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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, 1998
[ ] 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. 0-25161
MODTECH HOLDINGS, INC.
Successor Registrant to Modtech, 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 92572
(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 31, 1999 was $60,999,696. As of March 31, 1999, shares
entitled to cast an aggregate of 12,622,158 votes were outstanding, including
12,622,158 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 designs, manufactures, markets and installs modular relocatable
classrooms and other modular buildings for commercial use. Based upon 1997 net
sales, the Company believes that it is the largest manufacturer of modular
relocatable classrooms in California. The Company's classrooms are sold
primarily to California school districts and to third parties and the State of
California principally 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 products 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 portable units.
As a result of net enrollment increases in California schools and budgetary
constraints experienced by the State of California which limited the
availability of funds for the addition of new classrooms over the last few years
prior to 1996, California's schools are reported to be among the most crowded in
the nation. As the State budget deficit has ameliorated, the legislature has
increased funding for new classrooms in an effort to reduce the average number
of students per class. State funding initiatives include funds from both (i) the
State's operating budget, such as the $200 million allocated for construction or
addition of classrooms out of the total of $822 million spent under the Class
Size Reduction Program for the 1996-1997 school year and the $1.5 billion
allocated for the 1997-1998 school year for both general operations and school
facilities, and (ii) the sale of statewide bond issues, such as the $9.2 billion
bond issue for school construction, including the addition of classrooms which
was approved in November 1998. See "Business -- Legislation and Funding."
These factors have combined to increase the demand for modular relocatable
classrooms, which cost significantly less and take much less time to construct
and install than conventional school facilities, and which permit a school
district to relocate the units as student enrollments shift. In addition, the
Company's products provide added flexibility to school districts in financing
the costs of adding classroom space, since modular relocatable classrooms are
considered personal property which can be financed out of a district's operating
budget in addition to its capital budget. In recognition of these advantages,
California legislation currently requires, with certain exceptions, that 20% of
all classroom space in the district, not just new space added, consists of
relocatable classrooms. See "Business -- Legislation and Funding."
SPI MERGER. On February 16, 1999, Modtech, Inc. ("Modtech" or the "Company") 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. The SPI Merger will be accounted
for by the purchase method of accounting.
In connection with the SPI Merger, SPI stockholders received approximately $8
million in cash and approximately 4.3 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. See "Selected
Financial Data -- Unaudited Pro Forma Combined Financial Statements."
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.
Coastal is based in St. Petersburg, Florida. The acquisition 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.
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The construction of new schools and the addition of classrooms at existing
schools are tied to the sources and levels of funding available to California
school districts. The availability of funding for new school and classroom
additions, in turn, is determined in large measure by the amount of tax revenue
raised by the State, the level of annual allocations for education from the
State's budget which is determined by educational policies that are subject to
political concerns, and the willingness of the California electorate to approve
state and local bond issues to raise money for school facilities.
In 1978, California voters approved Proposition 13, which rolled back local
property taxes (a traditional source of funding for school districts) and
limited the ability of local school districts to raise taxes to finance the
construction of school facilities. The passage of Proposition 13, coupled with
growing student populations, has increased the need for local school districts
to find ways to reduce the cost of adding classrooms. The California legislature
has adopted several statutes designed to alleviate some of the problems
associated with the shortage of classrooms and lack of local funding
alternatives. For example, in 1976, California adopted legislation that through
November 1998 required, with certain exceptions, that at least 30% of all new
classroom space added using State funds must be relocatable structures. This
requirement was satisfied through the purchase or lease of the Company's
classrooms. See "Business -Legislation and Funding." Additionally, in 1979 the
California legislature adopted legislation that provides for State funding for
the purchase of relocatable classrooms that could be leased to local school
districts.
As the number of students enrolled in California schools continued to increase
throughout the 1990's, the State of California and California school districts
experienced increasing budget shortfalls. The resulting shortage of funding
available at both the State and local level led to declining sales of modular
relocatable classrooms, by the Company and on an industry-wide basis. However,
as the State budget deficit ameliorated, funding for modular relocatable
classrooms began to increase. This growth was accelerated when the California
Class Size Reduction Program was implemented in November 1996, the goal of which
is to reduce class sizes to 20 students in public elementary schools at the
kindergarten through third grade levels. For the 1996-1997 school year, the
State spent $822 million under this program, including $200 million specifically
for facilities, which may be relocatable classrooms. The total State funding
under the Class Size Reduction Program for the 1997-1998 school year was
approximately $1.5 billion for both general operations and school facilities.
See "Legislation and School Funding."
When compared to the construction of a conventionally built classroom, modular
classrooms offer a number of advantages, including, among others:
Lower Cost -- The cost of the Company's standard classroom
may be as low as $29,000 installed, as compared
to $80,000 to $100,000 for conventional
construction of a comparable classroom;
Shorter Construction -- 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.
MODULAR RELOCATABLE CLASSROOMS
The Company's modular relocatable classrooms are designed, engineered and
constructed in accordance with structural and seismic safety specifications
adopted by the California Department of State Architects, standards which are
more rigorous than the requirements for other portable units. The Department of
State Architects, which regulates all school construction on public land, has
prescribed extensive regulations regarding the design and construction of school
facilities, setting minimum qualifications for the preparation of plans and
specifications, and reviews all plans for the construction of material
modifications to any school building. Construction authorization is not given
unless the school district's architect certifies that a proposed project
satisfies construction cost and allowable area standards. The Company
subcontracts with structural engineering firms to interface with each school
district's architect or engineer to process project specifications through the
Department of State Architects. The Company believes that the regulated
environment in which the Company's classrooms are manufactured serves as a
significant barrier to market entry by prospective competitors. See "Business --
Competition."
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Conventional school facilities constructed by school districts using funds from
the State Office of Public School Construction typically require two to three
years for approval and funding. By contrast, factory-built school buildings like
the Company's standard classrooms may be pre-approved by the State for use in
school construction. Once plans and specifications for a given classroom have
been pre-approved, school districts can thereafter include in their application
to obtain State funds for new facilities a notification that they intend to use
pre-approved, standardized factory-built classrooms. This procedure reduces the
time required in the State's approval process to as little as 90 days, thereby
providing an additional incentive to use factory-built relocatable classrooms.
In all cases, continuous on-site inspection by a licensed architect or
structural engineer is required during actual manufacture of the classrooms,
with the school district obligated to reimburse the Department for the costs of
such inspection.
The Company's classrooms are manufactured and installed in accordance with the
applicable Department of State Architects building code, which supersedes all
local building codes for purposes of school construction. The classrooms must
comply with accessibility requirements for the handicapped, seismic and fire
code requirements.
The Company manufactures and installs standard, largely pre-fabricated modular
relocatable classrooms, as well as customized classrooms, which are modular in
design, but assembled on-site using components manufactured by the Company
together with components purchased from third party suppliers. The Company's
classrooms vary in size from two modular units containing a total of 960 square
feet to 20 units that can be joined together to produce a facility comprising
9,600 square feet. Larger configurations are also possible. Typical prices for
the Company's standard classrooms range from $29,000 to $34,000, while prices
for a custom classroom generally exceed $50,000, depending upon the extent of
customization required.
The two basic structural designs for standard and custom modular classrooms are
a rigid frame structure and a shear wall structure. The rigid frame structure
uses a steel floor and roof system, supported at each corner with square steel
tubing. These buildings have curtain walls to enclose the interior from the
outside, and have the advantage of unlimited width and length. Rigid frame
structures may be used for multipurpose rooms and physical education buildings
as well as standard classrooms. Shear wall classrooms have a maximum width of 48
feet (four 12 foot modules) and a maximum length of 60 feet. These classrooms
use the exterior and interior walls to produce the required structural strength
and can be built at lower costs than rigid frame structures. The Company's most
popular factory-built classroom is a rigid frame design, with two modules
connected side by side to complete a 24 by 40 foot classroom.
Custom built classrooms, libraries and gymnasiums contain design variations and
dimensions such as ceiling height, pitch, overall size and interior
configuration. These units typically are not assembled at the factory but
instead are shipped in pieces, including floors, walls and roofs, and assembled
on-site. Contracts for custom built units may include the design, engineering
and layout for an entire school or an addition to a school, and involve site
preparation, grading, concrete and asphalt work and landscaping. Customized
classrooms are generally more expensive and take longer to complete than the
Company's standard classrooms.
The interior and exterior of all of the Company's modular classrooms can be
customized by employing different materials, design features and floor plans.
Most classrooms are open, but the interior of the buildings can be divided into
individual rooms by permanent or relocatable partitions. The floor covering is
usually carpet but may be linoleum or wood depending upon the intended use of
the classroom. Interior wall material is usually vinyl covered firtex over
gypsum board, while other finishes such as porcelain enamel or painted hardboard
may be used in such places as restrooms and laboratories. Electrical wiring, air
conditioning, windows, doors, fire sprinklers and plumbing are installed during
the manufacturing process. The exterior of the units is typically plywood
siding, painted to the customer's specifications, but other common siding
material may also be applied.
CLASSROOM CUSTOMERS
The Company markets and sells its modular classrooms primarily to California
school districts. The Company also sells its classrooms to the State of
California and leasing companies, both of which lease the classrooms principally
to California school districts. Sales of classrooms accounted for 94.2%, 98.1%
and 97.7% of the Company's total net sales for the years ended December 31,
1996, 1997 and 1998. 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
"Legislation and Funding."
Sales of classrooms to individual California school districts accounted for
approximately 74.5%, 71.1% and 72.5%, respectively, of the Company's net sales
during the years ended December 31, 1996, 1997 and 1998, with sales of
classrooms to third party lessors to California school districts during these
periods accounting for approximately 7.2%, 19.1% and 13.9%, 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 1998 represented approximately 11.3% of the Company's
net sales for the period, compared to approximately 7.9% of the Company's 1997
net sales and approximately 12.5% of the Company's 1996 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, 1996, 1997 and 1998. One of the lessors to which the Company
sells classrooms for lease
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to California school districts is affiliated with the Company through common
ownership by two of the Company's directors. During the years ended December 31,
1996, 1997 and 1998, sales of classrooms to this affiliated leasing company
comprised approximately 2.9%, 2.2% and 2.1%, respectively, of the Company's net
sales. See "Management -- Certain Transactions."
