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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 2000
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from N/A to N/A
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Commission File No. 000-25161
MODTECH HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0825386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2830 BARRETT AVENUE, PERRIS, CALIFORNIA 92571
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (909) 943-4014
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 26, 2001 was $42,801,999. As of March 26, 2001, shares
entitled to cast an aggregate of 13,363,780 votes were outstanding, including
13,363,780 shares of registrant's Common Stock.
Certain portions of the registrant's definitive proxy statement to be filed not
later than 120 days after the end of the fiscal year covered hereby are
incorporated by reference in Part III of this Form 10-K report.
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PART I
Item 1. BUSINESS
GENERAL
The Company is one of the leading modular building manufacturers in the country
with substantial product and geographic diversification. The Company is a
leading provider of modular classrooms in the State of California and a
significant provider of commercial and light industrial modular buildings in
California, Nevada, Arizona, New Mexico, Utah, Colorado and Texas and other
neighboring states.
The Company designs, manufactures, markets and installs modular relocatable
classrooms. The Company's classrooms are sold primarily to California school
districts directly and to third parties and the State of California primarily
for lease to California's school districts. The Company's products include
standardized classrooms, as well as customized structures for use as libraries,
gymnasiums, computer rooms and bathroom facilities. The Company believes that
its modular structures can be substituted for virtually any part of a school.
The Company's classrooms are engineered and constructed in accordance with
structural and seismic safety specifications adopted by the California
Department of State Architects which regulates all school construction on public
land, standards which are more rigorous than the requirements for other
relocatable units.
As a result of net enrollment increases in California schools and budgetary
constraints experienced by the State of California which limit the availability
of funds for the addition of new classrooms, California's schools are reported
to be among the most crowded in the nation. As the State budget deficit has
ameliorated, the legislature has increased funding for new classrooms in an
effort to reduce the average number of students per class. State funding
initiatives include funds from both (i) the State's operating budget, such as
the proposed $28.3 billion allocated for the 2000-2001 school year for both
general operations and school facilities, and (ii) the sale of statewide bond
issues, such as the $9.2 billion bond issue for school construction, including
the addition of classrooms which was approved in November 1998.
See "Business -- Legislation and Funding."
These factors have combined to increase the demand for modular relocatable
classrooms, which cost significantly less and take much less time to construct
and install than conventional 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 dealers and
through multiple regional and local dealers. These dealers lease or sell modular
buildings to a diverse end-user market.
SPI Merger. On February 16, 1999, Modtech, Inc. (Modtech) and SPI Holdings,
Inc., a Colorado corporation (SPI) merged pursuant to the Agreement and Plan of
Reorganization and Merger, dated as of September 28, 1998 (the Merger
Agreement), between Modtech and SPI. SPI is a designer, manufacturer and
wholesaler of commercial and light industrial modular buildings. Pursuant to the
Merger Agreement, SPI merged with a subsidiary of Modtech Holdings, Inc.
(Holdings), a newly formed Delaware corporation (the SPI Merger). Concurrently,
Modtech merged with a separate subsidiary of Holdings (the Modtech Merger).
Pursuant to the mergers, both SPI and Modtech became wholly owned subsidiaries
of Holdings.
In connection with the SPI Merger, SPI stockholders received approximately $8
million in cash and approximately 4.6 million shares of Holdings Common Stock.
Holdings refinanced approximately $32 million of SPI debt. In connection with
the Modtech Merger, Modtech stockholders received approximately $40 million in
cash, approximately 8.3 million shares of Holdings Common Stock and 388,939
shares of Holdings Series A Preferred Stock. In connection with both mergers,
Holdings incurred a total of approximately $51 million of debt.
The purchase price for the SPI Merger, including acquisition costs, was
approximately $89 million. The SPI Merger has been accounted for as a purchase
and, accordingly, the results of operations of SPI are included in the Company's
consolidated statements of income from the date of acquisition. The excess of
fair value of net assets acquired was approximately $115.2 million, and is being
amortized on a straight-line basis over 40 years.
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Coastal Acquisition. On March 22, 1999, Holdings purchased 100% of the stock of
Coastal Modular Buildings, Inc. (Coastal). Coastal designs and manufactures
modular relocatable classrooms and other modular buildings for commercial use.
The acquisition of Coastal has been accounted for as a purchase and,
accordingly, the results of operations of Coastal are included in the Company's
consolidated statements of income from the date of acquisition.
IMS Acquisition. On March 8, 2001, the Company purchased 100% of the stock of
Innovative Modular Structures, Inc. (IMS). IMS designs and manufactures modular
relocatable classrooms and other modular buildings for commercial use. IMS is
based in St. Petersburg, Florida. The acquisition of IMS will be accounted for
by the purchase method of accounting.
INDUSTRY OVERVIEW
In recent years, the growth in population in California, both from births and
from immigration, has led to increasing school enrollments. As a result,
classrooms in many California school districts currently are reported to be
among the most crowded in the nation, with an average of 29 students per class
compared to a national average class size of 17. The California Department of
Finance has estimated that student enrollment in grades kindergarten through 12
will increase by approximately 18% over the period from 1995 through 2005.
Additionally, changes in population demographics have left many existing
permanent school facilities in older residential areas with excess capacity due
to declining enrollments, while many new residential areas are faced with a
continuing shortage of available classrooms. Consequently, it has become
necessary to add additional classrooms at many existing facilities, and to build
a number of new schools.
The construction of new schools and the addition of classrooms at existing
schools are tied to the sources and levels of funding available to California
school districts. The availability of funding for new school and classroom
additions, in turn, is determined in large measure by the amount of tax revenue
raised by the State, the level of annual allocations for education from the
State's budget which is determined by educational policies that are subject to
political concerns, and the willingness of the California electorate to approve
state and local bond issues to raise money for school facilities.
In 1978, California voters approved Proposition 13, which rolled back local
property taxes (a traditional source of funding for school districts) and
limited the ability of local school districts to raise taxes to finance the
construction of school facilities. The passage of Proposition 13, coupled with
growing student populations, has increased the need for local school districts
to find ways to reduce the cost of adding classrooms. The California legislature
has adopted several statutes designed to alleviate some of the problems
associated with the shortage of classrooms and lack of local funding
alternatives. For example, in 1976, California adopted legislation that through
November 1998 required, with certain exceptions, that at least 30% of all new
classroom space added using State funds must be relocatable structures. This
requirement was satisfied through the purchase or lease of the Company's
classrooms. See "Business -- Legislation and Funding." Additionally, in 1979 the
California legislature adopted legislation that provides for State funding for
the purchase of relocatable classrooms that could be leased to local school
districts.
When compared to the construction of a conventionally built classroom, modular
classrooms offer a number of advantages, including, among others:
Lower Cost -- The cost of the Company's standard classroom
may be as low as $29,000 installed, as compared
to $80,000 to $100,000 for conventional
construction of a comparable classroom;
Shorter Construction -- A modular classroom can be built and ready for
occupancy in a shorter Time period of time than
that required for state approval and
construction of a conventional facility;
Flexibility of Use -- Modular relocatable classrooms enable a school
district to use the units for short or long
term needs and to move them if necessary to
meet shifts in student populations; and
Ease of Financing -- As personal rather than real property, modular
classrooms may be leased on a long or
short-term basis from manufacturers and leasing
companies. This allows school districts to
finance modular classrooms out of both their
operating and capital budgets.
For the Company's commercial and light industrial buildings, the growth in the
nonresidential modular market has resulted from the wide-spread acceptance of
modular structures as an alternative to traditional site construction and the
increasing number of applications for modular buildings across a broad spectrum
of industries. Because modular buildings are constructed in a factory using an
assembly line process, construction is typically not subject to the delays
caused by weather and site conditions. Modular buildings can, therefore,
generally be built faster than conventional buildings, at a lower cost and with
more consistent quality.
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Modular buildings can generally be relocated more easily to meet the changing
needs of end users and be quickly joined to other modular buildings to meet
increased space requirements.
CALIFORNIA MODULAR RELOCATABLE CLASSROOMS
The Company's California modular relocatable classrooms are designed, engineered
and constructed in accordance with structural and seismic safety specifications
adopted by the California Department of State Architects, standards which are
more rigorous than the requirements for other portable units. The Department of
State Architects, which regulates all school construction on public land, has
prescribed extensive regulations regarding the design and construction of school
facilities, setting minimum qualifications for the preparation of plans and
specifications, and reviews all plans for the construction of material
modifications to any school building. Construction authorization is not given
unless the school district's architect certifies that a proposed project
satisfies construction cost and allowable area standards. The Company
subcontracts with structural engineering firms to interface with each school
district's architect or engineer to process project specifications through the
Department of State Architects. The Company believes that the regulated
environment in which the Company's classrooms are manufactured serves as a
significant barrier to market entry by prospective competitors. See "Business --
Competition."
Conventional school facilities constructed by school districts using funds from
the State Office of Public School Construction typically require two to three
years for approval and funding. By contrast, factory-built school buildings like
the Company's standard classrooms may be pre-approved by the State for use in
school construction. Once plans and specifications for a given classroom have
been pre-approved, school districts can thereafter include in their application
to obtain State funds for new facilities a notification that they intend to use
pre-approved, standardized factory-built classrooms. This procedure reduces the
time required in the State's approval process to as little as 90 days, thereby
providing an additional incentive to use factory-built relocatable classrooms.
In all cases, continuous on-site inspection by a licensed architect or
structural engineer is required during actual manufacture of the classrooms,
with the school district obligated to reimburse the California Department of
State Architects for the costs of such inspection.
The Company's California classrooms are manufactured and installed in accordance
with the applicable Department of State Architects building code, which
supersedes all local building codes for purposes of school construction. The
classrooms must comply with accessibility requirements for the handicapped,
seismic and fire code requirements.
The Company manufactures and installs standard, largely pre-fabricated modular
relocatable classrooms, as well as customized classrooms, which are modular in
design, but assembled on-site using components manufactured by the Company
together with components purchased from third party suppliers. The Company's
classrooms vary in size from two modular units containing a total of 960 square
feet to 20 units that can be joined together to produce a facility comprising
9,600 square feet. Larger configurations are also possible. Typical prices for
the Company's standard classrooms range from $29,000 to $34,000, while prices
for a custom classroom generally exceed $50,000, depending upon the extent of
customization required.
