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
describe factors, among others, that could contribute to or cause such
differences. Although we believe the expectations reflected in our
forward-looking statements are based upon reasonable assumptions, there is no
assurance that our expectations will be attained.
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 operations 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,
--------------------------------
2000 2001 2002
---------- ---------- --------
Net sales .................................. 100.0% 100.0% 100.0%
Cost of sales .............................. 84.6 82.1 86.2
-------- -------- --------
Gross profit ............................... 15.4 17.9 13.8
Selling, general and administrative
expenses ................................. 3.4 4.0 4.5
Goodwill and covenant amortization ......... 1.6 1.9 0.2
-------- -------- --------
Income from operations ..................... 10.4 12.0 9.1
Interest expense, net ...................... (2.1) (1.5) (0.9)
Other income ............................... -- -- --
-------- -------- --------
Income before income taxes and cumulative
effect of a change in an accounting
principle ................................ 8.4 10.5 8.2
Income taxes ............................... 3.9 4.7 3.4
-------- -------- --------
Income before cumulative effect of a
change in an accounting principle ........ 4.4% 5.8% 4.8%
-------- -------- --------
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net sales for the year ended December 31, 2002 decreased to $168.0 million, a
decrease of $33.1 million, or approximately 16.5%, from $201.1 million in 2001.
The decrease in 2002 is attributable to lower sales of commercial and industrial
buildings, reflecting the general business decline in the non-residential
building sector and the overall economy.
For the year ended December 31, 2002, gross profit was $23.2 million, a decrease
of $12.9 million, or approximately 35.7%, from 2001 gross profit of $36.0
million. Gross profit as a percentage of net sales decreased to 13.8% in 2002
from 17.9% in 2001. The
14
percentage decrease in gross profit was due principally to a decrease in
production. The Company was unable to recover a portion of its fixed production
facility costs through billings to customers.
In 2002, selling, general and administrative expenses decreased to $7.5 million
from $8.1 million in 2001. As a percentage of net sales, selling, general and
administrative expenses increased to 4.5% in 2002 from 4.0% in 2001. The
percentage increase in selling, general and administrative expenses was due
principally to a decrease in net sales. The Company was unable to recover a
portion of its fixed selling, general and administrative costs through billings
to customers.
Goodwill was recorded for acquisitions in 1999 and 2001 and was amortized from
the respective dates of acquisition through December 31, 2001. SFAS No. 142
requires that goodwill no longer be amortized, but instead tested for impairment
at least annually in accordance with the provisions of SFAS No. 142.
Accordingly, no goodwill amortization was recorded for the year ended December
31, 2002. In accordance with SFAS No. 142, the Company took a one-time
impairment charge to goodwill of $37,288,488, which was recognized as a
cumulative effect of a change in an accounting principle in the three month
period ended March 31, 2002 (see note 1). The Company continues to amortize its
covenants not to compete over their respective useful lives.
In 2002, interest expense, net decreased to $1.6 million from $3.1 million in
2001. 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, 2002. As a percentage of net sales, interest expense,
net decreased to 0.9% in 2002 from 1.5% in 2001.
Income before income taxes and the cumulative effect of a change in an
accounting principle for the year ended December 31, 2002 decreased by $7.5
million, or 35.2%, when compared to 2001. As a percentage of net sales, income
before income taxes and the cumulative effect of a change in an accounting
principle decreased from 10.5% in 2001, to 8.2% in 2002.
The provision for income taxes was $5.8 million for the year ended December 31,
2002, compared to $9.6 million for 2001. The Company's effective tax rate
decreased to 42.0% for the year ended December 31, 2002 from 45.3% for the year
ended December 31, 2001. The decrease in income taxes is attributed to the
decrease in income before income taxes and cumulative effect of a change in an
accounting principle, which is primarily the result of the decrease in net
sales.
Income before the cumulative effect of a change in an accounting principle for
2002 decreased by $3.6 million, or 31.4%, when compared to 2001. As a percentage
of net sales, income before the cumulative effect of a change in an accounting
principle decreased from 5.8% in 2001 to 4.8% in 2002.
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 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 was being amortized from the respective
dates of acquisition through December 31, 2001. The Company ceased amortizing
goodwill on January 1, 2002 upon the adoption of SFAS No. 142.
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.
15
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.
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, 2000, 2001 and 2002, the Company's operations provided cash in the amounts
of approximately $2.1 million, $8.1 million and $8.2 million, respectively. At
December 31, 2002, the Company had approximately $213,000 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. The credit facility expires in December 2006. At
December 31, 2002, $9,000,000 was outstanding under the revolving credit line.
The Company had working capital of $17.2 million, $25.3 million and $28.0
million at December 31, 2000, 2001 and 2002, respectively. In 2002, current
assets increased by $6.7 million, with an increase of $7.8 million in costs and
estimated earnings in excess of billings on contracts, an increase of $0.9
million in due from affiliates and an increase of $0.5 million in prepaid
assets, offset by a decrease of $1.8 million in contract receivables and a
decrease of $0.9 million in deferred tax assets. Current liabilities increased
by $4.0 million, attributable to an increase of $4.0 million in accounts payable
and accrued liabilities. 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
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.