OTHER PRODUCTS
In addition to modular relocatable classrooms that are designed and manufactured
in accordance with the California Department of State Architects standards, the
Company also manufactures modular, portable buildings, which can be used as
office facilities and construction trailers and for other commercial purposes.
Currently, most of these non-classroom products are manufactured at the
Patterson, California plant, which the Company acquired in 1996. During the
years ended December 31, 1996, 1997 and 1998, sales of such modular, portable
buildings to commercial customers accounted, in the aggregate, for approximately
5.8%, 1.9% and 2.3%, respectively, of the Company's net sales. The Company also
manufactures a small number of modular structures that house and shelter
electronic equipment used in the wireless telecommunications industry. During
the years ended December 31, 1996, 1997 and 1998, sales of modular
telecommunications equipment shelters, which are included above in sales to
commercial customers, accounted for less than one percent of the Company's net
sales for each period.
SALES AND MARKETING
At December 31, 1998 the Company's classroom sales force was divided into three
marketing regions: Northern, Central and Southern California. At December 31,
1998 the Company employed three 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.
A fourth salesperson is charged with increasing the Company's sales of buildings
to the commercial and telecommunications markets. In addition, the Company has
two additional salespeople whose focus is on the sale of classrooms in Nevada
and Arizona, and to private schools and day care operators in California.
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.
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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.
At December 31, 1998 the Company had five manufacturing facilities. Two are
located in Southern California, in Perris, California, which is approximately 60
miles east of Los Angeles. The Company has another two facilities near Lathrop,
California. Lathrop is located approximately 75 miles east of San Francisco. The
fifth manufacturing facility is located in Glendale, Arizona, which is located
in the Phoenix Metropolitan area. At December 31, 1998, the Company had a total
of five production lines in operation.
The standard contractual warranty for the Company's modular relocatable
classrooms 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 classrooms, most of
which are standard construction items such as steel, plywood and wallboard.
BACKLOG
The Company manufactures classrooms to fill existing orders only, and not for
inventory. As of December 31, 1998, the backlog of sales orders was
approximately $25.0 million, down from approximately $71.0 million at December
31, 1997 and $58.0 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 Company believes that, based upon 1997 net sales, it is the largest modular
relocatable classroom manufacturer in California. However, the modular
relocatable classroom industry is highly competitive, with the market divided
among a number of privately-owned companies whose share of the market is smaller
than that of the Company. The Company believes that the nature of the bidding
process, the level of performance bonding required, and the industry's regulated
environment serve as barriers to market entry, and that the expertise of its
management gives it an advantage over competitors. Nevertheless, the Company
believes that additional competitors may enter the market in the future, some of
whom may have significantly greater capital and other resources than are
available to the Company, and that competition may therefore increase.
The Company also believes that its expertise in site preparation and on-site
installation gives it a competitive advantage over many manufacturers of
higher-priced, customized modular units, while its vertically integrated,
assembly-line approach to manufacturing enables the Company to be one of the low
cost producers of standardized, modular relocatable classrooms in California.
Unlike many of its competitors, the Company manufactures most of its own metal
components which allows the Company to maintain quality control over these
components and to produce them at a lower average cost than that at which they
could be obtained from outside sources. The Company also believes that the
quality and appearance of its buildings, and its reputation for reliability in
completion of its contracts, enable it to maintain a favorable position among
its competition.
The Company categorizes its current competition based upon the geographic market
served (Northern California versus Southern California), as well as upon the
relative degree of customization of products sold. Beyond a radius of
approximately 300 miles, the Company believes that transportation costs
typically will either significantly increase the prices at which it bids for
given projects, or will substantially erode the Company's gross profit margins.
The primary competitors of the Company for standardized classrooms are believed
to be Aurora Modular Industries in Southern California and American Modular
Systems in Northern California. Profiles Structures, Inc. in Southern California
and Design Mobile Systems in Northern California are the Company's primary
competitors in the market for higher-priced, customized classrooms. Each of
these four competitors is a privately-owned company.
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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. In November 1996, California implemented the Class Size Reduction
Program in response to overcrowding in classrooms in the state and its assumed
negative impact on learning. An additional impetus for the program was a study
conducted by Tennessee State University which indicated that students in small
classrooms outperformed their peers from larger classes at least through the
eighth grade on standardized tests in math and reading. The goal of the
California Class Size Reduction Program is to reduce public elementary school
class sizes in kindergarten through the third grade. Under this program, schools
that reduce class size to 20 students in those grades receive additional funds.
For the 1996-1997 school year, a school district was entitled to receive $25,000
for each new classroom added which reduced the average class size for a
specified grade level to 20 students or less. Among other ways new classrooms
can quickly and inexpensively be added, school districts may reconfigure
existing space to convert it to classrooms from other uses, or purchase or lease
a modular relocatable classroom.
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Until the adoption of the Class Size Reduction Program in 1996, the most
important source of funding at the State level for new school facilities was
through the issuance and sale of statewide general obligation bonds which are
repaid out of the State's General Funds. Proposals to issue such bonds are
placed on statewide ballots from time-to-time in connection with general or
special elections, and require approval by a majority of the votes cast in
connection with such proposals. As in the case of the Class Size Reduction
Program, the State also may annually allocate funds from the State's budget for
the support of school districts and community college districts.
AUTHORITY FOR BOND FINANCING. Under the School Building Lease -- Purchase Law of
1976, the State Allocation Board is empowered to purchase or lease school
facilities using funds from the periodic issuance of general obligation bonds of
the State of California. These purchased or leased school facilities may be made
available by the State Allocation Board to school districts. Certain matching
funds, usually derived from Developer Fees, are required to be supplied by the
school districts seeking state funded facilities. If the school districts
acquire relocatable structures using Developer Fees, the amount of the required
matching funds is reduced by the cost of such facilities. This reduction in
matching funds is intended to provide an incentive for school districts to lease
relocatable classrooms. Prior to November 1998, as a condition of funding any
project under this program, at least 30% of new classroom space to be added must
be comprised of relocatable structures, unless relocatable structures are not
available or special conditions of terrain, climate or unavailability of space
make the use of relocatable structures impractical. In addition, State funds
under this program are not available to school districts which are determined to
have an adequate amount of square footage available for their student
population.
Senate Bill 50, which was passed in November 1998 by the California Legislature,
revised the School Building Lease - Purchase Law of 1976 by eliminating the
requirement that at least 30% of all new classroom space being added using
California state funds must be relocatable classrooms. In general, it replaced
this provision with a requirement that, in order for school districts to
increase the amount of funds to be received from developers in excess of the
current statutory level, the school districts must show that 20% of all
classroom space in the district, not just new space added, consists of
relocatable classrooms. The bill also placed a $9.2 billion bond issue on the
November 1998 ballot, which was approved by the voters. The bill allocates from
the bond issue $2.9 billion for growth and new construction, and $2.2 billion
for modernization and reconstruction through the year 2001. In addition, it
allocates $700 million for class-size reductions to fully implement the program
from kindergarten through third grade. The costs to implement the foregoing will
include land acquisition costs, hiring of new teachers, remodeling of existing
structures and construction of new permanent and relocatable structures. The
bill does not designate the specific usage of funds, and the actual amount spent
on relocatable classrooms will vary among school districts. Implementation of
Senate Bill 50 began the third week of January 1999. The Company does not expect
any significant change in its future operating results due to implementation of
Senate Bill 50.
In response to the adoption of Proposition 13, the State of California adopted
the California Emergency Classroom Law of 1979, pursuant to which the State
Allocation Board may spend up to $35 million per year from available funds to
purchase relocatable classrooms to be leased to school districts. Relocatable
classrooms are not available to school districts under this program if the
school district has available local bond proceeds that could be used to purchase
classroom facilities, unless the district has approved projects pending under
the School Building Lease-Purchase Law of 1976. The State has, in the past,
funded this program primarily from the proceeds of statewide bond issues
approved by voters.
BUDGET ALLOCATIONS. Proposition 98, which was approved in 1988, requires the
State to allocate annually from the State's budget, for the support of school
districts and community college districts, a minimum amount equal to the same
percentage of funds as was appropriated for the support of those institutions in
fiscal year 1986-87. While this requirement may be suspended for a given year by
emergency legislation, it has the effect of limiting the ability of the
California legislature to reduce the level of school funding from that in
existence in 1986-87. The State raises the necessary funds through proceeds from
the sale of statewide bond issues, income tax revenues and other revenues. A
recent reduction in California's corporate tax rates, and a proposed reduction
in personal income tax rates, may affect future levels of the State's income tax
revenues.
LOCAL FUNDING. Local school districts in California have the ability to issue
local general obligation bonds for the acquisition and improvement of real
property for school construction. These bond issues require the approval of
two-thirds of the voters in the district and are repaid using the proceeds of
increases in local property taxes. A local school district may also levy
Developer Fees on new development projects in the district, subject to a maximum
rate set by state law. The Developer Fees can only be levied if the project can
be shown to contribute to the need for additional school facilities and the fee
levied is reasonably related to such need. In addition, California law provides
for the issuance of bonds by Community Facilities Districts which can be formed
by a variety of local government agencies, including school districts. These
districts, known as "Mello-Roos" districts, can have flexible boundaries and the
tax imposed to repay the bonds can be based on property use, acreage, population
density or other factors.