The two basic structural designs for standard and custom modular classrooms are
a rigid frame structure and a shear wall structure. The rigid frame structure
uses a steel floor and roof system, supported at each corner with square steel
tubing. These buildings have curtain walls to enclose the interior from the
outside, and have the advantage of unlimited width and length. Rigid frame
structures may be used for multipurpose rooms and physical education buildings
as well as standard classrooms. Shear wall classrooms have a maximum width of 48
feet (four 12-foot modules) and a maximum length of 60 feet. These classrooms
use the exterior and interior walls to produce the required structural strength
and can be built at lower costs than rigid frame structures. The Company's most
popular factory-built classroom is a rigid frame design, with two modules
connected side by side to complete a 24 by 40-foot classroom.
Custom built classrooms, libraries and gymnasiums contain design variations and
dimensions such as ceiling height, pitch, overall size and interior
configuration. These units typically are not assembled at the factory but
instead are shipped in pieces, including floors, walls and roofs, and assembled
on-site. Contracts for custom-built units may include the design, engineering
and layout for an entire school or an addition to a school, and involve site
preparation, grading, concrete and asphalt work and landscaping. Customized
classrooms are generally more expensive and take longer to complete than the
Company's standard classrooms.
The interior and exterior of all of the Company's modular classrooms can be
customized by employing different materials, design features and floor plans.
Most classrooms are open, but the interior of the buildings can be divided into
individual rooms by permanent or relocatable partitions. The floor covering is
usually carpet but may be linoleum or wood depending upon the intended use of
the classroom. Interior wall material is usually vinyl covered firtex over
gypsum board, while other finishes such as porcelain enamel or painted hardboard
may be used in such places as restrooms and laboratories. Electrical wiring, air
conditioning, windows, doors, fire
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sprinklers and plumbing are installed during the manufacturing process. The
exterior of the units is typically plywood siding, painted to the customer's
specifications, but other common siding material may also be applied.
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 accounted for 97.7%, 52.9%
and 49.9% of the Company's total net sales for the years ended December 31,
1998, 1999 and 2000. 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 72.5%, 38.3% and 36.7%, respectively, of the Company's net sales
during the years ended December 31, 1998, 1999 and 2000, respectively, with
sales of classrooms to third party lessors to California school districts during
these periods accounting for approximately 13.9%, 9.1% and 5.6%, 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 2000 and 1999 represented
approximately 5.6% of the Company's net sales for each year, compared to
approximately 11.3% of the Company's 1998 net sales. Sales of classrooms to
private schools, day care providers and out-of-state customers accounted for
less than one percent of the Company's net sales during the years ended December
31, 1998, 1999 and 2000. 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, 1998, 1999 and 2000, sales of classrooms to this affiliated
leasing company comprised approximately 2.1%, 3.8% and 1.8%, respectively, of
the Company's net sales.
COMMERCIAL, LIGHT INDUSTRIAL MODULAR BUILDINGS AND RELOCATABLE CLASSROOMS FOR
OTHER STATES
The Company is also a designer, manufacturer and wholesaler of commercial and
light industrial modular buildings. The Company designs and builds modular
buildings to customer specifications for a wide array of uses, including
governmental, healthcare, educational, airport and correctional facilities;
office and retail space; daycare centers; libraries; churches; construction
trailers; golf clubhouses; police stations; convenience stores; fast food
restaurants; classrooms and sales offices. The modular buildings serve as
temporary, semi-permanent and permanent facilities and can function as
free-standing buildings or additions to existing structures. These modular
buildings range in size and complexity from a basic single-unit 720-square foot
module to a 50,000-square foot building combining several structures and
containing multiple stories. The price at which the Company's modular buildings
are sold to dealers ranges from $10,000 to $25,000 per module.
SALES AND MARKETING
California Classroom Sales Force
At December 31, 2000 the Company's classroom sales force was divided into three
marketing regions: Northern, Central and Southern California. At December 31,
2000 the Company employed five classroom salespersons, each of whom is
compensated on a commission basis. These salespersons maintain contact with the
individual school districts in their respective marketing regions on a quarterly
basis. They are also in contact with architects and building inspectors employed
by the school districts, as well as school officials who may be in a position to
influence purchasing decisions.
Most of the Company's contracts are awarded on an open bid basis. The marketing
process for many of the Company's contracts begins prior to the time the bid
process begins. After the Company selects bids or contracts that it desires to
pursue, the Company's marketing and engineering personnel interface directly
with various school boards, superintendents or architects during the process of
formulating bid or contract specifications. The Company prepares its bids or
proposals using various criteria, including current material prices, historical
overhead costs and a targeted profit margin. Substantially all of the Company's
contracts are turnkey, including engineering and design, manufacturing,
transportation, installation and necessary site work. Open bid contracts are
normally awarded to the lowest responsible bidder.
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, multiple regional and local
dealers. The Company believes that larger dealers are becoming increasingly more
inclined to do business with fewer manufacturers and to place their orders with
manufacturers who have a history of consistent performance. Certain dealers have
developed stringent quality control programs
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for the modular buildings they distribute. The Company believes its products
currently meet or exceed existing dealer quality control standards.
Certain states require the Company's dealers to be licensed to sell or lease the
Company's products. Historically, these dealers have had sufficient capital
resources to support the purchase of modular structures and the maintenance of
the structures retained in their lease fleets. Typically, dealers arrange for,
and bear the cost of, transporting and installing structures purchased from the
Company.
Because of its strong dealer relationships, the Company does not maintain an
extensive internal sales force for the sale of commercial and light industrial
modular buildings. Instead, the Company maintains an internal marketing and
estimating staff whose primary responsibility is to maintain contact with the
dealer community and to respond to requests from dealers for price quotations
for production of modular buildings for end-users. The Company has few formal
marketing or other agreements with its dealers, and substantially all of the
Company's dealers also market and sell products of other manufacturers.
MANUFACTURING AND ON-SITE INSTALLATION
The Company uses an assembly-line approach in the manufacture of its
standardized classrooms. The process begins with the fabrication of the steel
floor joists. The floor joists are welded to steel frames to form the floor
sub-assembly, which is covered by plywood flooring. Metal roof trusses and
structural supports are fabricated separately and added as the unit progresses
down the assembly-line. Installation of walls, insulation, suspended grid
ceilings, electrical wiring, air conditioning, windows, doors, fire sprinklers,
plumbing and chalkboards follow, with painting and finishing crews completing
the process. Once construction of a standard classroom commences, the building
can be completed in as little as three days. The construction of custom units
on-site, from pre-manufactured components, is similar to factory-built units in
its progressively-staged assembly process but may involve more extensive
structural connections and finish work depending upon the size and type of
building, and typically takes 30 to 60 days to complete.
The Company is vertically-integrated in the manufacture of its standardized
modular classrooms, in that the Company fabricates substantially all of its own
metal components at its facility in Perris, California, including structural
floor and roof joists, exterior roof panels, gutters, down spouts, vents, ramps,
stairs and railings. The Company believes that the ability to fabricate its own
metal components helps it reduce the costs of its products and to control their
quality and delivery schedules. The Company maintains a quality control system
throughout the manufacturing process, under the supervision of its own quality
control personnel and inspectors engaged by its customers. In addition, the
Company tracks the status of all classrooms from sale through installation.
Completed standard classroom units, or components used in customized units, are
loaded onto specially designed flatbed trailers for towing by trucks to the
school building site. Upon arrival at the site, the units are structurally
connected, or components are assembled, and the classroom is installed on its
foundation. Connection with utilities is completed in the same manner as in
conventional on-site construction. Installation of the modular classrooms may be
on a separate foundation, or several units may be incorporated on a common
foundation under a unified roof, so that upon installation they appear to be an
integral part of an existing school facility or function as a larger building,
such as a gymnasium or cafeteria.
The Company oversees installation of its modular classrooms on-site, using its
own employees for job supervision as a general contractor and, whenever
possible, for utility hook-ups and other tasks. In many custom projects, the
Company performs or supervises subcontracted electrical, plumbing, grading,
paving and foundation work, landscaping and other site preparation work and
services. Sub-contractors are typically used for larger utility, grading,
concrete and landscaping jobs. The Company has a general contractor's license in
the State of California.
In addition to approvals by the Department of State Architects, licensed
inspectors representing various school districts are on-site at each
manufacturing facility of the Company to continuously inspect the construction
of classrooms for structural integrity. On-site inspections after installation
are also made by local fire departments for purposes of determining adequate
accessibility.
The Company's commercial and light industrial modular buildings are also
produced by a continuous flow assembly line process. Multiple structures are
assembled simultaneously at various stations along the assembly line. Depending
upon the complexity of the design for a particular modular building, the average
construction time from receipt of the order to shipment ranges from 30 to 45
days. Once construction of a typical modular building commences, the building
can be completed in as few as seven to nine days.
At December 31, 2000 the Company had seven manufacturing facilities. Two are
located in Southern California, in Perris, California, which is approximately 60
miles east of Los Angeles. The Company has another facility near Lathrop,
California. Lathrop is located approximately 75 miles east of San Francisco. The
fourth manufacturing facility is located in Phoenix, Arizona and the fifth
manufacturing facility is located in Glendale, Arizona, which are both located
in the Phoenix Metropolitan area. The Company has
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another facility in Glen Rose, Texas. Glen Rose is located approximately 75
miles east of Dallas. The seventh manufacturing facility is located in St.
Petersburg, Florida, which is located in the Tampa area.
The standard contractual warranty for the Company's modular buildings is one
year, although it may be varied by contract specifications. Purchased equipment
installed by the Company, such as air conditioning units, carry the
manufacturers' standard warranty. Warranty costs have not been material in the
past.
The Company believes that there are multiple sources of supplies available for
all raw materials and equipment used in manufacturing its modular buildings,
most of which are standard construction items such as steel, plywood and
wallboard.
BACKLOG
The Company manufactures classrooms and other buildings to fill existing orders
only, and not for inventory. As of December 31, 2000, the backlog of sales
orders was approximately $80 million, up from approximately $60.0 million at
December 31, 1999 and $25.0 million at December 31, 1998. Only orders, which are
scheduled for completion during the following 12-month period, are included in
the Company's backlog. The rate of booking new contracts can vary from month to
month, and customer changes in delivery schedules can occur. For these reasons,
among others, the Company's backlog as of any particular date may not be
representative of actual sales for any succeeding period.