Capital expenditures amounted to $2.6 million, $1.2 million and $1.1 million
during the years ended December 31, 2000, 2001 and 2002, respectively. In 2000,
2001 and 2002, 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, 2002:
Payments Due by Year
--------------------
(amounts in thousands)
Total 2003 2004 2005 2006 2007 Thereafter
----- ---- ---- ---- ---- ---- ----------
Long-term debt $19,000 $7,000 $6,000 $4,000 $2,000 -- --
Operating leases 11,740 1,890 1,288 1,117 1,117 1,041 $5,287
--------------------------------------------------------------------------
16
Total contractual cash obligations $30,740 $8,890 $7,288 $5,117 $3,117 $1,041 $5,287
======================================================================
USE OF ESTIMATES AND 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. Management continually evaluates its estimates and
assumptions including those related the Company's most critical accounting
policies. Management bases its estimates and assumptions on historical
experience and other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. Changes in economic conditions could have an impact
on these estimates and the Company's actual results. Management believes that
the following may involve a higher degree of judgment or complexity:
Allowances for Contract Adjustments
The Company maintains allowances for contract adjustments that result from the
inability of its customers to make their required payments. Management bases its
allowances through analysis of the aging of accounts receivable at the date of
the financial statements, assessments of historical collection trends, and an
evaluation of the impact of current economic conditions.
Revenue Recognition on 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.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) 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 April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
(SFAS 145). This statement eliminates the automatic classification of gain or
loss on extinguishment of debt as an extraordinary item of income and requires
that such gain or loss be evaluated for extraordinary classification under the
criteria of Accounting Principles Board No. 30 "Reporting Results of
Operations". This statement also requires sale-leaseback accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions, and makes various other technical corrections to
existing pronouncements. The Company is required to adopt SFAS 145 for the year
ending December 31, 2003. The adoption of this statement is not expected to have
a material effect on the Company's results of operations or financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of such costs covered by the standard include lease termination costs
and certain employee severance costs that are associated with a restructuring,
discontinued operations, plant closings or other exit or disposal activities.
SFAS 146 is effective prospectively for exit and disposal activities initiated
after December 31, 2002, with earlier application encouraged. As the provisions
of SFAS 146 are to be applied prospectively after adoption date, the Company
cannot determine the potential effects that adoption of SFAS 146 will have on
the Company's results of operations or financial position.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (the "Interpretation"), which addresses the disclosure
to be made by a guarantor in its interim and annual financial statements about
its obligations under guarantees. At December 31, 2002, the Company has no such
guarantees.
17
On December 31, 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation. " SFAS No. 148 amends the disclosure
requirements in SFAS No. 123 for stock-based compensation for annual periods
ending after December 15, 2002 and for interim periods beginning after December
15, 2002, including those companies that continue to recognize stock-based
compensation under APB Opinion No. 25, "Accounting for Stock Issued to
Employees. " In addition, SFAS No. 148 provides three alternative transition
methods for companies that choose to adopt the fair value measurement provisions
of SFAS No. 123. For a complete explanation on the valuation of our stock-based
compensation consistent with the method prescribed by SFAS No. 123, please refer
to note 1 to the financial statements included in our annual report for fiscal
year ended December 31, 2002. The Company believes that there has not been a
material impact to the Company upon adoption of SFAS No. 148 other than the
disclosure requirements.
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, Consolidation of Variable Interest Entities, (FIN 46) which requires
extensive disclosures (including certain disclosures that are applicable to
December 31, 2002 financial statements) and will require companies to evaluate
variable interest entities to determine whether to apply the consolidation
provisions of FIN 46 to those entities. Companies must apply FIN 46 to entities
with which they are involved if the entity's equity has specified
characteristics. If it is reasonably possible that a company will have a
significant variable interest in a variable interest entity at the date FIN 46's
consolidation requirements become effective, the company must disclose the
nature, purpose, size and activities of the variable interest entity and the
consolidated enterprise's maximum exposure to loss resulting from its
involvement with the variable interest entity in all financial statements issued
after January 31, 2003 (including December 31, 2002 financial statements)
regardless of when the variable interest entity was created. We believe the
consolidation provisions of FIN 46, if applicable, would apply to variable
interest entities created after January 31, 2003 immediately, and to variable
interest entities created before February 1, 2003 in our interim period
beginning after June 15, 2003. The adoption of this statement is not expected to
have a material effect on the Company's results of operations or financial
position.
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 2002, 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 2003 will be $25
million. Therefore, a one-percentage point increase in interest rates would
result in an increase in interest expense of $250,000 for the year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated 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
18
DISCLOSURE
Not applicable.
19
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.
ITEM 14. CONTROLS AND PROCEDURES
As of a date within 90 days of the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as
amended. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, our disclosure controls and procedures are
effective in timely alerting them to material information relating to us that is
required to be included in our SEC filings. There have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date we carried out our evaluation.