8
9
OTHER LEGISLATION
California legislation adopted in 1989 provides that school districts which
currently lease any building which does not meet the prescribed structural
standards must have replaced nonconforming buildings with conforming ones by
September 1, 1990. However, any district has the right to request a one-time
waiver for a maximum of three years upon presentation of satisfactory evidence
to the State Allocation Board that the district is proceeding in a timely
fashion with a program that will eliminate the need for the nonconforming
facilities within that time period. The State has authorized districts to renew
these waivers through 2000 and may grant further waivers. The Company
understands that a number of school districts have requested and been granted
such waivers. Based upon information received by the State Allocation Board from
school districts and provided to the Company, it is believed that there are
approximately 4,500 trailers currently being used as classrooms by school
districts throughout California that eventually must be replaced with conforming
facilities by these school districts.
California has taken steps to encourage local school districts to adopt
year-round school programs to help increase the use of existing school
facilities and reduce the need for additional school facilities. School
districts requesting state funding under the School Building Lease-Purchase Law
of 1976 or the Emergency Classroom Law of 1979 discussed above must submit a
study examining the feasibility of implementing in the district a year-round
educational program that is designed to increase pupil capacity in the district
or in overcrowded high school attendance areas. The feasibility study
requirement is waived, however, if the district demonstrates that emergency or
urgent conditions exist in the district that necessitate the immediate need for
relocatable buildings. The demand for new school facilities, including
relocatable classrooms, would be adversely affected in the event that a
significant number of California school districts implemented year-round school
programs. In addition, a significant increase in the level of voluntary or
mandatory busing of students from overcrowded schools to schools with excess
capacity could adversely affect demand for new school facilities.
ENVIRONMENTAL MATTERS
The Company is subject to a variety of federal, state and local governmental
regulations related to the storage, use and disposal of any hazardous materials
used by the Company in connection with the manufacture of its products. Both the
governmental regulations and the costs associated with complying with such
regulations are subject to change in the future.
EMPLOYEES
At December 31, 1998, the Company had 481 employees, including 429 in
manufacturing, 6 in sales, 17 in operations and 29 in general management and
administration. The Company's employees are not represented by a labor union,
and it has experienced no work stoppages. The Company believes that its employee
relations are good.
ITEM 2. PROPERTIES
The Company's principal executive and administrative facilities are located in
approximately 12,000 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 on a 30-acre site in Lathrop, California that is leased through 2019.
The fourth plant, which was leased for up to five years in October 1996,
consists of approximately 50,000 square feet of manufacturing area on a 4-acre
site in Patterson, California. The fifth plant consists of approximately 30,000
square feet of manufacturing area on a 4-acre site in Glendale, Arizona. The
Company believes that its facilities are well maintained and in good operating
condition, and meet the requirements for its immediately foreseeable business
needs. Each of the Company's facilities at December 31, 1998, other than the
Patterson plant and Arizona plant, are leased from an affiliate. See "Management
- -- Certain Transactions."
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.
9
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was traded on the NASDAQ National Market System under
the symbol "MODT" at December 31, 1998. 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
------------- ------ ------
3/31/98 29.125 19.125
6/30/98 23.688 18.500
9/30/98 20.500 16.000
12/31/98 20.250 13.000
On December 31, 1998, the closing sales price on The NASDAQ National Market for
a share of the Company's Common Stock was $15.25. The approximate number of
holders of record of the Company's Common Stock as of December 31, 1998, was 90.
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.
10
11
ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected income statement and balance sheet data set forth below for the
three years ended December 31, 1996, 1997 and 1998 have been derived from the
audited financial statements of the Company included elsewhere herein. The
selected income statement and balance sheet data set forth below for the years
ended December 31, 1994 and 1995 have been derived from audited financial
statements of the Company that are not included herein. The selected income
statement and balance sheet data set forth below should be read in conjunction
with those financial statements (including the notes thereto) and with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" also included elsewhere herein.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA:
Net sales .................................. $ 20,355 $ 19,386 $ 49,886 $ 134,050 $ 127,620
Cost of goods sold ......................... 17,766 16,401 42,629 107,367 97,765
--------- --------- --------- --------- ---------
Gross profit ............................... 2,589 2,985 7,257 26,683 29,855
Selling, general and administrative expenses 1,554 1,613 2,345 5,156 4,739
Income from operations ..................... 1,035 1,372 4,912 21,527 25,116
Interest income (expense), net ............. (471) (387) (422) (909) 1,097
Other income (expense) ..................... 42 (1) (13) 92 25
--------- --------- --------- --------- ---------
Income before income taxes ................. 606 984 4,477 20,711 26,238
Provision for income taxes ................. 4 19 208 (7,703) (9,708)
--------- --------- --------- --------- ---------
Net income ................................. 602 965 4,269 13,008 16,530
========= ========= ========= ========= =========
Net income available for common
stock(1) ................................. $ 602 $ 799 $ 4,221 $ 13,008 $ 16,530
========= ========= ========= ========= =========
Basic earnings per common share(2) ......... $ 0.19 $ 0.25 $ 0.77 $ 1.47 $ 1.68
Weighted average shares outstanding
(in thousands)(2) ........................ 3,209 3,170 5,461 8,854 9,857
Diluted earnings per common share(2) ....... $ 0.11 $ 0.14 $ 0.47 $ 1.31 $ 1.50
Weighted average shares outstanding
(in thousands)(2) ........................ 5,294 6,712 9,041 9,898 10,988
AS OF DECEMBER 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Working capital ................. $ 4,403 $ 4,383 $14,069 $36,417 $52,129
Total assets .................... 15,919 15,154 34,029 68,220 82,873
Total liabilities ............... 7,900 6,411 18,716 20,177 17,777
Long-term debt, excluding
current portion................ 4,400 3,590 7,844 -- --
Shareholders' equity ............ 8,019 8,743 8,743 48,043 65,097
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1994 1995 1996 1997 1998
-------- --------- --------- --------- ---------
SELECTED OPERATING DATA:
Gross margin .............. 12.7% 15.4% 14.5% 19.9% 23.4%
Operating margin .......... 5.1% 7.1% 9.8% 16.1% 19.7%
Standard classrooms sold(3) 680 605 1,610 4,514 6,852
Backlog at period end(4) .. $7,000 $4,100 $58,000 $71,000 $25,000
- -----------------
(1) After deduction of preferred stock dividends paid or accrued of $166,000
and $48,000 for the years ended December 31, 1995 and 1996, respectively.
All of the preferred stock was converted into common stock during 1996.
See Note 11 of Notes to Financial Statements.
(2) Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share". All prior periods have
been restated accordingly.
(3) Determined by dividing the total square footage of floors sold during the
year by 960 square feet, the floor area of a standard classroom. See
"Business--Relocatable Modular Classrooms."
(4) The Company manufactures classrooms 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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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Following are the unaudited pro forma combined condensed balance sheet as of
December 31, 1998 and the unaudited pro forma combined condensed income
statements for the year ended December 31, 1998 and 1997 of Modtech, Inc. and
SPI Holdings, Inc. These statements are based on the historical consolidated
financial statements of Modtech, Inc. and SPI Manufacturing, Inc., combined, and
are adjusted to give effect to the mergers. In addition, pro forma adjustments
have been made for the acquisitions consummated by SPI prior to the merger.
Certain reclassifications have been made to the historical financial statements
to conform with this pro forma presentation.
The pro forma adjustments are based upon preliminary estimates, information
currently available and certain assumptions that management believes are
reasonable under the circumstances. Holding's actual consolidated financial
statements will reflect the effects of the mergers on and after February 16,
1999 rather than the dates indicated above. The unaudited pro forma combined
condensed financial statements neither purport to represent what the combined
results of operations or financial condition actually would have been had the
mergers, in fact, occurred on the assumed dates, nor to project the combined
results of operations and financial position for any future period.
These statements should be read in conjunction with (i) Modtech Inc.'s
historical financial statements and notes thereto included elsewhere herein,
and (ii) Holdings' Joint Proxy Statement/Prospectus dated January 11, 1999
which is included in Holding's Registration Statement on Form S-4 filed with
the Securities and Exchange Commission (Commission File No. 333-69033).
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
ASSETS
HISTORICAL
----------------- PRO FORMA PRO FORMA
MODTECH SPI NOTES ADJUSTMENTS COMBINED
------- ----- ----- ----------- ---------
Current assets:
Cash and cash equivalents $40,142 $ 259 (B) $(36,289) $ 4,112
Contracts receivable, net 12,923 2,433 15,356
Costs in excess of billings 3,823 -- 3,823
Inventories 4,442 3,852 8,294
Due from affiliates 2,389 -- 2,389
Income tax receivable 2,368 840 3,208
Deferred tax asset 3,440 135 (C) (135) 3,440
Other current assets 281 1,068 (T) (745) 604
------- ------- -------- --------
Total current assets 69,808 8,587 (37,169) 41,226
Property and equipment, net 12,314 2,175 14,489
Other assets:
Deferred tax asset -- 62 (C) (62) --
Other assets 751 3,521 (D,E) 1,494 5,766
Costs in excess of net
assets of business
acquired, net -- 33,560 (F,G) 95,391 128,951
------- ------- -------- --------
$82,873 $47,905 $ 59,654 $190,432
======= ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued liabilities $10,541 $ 2,811 (H) $ 750 $ 14,102
Billings in excess of costs 7,138 -- 7,138
Revolving credit facility -- 4,524 (I,J) 1,576 6,100
Current portion of
long-term debt -- 4,914 (J,K) 1,086 6,000
------- ------- -------- --------
Total current liabilities 17,679 12,249 3,412 33,340
Deferred tax liability 97 -- 97
Long-term debt -- 23,701 (J,K) 15,299 39,000
------- ------- -------- --------
Total liabilities 17,776 35,950 18,711 72,437
------- ------- -------- --------
Stockholders' equity:
Common stock 99 6 (L,M,N) 21 126
Preferred stock -- 10,106 (L,N) (10,102) 4
Additional paid-in capital 39,854 -- (A,M,N) 52,867 92,721
Retained earnings 25,144 1,843 (L) (1,843) 25,144
------- ------- -------- --------
Total stockholders'
equity 65,097 11,955 40,943 117,995
$82,873 $47,905 $59,654 $190,432
======= ======= ======= ========
See the accompanying notes to the unaudited pro forma
combined condensed financial statements.