COMPETITION
The modular relocatable classroom industry is highly competitive, with the
market divided among a number of privately-owned companies whose share of the
market is smaller than that of the Company. The Company believes that the nature
of the bidding process, the level of performance bonding required, and the
industry's regulated environment serve as barriers to market entry, and that the
expertise of its management gives it an advantage over competitors. The Company
believes that, based upon 1998 net sales, it is the largest modular relocatable
classroom manufacturer in California. Nevertheless, the Company believes that
additional competitors may enter the market in the future, some of whom may have
significantly greater capital and other resources than are available to the
Company, and that competition may therefore increase.
The Company also believes that its expertise in site preparation and on-site
installation gives it a competitive advantage over many manufacturers of
higher-priced, customized modular units, while its vertically integrated,
assembly-line approach to manufacturing enables the Company to be one of the low
cost producers of standardized, modular relocatable classrooms in California.
Unlike many of its competitors, the Company manufactures most of its own metal
components which allows the Company to maintain quality control over these
components and to produce them at a lower average cost than that at which they
could be obtained from outside sources. The Company also believes that the
quality and appearance of its buildings, and its reputation for reliability in
completion of its contracts, enable it to maintain a favorable position among
its competition.
The Company categorizes its current competition based upon the geographic market
served (Northern California versus Southern California), as well as upon the
relative degree of customization of products sold. Beyond a radius of
approximately 300 miles, the Company believes that transportation costs
typically will either significantly increase the prices at which it bids for
given projects, or will substantially erode the Company's gross profit margins.
The primary competitors of the Company for standardized classrooms are believed
to be Aurora Modular Industries in Southern California and American Modular
Systems in Northern California. Profiles Structures, Inc. in Southern California
and Design Mobile Systems in Northern California are the Company's primary
competitors in the market for higher-priced, customized classrooms. Each of
these four competitors is a privately-owned company.
With respect to the commercial and light industrial modular buildings, the
nonresidential modular building industry is highly competitive. For the
Company's highly customized modular buildings, the main competitive factor is
the ability to meet end user requirements in a timely manner, while price is the
main competitive factor for less customized structures. Because the cost of
transporting completed modular buildings is substantial, most manufacturers
limit their distribution to dealers located within a 400-mile radius of their
manufacturing facility. As a result, the nonresidential modular building
industry is highly fragmented and is composed primarily of small,
regionally-based private companies maintaining a single manufacturing facility.
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.
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PERFORMANCE BONDS
A substantial portion of the Company's sales require that the Company provide
bonds to ensure that the contracts will be performed and completed in accordance
with contract terms and conditions, and to assure that subcontractors and
materialmen will be paid. In determining whether to issue a performance bond on
behalf of the Company, bonding companies consider a variety of factors
concerning the specific project to be bonded, as well as the Company's levels of
working capital, shareholders' equity and outstanding indebtedness. From time to
time the Company has had, and in the future may again encounter, difficulty in
obtaining bonding for a given project. Although it has had no difficulty in
obtaining the necessary bonding in the last twelve months, the Company believes
that its difficulty in obtaining bonding for certain large projects from time to
time in the past has been attributable to the Company's levels of working
capital, shareholders' equity and indebtedness, and not to concerns about the
Company's ability to perform the work required under the contract. To assist the
Company in obtaining performance bonds in certain instances, the Company's
executive officers have been required to indemnify the bonding companies against
all losses they might suffer as a result of providing performance bonds for the
Company.
REGULATION OF CLASSROOM CONSTRUCTION
In 1933, the California Legislature adopted the Field Act, which generally
provides that school facilities must be constructed in accordance with more
rigorous structural and seismic safety specifications than are applicable to
general commercial buildings. Under the Field Act, the Department of General
Services, through the Department of State Architects, has prescribed extensive
regulations regarding the design and construction of school facilities, and
reviews all plans for the construction of material modifications to any school
building. Construction authorization is not given unless the school district's
architect certifies that a proposed project satisfies construction cost and
allowable area standards. In addition, the Field Act provides for the submittal
of complete plans, cost estimates, and filing fees by the school district to the
Department of General Services, for the adoption of regulations setting minimum
qualifications for the preparation of plans and specifications, and the
supervision of school construction by a licensed architect or structural
engineer.
Additionally, California legislation provides that certain factory-built school
buildings may be pre-approved by the State for use in school construction. Once
plans and specifications for a given classroom have been pre-approved by the
Department of General Services, school districts can thereafter include in their
application to obtain State funds for new facilities a notification that they
intend to use pre-approved, standardized factory-built classrooms. This
procedure reduces the time required in the State's approval process thereby
providing additional incentive to use factory-built relocatable classrooms. The
Department of General Services provides for the continuous on-site inspection
during actual manufacturing of the classrooms, with the school districts
obligated to reimburse the Department for the costs of such inspection.
LEGISLATION AND FUNDING
The demand for modular relocatable classrooms in California is affected by
various statutes. These statutes, among other things, prescribe the methods by
which the Company's customers, primarily individual school districts, obtain
funding for the construction of new school facilities, and the manner in which
available funding is to be spent by the school districts.
In 1978, Proposition 13 was approved, which rolled back property taxes and
limited the ability of local school districts to rely upon revenue from such
taxes to finance the construction of school facilities. As a result, financing
for new school construction and rehabilitation of existing schools by California
school districts is currently provided, at the state level, by funds derived
from general revenue sources or statewide bond issues, and, at the local level,
by local bond issues and fees imposed on the developers of residential,
commercial and industrial real property ("Developer Fees"). Historically, the
primary source of financing for the purchase or lease of relocatable classrooms
has been state funding.
STATE FUNDING. A source of funding at the State level for new school facilities
is through the issuance and sale of statewide general obligation bonds which are
repaid out of the State's General Funds. Proposals to issue such bonds are
placed on statewide ballots from time-to-time in connection with general or
special elections, and require approval by a majority of the votes cast in
connection with such proposals.
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
8
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relocatable classrooms. Prior to November 1998, as a condition of funding any
project under this program, at least 30% of new classroom space to be added must
be comprised of relocatable structures, unless relocatable structures are not
available or special conditions of terrain, climate or unavailability of space
make the use of relocatable structures impractical. In addition, State funds
under this program are not available to school districts which are determined to
have an adequate amount of square footage available for their student
population.
Senate Bill 50, which was passed in November 1998 by the California Legislature,
revised the School Building Lease -- Purchase Law of 1976 by eliminating the
requirement that at least 30% of all new classroom space being added using
California state funds must be relocatable classrooms. In general, it replaced
this provision with a requirement that, in order for school districts to
increase the amount of funds to be received from developers in excess of the
current statutory level, the school districts must show that 20% of all
classroom space in the district, not just new space added, consists of
relocatable classrooms. The bill also placed a $9.2 billion bond issue on the
November 1998 ballot, which was approved by the voters. The bill allocates from
the bond issue $2.9 billion for growth and new construction, and $2.2 billion
for modernization and reconstruction through the year 2001. In addition, it
allocates $700 million for class-size reductions to fully implement the program
from kindergarten through third grade. The costs to implement the foregoing will
include land acquisition costs, hiring of new teachers, remodeling of existing
structures and construction of new permanent and relocatable structures. The
bill does not designate the specific usage of funds, and the actual amount spent
on relocatable classrooms will vary among school districts. Implementation of
Senate Bill 50 began the third week of January 1999. The Company does not expect
any significant change in its future operating results due to implementation of
Senate Bill 50.
In response to the adoption of Proposition 13, the State of California adopted
the California Emergency Classroom Law of 1979, pursuant to which the State
Allocation Board may spend up to $35 million per year from available funds to
purchase relocatable classrooms to be leased to school districts. Relocatable
classrooms are not available to school districts under this program if the
school district has available local bond proceeds that could be used to purchase
classroom facilities, unless the district has approved projects pending under
the School Building Lease - Purchase Law of 1976. The State has, in the past,
funded this program primarily from the proceeds of statewide bond issues
approved by voters.
BUDGET ALLOCATIONS. Proposition 98, which was approved in 1988, requires the
State of California to allocate annually from the State's budget, for the
support of school districts and community college districts, a minimum amount
equal to the same percentage of funds as was appropriated for the support of
those institutions in fiscal year 1986-87. While this requirement may be
suspended for a given year by emergency legislation, it has the effect of
limiting the ability of the California legislature to reduce the level of school
funding from that in existence in 1986-87. The State raises the necessary funds
through proceeds from the sale of statewide bond issues, income tax revenues and
other revenues. A recent reduction in California's corporate tax rates, and a
proposed reduction in personal income tax rates, may affect future levels of the
State's income tax revenues.
LOCAL FUNDING. Local school districts in California have the ability to issue
local general obligation bonds for the acquisition and improvement of real
property for school construction. These bond issues require the approval of
two-thirds of the voters in the district and are repaid using the proceeds of
increases in local property taxes. A local school district may also levy
Developer Fees on new development projects in the district, subject to a maximum
rate set by state law. The Developer Fees can only be levied if the project can
be shown to contribute to the need for additional school facilities and the fee
levied is reasonably related to such need. In addition, California law provides
for the issuance of bonds by Community Facilities Districts which can be formed
by a variety of local government agencies, including school districts. These
districts, known as "Mello-Roos" districts, can have flexible boundaries and 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
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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, 2000, the Company had 1,540 employees. The Company's employees
are not represented by a labor union, and it has experienced no work stoppages.
The Company believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company's principal executive and administrative facilities are located in
approximately 17,000 square feet of modular buildings at its primary
manufacturing facility located in Perris, California. This manufacturing
facility occupies twenty-five acres, with approximately 226,000 square feet of
covered production space under roof, pursuant to a lease expiring in 2014. A
second facility in Perris occupies approximately thirty acres, with
approximately 120,000 square feet of covered production space under roof,
pursuant to a lease expiring in 2014. This second facility also includes
approximately 80,000 square feet under roof used as a metal working facility.
The Company's third plant consists of a 400,000 square foot manufacturing
facility, with approximately 160,000 square feet of covered production space
under roof, on a 30-acre site in Lathrop, California that is leased through
2019.
The fourth plant consists of approximately 50,000 square feet of covered
production space under roof, on a 10-acre site in Phoenix, Arizona, pursuant to
a lease expiring in 2002. The fifth plant consists of approximately 30,000
square feet of covered production space under roof on a 4-acre site in Glendale,
Arizona, pursuant to a lease expiring in 2002. The sixth plant consists of
approximately 80,000 square feet of manufacturing area on a 20-acre site in Glen
Rose, Texas, outside the Dallas-Fort Worth metropolitan area. The Texas lease
expires in 2008. The seventh plant consists of approximately 119,000 square feet
of manufacturing area on a 10-acre site in St. Petersburg, Florida that is
leased through 2003.