20
PART IV
ITEM 15. 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, 2001 and 2002
Consolidated Statements of Operations - For the Years Ended December
31, 2000, 2001 and 2002
Consolidated Statements of Shareholders' Equity - For the Years Ended
December 31, 2000, 2001 and 2002
Consolidated Statements of Cash Flows - For the Years Ended December
31, 2000, 2001 and 2002
Notes to Consolidated Financial Statements
Schedule Included - For the Years Ended December 31, 2000, 2001 and 2002
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.
21
10.9/3/ Financial Advisory Services Agreement.
10.10/6/ Credit Agreement, dated February 16, 1999
10.11/7/ Credit Agreement, dated December 26, 2001
23.1 Independent Auditors' Consent
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- ----------
/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).
/7/ Incorporated by reference to Modtech Holdings, Inc.'s Form 10-K filed with
the Commission on April 1, 2002 (Commission File No. 000-25161).
22
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 31, 2003 MODTECH HOLDINGS, INC.,
a Delaware corporation
By: /s/ SHARI L. WALGREN
--------------------
Shari L. Walgren
Chief Financial Officer
By: /s/ EVAN M. GRUBER
------------------
Evan M. Gruber
Chief Executive Officer
23
CERTIFICATIONS PURSUANT TO
RULE 13a-14 UNDER THE
SECURITIES EXCHANGE ACT OF 1934
I, Evan M. Gruber, certify that:
1. I have reviewed this annual report on Form 10-K of Modtech Holdings, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Evan M. Gruber
- ------------------
Chief Executive Officer
March 31, 2003
24
I, Shari L. Walgren, certify that:
1. I have reviewed this annual report on Form 10-K of Modtech Holdings, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Shari L. Walgren
- --------------------
Chief Financial Officer
March 31, 2003
25
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 31, 2003
- ------------------ Board, Chief Executive Officer
Evan M. Gruber
/s/ ROBERT W. CAMPBELL Director March 31, 2003
- ----------------------
Robert W. Campbell
/s/ DANIEL J. DONAHOE Director March 31, 2003
- ---------------------
Daniel J. Donahoe
/s/ STANLEY GAINES Director March 31, 2003
- ------------------
Stanley Gaines
/s/ CHARLES R. GWIRTSMAN Director March 31, 2003
- ------------------------
Charles R. Gwirtsman
/s/ CHARLES C. McGETTIGAN Director March 31, 2003
- -------------------------
Charles C. McGettigan
/s/ MICHAEL G. RHODES Director, President, March 31, 2003
- --------------------- Chief Operating Officer
Michael G. Rhodes
/s/ MYRON A. WICK III Director March 31, 2003
- ---------------------
Myron A. Wick III
26
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Annual Report - Form 10-K
Consolidated Financial Statements and Schedule
December 31, 2000, 2001 and 2002
(With Independent Auditors' Report Thereon)
27
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, 2001 and 2002, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2002. 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, 2002. 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, 2001 and 2002 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, 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.
As discussed in Notes 1 and 7 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and intangible assets in
2002.
/s/ KPMG LLP
Orange County, California
March 5, 2003
28
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2002
ASSETS 2001 2002
------------- -------------
Current assets:
Cash and cash equivalents $ 129,772 $ 212,889
Contracts receivable, less allowance for contract adjustments of
$1,425,000 in 2001 and 2002 34,195,202 32,409,016
Costs and estimated earnings in excess of billings on contracts 10,110,110 17,922,948
Inventories 8,667,555 8,355,580
Due from affiliates 478,809 1,367,987
Prepaid assets 857,540 1,319,173
Deferred tax assets 3,574,631 2,654,272
Other current assets 349,751 823,185
------------- -------------
Total current assets 58,363,370 65,065,050
------------- -------------
Property and equipment, net 15,292,051 14,478,225
Goodwill, net 109,612,025 72,383,537
Covenants not to compete, net 505,903 137,311
Debt issuance costs, net 1,413,604 1,159,092
Deferred tax assets 557,934 --
Other assets 651,010 1,318,851
------------- -------------
$ 186,395,897 $ 154,542,066
============= =============
See accompanying notes to consolidated financial statements.
29
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2002
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2002
------------- -------------
Current liabilities:
Accounts payable $ 4,860,957 $ 9,858,941
Accrued compensation 3,784,782 3,643,592
Accrued insurance expense 2,663,607 2,187,625
Other accrued liabilities 3,467,964 3,130,449
Billings in excess of costs and estimated earnings on contracts 2,221,449 2,243,514
Current revolving credit line 9,100,000 9,000,000
Current maturities of long-term debt 7,000,000 7,000,000
------------- -------------
Total current liabilities 33,098,759 37,064,121
------------- -------------
Deferred tax liabilities -- 212,624
Long-term debt, excluding current portion 19,000,000 12,000,000
------------- -------------
Total liabilities 52,098,759 49,276,745
------------- -------------
Shareholders' equity:
Series A preferred stock, $.01 par. Authorized 5,000,000 shares;
issued and outstanding 388,939 in 2001 and 2002 3,889 3,889
Common stock, $.01 par. Authorized 25,000,000 shares; issued and
outstanding 13,456,365 and 13,504,756 in 2001 and 2002,
respectively 134,564 135,048
Additional paid-in capital 78,589,720 78,873,238
Retained earnings 55,568,965 26,253,146
------------- -------------
Total shareholders' equity 134,297,138 105,265,321
Commitments and contingencies (notes 4, 10, 17, 18 and 19)
------------- -------------
$ 186,395,897 $ 154,542,066
============= =============
See accompanying notes to consolidated financial statements.