12
13
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO FORMA PRO FORMA PRO FORMA
MODTECH SPI NOTES ADJUSTMENTS COMBINED NOTES
---------- --------- ----- ----------- --------- -----
Net sales $127,620 $72,643 $ $200,263
Cost of goods sold 97,765 61,161 158,926
-------- ------- --------- --------
Gross profit 29,855 11,482 -- 41,337
-------- ------- --------- --------
Selling, general and
administrative expenses 4,739 7,006 (F,G) 2,375 14,120
-------- ------- --------- --------
Income from
operations 25,116 4,476 (2,375) 27,217
Interest income (expense),
net 1,097 (3,795) (D,E,J,O,P) (306) (3,004)
Other income 25 38 63
-------- ------- --------- --------
Income before
income taxes 26,238 719 (2,681) 24,276
Income taxes 9,708 787 (Q) (122) 10,373
-------- ------- --------- --------
Net income (loss) $ 16,530 $ (68) $ (2,559) $ 13,903
======== ======= ========= ========
Basic earnings per share $1.68 $1.09 (R)
===== =====
Number of shares used in
computing basic earnings
per share 9,857 12,622 (R)
===== ======
Diluted earnings per share $1.50 $0.94 (S)
===== =====
Number of shares used in
computing diluted
earnings per share 10,988 14,845 (S)
====== ======
See the accompanying notes to the unaudited pro forma
combined condensed financial statements.
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO FORMA PRO FORMA PRO FORMA
MODTECH SPI NOTES ADJUSTMENTS COMBINED NOTES
---------- --------- ----- ----------- --------- -----
Net sales $134,050 $80,497 $ $214,547
Cost of goods sold 107,367 65,321 172,688
-------- ------- --------- --------
Gross profit 26,683 15,176 -- 41,859
-------- ------- --------- --------
Selling, general and
administrative expenses 5,156 7,324 (F,G) 2,380 14,860
-------- ------- --------- --------
Income from
operations 21,527 7,852 (2,380) 26,999
Interest expense, net (908) (4,041) (D,E,J,O,P) (494) (5,443)
Other income 92 195 287
-------- ------- --------- --------
Income before
income taxes 20,711 4,006 (2,874) 21,843
Income taxes 7,703 1,950 (Q) (198) 9,455
-------- ------- --------- --------
Net income $ 13,008 $ 2,056 $ (2,676) $ 12,388
======== ======= ========= ========
Basic earnings per share $1.47 $0.97 (R)
===== =====
Number of shares used in
computing basic earnings
per share 8,854 12,622 (R)
===== ======
Diluted earnings per share $1.31 $0.83 (S)
===== =====
Number of shares used in
computing diluted
earnings per share 9,898 14,845 (S)
===== ======
See the accompanying notes to the unaudited pro forma
combined condensed financial statements.
13
14
NOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
A. The unaudited pro forma combined condensed balance sheet has been prepared
to reflect the acquisition of SPI for an estimated aggregate purchase price,
including estimated transaction costs, of $105,648,000 which is subject to
adjustment and is summarized as follows:
Modtech Holdings Common Stock offered hereby...... $ 87,627,000
Fair value of stock options offered hereby........ 5,195,000
Cash paid to SPI stockholders..................... 8,076,000
Estimated acquisition costs....................... 4,750,000
------------
Total............................... $105,648,000
============
B. To record net cash distribution resulting from the following transactions:
Gross proceeds from New Term Loan................. $ 45,000,000
Gross proceeds from New Revolving Credit facility. 6,100,000
Cash paid to SPI Stockholders..................... (8,076,000)
Cash distribution to Modtech Stockholders......... (39,924,000)
Retirement of SPI Indebtedness.................... (33,139,000)
Payment of Estimated Debt Issuance Costs.......... (2,250,000)
Payment of Estimated Merger Costs................. (4,000,000)
------------
Net cash distribution....................... $(36,289,000)
============
C. To eliminate current deferred tax assets of $135,000 and non-current
deferred tax assets of $62,000 not available to the Company.
D. To eliminate unamortized SPI debt issuance costs of $756,000 and the related
amortization expense of debt issuance costs of $178,000 and $170,000 for the
year ended December 31, 1998 and 1997, respectively.
E. To record (i) estimated debt issuance costs of $2,250,000 to be amortized
over the term of the New Term Loan and (ii) amortization of debt issuance
costs of $450,000 for the fiscal year ended December 31, 1998 and 1997.
F. To record (i) $128,951,000 for the excess of the consideration paid over the
preliminary estimate of the fair value of net liabilities assumed, to be
amortized over 40 years and (ii) to record goodwill amortization of
$3,224,000 for the year ended December 31, 1998 and 1997. The preliminary
purchase price allocation of the SPI acquisition is as follows:
Current assets................................... $ 7,707,000
Property, plant & equipment...................... 2,175,000
Other tangible assets............................ 189,000
Identifiable intangible assets................... 2,576,000
Current liabilities.............................. (2,811,000)
Current portion of long-term debt................ (9,438,000)
Long-term debt................................... (23,701,000)
-------------
Net liabilities assumed....................... (23,303,000)
Total Estimated Aggregate Purchase Price... (105,648,000)
-------------
Goodwill......................................... $ 128,951,000
=============
G. To eliminate $33,560,000 of goodwill previously recorded by SPI and the
related amortization expense of $849,000 and $844,000 for the year ended
December 31, 1998 and 1997, respectively.
H. To record the recognition of liabilities related to certain merger costs.
I. To record the incurrence of $6,100,000 of indebtedness under a New Revolving
Credit Facility, with an assumed effective interest rate of 7.5%, utilized
to partially finance the cash portion of the Merger Consideration and pay
certain related transaction costs.
J. To eliminate the $33,139,000 of SPI indebtedness, including $4,914,000
classified as current and $4,524,000 under the revolving credit facility,
which will be retired by Modtech, and to eliminate the related interest
expense of $3,798,000 and $4,046,000 for the year ended December 31, 1998
and 1997, respectively.
K. To record the assumed of $45,000,000 of indebtedness, including $6,000,000
classified as current, under a New Term Loan, with an assumed effective
interest rate of 7.5%, utilized to partially finance the cash portion of the
Merger Consideration, retire SPI indebtedness and to pay certain related
transaction costs.
L. To eliminate the equity of SPI, which includes common stock of $6,000,
preferred stock of $10,106,000 and retained earnings of $1,843,000.
14
15
M. To reflect the equity adjustments necessary to reflect the acquisition of
SPI under the purchase method of accounting. Such adjustment had the effect
of increasing common stock by $46,000 to record the common stock par value
and increasing additional paid-in capital by $92,776,000.
N. To record the repurchase of Modtech common stock for $39,924,000 cash in
connection with the Modtech Merger, resulting in a decrease of $39,909,000
to additional paid-in capital, a decrease of $19,000 to common stock and an
increase of $4,000 to preferred stock.
O. To record interest expense on borrowings under the New Term Loan of
$3,375,000 for the year ended December 31, 1998 and 1997, respectively.
using an assumed effective interest rate of 7.5%. A 0.125% increase/decrease
in the estimated interest rate incrementally increases/decreases income
before income taxes by $56,000 for the year ended December 31, 1998 and
1997.
P. To record interest expense on borrowings under the New Revolving Credit
Facility of $457,000 for the year ended December 31, 1998 and 1997 using an
assumed effective interest rate of 7.5%. A 0.125% increase/decrease in the
estimated interest rate incrementally increases/decreases income before
income taxes by $7,600 for the year ended December 31, 1998 and 1997.
Q. To record the income tax effects of the pro forma adjustments at a pro forma
effective tax rate of 40%.
R. Basic shares include 8,034,334 common shares assumed issued to former
Modtech stockholders and 4,587,824 common shares assumed issued to former
SPI stockholders. Net income is reduced by preferred dividends of $104,000
for the year ended December 31, 1998 and 1997.
S. Diluted shares include basic shares, preferred shares converted into common
shares on a one-to-one basis and exercise of stock options reduced by the
number of shares purchase with the proceeds.
T. To eliminate SPI merger costs as of December 31, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
Since its inception in 1982, the Company's principal business has been the
design, manufacture, marketing and installation of modular relocatable
classrooms. The Company's primary customers consist of individual school
districts located in California and the State of California. The need for new
classrooms in California school districts is generally governed by the number of
students per class, which is a function of the net migration of families into
and out of school districts and the total number of new students entering the
school system in any given year.
Specific provisions of California legislation govern the amount of the State's
budget that must be directed toward the public school system. A portion of these
funds may be allocated for the addition of new classrooms. In addition, the
State can raise funds to build or add new classrooms through the issuance of
general obligation bonds. See "Business -- Legislation and Funding."
In the early to mid 1990's, California suffered through a recession that
resulted in statewide budgetary constraints. During this period, the amount of
State funds available for the addition of new classrooms was severely limited.
As a result, the Company experienced a decline in net sales in 1992 and 1993,
and net sales in 1994 and 1995 were essentially the same as those generated in
1993. In response, the Company initiated a cost control program that included
layoffs of approximately 80% of its staff as compared to the June 1991 work
force, and temporarily closed its plant in Lathrop, California. In addition, the
Chief Executive Officer of the Company agreed to a 50% salary reduction and each
of the Company's other top management personnel agreed to a 10% salary
reduction.