The Company believes that its facilities are well maintained and in good
operating condition, and meet the requirements for its immediately foreseeable
business needs. Two of the Company's facilities at December 31, 2000 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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was traded on the NASDAQ National Market System under
the symbol "MODT" at December 31, 2000. The range of high and low sales prices
for the common stock as reported by the National Association of Securities
Dealers, Inc. for the periods indicated below, are as follows:
Quarter Ended High Low
------------- ---- ---
3/31/99 18.000 8.750
6/30/99 11.500 7.375
9/30/99 14.000 6.750
12/31/99 7.656 4.750
3/31/00 10.000 5.875
6/30/00 11.875 7.250
9/30/00 11.000 8.000
12/31/00 10.938 6.125
On December 31, 2000, the closing sales price on The NASDAQ National Market for
a share of the Company's Common Stock was $7.25. The approximate number of
holders of record of the Company's Common Stock as of December 31, 2000, was 59.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock since 1990. The
Board of Directors currently intends to follow a policy of retaining all
earnings, if any, to finance the continued growth and development of the
Company's business and does not anticipate paying cash dividends on its Common
Stock in the foreseeable future. Any future determination as to the payment of
cash dividends will be dependent upon the Company's financial condition and
results of operations and other factors deemed relevant by the Board of
Directors.
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ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected income statement and balance sheet data set forth below for the
three years ended December 31, 1998, 1999 and 2000 have been derived from the
audited consolidated financial statements of the Company included elsewhere
herein. The selected income statement and balance sheet data set forth below for
the years ended December 31, 1996 and 1997 have been derived from audited
financial statements of the Company that are not included herein. The selected
income statement and balance sheet data set forth below should be read in
conjunction with those consolidated financial statements (including the notes
thereto) and with "Management's Discussion and Analysis of Results of Operations
and Financial Condition" also included elsewhere herein.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA:
Net sales ................................. $ 49,886 $ 134,050 $ 127,620 $ 167,228 $ 234,734
Cost of goods sold ........................ 42,629 107,367 97,765 138,668 198,501
--------- --------- --------- --------- ---------
Gross profit .............................. 7,257 26,683 29,855 28,560 36,233
Selling, general and administrative
expenses .................................. 2,345 5,156 4,731 6,834 8,011
Goodwill and covenant amortization ........ -- -- 8 3,213 3,702
Income from operations .................... 4,912 21,527 25,116 18,513 24,520
Interest income (expense), net ............ (422) (909) 1,097 (3,083) (4,928)
Other income (expense) .................... (13) 92 25 85 61
--------- --------- --------- --------- ---------
Income before income taxes ................ 4,477 20,711 26,238 15,515 19,653
Income taxes .............................. 208 (7,703) (9,708) (7,128) (9,237)
--------- --------- --------- --------- ---------
Net income ................................ 4,269 13,008 16,530 8,387 10,416
========= ========= ========= ========= =========
Net income available for common
stock(1) ................................ $ 4,221 $ 13,008 $ 16,530 $ 8,251 $ 10,260
========= ========= ========= ========= =========
Basic earnings per common share(2) ........ $ 0.77 $ 1.47 $ 1.68 $ 0.64 $ 0.78
Basic weighted-average shares
outstanding (in thousands)(2) ............. 5,461 8,854 9,857 12,986 13,238
Diluted earnings per common share(2) ...... $ 0.47 $ 1.31 $ 1.50 $ 0.59 $ 0.72
Diluted weighted-average shares
outstanding (in thousands)(2) ............. 9,041 9,898 10,988 14,204 14,357
AS OF DECEMBER 31,
------------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital .............................. $ 14,069 $ 36,417 $ 52,129 $ 11,231 $ 17,153
Total assets ................................. 34,029 68,220 82,873 168,723 187,702
Total liabilities ............................ 18,716 20,177 17,777 58,050 65,610
Long-term debt, excluding current portion .... 7,844 -- -- 32,000 23,600
Shareholders' equity ......................... 8,743 48,043 65,097 110,672 122,092
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
SELECTED OPERATING DATA:
Gross margin .................. 14.5% 19.9% 23.4% 17.1% 15.4%
Operating margin .............. 9.8% 16.1% 19.7% 11.1% 10.4%
Backlog at period end(3) ...... $ 58,000 $ 71,000 $ 25,000 $ 60,000 $ 80,000
- -------------
(1) After deduction of preferred stock dividends accrued of $48,000, $136,000
and $156,000 for the years ended December 31, 1996, 1999 and 2000,
respectively.
(2) Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share". All prior periods have
been restated accordingly.
(3) The Company manufactures classrooms and other buildings to fill existing
orders only, and not for inventory. Backlog consists of sales orders
scheduled for completion during the next 12 months.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
On February 16, 1999, the Company completed the SPI Merger and on March 22,
1999, the Company completed the Coastal acquisition. The SPI Merger and the
Coastal acquisition were both accounted for as purchases, and accordingly, the
results of operations of SPI and Coastal are included in the Company's
consolidated statements of income from the respective dates of acquisition. Due
to the magnitude of these acquisitions and the integration of the acquired
operations with the Company, results of operations for prior periods are not
necessarily comparable to or indicative of results of operation for current or
future periods.
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,
---------------------------------
1998 1999 2000
------ ------ ------
Net sales ........................................ 100.0% 100.0% 100.0%
Cost of sales .................................... 76.6 82.9 84.6
------ ------ ------
Gross profit ..................................... 23.4 17.1 15.4
Selling, general and administrative expenses ..... 3.7 4.1 3.4
Goodwill and covenant amortization ............... -- 1.9 1.6
------ ------ ------
Income from operations ........................... 19.7 11.1 10.4
Interest income (expense), net ................... 0.9 (1.8) (2.1)
Other income ..................................... -- -- --
------ ------ ------
Income before income taxes ....................... 20.6 9.3 8.4
Income taxes ..................................... 7.6 4.3 3.9
------ ------ ------
Net income ....................................... 13.0% 5.0% 4.4%
====== ====== ======
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net sales for the year ended December 31, 2000 increased to $234.7 million, an
increase of $67.5 million, or approximately 40.4%, from $167.2 million in 1999.
The increase in 2000 is attributable to increased sales from the public school
system in California where funds from the 1998 California School Construction
Bond have begun and continue to flow. Sales outside of California increased,
spurred by the growth of the national economy. Additionally, net sales for the
year ended December 31, 2000 increased as the year ended December 31, 1999 only
included net sales for SPI and Coastal from their respective dates of
acquisition.
For the year ended December 31, 2000, gross profit was $36.2 million, an
increase of $7.7 million, or approximately 26.9%, over 1999 gross profit of
$28.6 million. Gross profit as a percentage of net sales decreased to 15.4% in
2000 from 17.1% in 1999. The decrease in gross profit as a percentage of net
sales was primarily attributable to the shift in product mix for 2000.
In 2000, selling, general and administrative expenses increased to $8.0 million
from $6.8 million, due primarily to the increase in net sales for the year, as
well as an increase in the number of employees. Selling, general and
administrative expenses for the year ended December 31, 2000 also increased as
the year ended December 31, 1999 only included selling, general and
administrative expenses for SPI and Coastal from their respective dates of
acquisition. As a percentage of net sales, selling, general and administrative
expenses decreased to 3.4% in 2000 from 4.1% in 1999.
Goodwill and covenant amortization for the year ended December 31, 2000 was $3.7
million, compared to $3.2 million for 1999. As a percentage of net sales,
goodwill and covenant amortization decreased to 1.6% in 2000 from 1.9% in 1999.
Goodwill was recorded for both the SPI Merger and the Coastal acquisition and is
being amortized from the respective dates of acquisition.
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In 2000, interest expense, net increased to $4.9 million from $3.1 million, due
primarily to debt incurred as a result of the SPI Merger; which occurred in
February 1999, increased line of credit borrowings and higher interest rates. As
a percentage of net sales, interest expense, net increased to 2.1% in 2000 from
1.8% in 1999.
The provision for income taxes was $9.2 million for the year ended December 31,
2000, compared to $7.1 million for 1999. The Company's effective tax rate
increased to 47.0% for the year ended December 31, 2000 from 46.0% for the year
ended December 31, 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net sales for the year ended December 31, 1999 increased to $167.2 million, an
increase of $39.6 million, or approximately 31.0%, from $127.6 million in 1998.
The increase in 1999 is attributable to comparing merged results for 1999 to
historical Modtech, Inc. 1998 sales. The increase in net sales as a result of
the acquisitions in 1999 was offset by a delay in allocating the funds from the
$9.2 billion school construction bond issue which was passed in November 1998.
For the year ended December 31, 1999, gross profit was $28.6 million, a decrease
of $1.3 million, or approximately 4.3%, over 1998 gross profit of $29.9 million.
Gross profit percentage of net sales decreased to 17.1% in 1999 from 23.4% in
1998. The decrease in gross profit as a percentage of net sales was primarily
attributable to the shift in product mix for 1999 as a result of the SPI Merger
and the Coastal acquisition.
In 1999, selling, general and administrative expenses increased to $6.8 million
from $4.7 million, due primarily to the integration of SPI and Coastal with the
Company. As a percentage of net sales, selling, general and administrative
expenses increased to 4.1% in 1999 from 3.7% in 1998.
Goodwill and covenant amortization for the year ended December 31, 1999 was $3.2
million. As a percentage of net sales, goodwill and covenant amortization for
the year was 1.9%. Goodwill was recorded for both the SPI Merger and the Coastal
acquisition. There was no goodwill amortization in 1998.
Due to the combination of a reduced cash balance and debt incurred as a result
of the SPI Merger and Coastal acquisition, the year ended December 31, 1999
reflects net interest expense of $3.1 million compared to net interest income of
$1.1 million for the year ended December 31, 1998.
The provision for income taxes was $7.1 million for the year ended December 31,
1999, compared to $9.7 million for 1998. The Company's effective tax rate
increased to 46.0% for the year ended December 31, 1999 from 37.0% for the year
ended December 31, 1998. The effective tax rate in 1999 was negatively impacted
by the non-deductibility of goodwill amortization as a result of the SPI Merger
and Coastal acquisition. The effective tax rate in 1998 was positively impacted
by a reduction in the federal valuation allowance.