30
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2000, 2001 and 2002
2000 2001 2002
------------- ------------- -------------
Net sales $ 234,733,693 $ 201,116,076 $ 167,972,842
Cost of goods sold 198,501,243 165,067,663 144,781,691
------------- ------------- -------------
Gross profit 36,232,450 36,048,413 23,191,151
Selling, general, and administrative expenses 8,010,917 8,092,780 7,488,269
Goodwill and covenant amortization 3,701,632 3,751,642 368,597
------------- ------------- -------------
Income from operations 24,519,901 24,203,991 15,334,285
------------- ------------- -------------
Other income (expense):
Interest expense (4,987,629) (3,094,658) (1,630,702)
Interest income 59,324 27,049 2,197
Other, net 61,296 91,349 40,204
------------- ------------- -------------
(4,867,009) (2,976,260) (1,588,301)
------------- ------------- -------------
Income before income taxes and cumulative
effect of a change in an accounting principle 19,652,892 21,227,731 13,745,984
Income taxes (9,236,858) (9,605,709) (5,773,315)
------------- ------------- -------------
Income before cumulative effect of a change in
an accounting principle 10,416,034 11,622,022 7,972,669
------------- ------------- -------------
Cumulative effect of a change in an accounting principle -- -- (37,288,488)
Net income (loss) 10,416,034 11,622,022 (29,315,819)
------------- ------------- -------------
Series A preferred stock dividend 155,576 155,576 155,576
Net income (loss) available to common
stockholders $ 10,260,458 $ 11,466,446 $ (29,471,395)
============= ============= =============
Basic earnings per common share before cumulative effect of
a change in an accounting principle $ 0.78 $ 0.85 $ 0.58
============= ============= =============
Cumulative effect of a change in an accounting principle
per common share - basic -- -- (2.77)
============= ============= =============
Basic earnings (loss) per common share $ 0.78 $ 0.85 $ (2.19)
============= ============= =============
Basic weighted-average shares outstanding 13,237,867 13,411,368 13,479,031
============= ============= =============
Diluted earnings per common share before cumulative effect
of a change in an accounting principle $ 0.72 $ 0.82 $ 0.54
============= ============= =============
Cumulative effect of a change in an accounting principle
per common share - diluted -- -- (2.53)
============= ============= =============
Diluted earnings (loss) per common share $ 0.72 $ 0.82 $ (1.99)
============= ============= =============
Diluted weighted-average shares outstanding 14,357,341 14,422,201 14,722,562
============= ============= =============
See accompanying notes to consolidated financial statements.
31
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 2000, 2001 and 2002
Additional
Series A Preferred Stock Common Stock paid-in Retained
--------------------------- ---------------------------
Shares Amount Shares Amount capital earnings
------------ ------------ ------------ ------------ ------------ ------------
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 -- -- 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 -- -- 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
============ ============ ============ ============ ============ ============
Exercise of options, including tax benefit
of $128,785 -- -- 48,391 484 283,518 --
Net loss -- -- -- -- -- (29,315,819)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 388,939 $ 3,889 13,504,756 $ 135,048 $ 78,873,238 $ 26,253,146
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
32
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 2001 and 2002
2000 2001 2002
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 10,416,034 $ 11,622,022 $(29,315,819)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Cumulative effect of a change in an
accounting principle -- -- 37,288,488
Depreciation and amortization 5,968,290 6,417,154 2,589,556
Provision for contract adjustments -- 683,363 --
Loss (gain) on sale of equipment 11,957 (41,101) 2,372
(Increase) decrease in assets, net of
effects from acquisitions:
Contracts receivable (15,196,731) (263,710) 1,786,186
Costs and estimated earnings in excess
of billings on contracts (3,446,313) (386,021) (7,812,838)
Inventories (3,175,532) 1,991,816 311,975
Due from affiliates 305,594 223,717 (889,178)
Prepaids and other assets (682,664) (400,233) (1,602,908)
Deferred tax assets (826,232) (669,818) 1,478,293
Increase (decrease) in liabilities, net of
effects from acquisitions:
Accounts payable 4,183,569 (6,579,351) 4,997,984
Accrued compensation 727,952 (136,693) (141,190)
Accrued insurance expense 2,180,877 113,140 (475,982)
Other accrued liabilities 2,824,768 (2,714,946) (208,730)
Billings in excess of costs and
estimated earnings on contracts (1,145,421) (1,781,616) 22,065
Deferred tax liabilities (66,195) -- 212,624
------------ ------------ ------------
Net cash provided by operating
activities 2,079,953 8,077,723 8,242,898
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of equipment 2,400 99,276 6,000
Purchase of property and equipment (2,566,609) (1,237,209) (1,133,718)
Purchase of covenants not to compete -- (125,000) --
Acquisition of subsidiaries, net of cash
acquired -- (3,406,224) (60,000)
------------ ------------ ------------
Net cash used in investing
activities (2,564,209) (4,669,157) (1,187,718)
------------ ------------ ------------
(Continued)
33
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
2000 2001 2002
----------- ----------- -----------
Cash flows from financing activities:
Net principal borrowings (payments) under
revolving credit line $ 6,500,000 $ 2,900,000 $ (100,000)
Net principal payments on long-term debt (7,000,000) (6,300,000) (7,000,000)
Payment of debt issuance costs (155,286) (623,753) (27,280)
Net proceeds from issuance of common stock 357,924 328,994 155,217
----------- ----------- -----------
Net cash used in financing
activities (297,362) (3,694,759) (6,972,063)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents (781,618) (286,193) 83,117
Cash and cash equivalents at beginning of year 1,197,583 415,965 129,772
----------- ----------- -----------
Cash and cash equivalents at end of year $ 415,965 $ 129,772 $ 212,889
=========== =========== ===========
See accompanying notes to consolidated financial statements.