Due in large measure to the amelioration of the State budget crises and the
realization that the need for new classrooms in California far exceeded supply,
beginning in the second half of 1996 and continuing into 1997 and 1998, the
State has increased the amount of funds targeted specifically for the addition
of new classrooms. In November 1996, the State implemented the Class Size
Reduction Program, the goal of which is to reduce public school class sizes in
kindergarten through the third grade. For the 1996-1997 school year the State
spent $822 million under this program, including $200 million specifically for
facilities, which may be relocatable classrooms. Primarily as a result of the
implementation of the Class
15
16
Size Reduction Program, the Company's net sales increased to $134.0 million in
1997 as compared to $49.9 million for the year ended December 31, 1996 and $19.4
million in 1995. In addition, a $9.2 billion school construction bond issue was
approved in November 1998. $2.9 billion of the bond issue is allocated for
growth and new construction and $2.2 billion for modernization and
reconstruction through the year 2001. It additionally allocated $700 million for
class-size reductions to fully implement the program from kindergarten through
third grade. See "Business -- Legislation and Funding." In response to the
increased demand for its modular relocatable classrooms, the Company re-opened
the Northern California Lathrop plant in 1997 and expanded its Southern
California production capacity in Perris in 1998.
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,
-------------------------
1996 1997 1998
------ ------ -----
Net sales......................... 100.0% 100.0% 100.0%
Cost of sales..................... 85.5 80.1 76.6
----- ----- -----
Gross profit...................... 14.5 19.9 23.4
Selling, general and
administrative expenses......... 4.7 3.8 3.7
----- ----- -----
Income from operations............ 9.8 16.1 19.7
Interest income (expense), net.... (0.8) (0.7) 0.9
Other income...................... -- -- --
Income before income taxes........ 9.0 15.4 20.6
Provision for income taxes........ 0.4 5.7 7.6
----- ----- -----
Net income........................ 8.6% 9.7% 13.0%
===== ===== =====
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales for the year ended December 31, 1998 decreased to $127.6 million, a
decrease of $6.4 million, or approximately 4.8%, from $134.0 million in 1997.
The decrease in 1998 was due in part to the fact that the California Legislature
was more than two months late in passing the state budget. Additionally, there
was a delay in allocating the funds from the $9.2 billion school construction
bond issue which was passed in November 1998.
For the year ended December 31, 1998, gross profit was $29.9 million, an
increase of $3.2 million, or approximately 11.9%, over 1997 gross profit of
$26.7 million. Gross profit percentage of net sales increased to 23.4% in 1998
from 19.9% in 1997. The increase in gross profit as a percentage of net sales
was primarily attributable to the realization of manufacturing efficiencies.
In 1998, selling, general and administrative expenses decreased to $4.7 million
from $5.2 million, due to decreases in the number of employees and a decrease in
selling costs. As a percentage of net sales, selling, general and administrative
expenses decreased to 3.7% in 1998 from 3.8% in 1997.
Due to higher cash balance and reduced line of credit borrowing, the year ended
December 31, 1998 reflects net interest income of $1,097,000, compared to net
interest expense of $909,000 for the same period in 1997, a favorable increase
of $2,006,000 or 220.7%.
The provision for income taxes was $9.7 million for the year ended December 31,
1998, compared to $7.7 million for 1997. The Company's effective tax rate
decreased to 37.0% for the year ended December 31, 1998 from 37.2% for the year
ended December 31, 1997. The effective tax rate in 1998 was positively impacted
by a reduction in the federal valuation allowance. The effective tax rate in
1997 was positively impacted by the utilization for federal income tax purposes
of net operating loss carryforwards generated in prior years.
16
17
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales for the year ended December 31, 1997 increased to $134.0 million, an
increase of $84.1 million, or approximately 169%, from $49.9 million in 1996.
The increase in 1997 was due principally to the amelioration of the State of
California budget deficit and the implementation during the year of the Class
Size Reduction Program for kindergarten through third grade classes in
California's public elementary schools.
For the year ended December 31, 1997, gross profit was $26.7 million, an
increase of $19.4 million, or approximately 266%, over 1996 gross profit of $7.3
million. Gross profit percentage of net sales increased to 19.9% in 1997 from
14.5% in 1996. The increase in gross profit as a percentage of net sales was
primarily attributable to the increased volume, utilization of a previously idle
facility, and the realization of manufacturing efficiencies.
In 1997, selling, general and administrative expenses increased to $5.2 million
from $2.3 million, due to increases in the number of employees and an increase
in selling costs. However, as a percentage of net sales, selling, general and
administrative expenses decreased to 3.8% in 1997 from 4.7% in 1996.
Due to increased volume and average borrowings outstanding, net interest expense
increase from $422,000 in 1996 to $909,000 for 1997.
The provision for income taxes was $7.7 million for the year ended December 31,
1997, compared to $208,000 for 1996. The Company's effective tax rate increased
to 37.2% for the year ended December 31, 1997 from 4.6% for the year ended
December 31, 1996. The effective tax rate in 1996 was positively impacted by the
utilization for federal income tax purposes of net operating loss carryforwards
generated in prior years.
LIQUIDITY AND CAPITAL RESOURCES
Since the 1994 Financing described below, the Company has funded its operations
and capital expenditures with cash generated internally by operations,
supplemented by borrowings under various credit facilities. During the years
ended December 31, 1996, 1997 and 1998, the Company's operations provided (used)
cash in the amounts of approximately ($4.9 million), $2.0 million and $32.8
million, respectively. At December 31, 1998, the Company had approximately $40.1
million in cash.
The Company's revolving loan facility, which was scheduled to expire in
September 2000, was paid off on December 4, 1998.
The Company had working capital of $14.1 million, $36.4 million and $52.1
million at December 31, 1996, 1997 and 1998, respectively. In 1998, current
assets increased by $13.2 million, with an increase of $28.5 million in cash, an
increase of $1.4 million in deferred tax assets and an increase of $1.3 million
in due from affiliates, offset by a decrease of $8.6 million in contracts
receivable and a decrease of $12.2 million in costs and estimated earnings in
excess of billings. Current liabilities decreased by $2.5 million, with various
accrued liabilities and current maturities of long-term debt decreasing by $1.9
million and $1.4 million, respectively, offset by a $0.7 million increase in
accounts payable. In 1997, contracts receivable, costs and estimated earnings in
excess of billings on contracts increased by $11.2 million and $6.9 million,
respectively, as the Company's net sales increased significantly due to the
implementation of the State's Class Size Reduction Program. Accrued liabilities
increased by $6.1 million in 1997, also as a result of the increase in net
sales.
17
18
Capital expenditures amounted to $2.0 million, $4.1 million and $2.1 million
during the years ended December 31, 1996, 1997 and 1998, respectively. In 1996,
the majority of expenditures were as a result of the re-opening of the Company's
Lathrop, California Manufacturing facility. In 1997 and 1998, the majority of
expenditures were related to the construction of an additional production line
at one of its Perris, California facilities.
The Company had a $4.0 million Industrial Development Bond issued by the
Industrial Development Authority of the County of San Joaquin, California, the
net proceeds of which were used to partially finance the $6.0 million cost of
construction of the Company's Lathrop, California facility. The loan was paid in
full during 1998.
In May 1994, the Company raised net proceeds of approximately $2.7 million
through the sale of 2,850,000 shares of Series A Preferred Stock to several
private investors who are Selling Shareholders in this Offering (the "1994
Financing"). In April 1996, all of the Series A Preferred Stock was converted
into 2,850,000 shares of Common Stock. In December 1996, warrants issued to the
investors in connection with the 1994 Financing were exercised, resulting in
cash proceeds to the Company of approximately $1.6 million and the issuance of
2,204,000 additional shares of Common Stock.
Management believes that the Company's existing product lines and manufacturing
capacity will enable the Company to generate sufficient cash through operations,
supplemented by periodic use of Holding's bank line of credit, to finance the
Company's business over the next twelve months. However, additional cash
resources may be required if the Company's rate of growth exceeds currently
anticipated levels. Moreover, it may prove necessary for the Company to
construct or acquire additional manufacturing facilities in order for the
Company to compete effectively in new market areas or states which are beyond a
300 mile radius from one of its production facilities. The construction or
acquisition of new facilities could require significant additional capital. For
these reasons, among others, the Company may need additional debt or equity
financing in the future. There can be, however, no assurance that the Company
will be successful in obtaining such additional financing, or that any such
financing will be available on terms acceptable to it.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting
and reporting standards for derivative instruments embedded in other contracts,
and hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Application of SFAS 133 is not expected to
have a material impact on the Company's financial position, results of
operations or liquidity.
YEAR 2000
The "year 2000" issue concerns the potential exposures related to the automated
generation of business and financial misinformation resulting from the
application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions. When
the year 2000 begins, programs with such date-related logic will not be able to
distinguish between the years 1900 and 2000, potentially causing software and
hardware to fail, generating erroneous calculations or presenting information in
an unusable format.
The Company is dependent on multiple computer servers and the third-party
computer programs running on them to provide data in support of its accounting
and engineering functions. In recognition of the potential year 2000 problem, in
November 1997, the Company began a program to replace all of its existing
engineering and accounting software with new software that is warranted by its
vendors as being year 2000 compliant. The software replacement program was
completed in November 1998 at a total cost of approximately $250,000. SPI's
computer data is currently being transferred to the Company's computer system.
The Company estimates that this transfer will be completed by the end of the
second quarter of 1999 at a cost of approximately $100,000.
The Company has relationships with various third parties on whom it relies to
provide goods and services necessary for the manufacture and distribution of its
products. These include suppliers and vendors. As part of its determination of
year 2000 readiness, the Company had identified material relationships with
third-party vendors and is in the process of assessing the status of their
compliance through the use of questionnaires. The Company expects this process
will be completed by the second quarter of 1999 at a cost of approximately
$100,000.
The total cost of the Company's year 2000 efforts, including hardware, software,
related consulting costs, assessment of third-party compliance, and transfer of
SPI data is estimated to be about $500,000, and is not material to the Company's
financial statements.