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, 1998, 1999 and 2000, the Company's operations provided cash in the amounts
of approximately $32.8 million, $14.4 million and $2.1 million, respectively. At
December 31, 2000, the Company had approximately $416,000 in cash and cash
equivalents.
The Company has a $100 million credit facility with a bank. The credit facility
provides for a $30 million revolving credit line. The credit facility is secured
by all the Company's assets, as well as the Company's stock ownership in its
subsidiaries. The credit facility expires in February 2004. At December 31,
2000, $6,500,000 was outstanding under the revolving credit line.
The Company had working capital of $52.1 million, $11.2 million and $17.1
million at December 31, 1998, 1999 and 2000, respectively. In 2000, current
assets increased by $21.9 million, with an increase of $15.2 million in
contracts receivable, an increase of $3.4 million in costs and estimated
earnings in excess of billings and an increase of $3.2 million in inventories.
Current liabilities increased by $16.0 million, with an increase of $6.5 million
in accounts payable and accrued liabilities, an increase of $6.5 million in
current revolving credit line, an increase of $2.7 million in income tax payable
and an increase of $1.4 million in current maturities of long-term debt, offset
by a $1.1 million decrease in billings in excess of costs and estimated earning
on contracts. In 1999, current assets decreased by $32.6 million, with a
decrease of $38.9 million in cash, a decrease of $1.4 million in due from
affiliates and a decrease of $2.4 million in income tax receivable, offset by an
increase of $6.0 million in contracts receivable, an increase of $2.5 million in
costs and estimated earnings in excess of billings and an increase of $2.2
million in inventories. Current liabilities increased
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by $8.3 million, with accounts payable and accrued liabilities and current
maturities of long-term debt increasing by $3.3 million and $7.0 million,
respectively, offset by a $2.0 million decrease in billings in excess of costs
and estimated earning on contracts.
Capital expenditures amounted to $2.1 million, $2.3 million and $2.6 million
during the years ended December 31, 1998, 1999 and 2000, respectively. In 1998,
the majority of expenditures were related to the construction of an additional
production line at one of the Perris, California facilities. In 1999, the
majority of expenditures were as a result of construction of a production line
at one of the Perris, California facilities and the addition of metal
fabrication machinery at the Glendale, Arizona and St. Petersburg, Florida
facilities. 1n 2000, 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting
and reporting standards for derivative instruments, derivative instruments
embedded in other contracts, and hedging activities. SFAS 133, as amended, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Application of SFAS 133 has not had a material impact on our consolidated
financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 (SAB 101) "Revenue Recognition in Financial Statements" as amended
by Staff Accounting Bulletins No. 101 A and 101 B. These Bulletins summarize
certain of the staff's views about applying generally accepted accounting
principles to revenue recognition in financial statements. The provisions of
these bulletins are effective commencing with the quarter beginning October 1,
2000. Application of SAB 101 has not had a material impact on our consolidated
financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation -- an interpretation of APB Opinion
No. 25 (FIN 44). This Interpretation clarifies the definition of employee for
purposes of applying APB Opinion No. 25, Accounting for Stock Issued to
Employee, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998
or January 12, 2000. The Company adopted FIN 44 during the quarter ended
September 30, 2000. This adoption did not have a material effect on the
Company's consolidated financial position or results of operations.
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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to fluctuation in interest rates on our
$100 million credit facility. During 2000, 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 the
lower of (1) LIBOR plus additional interest of between 1.5% and 2.25%, or (2) a
rate equal to the greater of (i) the Federal funds rate plus 0.5% or (ii) the
bank's prime rate, plus in either case an additional interest of between 0.25%
to 1.0%. We estimate that the average amount of debt outstanding under the
credit facility for 2001 will be $50 million. Therefore, a one percentage point
increase in interest rates would result in an increase in interest expense of
$500,000 for the year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, along with the notes thereto and the
Independent Auditors' Report thereon, required to be filed in response to this
Item 8 are attached hereto as exhibits under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item will be set forth in the Proxy Statement and
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item will be set forth in the Proxy Statement and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item will be set forth in the Proxy Statement and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item will be set forth in the Proxy Statement and
is incorporated herein by reference.
17
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits and Financial Statement Schedules
1 & 2. Index to Financial Statements
The following financial statements and financial statement 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, 1999 and 2000
Consolidated Statements of Income - For the Years Ended December 31,
1998, 1999 and 2000
Consolidated Statements of Shareholders' Equity - For the Years Ended
December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows - For the Years Ended December 31,
1998, 1999 and 2000
Notes to Consolidated Financial Statements
Schedule Included - For the Years Ended December 31, 1998, 1999 and 2000
Schedule II - Valuation and Qualifying Accounts
All other Financial Statement Schedules have been omitted because the required
information is shown in the consolidated financial statements or notes thereto,
the amounts involved are not significant, or the schedules are not applicable.
3. Exhibits
Exhibit
Number Name of Exhibit
------ ---------------
3.1(1) Certificate of Incorporation of Modtech Holdings, Inc.
3.2(1) Bylaws of Modtech Holdings, Inc.
10.1(2) Modtech, Inc.'s 1996 Stock Option Plan.
10.2(3) Transaction Advisory Agreement.
10.3(4) Employment Agreement between the Company and Evan M.
Gruber.
10.4(4) Employment Agreement between the Company and Patrick Van
Den Bossche.
10.5(4) Employment Agreement between the Company and Michael G.
Rhodes.
10.6(5) Lease between the Company and Pacific Continental Modular
Enterprises, relating to the Barrett Street property in
Perris, California.
10.7(5) Lease between the Company and BMG, relating to the
property in Lathrop, California.
10.8(5) Form of Indemnity Agreement between the Company and its
executive officers and directors.
18
19
10.9(3) Financial Advisory Services Agreement.
10.10(6) Credit Agreement.
23.1 Independent Auditors' Consent.
- --------------------
(1) Incorporated by reference to Modtech Holdings, Inc.'s Registration
Statement on Form S-4 filed with the Commission on October 27, 1998
(Commission File No. 333-69033).
(2) Incorporated by reference to Modtech, Inc.'s Registration Statement on
form S-8 filed with the Commission on December 11, 1996 (Commission File
No. 333-17623).
(3) Incorporated by reference to Amendment No. 2 to Modtech Holdings, Inc.'s
Registration Statement on Form S-4, filed with the Commission on January
11, 1999 (Commission File No. 333-69033).
(4) Incorporated by reference to Amendment No. 1 to Modtech Holdings, Inc.'s
Registration Statement on Form S-4, filed with the Commission on
December 15, 1998 (Commission File No. 333-69033).
(5) Incorporated by reference to Modtech, Inc.'s Registration Statement on
Form S-1 filed with the Commission on June 6, 1990 (Commission File No.
033-35239).
(6) Incorporated by reference to Modtech Holdings, Inc.'s Form 10-K filed
with the Commission on April 15, 1999 (Commission File No. 000-25161).
19
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 28, 2001 MODTECH HOLDINGS, INC.,
a Delaware corporation
By: /s/ SHARI L. WALGREN
-------------------------------
Shari L. Walgren
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by he following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Name Capacities Date
- ---- ---------- ----
/s/ EVAN M. GRUBER Director, Chairman of the March 28, 2001
- ------------------------------ Board, Chief Executive Officer
Evan M. Gruber
/s/ ROBERT W. CAMPBELL Director March 28, 2001
- ------------------------------
Robert W. Campbell
/s/ DANIEL J. DONAHOE Director March 28, 2001
- ------------------------------
Daniel J. Donahoe
/s/ STANLEY GAINES Director March 28, 2001
- ------------------------------
Stanley Gaines
/s/ CHARLES R. GWIRTSMAN Director March 28, 2001
- ------------------------------
Charles R. Gwirtsman
/s/ CHARLES A. HAMILTON Director March 28, 2001
- ------------------------------
Charles A. Hamilton
/s/ CHARLES C. McGETTIGAN Director March 28, 2001
- ------------------------------
Charles C. McGettigan
/s/ PATRICK VAN DEN BOSSCHE Director, President March 28, 2001
- ------------------------------
Patrick Van Den Bossche
/s/ MYRON A. WICK III Director March 28, 2001
- ------------------------------
Myron A. Wick III
20
21
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Annual Report -- Form 10-K
Consolidated Financial Statements and Schedule
December 31, 1998, 1999 and 2000
(With Independent Auditors' Report Thereon)
22
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Modtech Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Modtech
Holdings, Inc. and subsidiaries as of December 31, 1999 and 2000, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 2000. 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, 2000. 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, 1999 and 2000 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Orange County, California
March 9, 2001
23
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 2000
ASSETS (NOTE 8) 1999 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 1,197,583 $ 415,965
Contracts receivable, less allowance for contract
adjustments of $728,119 in 1999 and $703,119 in 2000
(note 3) 18,891,918 34,088,649
Costs and estimated earnings in excess of billings on
contracts (notes 4 and 10) 6,277,776 9,724,089
Inventories (note 5) 6,639,055 9,814,587
Due from affiliates (note 10) 962,908 657,314
Note receivable from affiliates (note 10) 45,212 45,212
Prepaid assets 443,954 691,486
Deferred tax assets (note 9) 2,636,515 3,406,756
Other current assets 120,648 319,092
------------ ------------
Total current assets 37,215,569 59,163,150
------------ ------------
Property and equipment, net (note 6) 13,872,324 14,538,234
Goodwill, net (notes 2 & 7) 114,072,403 111,156,928
Covenants not to compete, net 1,974,067 1,187,910
Debt issuance costs, net (note 8) 1,429,938 1,204,908
Deferred tax assets (note 9) -- 55,991
Other assets 158,367 395,055
------------ ------------
$168,722,668 $187,702,176
============ ============
See accompanying notes to consolidated financial statements.