34
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 2001 and 2002
(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,
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.
35
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 and building improvements 5 to 39 years
Leasehold improvements 1 to 30 years
Machinery and equipment 5 to 20 years
Office equipment 3 to 7 years
Trucks and automobiles 3 to 5 years
Impairment of Long-Lived Assets
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
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 141, "Business
Combinations", (SFAS No. 141) and SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142). SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations consummated
after June 30, 2001. SFAS No. 141 specifies criteria that intangible assets
acquired in a business combination must meet to be recognized and reported
separately from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No.
36
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
142. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 121 and subsequently, SFAS No. 144 after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and
SFAS No. 142 as of January 1, 2002. Upon adoption of SFAS No. 142, the
Company was required to evaluate its existing intangible assets and
goodwill that were acquired in purchase business combinations, and make any
necessary reclassifications in order to conform with the new classification
criteria in SFAS No. 141 for recognition separate from goodwill. The
Company was required to reassess the useful lives and residual values of
all intangible assets acquired, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. If an
intangible asset was identified as having an indefinite useful life, the
Company was required to test the intangible asset for impairment in
accordance with the provisions of SFAS No. 142 within the first interim
period. Impairment is measured as the excess of carrying value over the
fair value of an intangible asset with an indefinite life. Any impairment
loss was measured as of the date of adoption and recognized as a cumulative
effect of a change in an accounting principle in the first interim period.
In connection with SFAS No. 142's transitional goodwill impairment
evaluation, SFAS No. 142 required the Company to perform an assessment of
whether there was an indication that goodwill was impaired as of the date
of adoption, January 1, 2002. To accomplish this, the Company identified
its reporting units and determined the carrying value of each reporting
unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of January 1,
2002. The Company determined the fair value of each reporting unit and
compared it to the carrying amount of the reporting unit. To the extent the
carrying amount of a reporting unit exceeded the fair value of the
reporting unit, an indication existed that the reporting unit goodwill may
be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company compared the
implied fair value of the reporting unit goodwill with the carrying amount
of the reporting unit goodwill, both of which were measured as of the date
of adoption. The implied fair value of goodwill was determined by
allocating the fair value of the reporting unit to all of the assets
(recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with SFAS No.
141. The residual fair value after this allocation was the implied fair
value of the reporting unit goodwill. Any transitional impairment loss was
recognized as a cumulative effect of a change in an accounting principle in
the Company's 2002 consolidated statement of operations for the three
months ended March 31, 2002.
In accordance with SFAS No. 142, quoted market prices in active markets are
the best evidence of fair value and shall be used as the basis for
measurement, if available. The Company used quoted market prices to perform
the assessment of whether there was an indication that goodwill may be
impaired. As a result of this assessment, there was an indication that
goodwill was impaired. As required by SFAS No. 142, the Company performed a
fair market valuation analysis, using market multiples, and other factors,
on its business that had previously recorded goodwill. As a result of this
analysis, the Company recorded an impairment charge of $37,288,488 during
the three months ended March 31, 2002. The impairment loss was recognized
as a cumulative effect of a change in an accounting principle in the
Company's 2002 consolidated statement of operations for the year ended
December 31, 2002.
The Company recorded goodwill amortization expense in the amount of
$2,915,474 and $2,944,635 for the years ended December 31, 2000 and 2001,
respectively. No goodwill amortization was recorded for the year ended
December 31, 2002.
Debt Issuance Costs
Debt issuance costs have been deferred and are being amortized over the
term of the credit facility of five years.
37
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Stock Option Plans
Prior to January 1, 1996, the Company accounted for stock option plans in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recognized on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standard (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 (loss) and pro forma earnings (loss) 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.