The Company's construction materials are available through numerous independent
sources. Due to the broad diversification of these sources, the risk associated
with potential business interruptions as a result of year 2000 non-compliance by
one or more sources is not considered significant.
The Company's primary customers are California school districts, each of which
obtains its funds for paying the Company's invoices through the computer system
operated by the State of California. If this system does not properly function
after January 1, 2000, it could result in a temporary shutdown of portions of
the state government, in which case, payment of the Company's invoices would be
delayed, and new purchase orders may not be processed. If the shutdown lasted
for more than 60 days, the Company would experience a severe cash shortage and a
material decline in revenue during the period of the government shutdown. The
cash shortage can be alleviated to some degree by borrowings from Holding's line
of credit and by reductions in work force and possible temporary plant closures.
The Company does not believe it can design or implement any other contingency
plans that will mitigate the effects of such a government shutdown.
It is anticipated that the steps the Company has taken and is continuing to take
deal with the year 2000 problem will reduce the risk of significant business
interruption, but there is no assurance that this outcome will be achieved.
Failure to detect and correct all internal instances of non-compliance or the
inability of third parties to achieve timely compliance could result in the
interruption of normal business operations which could, depending on its
duration, have a material adverse effect on the Company's financial statements.
18
19
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. In addition, the Company's operating margins
may vary on a quarterly basis depending upon the mix of revenues between
standardized classrooms and higher margin customized classrooms and the timing
of the completion of large, higher margin customized contracts.
INFLATION
During the past three years, the Company has not been adversely affected by
inflation, because it has been generally able to pass along to its customers
increases in the costs of labor and materials. However, there can be no
assurance that the Company's business will not be affected by inflation in the
future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, along with the notes thereto and the
report of Independent Certified Public Accountants thereon, required to be filed
in response to this Item 8 are attached hereto as exhibits under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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.
19
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits and Financial Statement Schedules
1 & 2. Index to Financial Statements
The following financial statements and financial statement schedules of the
Company, along with the notes thereto and the Independent Auditors' Reports, are
filed herewith, as required by Part II, Item 8 hereof.
Financial Statements
Independent Auditors' Reports
Consolidated Balance Sheets - December 31, 1997 and 1998
Consolidated Statements of Income - For the Years Ended December 31,
1996, 1997 and 1998
Consolidated Statements of Shareholders' Equity - For the Years Ended
December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows - For the Years Ended December 31,
1996, 1997 and 1998
Summary of Significant Accounting Policies
Notes to Consolidated Financial Statements
Schedule Included - For the Years Ended December 31, 1996, 1997 and 1998
Schedule II - Valuation and Qualifying Accounts
All other Financial Statement Schedules have been omitted because the required
information is shown in the financial statements or notes thereto, the amounts
involved are not significant, or the schedules are not applicable.
3. Exhibits
Exhibit
Number Name of Exhibit
- ------ ---------------
3.1(1) Certificate of Incorporation of Modtech Holdings, Inc.
3.2(1) Bylaws of Modtech Holdings, Inc.
10.1(2) Modtech, Inc.'s 1996 Stock Option Plan.
10.2(3) Transaction Advisory Agreement.
10.3(4) Employment Agreement between the Company and Evan M. Gruber.
10.4(4) Employment Agreement between the Company and Patrick Van Den Bossche.
10.5(4) Employment Agreement between the Company and Michael G. Rhodes.
10.6(5) Amendment to Loan and Security Agreement.
10.7(6) Industrial Development Bond agreements.
10.8(6) Lease between the Company and Pacific Continental Modular Enterprises,
relating to the Barrett Street property in Perris, California.
10.9(6) Lease between the Company and Gerald Bashaw, relating to the Morgan Street
property in Perris, California.
10.10(6) Lease between the Company and BMG, relating to the property in Lathrop, California.
10.11(6) Form of Indemnity Agreement between the Company and its executive officers and directors.
10.12(3) Financial Advisory Services Agreement.
10.13 Credit Agreement.
27 Financial Data Schedule
- -------------
(1) Incorporated by reference to Modtech Holdings, Inc.'s Registration
Statement on Form S-4 filed with the Commission on October 27, 1998
(Commission File No. 333-69033).
(2) Incorporated by reference to Modtech, Inc.'s Registration Statement on Form
S-8 filed with the Commission on December 11, 1996 (Commission File No.
333-17623).
(3) Incorporated by reference to Amendment No. 2 to Modtech Holdings, Inc.'s
Registration Statement on Form S-4, filed with the Commission on January
11, 1999 (Commission File No. 333-69033).
(4) Incorporated by reference to Amendment No. 1 to Modtech Holdings, Inc.'s
Registration Statement on Form S-4, filed with the Commission on December
15, 1998 (Commission File No. 333-69033).
(5) Incorporated by reference to Modtech, Inc.'s Registration Statement on Form
S-1 filed with the Commission on October 9, 1997 (Commission File No.
333-37473).
(6) Incorporated by reference to Modtech, Inc.'s Registration Statement on Form
S-1 filed with the Commission on June 6, 1990 (Commission File No.
033-035239).
20
21
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: APRIL 14, 1999 MODTECH HOLDINGS, INC.,
a Delaware corporation
By: /s/ MICHAEL G. RHODES
---------------------------
Michael G. Rhodes
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the 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 Board, APRIL 14, 1999
- ----------------------------- Chief Executive Officer
Evan M. Gruber
/s/ ROBERT W. CAMPBELL Director APRIL 14, 1999
- -----------------------------
Robert W. Campbell
/s/ DANIEL J. DONAHOE Director APRIL 14, 1999
- -----------------------------
Daniel J. Donahoe
/s/ CHARLES R. GWIRTSMAN Director APRIL 14, 1999
- -----------------------------
Charles R. Gwirtsman
/s/ CHARLES A. HAMILTON Director APRIL 14, 1999
- -----------------------------
Charles A. Hamilton
/s/ CHARLES C. McGETTIGAN Director APRIL 14, 1999
- -----------------------------
Charles C. McGettigan
/s/ PATRICK VAN DEN BOSSCHE Director, President APRIL 14, 1999
- -----------------------------
Patrick Van Den Bossche
/s/ MYRON A. WICK III Director APRIL 14, 1999
- -----------------------------
Myron A. Wick III
21
22
MODTECH, INC.
Annual Report - Form 10-K
Consolidated Financial Statements and Schedule
December 31, 1996, 1997 and 1998
(With Independent Auditors' Report Thereon)
23
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Modtech, Inc.:
We have audited the accompanying consolidated balance sheets of Modtech, Inc.
and subsidiary as of December 31, 1997 and 1998, 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, 1998. In connection with our audits
of the consolidated financial statements, we have also audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Modtech, Inc. and
subsidiary as of December 31, 1997 and 1998 and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Also in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
Orange County, California
March 17, 1999
24
MODTECH, INC.
Consolidated Balance Sheets
December 31, 1997 and 1998
ASSETS 1997 1998
----------- -----------
Current assets:
Cash $11,628,851 $40,142,355
Contracts receivable, less allowance for
contract adjustments of $410,119 in 1997 and
$429,107 in 1998 (note 2) 21,510,146 12,923,491
Costs and estimated earnings in excess
of billings on contracts (notes 3 and 8)
16,020,986 3,823,364
Inventories 3,931,505 4,441,537
Due from affiliates (note 8) 1,052,634 2,343,968
Note receivable from affiliates (note 8) 45,212 45,212
Prepaid assets 83,585 261,525
Income tax receivable 184,710 2,367,924
Deferred tax asset (note 7) 2,094,059 3,440,199
Other current assets 42,274 18,502
----------- -----------
Total current assets 56,593,962 69,808,077
----------- -----------
Property and equipment, net (note 4) 11,229,163 12,313,675
Other assets 298,258 751,517
Deferred tax asset (note 7) 98,874 --
----------- -----------
$68,220,257 $82,873,269
=========== ===========
See accompanying notes to consolidated financial statements.
25
MODTECH, INC.
Consolidated Balance Sheets
December 31, 1997 and 1998
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1998
----------- -----------
Current liabilities:
Accounts payable $ 2,421,346 $ 3,126,185
Accrued compensation 3,616,498 2,665,231
Accrued insurance expense 1,470,725 1,410,887
Other accrued liabilities 3,237,255 3,338,717
Income tax payable 1,017,027 --
Billings in excess of costs and estimated earnings on contracts (notes 3
and 8)
6,997,350 7,138,142
Current note payable (note 5) 42,185 --
Current maturities of long-term debt (note 6) 1,374,952 --
----------- -----------
Total current liabilities 20,177,338 17,679,162
----------- -----------
Deferred tax liability (note 7) -- 97,366
----------- -----------
Total liabilities 20,177,338 17,776,528
----------- -----------
Shareholders' equity:
Common stock, $.01 par. Authorized 20,000,000 shares; issued and
outstanding 9,819,959 and 9,871,409 in 1997 and 1998 (notes 10 and 11) 98,200 98,714
Additional paid-in capital 39,330,902 39,854,127
Retained earnings 8,613,817 25,143,900
----------- -----------
Total shareholders' equity 48,042,919 65,096,741
----------- -----------
Commitments and contingencies (notes 3, 8, 15 and 18)
----------- -----------
$68,220,257 $82,873,269
=========== ===========
See accompanying notes to consolidated financial statements.
26
MODTECH, INC.