24
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 2000
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 2000
------------ ------------
Current liabilities:
Accounts payable $ 6,258,625 $ 10,442,194
Accrued compensation 3,193,523 3,921,475
Accrued insurance expense 369,590 2,550,467
Income tax payable (note 9) 335,374 3,064,003
Other accrued liabilities 3,678,495 3,128,920
Billings in excess of costs and estimated earnings on
contracts (notes 4 and 10) 5,148,486 4,003,065
Current revolving credit line (note 8) -- 6,500,000
Current maturities of long-term debt (note 8) 7,000,000 8,400,000
------------ ------------
Total current liabilities 25,984,093 42,010,124
------------ ------------
Deferred tax liabilities (note 9) 66,195 --
Long-term debt, excluding current portion (note 8) 32,000,000 23,600,000
------------ ------------
Total liabilities 58,050,288 65,610,124
------------ ------------
Shareholders' equity:
Series A preferred stock, $.01 par. Authorized
5,000,000 shares; issued and outstanding 388,939 in
1999 and 2000 (note 13) 3,889 3,889
Common stock, $.01 par. Authorized 25,000,000 shares;
issued and outstanding 13,134,360 and 13,348,015 in
1999 and 2000, respectively (note 12) 131,344 133,480
Additional paid-in capital 77,006,238 78,007,740
Retained earnings 33,530,909 43,946,943
------------ ------------
Total shareholders' equity 110,672,380 122,092,052
Commitments and contingencies (notes 4, 10, 17, 18 and 19)
Subsequent event (note 20)
------------ ------------
$168,722,668 $187,702,176
============ ============
See accompanying notes to consolidated financial statements.
25
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1998, 1999 and 2000
1998 1999 2000
------------- ------------- -------------
Net sales (notes 10 and 15) $ 127,620,102 $ 167,227,690 $ 234,733,693
Cost of goods sold (note 10) 97,765,554 138,667,671 198,501,243
------------- ------------- -------------
Gross profit 29,854,548 28,560,019 36,232,450
Selling, general, and administrative expenses 4,731,222 6,833,608 8,010,917
Goodwill and covenant amortization (notes 2 & 7) 7,662 3,213,450 3,701,632
------------- ------------- -------------
Income from operations 25,115,664 18,512,961 24,519,901
------------- ------------- -------------
Other income (expense):
Interest expense (note 8) (204,535) (3,512,499) (4,987,629)
Interest income 1,301,952 429,599 59,324
Other, net 25,146 85,243 61,296
------------- ------------- -------------
1,122,563 (2,997,657) (4,867,009)
------------- ------------- -------------
Income before income taxes 26,238,227 15,515,304 19,652,892
Income taxes (note 9) (9,708,144) (7,128,295) (9,236,858)
------------- ------------- -------------
Net income $ 16,530,083 $ 8,387,009 $ 10,416,034
------------- ------------- -------------
Series A preferred stock dividend (note 13) -- 136,128 155,576
Net income available to common stock $ 16,530,083 $ 8,250,881 $ 10,260,458
============= ============= =============
Basic earnings per common share (note 14) $ 1.68 $ 0.64 $ 0.78
============= ============= =============
Basic weighted-average shares outstanding
(note 14) 9,857,422 12,986,067 13,237,867
============= ============= =============
Diluted earnings per common share (note 14) $ 1.50 $ 0.59 $ 0.72
============= ============= =============
Diluted weighted-average shares outstanding
(note 14) 10,988,302 14,204,478 14,357,341
============= ============= =============
See accompanying notes to consolidated financial statements.
26
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1998, 1999 and 2000
SERIES A PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------------- -------------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 -- -- 9,819,959 98,200 39,330,902 8,613,817
Exercise of options, including tax
benefit of $451,563 (notes 9 and 12) -- -- 51,450 514 523,225 --
Net income -- -- -- -- -- 16,530,083
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 -- -- 9,871,409 98,714 39,854,127 25,143,900
Exercise of options, including tax
benefit of $770,648 (notes 9 and 12) -- -- 268,149 2,682 1,368,040 --
Issuance of preferred stock (note 13) 388,939 3,889 -- -- -- --
Issuance of common stock in connection
with acquisition (note 2) -- -- 4,587,824 45,878 75,694,171 --
Modtech Merger distribution (note 2) -- -- (1,593,022) (15,930) (39,910,100) --
Net income -- -- -- -- -- 8,387,009
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 388,939 $ 3,889 13,134,360 $ 131,344 $ 77,006,238 $ 33,530,909
Exercise of options, including tax
benefit of $645,714 (notes 9 and 12) -- -- 213,655 2,136 1,001,502 --
Net income -- -- -- -- -- 10,416,034
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 388,939 $ 3,889 13,348,015 $ 133,480 $ 78,007,740 $ 43,946,943
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
27
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1999 and 2000
1998 1999 2000
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 16,530,083 $ 8,387,009 $ 10,416,034
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,247,557 5,270,027 5,968,290
Provision for contract adjustments -- 280,000 --
Loss (gain) on sale of equipment (1,500) 32,112 11,957
(Increase) decrease in assets, net
of effects from acquisitions:
Contracts receivable 8,922,813 (1,987,086) (15,196,731)
Costs and estimated earnings in
excess of billings on contracts 12,197,622 (2,454,412) (3,446,313)
Inventories 54,579 3,167,029 (3,175,532)
Amounts due from affiliates (1,291,334) 1,381,060 305,594
Prepaids and other assets (543,045) 948,173 (682,664)
Income tax receivable (2,183,214) 3,185,950 --
Deferred tax assets (960,702) 803,684 (826,232)
Increase (decrease) in liabilities,
net of effects from acquisitions:
Accounts payable 186,075 (1,207,346) 4,183,569
Accrued compensation (974,453) 138,376 727,952
Accrued insurance expense (59,838) (1,052,549) 2,180,877
Income tax payable (852,028) -- 3,374,343
Other accrued liabilities 271,805 (497,875) (549,575)
Billings in excess of costs and
estimated earnings on contracts 140,792 (1,989,656) (1,145,421)
Deferred tax liabilities 97,366 (31,171) (66,195)
------------ ------------ ------------
Net cash provided by
operating activities 32,782,578 14,373,325 2,079,953
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and
equipment 1,500 649,669 2,400
Purchase of property and equipment (2,125,613) (2,268,112) (2,566,609)
Purchase of covenants not to compete (50,000) (122,500) --
Acquisition of subsidiaries (750,000) (49,515,499) --
------------ ------------ ------------
Net cash used in investing
activities (2,924,113) (51,256,442) (2,564,209)
------------ ------------ ------------
(Continued)
28
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
1998 1999 2000
------------ ------------ ------------
Cash flows from financing activities:
Net principal borrowings (payments)
under revolving credit lines $ (42,185) $ -- $ 6,500,000
Net principal borrowings (payments) on
long-term debt (1,374,952) 39,000,000 (7,000,000)
Payment of debt issuance costs -- (1,733,258) (155,286)
Net proceeds from issuance of common stock 72,176 600,074 357,924
Modtech Merger distribution -- (39,928,471) --
------------ ------------ ------------
Net cash used in financing
activities (1,344,961) (2,061,655) (297,362)
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents 28,513,504 (38,944,772) (781,618)
Cash and cash equivalents at beginning of
year 11,628,851 40,142,355 1,197,583
------------ ------------ ------------
Cash and cash equivalents at end of year $ 40,142,355 $ 1,197,583 $ 415,965
============ ============ ============
See accompanying notes to consolidated financial statements.
29
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Modtech Holdings, Inc. and its subsidiaries (the Company) design,
manufacture, market and install modular relocatable classrooms and other
modular buildings for commercial use.
The Company's classrooms are sold primarily to California school
districts. The Company also sells classrooms to the State of California
and to leasing companies, who lease the classrooms principally to
California school districts. The Company's modular classrooms include
standardized units prefabricated at its manufacturing facilities, as well
as customized units that are modular in design but constructed on site
using components manufactured by the Company.
The Company also designs and manufactures modular, portable buildings to
customer specifications for a wide array of uses, including governmental,
healthcare, educational, airport and correctional facilities; office and
retail space; daycare centers; libraries; churches; construction trailers;
golf clubhouses; police stations; convenience stores; fast food
restaurants; and sales offices. The buildings are sold primarily through a
network of sales and leasing companies to a wide range of end users.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Modtech Holdings, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
Preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, contracts receivable and
note receivable, costs and estimated earnings in excess of billings on
contracts, prepaid and other assets, accounts payable, accrued
liabilities, billings in excess of estimated earnings on contracts,
revolving credit line and long-term debt are measured at cost which
approximates their fair value.
REVENUE RECOGNITION
Construction Contracts
Contracts are recognized using the percentage-of-completion method of
accounting and, therefore, take into account the costs, estimated earnings
and revenue to date on contracts not yet completed. Revenue recognized is
that percentage of the total contract price that cost expended to date
bears to anticipated final total cost, based on current estimates of costs
to complete.
30
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:
Leasehold improvements 15 to 31 years
Machinery and equipment 5 to 7 years
Trucks and automobiles 3 to 5 years
Office equipment 5 to 7 years
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS HELD FOR DISPOSAL
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of
the assets exceed the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs
to sell.
GOODWILL
The costs in excess of the fair market value of net assets acquired for
each acquisition is recorded as goodwill and amortized using the
straight-line method over a period of 40 years. The Company evaluates the
recoverability of these costs based upon expectations of non-discounted
cash flows. The amount of goodwill impairment, if any, is measured based
on projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds.
31
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
DEBT ISSUANCE COSTS
Debt issuance costs have been deferred and are being amortized over the
term of the credit facility of five years.
STOCK OPTION PLANS
Prior to January 1, 1996, the Company accounted for stock option plans in
accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recognized on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provision of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123.
EARNINGS PER SHARE
The Company accounts for earnings per share in accordance with SFAS No.
128, "Earnings per Share." This Statement requires the presentation of
both basic and diluted net income per share for financial statement
purposes. Basic net income per share is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding. Diluted net income per share includes the effect of
the potential common shares outstanding.
INCOME TAXES
Income taxes are accounted for under the asset and liability method of
SFAS No. 109, "Accounting for Income Taxes". Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
SEGMENT INFORMATION
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS 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. Reclassification or restatement
of comparative financial statements or financial information for earlier
periods is required upon adoption of SFAS 131. In 2000, the Company
operated in one industry segment and in accordance with SFAS 131, only
enterprise-wide disclosures have been provided.
RECLASSIFICATION
Certain amounts in the 1998 and 1999 consolidated financial statements
have been reclassified to conform to the 2000 presentation.
32
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) ACQUISITIONS
SPI Merger
On February 16, 1999, Modtech, Inc. (Modtech) and SPI Holdings, Inc., a
Colorado corporation (SPI) merged pursuant to the Agreement and Plan of
Reorganization and Merger, dated as of September 28, 1998 (the Merger
Agreement), between Modtech and SPI. SPI is a designer, manufacturer and
wholesaler of commercial and light industrial modular buildings. Pursuant
to the Merger Agreement, SPI merged with a subsidiary of Modtech Holdings,
Inc. (Holdings), a newly formed Delaware corporation (the SPI Merger).