The per share weighted-average fair value of stock options granted during
2000, 2001 and 2002 was $3.81, $3.53, and $4.88 respectively, on the date
of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions:
2000 2001 2002
--------- --------- ---------
Expected dividend yield 0% 0% 0%
Average risk-free interest rate 6.2% 4.4% 3.4%
Volatility factor 66.56% 61.56% 66.61%
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 (loss) and
earnings (loss) per share would have been reduced to the pro forma amounts
indicated below:
2000 2001 2002
------------- ------------ -------------
Net income (loss)
As Reported $ 10,416,034 $ 11,622,022 $ (29,315,819)
Pro Forma 9,872,535 10,772,591 (30,300,674)
============= ============ =============
Basic earnings (loss) per share
As Reported $ 0.78 $ 0.85 $ (2.19)
Pro forma 0.73 0.79 (2.24)
============= ============ =============
Diluted earnings (loss) per share
As Reported $ 0.72 $ 0.82 $ (1.99)
Pro Forma 0.69 0.75 (2.06)
============= ============ =============
38
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Earnings (loss) per Share
The Company accounts for earnings (loss) per share in accordance with SFAS
No. 128, "Earnings per Share." This Statement requires the presentation of
both basic and diluted net income (loss) per share for financial statement
purposes. Basic net income (loss) per share is computed by dividing income
(loss) available to common shareholders by the weighted average number of
common shares outstanding. Diluted net income (loss) 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,
2001 and 2002, the Company operated in one industry segment and in
accordance with SFAS No. 131, only enterprise-wide disclosures have been
provided.
Reclassification
Certain amounts in the 2000 and 2001 consolidated financial statements have
been reclassified to conform to the 2002 presentation.
(2) 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 operations
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:
2001 2002
------------ ------------
Completed contracts $ 16,722,192 $ 21,634,246
Contracts in progress 16,010,780 7,455,198
Retentions 2,887,230 4,744,572
------------ ------------
35,620,202 33,834,016
39
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Less allowance for contract adjustments (1,425,000) (1,425,000)
------------ ------------
$ 34,195,202 $ 32,409,016
============ ============
(4) Costs and Estimated Earnings in Excess of Billings on Contracts
Net costs and estimated earnings in excess of billings on contracts
consisted of:
2001 2002
------------- -------------
Net costs and estimated earnings on
uncompleted contracts $ 99,216,210 $ 103,486,168
Billings to date (91,236,754) (87,722,104)
------------- -------------
7,979,456 15,764,064
Net over billed receivables from completed
contracts (90,795) (84,630)
------------- -------------
$ 7,888,661 $ 15,679,434
============= =============
These amounts are shown in the accompanying consolidated balance sheets
under the following captions:
2001 2002
------------- -------------
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 10,076,529 $ 17,898,684
Costs and estimated earnings in excess of billings on
completed contracts 33,581 24,264
------------- -------------
Costs and estimated earnings in excess of
billings on contracts 10,110,110 17,922,948
------------- -------------
Billings in excess of costs and estimated earnings on
uncompleted contracts (2,097,073) (2,134,620)
Billings in excess of costs and estimated earnings on
completed contracts (124,376) (108,894)
------------- -------------
Billings in excess of costs and estimated
earnings on contracts (2,221,449) (2,243,514)
------------- -------------
$ 7,888,661 $ 15,679,434
============= =============
(5) Inventories
Inventories consist of:
2001 2002
------------- -------------
Raw Materials $ 7,691,781 $ 6,622,400
Work in process 968,136 1,733,180
Finished Goods 7,638 --
------------- -------------
40
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
$ 8,667,555 $ 8,355,580
============= =============
(6) Property and Equipment, Net
Property and equipment, net consists of:
2001 2002
------------- -------------
Leasehold improvements $ 14,217,751 $ 14,183,463
Machinery and equipment 6,638,119 6,916,047
Office equipment 1,855,283 1,971,531
Land 923,484 923,484
Construction in progress 975,474 600,833
Trucks and automobiles 587,769 609,828
Buildings 392,690 472,144
Land and building improvements 303,667 767,353
------------- -------------
25,894,237 26,444,683
Less accumulated depreciation and
amortization (10,602,186) (11,966,458)
------------- -------------
$ 15,292,051 $ 14,478,225
============= =============
(7) Goodwill
The changes in the carrying amount of goodwill are as follows:
Balance as of January 1, 2002 $ 109,612,025
Goodwill acquired during the period 60,000
Impairment loss (37,288,488)
-------------
Balance as of December 31, 2002 $ 72,383,537
=============
The following table reconciles previously reported net income (loss) as
if the provisions of SFAS No. 142 were in effect in 2000 and 2001:
2000 2001 2002
------------- -------------- -------------
Reported net income (loss) $ 10,416,034 $ 11,622,022 $ (29,315,819)
Add back: Goodwill amortization, net of taxes 2,673,618 2,397,950 --
Add back: Cumulative effect of a change in
an accounting principle -- -- 37,288,488
------------- -------------- -------------
Adjusted net income $ 13,089,652 $ 14,019,972 $ 7,972,669
============= ============== =============
Reported basic earnings (loss) per common
share $ 0.78 $ 0.85 $ (2.19)
Add back: Goodwill amortization, net of taxes 0.20 0.18 --
41
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Add back: Cumulative effect of a change in
an accounting principle -- -- 2.77
------------- -------------- -------------
Adjusted basic earnings per common share $ 0.98 $ 1.03 $ 0.58
============= ============== =============
Reported diluted earnings (loss) per common
share $ 0.72 $ 0.82 $ (1.99)
Add back: Goodwill amortization, net of taxes 0.19 0.16 --
Add back: Cumulative effect of a change in an
accounting principle -- -- 2.53
------------- -------------- -------------
Adjusted diluted earnings per common share $ 0.91 $ 0.98 $ 0.54
============= ============== =============
(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, 2001 and 2002, $9,100,000 and $9,000,000, respectively, was
outstanding on the revolving credit line. The Company has two standby
letters of credit issued under the credit facility for $4,479,125 on
which no amounts were outstanding as of December 31, 2002.