Consolidated Statements of Income
Years ended December 31, 1996, 1997 and 1998
1996 1997 1998
------------- ------------- -------------
Net sales (notes 8 and 13) $ 49,885,858 $ 134,050,485 $ 127,620,102
Cost of goods sold (note 8) 42,628,970 107,367,035 97,765,554
------------- ------------- -------------
Gross profit 7,256,888 26,683,450 29,854,548
Selling, general, and administrative expenses 2,345,182 5,155,987 4,738,884
------------- ------------- -------------
Income from operations 4,911,706 21,527,463 25,115,664
------------- ------------- -------------
Other income (expense):
Interest expense (445,631) (1,004,198) (204,535)
Interest income 23,704 95,551 1,301,952
Other, net (13,116) 92,103 25,146
------------- ------------- -------------
(435,043) (816,544) 1,122,563
------------- ------------- -------------
Income before income taxes 4,476,663 20,710,919 26,238,227
Income taxes (note 7) (207,631) (7,702,634) (9,708,144)
------------- ------------- -------------
Net income $ 4,269,032 $ 13,008,285 $ 16,530,083
------------- ------------- -------------
5% Convertible preferred stock dividend (note 11) (47,500) -- --
Net income available to common stock $ 4,221,532 $ 13,008,285 $ 16,530,083
============= ============= =============
Basic earnings per common share (note 12) $ 0.77 $ 1.47 $ 1.68
============= ============= =============
Basic weighted-average shares outstanding (note 12) 5,461,007 8,853,786 9,857,422
============= ============= =============
Diluted earnings per common share (note 12) $ 0.47 $ 1.31 $ 1.50
============= ============= =============
Diluted weighted-average shares outstanding (note 12) 9,041,084 9,897,935 10,988,302
============= ============= =============
See accompanying notes to consolidated financial statements.
27
MODTECH, INC.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1996, 1997 and 1998
(ACCUMULATED
5% CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL DEFICIT)
------------------------------ ---------------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 2,850,000 $ 2,685,000 3,053,350 $ 30,534 $ 14,643,627 $ (8,616,000)
Conversion of preferred stock (note 11) (2,850,000) (2,685,500) 2,850,000 28,500 2,656,500 --
Exercise of options and warrants -- -- 2,746,086 27,460 2,320,867 --
Dividend (note 11) -- -- -- -- -- (47,500)
Net income -- -- -- -- -- 4,269,032
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 -- -- 8,649,436 86,494 19,620,994 (4,394,468)
Exercise of options, including tax
benefit of $753,874
(notes 7 and 10) -- -- 170,523 1,706 1,119,890 --
Secondary offering - Net (note 16) -- -- 1,000,000 10,000 18,590,018 --
Net income -- -- -- -- -- 13,008,285
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 -- -- 9,819,959 98,200 39,330,902 8,613,817
Exercise of options,
including tax benefit of
$451,563 (notes 7 and 10) -- -- 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
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
28
MODTECH, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1997 and 1998
1996 1997 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 4,269,032 $ 13,008,285 $ 16,530,083
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities:
Depreciation and amortization 540,421 1,344,098 1,247,557
Provision for contract adjustments (5,283) -- --
Loss (gain) on sale of equipment 17,265 (9,177) (1,500)
(Increase) decrease in assets, net of
effects from acquisition:
Contracts receivable (7,135,702) (11,200,285) 8,922,813
Costs and estimated earnings
in excess of billings (7,648,812) (6,918,253) 12,197,622
Inventories (3,520,404) 235,195 54,579
Amounts due from affiliates 686,774 (298,567) (1,291,334)
Prepaids and other assets (12,947) 83,673 (543,045)
Income tax receivable -- -- (2,183,214)
Deferred tax asset -- (2,192,933) (960,702)
Increase (decrease) in liabilities,
net of effects from acquisition:
Accounts payable 5,304,183 (3,988,076) 186,075
Accrued compensation 1,081,171 2,247,057 (974,453)
Accrued insurance expense 526,813 919,145 (59,838)
Other accrued liabilities 465,766 2,147,816 271,805
Income tax payable 184,919 813,010 (852,028)
Deferred tax liability -- -- 97,366
Billings in excess of costs and earnings 388,448 5,849,300 140,792
------------ ------------ ------------
Net cash provided by (used in) operating
activities (4,858,356) 2,040,288 32,782,578
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of equipment 5,550 60,604 1,500
Purchase of property and equipment (1,958,303) (4,071,968) (2,125,613)
Acquisition of subsidiary -- -- (800,000)
------------ ------------ ------------
Net cash used in investing activities (1,952,753) (4,011,364) (2,924,113)
------------ ------------ ------------
(Continued)
29
MODTECH, INC.
Consolidated Statements of Cash Flows, Continued
1996 1997 1998
------------ ------------ ------------
Cash flows from financing activities:
Net principal borrowings (payments)
under revolving credit lines $ 4,353,843 $ (5,901,668) $ (42,185)
Principal payments on long-term debt -- (625,000) (1,374,952)
Net proceeds from issuance of common stock 2,348,327 19,721,614 72,176
Declared dividends (note 11) (47,500) -- --
------------ ------------ ------------
Net cash provided by (used in) financing
activities 6,654,670 13,194,946 (1,344,961)
------------ ------------ ------------
Net increase (decrease) in cash (156,439) 11,223,870 28,513,504
Cash at beginning of year 561,420 404,981 11,628,851
------------ ------------ ------------
Cash at end of year $ 404,981 $ 11,628,851 $ 40,142,355
============ ============ ============
See accompanying notes to consolidated financial statements.
30
MODTECH, INC.
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Modtech, Inc. and its majority owned subsidiary (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.
In addition to modular relocatable classrooms, the Company also
manufactures modular, portable buildings which can be used as office
facilities and construction trailers and for other commercial purposes,
including modular structures that house and shelter electronic
equipment used in the wireless telecommunications industry.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements
of Modtech, Inc. and its majority owned subsidiary. All significant
intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results could differ
from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, contracts receivable and note receivable,
costs and estimated earnings in excess of billings on contracts,
prepaid and other assets, accounts payable, accrued liabilities,
billings in excess of estimated earnings on contracts and notes payable
are measured at cost which approximates their fair value.
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.
31
MODTECH, INC.
Notes to Consolidated Financial Statements, Continued
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general, and
administrative costs are charged to expense as incurred. At the time a
loss on a contract becomes known, the entire amount of the estimated
ultimate loss is recognized in the financial statements.
The current asset, "Costs and Estimated Earnings in Excess of Billings
on Contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in Excess of Costs and
Estimated Earnings on Contracts," represents billings in excess of
revenues recognized.
The current contra asset, "Allowance for Contract Adjustments," is
management's estimated adjustments to contract amounts due to disputes
and or litigation.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method. Inventories,
generally include only raw materials, as any work-in-process or
finished goods are accounted for in percentage of completion
allocations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization 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 of fair value less costs to sell.
STOCK OPTION PLANS
Prior to January 1, 1996, the Company accounted for stock option plans
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recognized on
the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On January 1, 1996, the Company
adopted Statement of Financial Accounting Standard No. 123 (SFAS No.
123), "Accounting for Stock-Based Compensation," which permits entities
to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to
32
MODTECH, INC.
Notes to Consolidated Financial Statements, Continued
continue to apply the provision of APB Opinion No. 25 and provide the
pro forma disclosure provisions of SFAS No. 123.
EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). This
statement replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any
dilutive effects of options. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All
earnings per share amounts have been restated to conform to the SFAS
No. 128 requirements.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
RECLASSIFICATION
Certain amounts in the 1996 and 1997 financial statements have been
reclassified to conform to the 1998 presentation.
(2) CONTRACTS RECEIVABLE
Contracts receivable consisted of customer billings for:
1997 1998
------------ ------------
Completed contracts $ 9,226,114 $ 5,936,682
Contracts in progress 9,444,794 5,134,815
Retentions 3,249,357 2,281,101
------------ ------------
21,920,265 13,352,598
Less allowance for contract adjustments (410,119) (429,107)
------------ ------------
$ 21,510,146 $ 12,923,491
============ ============
(3) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON CONTRACTS Net
costs and estimated earnings in excess of billings on contracts
consisted of:
33
MODTECH, INC.
Notes to Consolidated Financial Statements, Continued
1997 1998
------------- -------------
Net costs and estimated earnings on uncompleted contracts $ 105,465,154 $ 96,036,279
Billings to date (96,144,454) (99,722,520)
------------- -------------
9,320,700 (3,686,241)
Net under (over) billed receivables from completed contracts (297,064) 371,463
------------- -------------
$ 9,023,636 $ (3,314,778)
============= =============
These amounts are shown in the accompanying balance sheets under the
following captions:
1997 1998
------------ ------------
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 15,832,818 $ 3,372,864
Costs and estimated earnings in
excess of billings on completed contracts 188,168 450,500
------------ ------------
Costs and estimated earnings
in excess of billings 16,020,986 3,823,364
------------ ------------
Billings in excess of costs and estimated
earnings on uncompleted contracts (6,512,121) (7,059,106)
Billings in excess of costs and
estimated earnings on completed contracts (485,229) (79,036)
------------ ------------
Billings in excess of costs and estimated earnings (6,997,350) (7,138,142)
------------ ------------
$ 9,023,636 $ (3,314,778)
============ ============
(4) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of:
1997 1998
------------ ------------
Land $ -- $ 451,281
Leasehold improvements 10,764,783 11,528,459
Machinery and equipment 4,347,692 4,508,908
Trucks and automobiles 181,001 191,402
Office equipment 364,510 651,436
Construction in progress 354,826 293,860
------------ ------------
16,012,812 17,625,346
Less accumulated depreciation and amortization
(4,783,649) (5,311,671)
------------ ------------
$ 11,229,163 $ 12,313,675
============ ============
34
MODTECH, INC.
Notes to Consolidated Financial Statements, Continued
(5) NOTE PAYABLE - REVOLVING CREDIT AGREEMENT
The Company's revolving credit facility, which was scheduled to expire
in September 2000, was paid off on December 4, 1998 and the revolving
loan commitment was terminated. Actual outstanding borrowings were
$42,185 at December 31, 1997.
(6) LONG-TERM DEBT
Long-term debt consists of:
1997 1998
----------- -----------
Industrial development bonds $ 1,374,952 $ --
Less current portion of long-term debt (1,374,952) --
----------- -----------
$ -- $ --
=========== ===========
In June 1990, the Industrial Development Authority of the County of San
Joaquin, California issued $4,200,000 of Industrial Development Bonds.