Concurrently, Modtech merged with a separate subsidiary of Holdings (the
Modtech Merger). Pursuant to the mergers, both SPI and Modtech became
wholly owned subsidiaries of Holdings.
In connection with the SPI Merger, SPI stockholders received approximately
$8 million in cash and approximately 4.6 million shares of Holdings Common
Stock. Holdings refinanced approximately $32 million of SPI debt. In
connection with the Modtech Merger, Modtech stockholders received
approximately $40 million in cash, approximately 8.3 million shares of
Holdings Common Stock and 388,939 shares of Holdings Series A Preferred
Stock. In connection with both mergers, the Company incurred a total of
approximately $51 million of debt (see note 8).
The following unaudited pro forma operating results for the Company assume
the SPI Merger had been completed as of the beginning of the years
presented. The pro forma operating results are adjusted to give effect to
the mergers. Additionally, pro forma adjustments have been made for the
acquisitions consummated by SPI prior to the merger. Pro forma net sales,
in thousands, are $200,260 and $172,870 for 1998 and 1999, respectively.
Pro forma net income, in thousands, are $14,480 and $7,930 for 1998 and
1999, respectively. Pro forma diluted earnings per share are $1.03 and
$0.57 for 1998 and 1999, respectively.
The purchase price for the SPI Merger, including acquisition costs, was
approximately $89 million. The SPI Merger has been accounted for as a
purchase and, accordingly, the results of operations of SPI are included
in the Company's consolidated statements of income from the date of
acquisition. The excess of fair value of net assets acquired was
approximately $115.2 million, and is being amortized on a straight-line
basis over 40 years.
The purchase price allocation of the SPI Merger is as follows:
Current assets $ 8,636,887
Property and equipment 1,499,721
Other tangible assets 189,278
Identifiable intangible assets 2,476,814
Current liabilities (4,724,118)
Current portion of long-term debt (10,787,419)
Long-term debt (23,462,179)
-------------
Net liabilities assumed (26,171,016)
Total Aggregate Purchase Price (89,017,553)
-------------
Goodwill $ 115,188,569
=============
33
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Coastal Acquisition
On March 22, 1999, the Company purchased 100% of the stock of Coastal
Modular Buildings, Inc. (Coastal). Coastal designs and manufactures
modular relocatable classrooms and other modular buildings for commercial
use. Coastal is based in St. Petersburg, Florida. The acquisition of
Coastal has been accounted for as a purchase and, accordingly, the results
of operations of Coastal are included in the Company's consolidated
statements of income from the date of acquisition. Pro forma amounts for
the Coastal acquisition are not included, as the effect is not material to
the Company's consolidated financial statements.
(3) CONTRACTS RECEIVABLE
Contracts receivable consisted of customer billings for:
1999 2000
------------- -------------
Completed contracts $ 14,032,792 $ 22,750,678
Contracts in progress 3,402,813 8,538,451
Retentions 2,184,432 3,502,639
------------- -------------
19,620,037 34,791,768
Less allowance for contract adjustments (728,119) (703,119)
------------- -------------
$ 18,891,918 $ 34,088,649
============= =============
(4) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON CONTRACTS
Net costs and estimated earnings in excess of billings on contracts
consisted of:
1999 2000
------------- -------------
Net costs and estimated earnings on
uncompleted contracts $ 97,439,346 $ 117,567,782
Billings to date (96,381,190) (112,324,879)
------------- -------------
1,058,156 5,242,903
Net under billed receivables from
completed contracts 71,134 478,121
------------- -------------
$ 1,129,290 $ 5,721,024
============= =============
34
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
These amounts are shown in the accompanying consolidated balance sheets
under the following captions:
1999 2000
----------- -----------
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 6,125,424 $ 9,217,246
Costs and estimated earnings in excess of
billings on completed contracts 152,352 506,843
----------- -----------
Costs and estimated earnings in excess
of billings on contracts 6,277,776 9,724,089
----------- -----------
Billings in excess of costs and estimated
earnings on uncompleted contracts (5,067,267) (3,974,344)
Billings in excess of costs and estimated
earnings on completed contracts (81,219) (28,721)
----------- -----------
Billings in excess of costs and
estimated earnings on contracts (5,148,486) (4,003,065)
----------- -----------
$ 1,129,290 $ 5,721,024
=========== ===========
(5) INVENTORIES
Inventories consist of:
1999 2000
------------ ------------
Raw Materials $ 5,403,931 $ 8,393,568
Work in process 1,075,149 1,413,381
Finished Goods 159,975 7,638
------------ ------------
$ 6,639,055 $ 9,814,587
============ ============
(6) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of:
1999 2000
------------ ------------
Leasehold improvements $ 12,365,370 $ 13,944,566
Machinery and equipment 5,331,095 6,330,923
Office equipment 1,401,475 1,617,383
Construction in progress 1,073,738 516,866
Trucks and automobiles 415,447 626,407
------------ ------------
20,587,125 23,036,145
Less accumulated depreciation
and amortization (6,714,801) (8,497,911)
------------ ------------
$ 13,872,324 $ 14,538,234
============ ============
35
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) GOODWILL
Goodwill and accumulated amortization consists of the following:
1999 2000
------------- -------------
Goodwill $ 116,618,973 $ 116,618,973
Less accumulated amortization (2,546,570) (5,462,045)
------------- -------------
$ 114,072,403 $ 111,156,928
============= =============
(8) LONG-TERM DEBT AND REVOLVING CREDIT LINE
The Company has a $100 million credit facility with a bank. The credit
facility provides for a $30 million revolving credit line, a 5-year term
loan of $45 million and a delayed draw 5-year term loan of $25 million.
The delayed draw term loan may be drawn on up to February 16, 2001. The
credit facility is secured by all the Company's assets, as well as the
Company's stock ownership in its subsidiaries. The credit facility expires
in February 2004. No amounts were outstanding under the revolving credit
line at December 31, 1999 and $6,500,000 was outstanding at December 31,
2000. The Company has one standby letter of credit issued under the credit
facility for $1,075,000 on which no amounts were outstanding as of
December 31, 2000.
Indebtedness under the credit facility bears interest at the lower of (1)
LIBOR plus additional interest of between 1.5% and 2.25%, or (2) a rate
equal to the greater of (i) the Federal funds rate plus 0.5% or (ii) the
bank's prime rate, plus in either case an additional interest of between
0.25% to 1.0%. The additional interest charge is based upon certain
financial ratios.
The credit facility contains various financial covenants for which the
Company was in compliance at December 31, 2000, 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:
1999 2000
------------- -------------
Term Loan $ 37,000,000 $ 30,000,000
Delayed Draw Term Loan 2,000,000 2,000,000
------------- -------------
39,000,000 32,000,000
Less current portion of long-term debt (7,000,000) (8,400,000)
------------- -------------
$ 32,000,000 $ 23,600,000
============= =============
Long-term debt maturities for the next three years are as follows:
$8,400,000 in 2001, $9,600,000 in 2002 and $14,000,000 in 2003.
36
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) INCOME TAXES
The components of the 1998, 1999 and 2000 provision for Federal and state
income tax (expense) benefit computed in accordance with SFAS No. 109 are
summarized below:
1998 1999 2000
------------ ------------ ------------
Current:
Federal $ (8,585,201) $ (4,968,324) $ (8,704,450)
State (2,272,844) (1,387,457) (1,424,835)
------------ ------------ ------------
(10,858,045) (6,355,781) (10,129,285)
Deferred:
Federal 593,693 (640,252) 755,446
State 556,208 (132,262) 136,981
------------ ------------ ------------
$ (9,708,144) $ (7,128,295) $ (9,236,858)
============ ============ ============
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:
1998 1999 2000
------ ------ ------
Taxes, U.S. statutory rates (35.0%) (35.0%) (35.0%)
State taxes, less Federal
benefit (4.0) (4.5) (5.2)
Effect of non-deductible
expenses -- (5.8) (5.3)
Reduction in Federal
valuation allowance 2.0 -- --
Other -- (0.7) (1.5)
------ ------ ------
Total taxes on income (37.0%) (46.0%) (47.0%)
====== ====== ======
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, 1999 and 2000 are as follows:
1999 2000
---------- ----------
Deferred tax assets:
Reserves and accruals not recognized
for income tax purposes $2,063,717 $2,605,029
State taxes 295,588 418,134
Other 379,736 878,195
---------- ----------
Total gross deferred tax assets 2,739,041 3,901,358
Less valuation allowance -- --
---------- ----------
Net deferred tax assets $2,739,041 $3,901,358
---------- ----------
37
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Deferred tax liabilities:
Prepaids $ (80,192) $ (84,525)
Depreciation (78,813) (308,209)
Revenue recognition (9,716) (45,877)
----------- -----------
Total gross deferred tax
liabilities (168,721) (438,611)
----------- -----------
Total net deferred tax assets $ 2,570,320 $ 3,462,747
=========== ===========
These amounts have been presented in the consolidated balance sheets as follows:
1999 2000
----------- -----------
Current deferred tax assets $ 2,636,515 $ 3,406,756
Noncurrent deferred tax
(liabilities) assets (66,195) 55,991
----------- -----------
Total net deferred tax assets $ 2,570,320 $ 3,462,747
=========== ===========
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:
1998 1999 2000
---------- ---------- ----------
Sales $2,675,457 $6,271,813 $4,128,935
Cost of goods sold 2,116,691 5,128,455 3,213,731
Gross profit percentage 20.90% 18.23% 22.17%
========== ========== ==========
The related party purchases modular relocatable classrooms from the
Company on standard terms and at standard wholesale prices.
38
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Due from affiliates includes a portion of unpaid invoices as a result of
the above transactions. As of December 31, 1999 and 2000 these amounts
totaled $786,315 and $476,200, respectively. Additional amounts arising
from these transactions are included in the following captions:
1999 2000
----------- -----------
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 1,888,141 $ 800,756
Billings in excess of costs and estimated
earnings on uncompleted contracts (31,388) (21,312)
=========== ===========
NOTE RECEIVABLE
At December 31, 1999 and 2000, the Company had a note receivable from a
related party partnership in the amount of $45,212. An officer of the
Company is a partner in the partnership. The note bears interest at 10%
and is payable upon demand. Unpaid interest related to this note and two
other related party notes with principal repayment in 1996 totaled
$165,111 at December 31, 1999 and $169,632 at December 31, 2000 and is
included in due from affiliates.