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. Interest rates at December
31, 2002 ranged from 3.3% to 4.5% on the amount outstanding under the
credit facility.
The credit facility contains various financial covenants for which the
Company was in compliance or obtained a waiver at December 31, 2002,
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:
2001 2002
-------------- -------------
Term Loan $ 26,000,000 $ 19,000,000
Less current portion of long-term debt (7,000,000) (7,000,000)
-------------- -------------
$ 19,000,000 $ 12,000,000
============== =============
Long-term debt maturities for the next four years are as follows:
$7,000,000 in 2003, $6,000,000 in 2004, $4,000,000 in 2005 and $2,000,000
in 2006.
42
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes
The components of the 2000, 2001 and 2002 provision for Federal and state
income tax (expense) benefit computed in accordance with SFAS No. 109 are
summarized below:
2000 2001 2002
------------ ------------ ------------
Current:
Federal $ (8,704,450) $ (8,445,508) $ (3,312,724)
State (1,424,835) (1,830,019) (769,674)
------------ ------------ ------------
(10,129,285) (10,275,527) (4,082,398)
Deferred:
Federal 755,446 507,114 (1,445,512)
State 136,981 162,704 (245,405)
------------ ------------ ------------
$ (9,236,858) $ (9,605,709) $ (5,773,315)
============ ============ ============
The tax benefits associated with dispositions from employee stock option
plans of $645,714, $254,070 and $128,785 in 2000, 2001 and 2002,
respectively, were recorded directly to additional paid-in capital.
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:
2000 2001 2002
------------ ------------ ------------
Taxes, U.S. statutory rates (35.0%) (35.0%) (35.0%)
State taxes, less Federal benefit (5.2) (5.1) (4.6)
Effect of non-deductible expenses (5.3) (4.9) (0.2)
Other (1.5) (0.3) (2.2)
------------ ------------ ------------
Total taxes on income (47.0%) (45.3%) (42.0%)
============ ============ ============
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets and
liabilities as of December 31, 2001 and 2002 are as follows:
2001 2002
------------- -------------
Deferred tax assets:
Reserves and accruals not recognized for
income tax purposes $ 2,987,514 $ 2,543,332
State taxes 657,886 326,948
Other 847,703 764,075
------------- -------------
Total gross deferred tax assets 4,493,103 3,634,355
Less valuation allowance -- --
------------- -------------
Net deferred tax assets $ 4,493,103 $ 3,634,355
------------- -------------
43
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Deferred tax liabilities:
Prepaids $ (116,842) $ (405,226)
Depreciation (194,966) (152,123)
Revenue recognition (48,730) (635,358)
-------------- --------------
Total gross deferred tax liabilities (360,538) (1,192,707)
-------------- --------------
Total net deferred tax assets $ 4,132,565 $ 2,441,648
============== ==============
These amounts have been presented in the consolidated balance sheets as follows:
2001 2002
-------------- --------------
Current deferred tax assets $ 3 ,574,631 $ 2,654,272
Noncurrent deferred tax assets (liabilities) 557,934 (212,624)
-------------- --------------
Total net deferred tax assets $ 4,132,565 $ 2,441,648
============== ==============
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:
2000 2001 2002
-------------- -------------- --------------
Sales $ 4,128,935 $ 1,604,099 $ 5,749,077
Cost of goods sold 3,213,731 1,258,635 4,611,296
Gross profit percentage 22.17% 21.54% 19.79%
============== ============== ==============
The related party purchases modular relocatable classrooms from the Company
on standard terms and at standard wholesale prices.
Due from affiliates includes a portion of unpaid invoices as a result of
the above transactions. As of December 31, 2001 and 2002 these amounts
totaled $478,809 and $1,367,987, respectively. Additional amounts arising
from these transactions are included in the following captions:
44
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
2001 2002
------------- -------------
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 161,623 $ 1,698,792
Billings in excess of costs and estimated
earnings on uncompleted contracts (32,998) (45,713)
============= =============
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 $39,000. 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 $409,000, $457,000 and $466,000 in rent
expense paid to related parties for the years ended December 31, 2000,
2001, and 2002 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 $369,430, $342,018
and $290,619 in 2000, 2001, and 2002 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.
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-
45
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 1,450,000 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 2001 and 2002, 577,809 and 185,038 shares were granted,
respectively, and 46,146 shares are available for future grants as of
December 31, 2002.
In 2002, the Company's shareholders approved a stock option plan (the 2002
Plan). The 2002 Plan provides for the grant of non-statutory options to
purchase up to 1,000,000 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). No shares were granted as of December 31,
2002.
Stock options outstanding under the Company's stock option plans are
summarized as follows:
Weighted
Average
Shares Exercise Price
------------- ----------------
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
------------- ----------------
Granted 185,038 9.21
Exercised (48,391) 3.21
Terminated (6,000) 8.33
------------- ----------------
December 31, 2002 2,336,381 7.38
============= ================
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,
2002:
46
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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
$1.50 - $4.50 537,486 2.9 $ 2.22 537,486 $ 2.22
$6.00 - $10.00 1,601,254 7.3 7.75 756,863 7.90
$12.62 - $20.57 197,641 5.1 18.41 197,641 18.41
------------ ------------
2,336,381 $ 7.38 1,491,990 $ 7.24
============ ============
(13) Series A Preferred Stock
In conjunction with a prior 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. In February 2003 the Series A Preferred Stock was
converted into the Company's common stock.
(14) Earnings (loss) per Share
The following table represents the calculation of basic and diluted
earnings (loss) per common share under the provisions of SFAS No. 128:
2000 2001 2002
------------- ------------- -------------
Basic
Income before cumulative effect of a change in an
accounting principle $ 10,416,034 $ 11,622,022 $ 7,972,669
Cumulative effect of a change in an accounting
principle -- -- (37,288,488)
------------- ------------- -------------
Net income (loss) $ 10,416,034 $ 11,622,022 $ (29,315,819)
Dividends on preferred stock (note 13) 155,576 155,576 155,576
------------- ------------- -------------
Net income (loss) available to common
stockholders $ 10,260,458 $ 11,466,446 $ (29,471,395)
============= ============= =============
Basic weighted-average shares outstanding 13,237,867 13,411,368 13,479,031
============= ============= =============
Basic earnings per common share before
47
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
cumulative effect of a change in an
accounting principle $ 0.78 $ 0.85 $ 0.58
Cumulative effect of a change in an accounting
principle per common share - basic -- -- (2.77)
------------- ------------- -------------
Basic earnings (loss) per common share $ 0.78 $ 0.85 $ (2.19)
============= ============= =============
Diluted
Net income (loss) $ 10,416,034 $ 11,622,022 $ (29,315,819)
============= ============= =============
Basic weighted-average shares outstanding 13,237,867 13,411,368 13,479,031
Add:
Conversion of preferred stock 388,939 388,939 388,939
Exercise of stock options 730,535 621,894 854,592
------------- ------------- -------------
Diluted weighted-average shares outstanding 14,357,341 14,422,201 14,722,562
============= ============= =============
Diluted earnings per common share before
cumulative effect of a change in an accounting
principle $ 0.72 $ 0.82 $ 0.54
Cumulative effect of a change in an accounting
principle per common share - diluted -- -- (2.53)
------------- ------------- -------------
Diluted earnings (loss) per common share $ 0.72 $ 0.82 $ (1.99)
============= ============= =============
Options to purchase 606,698 and 197,641 shares of common stock were
outstanding during 2001 and 2002, respectively, but were not included in
the computation of diluted earnings (loss) 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.
(15) Major Customer
Sales to two major customers represented the following percentage of net
sales:
2000 2001 2002
------------ ----------- -----------
Customer A 6% 11% 5%
Customer B 11% 11% 12%
============ =========== ===========
(16) Supplemental Cash Flow Disclosures
Supplemental Disclosures of Cash Flow Information
2000 2001 2002
------------ ----------- -----------
Cash paid during the year for:
Interest $ 4,587,398 $ 2,684,021 $ 1,339,900
============ =========== ===========
48
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Income taxes $ 6,766,998 $ 12,160,000 $ 4,415,000
============= ============= -============
(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:
2003 $ 1,890,000
2004 1,288,000
2005 1,117,000
2006 1,117,000
2007 1,041,000
Thereafter 5,287,000
---------------
$ 11,740,000
===============
Of the $11,740,000 in future rental payments, $6,805,000 is payable to
related parties (see note 10). Rent expense for the years ended December
31, 2000, 2001 and 2002 was $2,380,000, $2,318,000, and $2,321,000
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.
(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
---------------- ----------------- ------------------ ----------------
2002:
Net sales $ 36,245 $ 51,799 $ 44,569 $ 35,359
Gross profit 3,602 7,877 6,641 5,071
Net income (loss) 610 3,321 2,488 (35,734)
Earnings (loss)
per common
share:
49
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Basic $ 0.04 $ 0.24 $ 0.18 $ (2.66)
Diluted 0.04 0.22 0.17 (2.44)
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
50
Schedule II
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 2000, 2001, and 2002
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, 2000 $ 728,119 $ -- $ -- $ (25,000) $ 703,119
============ ============== ============ ============= ==========
Year ended December 31, 2001 $ 703,119 $ 50,000 $ 683,363 $ (11,482) $1,425,000
============ ============== ============ ============= ==========
Year ended December 31, 2002 $ 1,425,000 $ -- $ -- $ -- $1,425,000
============ ============== ============ ============= ==========