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 $37,000. 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 $478,000, $376,000 and $409,000 in rent
expense paid to related parties for the years ended December 31, 1998,
1999, and 2000, 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
$100,452, $179,861 and $369,430 in 1998, 1999, and 2000, 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 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
39
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
of the Company's common stock. The exercise price of the stock options
cannot be less than the fair market at the date of the grant. All of these
options were granted during 1994.
In May of 1994, the Board of Directors voted and approved an additional
stock option plan (the May 1994 Plan). The May 1994 Plan 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 at the date
of the grant (110% if granted to an employee who owns 10% or more of the
Company's common stock). All of these options were granted prior to 1999.
In July 1996, the Company's Board of Directors authorized the grant of
options to purchase up to 500,000 shares of the Company's common stock.
The non-statutory options were granted to employees, non-employee officers
and directors, consultants, vendors, customers and others expected to
provide significant service to the Company. The exercise price of the
stock options cannot be less than the fair market value at the date of the
grant (110% if granted to an employee who owns 10% or more of the
Company's common stock). All of these options were granted prior to 1999.
In 1999, the Company's shareholders approved a stock option plan (the 1999
Plan). The 1999 Plan provides for the grant of non-statutory options to
purchase up to 1,250,000 shares of the Company's common stock. The
non-statutory options may be granted to employees, officers, directors,
consultants, independent contractors and others expected to provide
significant service to the Company. The exercise price of the stock
options cannot be less than the fair market at the date of the grant (110%
if granted to an employee who owns 10% or more of the Company's common
stock). In 1999 and 2000, 438,631 and 368,747 shares were granted,
respectively.
Stock options outstanding under the Company's Stock Option Plans are
summarized as follows:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- ----------
December 31, 1997 1,240,608 $ 3.52
Granted 170,869 19.69
Exercised (51,450) 1.40
---------- ------
December 31, 1998 1,360,027 5.63
Granted 438,631 9.00
SPI Merger 389,909 2.26
Modtech Merger (178,864) 4.61
Exercised (268,149) 2.24
Terminated (71,513) 7.27
---------- ------
December 31, 1999 1,670,041 6.32
---------- ------
Granted 368,747 6.86
Exercised (213,655) 1.68
Terminated (3,532) 13.11
---------- ------
December 31, 2000 1,821,601 $ 6.96
========== ======
40
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
All stock options have a maximum term of ten years and become fully
exercisable in accordance with a predetermined vesting schedule which
varies.
The following information applies to options outstanding at December 31,
2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ --------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
NUMBER LIFE EXERCISE NUMBER EXERCISE
OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
----------- ----------- -------- ----------- --------
Range of exercise
prices
$1.19 - $4.50 671,461 4.8 $ 2.17 622,409 $ 2.14
$6.00 - $10.00 950,274 8.3 7.93 241,830 8.32
$12.62 - $20.57 199,866 7.1 18.42 129,892 17.95
--------- ---------
1,821,601 $ 6.96 994,131 $ 5.71
========= =========
The per share weighted-average fair value of stock options granted during
1998, 1999 and 2000 was $11.27, $5.06 and $3.81, respectively, on the date
of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions:
1998 1999 2000
------- ------- -------
Expected dividend yield 0% 0% 0%
Average risk-free interest rate 5.6% 5.5% 6.2%
Volatility factor 71.15% 69.40% 66.56%
Expected life 4 years 4 years 4 years
======= ======= =======
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recognized for its
stock options in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for
its stock options under SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below:
1998 1999 2000
----------- ----------- -----------
Net Income
As Reported $16,530,083 $ 8,387,009 $10,416,034
Pro Forma 15,424,671 8,054,385 9,872,535
=========== =========== ===========
Basic earnings per share
As Reported $ 1.68 $ 0.64 $ 0.78
Pro forma 1.57 0.61 0.73
=========== =========== ===========
Diluted earnings per share
As Reported $ 1.50 $ 0.59 $ 0.72
Pro Forma 1.40 0.57 0.69
=========== =========== ===========
41
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) SERIES A PREFERRED STOCK
In conjunction with the Modtech Merger, 388,939 shares of Series A
Preferred Stock were issued in February 1999. The Series A Preferred Stock
has no voting rights, including, without limitation, the right to vote on
the election of directors, mergers, reorganization or a sale of all or
substantially all of the Company's assets. Dividends accrue on each share
of Series A Preferred Stock at the rate of $0.40 per annum. Dividends may
not be paid on the Company's common stock until all accrued dividends on
the Series A Preferred Stock are paid or declared and set aside for
payment.
Subject to proportional adjustments due to stock splits, reverse stock
splits and similar transactions, each share of Series A Preferred Stock is
convertible into one share of the Company's common stock at any time
following two years after their date of issuance. Each outstanding share
of Series A Preferred Stock will automatically be converted into the
Company's common stock upon the fourth anniversary date of its issuance or
upon a change in control.
(14) EARNINGS PER SHARE
The following table represents the calculation of basic and diluted
earnings per common share under the provisions of SFAS No. 128:
1998 1999 2000
----------- ----------- -----------
BASIC
Net income $16,530,083 $ 8,387,009 $10,416,034
Dividends on preferred stock (note 13) -- 136,128 155,576
----------- ----------- -----------
Net income available to common stock $16,530,083 $ 8,250,881 $10,260,458
=========== =========== ===========
Basic weighted-average shares
outstanding 9,857,422 12,986,067 13,237,867
=========== =========== ===========
Basic earnings per common share $ 1.68 $ 0.64 $ 0.78
=========== =========== ===========
DILUTED
Net income $16,530,083 $ 8,387,009 $10,416,034
=========== =========== ===========
Basic weighted-average shares
outstanding 9,857,422 12,986,067 13,237,867
Add:
Conversion of preferred stock -- 388,939 388,939
Exercise of stock options 1,130,880 829,472 730,535
----------- ----------- -----------
Diluted weighted-average shares
outstanding 10,988,302 14,204,478 14,357,341
=========== =========== ===========
Diluted earnings per common share $ 1.50 $ 0.59 $ 0.72
=========== =========== ===========
Options to purchase 551,096, and 620,351 shares of common stock were
outstanding during 1999 and 2000, respectively, but were not included in
the computation of diluted earnings per share because the
42
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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:
1998 1999 2000
------ ------ ------
Customer A 11% 6% 6%
Customer B 0% 8% 11%
====== ====== ======
(16) SUPPLEMENTAL CASH FLOW DISCLOSURES
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1998 1999 2000
----------- ----------- -----------
Cash paid during the year for:
Interest $ 209,677 $ 3,209,179 $ 4,587,398
=========== =========== ===========
Income taxes $13,755,000 $ 2,320,000 $ 6,766,998
=========== =========== ===========
(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:
2001 $ 1,782,000
2002 1,652,000
2003 1,326,000
2004 917,000
2005 917,000
Thereafter 6,858,000
-----------
$13,452,000
===========
Of the $13,452,000 in future rental payments, $7,309,000 is payable to
related parties (note 10). Rent expense for the years ended December 31,
1998, 1999 and 2000 was $713,000, $2,139,000 and $2,380,000, respectively.
43
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(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) SUBSEQUENT EVENT
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 will be accounted for
by the purchase method of accounting.
(21) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
In thousands, except per share amounts:
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
2000:
Net sales $49,380 $76,450 $65,182 $43,722
Gross profit 7,381 13,310 9,719 5,822
Net income 1,747 4,530 3,032 1,107
Earnings per
common share:
Basic $ 0.13 $ 0.34 $ 0.23 $ 0.08
Diluted 0.12 0.31 0.21 0.08
1999:
Net sales $38,030 $59,331 $48,915 $20,952
Gross profit 5,958 10,941 8,165 3,496
Net income 1,071 3,992 2,301 1,023
Earnings per
common share:
Basic $ 0.07 $ 0.31 $ 0.18 $ 0.08
Diluted 0.07 0.29 0.16 0.07
44
Schedule II
MODTECH HOLDINGS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1998, 1999, and 2000
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, 1998 $410,119 $ 30,988 $ -- $(12,000) $429,107
======== ======== ======== ======== ========
Year ended December 31, 1999 $429,107 $ 50,000 $280,000 $(30,988) $728,119
======== ======== ======== ======== ========
Year ended December 31, 2000 $728,119 $ -- $ -- $(25,000) $703,119
======== ======== ======== ======== ========
45
EXHIBIT INDEX
Exhibit
Number Name of Exhibit
------ ---------------
3.1(1) Certificate of Incorporation of Modtech Holdings, Inc.
3.2(1) Bylaws of Modtech Holdings, Inc.
10.1(2) Modtech, Inc.'s 1996 Stock Option Plan.
10.2(3) Transaction Advisory Agreement.
10.3(4) Employment Agreement between the Company and Evan M.
Gruber.
10.4(4) Employment Agreement between the Company and Patrick Van
Den Bossche.
10.5(4) Employment Agreement between the Company and Michael G.
Rhodes.
10.6(5) Lease between the Company and Pacific Continental Modular
Enterprises, relating to the Barrett Street property in
Perris, California.
10.7(5) Lease between the Company and BMG, relating to the
property in Lathrop, California.
10.8(5) Form of Indemnity Agreement between the Company and its
executive officers and directors.
10.9(3) Financial Advisory Services Agreement.
10.10(6) Credit Agreement.
23.1 Independent Auditors' Consent.
- --------------------
(1) Incorporated by reference to Modtech Holdings, Inc.'s Registration
Statement on Form S-4 filed with the Commission on October 27, 1998
(Commission File No. 333-69033).
(2) Incorporated by reference to Modtech, Inc.'s Registration Statement on
form S-8 filed with the Commission on December 11, 1996 (Commission File
No. 333-17623).
(3) Incorporated by reference to Amendment No. 2 to Modtech Holdings, Inc.'s
Registration Statement on Form S-4, filed with the Commission on January
11, 1999 (Commission File No. 333-69033).
(4) Incorporated by reference to Amendment No. 1 to Modtech Holdings, Inc.'s
Registration Statement on Form S-4, filed with the Commission on
December 15, 1998 (Commission File No. 333-69033).
(5) Incorporated by reference to Modtech, Inc.'s Registration Statement on
Form S-1 filed with the Commission on June 6, 1990 (Commission File No.
033-35239).
(6) Incorporated by reference to Modtech Holdings, Inc.'s Form 10-K filed
with the Commission on April 15, 1999 (Commission File No. 000-25161).