The net proceeds of approximately $4,000,000 were used to fund the
construction of the Company's manufacturing facility on leased property
located in Lathrop, California. The Company fully utilized the bonds at
December 31, 1991. The bonds were paid in full during 1998.
(7) INCOME TAXES
The components of the 1996, 1997 and 1998 provision for Federal and
state income tax (expense) benefit computed in accordance with
Financial Accounting Standard No. 109 are summarized below:
1996 1997 1998
------------ ------------ ------------
Current:
Federal $ (90,483) $ (7,874,257) $ (8,585,201)
State (117,148) (2,021,309) (2,272,844)
------------ ------------ ------------
(207,631) (9,895,566) (10,858,045)
Deferred:
Federal -- 1,634,085 593,693
State -- 558,847 556,208
------------ ------------ ------------
$ (207,631) $ (7,702,634) $ (9,708,144)
============ ============ ============
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:
35
MODTECH, INC.
Notes to Consolidated Financial Statements, Continued
1996 1997 1998
------ ------ ------
Taxes, U.S. statutory rates (34.0%) (35.0%) (35.0%)
State taxes, less Federal benefit -- (4.5) (4.0)
Reduction in Federal valuation allowance
-- -- 2.0
Utilization of income tax benefit relating to
loss carryover 34.0 3.8 --
Other (4.6) (1.5) --
------ ------ ------
Total taxes on income (4.6%) (37.2%) (37.0%)
====== ====== ======
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, 1997 and 1998 are as follows:
1997 1998
----------- -----------
Deferred tax assets:
Reserves and accruals not recognized for
income tax purposes $ 2,490,821 $ 2,672,468
State taxes 474,653 578,535
Other 368,579 265,732
----------- -----------
Total gross deferred tax assets 3,334,053 3,516,735
Less valuation allowance (1,059,576) --
----------- -----------
Net deferred tax assets $ 2,274,477 $ 3,516,735
=========== ===========
Deferred tax liabilities:
Revenue recognition $ (73,589) $ (8,182)
Prepaids (7,955) (165,720)
----------- -----------
Total gross deferred tax liabilities (81,544) (173,902)
----------- -----------
Net deferred tax assets $ 2,192,933 $ 3,342,833
=========== ===========
These amounts have been presented in the balance sheet as follows:
1997 1998
----------- -----------
Current deferred tax asset $ 2,094,059 $ 3,440,199
Noncurrent deferred tax asset 98,874 --
----------- -----------
Total gross deferred tax assets 2,192,933 3,440,199
Noncurrent deferred tax liability -- (97,366)
----------- -----------
Total deferred tax assets $ 2,192,933 $ 3,342,833
=========== ===========
36
MODTECH, INC.
Notes to Consolidated Financial Statements, Continued
The valuation allowance for deferred tax assets as of December 31, 1997
and 1998 was $1,059,576 and $0, respectively. The net change in the
total valuation allowance for the years ended December 31, 1997 and
1998 was a decrease of $99,138 and $1,059,576, respectively. 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.
(8) TRANSACTIONS WITH RELATED PARTIES
SALES
The Company sells modular classrooms to certain companies and
partnerships, the shareholders and partners of which are either
shareholders or an officer of the Company. The buildings are then
leased to various school districts by the related companies and
partnerships.
The table below summarizes the classroom sales to related parties:
1996 1997 1998
---------- ---------- ----------
Sales $1,452,868 $2,942,313 $2,675,457
Cost of goods sold 1,239,425 2,530,803 2,116,691
Gross profit percentage 14.69% 13.99% 20.90%
========== ========== ==========
The related party purchases modular relocatable classrooms from the
Company, upon standard terms and at standard wholesale prices.
Due from affiliates includes a portion of unpaid invoices as a result
of the above transactions. As of December 31, 1997 and 1998 these
amounts totaled $825,963 and $2,171,896, respectively. Additional
amounts arising from these transactions are included in the following
captions:
1997 1998
----------- -----------
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 1,406,897 $ 492,418
Billings in excess of costs and
estimated earnings on uncompleted contracts (65,405) (90,838)
=========== ===========
NOTE RECEIVABLE
At December 31, 1997 and 1998, the Company had a note receivable from a
related party partnership in the amount of $45,212. The partnership is
composed of an officer and shareholders of the Company. The note bears
interest at 10% and is payable upon demand. Unpaid interest related to
this note and two other related party notes with principal repayment in
1996 totaled $226,671 at December 31, 1997 and $160,590 at December 31,
1998 and is included in due from affiliates. The Company has negotiated
payment terms on the accrued interest and is receiving regular interest
payments.
37
MODTECH, INC.
Notes to Consolidated Financial Statements, Continued
OPERATING LEASES
Certain manufacturing facilities are leased from the Company's Chairman
and partnerships composed of an officer and certain shareholders. These
related party leases require monthly payments which aggregate $41,000.
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
15. Included in cost of goods sold is $447,000, $444,000 and $478,000
in rent expense paid to related parties for the years ended December
31, 1996, 1997, and 1998, respectively.
(9) 401(K) PLAN
The Company has a tax deferred savings plan under Section 401(k) of the
Internal Revenue Code. Eligible employees can contribute up to 12% of
gross annual earnings. Company contributions, made on a 50% matching
basis, are determined annually. The Company's contributions were
$53,031, $77,016 and $100,452 in 1996, 1997, and 1998, respectively.
(10) STOCK OPTIONS
In 1989, the Company's shareholders approved a stock option plan (the
1989 Plan). The 1989 Plan provides for the grant of both incentive and
non-qualified options to purchase up to 400,000 shares of the Company's
common stock. The incentive stock options can be granted only to
employees, including officers of the Company, while non-qualified stock
options can be granted to employees, non-employee officers and
directors, consultants, vendors, customers and others expected to
provide significant services to the Company.
The exercise price of the stock options cannot be less than the fair
market at the date of the grant (110% if granted to an employee who
owns 10% or more of the common stock).
Stock options outstanding under the 1989 Plan are summarized as
follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
December 31, 1995 400,000 $1.82
Exercised (114,500) 1.87
-------- -----
December 31, 1996 285,500 1.82
Terminated (1,000) 1.50
Exercised (78,450) 2.12
-------- -----
December 31, 1997 206,050 1.70
Exercised (38,450) 0.81
-------- -----
December 31, 1998 167,600 $1.88
======== =====
38
MODTECH, INC.
Notes to Consolidated Financial Statements, Continued
As of December 31, 1998, 158,520 options are vested and exercisable at
prices ranging from $.625 to $10.00 per share under the 1989 Plan. With
respect to options issued pursuant to the Del-Tec acquisition, no
options were exercised during 1998 and 75,000 shares remained
outstanding as of December 31, 1998.
In March of 1994, pursuant to a vote of the Board of Directors, a
nonqualified option plan was approved (the March 1994 Plan). The March
1994 Plan provides for the grant of 200,000 options to purchase shares
of the Company's common stock. The exercise price of the stock options
cannot be less than the fair market at the date of the grant. All of
these options were granted during 1994.
Stock options outstanding under the March 1994 Plan are summarized
as follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
December 31, 1995 200,000 $1.22
Exercised (15,000) 1.19
-------- -----
December 31, 1996 185,000 1.22
Exercised (15,900) 1.40
-------- -----
December 31, 1997 169,100 1.21
Exercised (6,600) 1.50
-------- -----
December 31, 1998 162,500 $1.19
======== =====
As of December 31, 1998, 162,500 options are vested and exercisable at
prices ranging from $1.19 to $1.50 per share under the March 1994 Plan.
In May of 1994, in conjunction with the offering of preferred stock
(note 11) the Board of Directors voted and approved an additional stock
option plan (the May 1994 Plan). The May 1994 Plan provides for the
grant of both incentive and non-qualified options to purchase up to
500,000 shares of the Company's common stock. The incentive stock
options can be granted only to employees, including officers of the
Company, while non-qualified stock options can be granted to employees,
non-employee officers and directors, consultants, vendors, customers
and others expected to provide significant services to the Company. The
exercise price of the stock options cannot be less than the fair market
at the date of the grant (110% if granted to an employee who owns 10%
or more of the common stock).
Stock options outstanding under the May 1994 Plan, are summarized as
follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------ ----------------
December 31, 1995 285,000 $ 1.60
Granted 205,000 2.59
Terminated (37,500) 1.50
Exercised (12,500) 1.50
------------ ------------
39
MODTECH, INC.
Notes to Consolidated Financial Statements, Continued
December 31, 1996 440,000 2.06
Granted 7,500 19.50
Exercised (9,375) 3.86
------------ ------------
December 31, 1997 438,125 2.32
Granted 40,000 20.05
Exercised (5,775) 3.99
------------ ------------
December 31, 1998 472,350 $ 3.80
============ ============
As of December 31, 1998, 339,914 options are vested and exercisable at
prices ranging from $1.50 to $19.50 per share under the May 1994 Plan.
In July 1996, the Company's Board of Directors authorized the grant of
options to purchase up to 500,000 shares of the Company's common stock.
The non-statutory options may be granted to employees, non-employee
officers and directors, consultants, vendors, customers and others
expected to provide significant service to the Company. The exercise
price of the stock options cannot be less than the fair market value at
the date of the grant (110% if granted to an employee who owns 10% or
more of the common stock).
Stock options outstanding under the July 1996 Plan, are summarized as
follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------ ----------------
December 31, 1995 -- $ --
Granted 110,000 4.50
------------ ------------
December 31, 1996 110,000 4.50
Granted 263,333 8.75
Terminated (4,202) 12.62
Exercised (16,798) 4.89
------------ ------------
December 31, 1997 352,333 7.56
Granted 130,869 19.58
Exercised (625) 12.88
------------ ------------
December 31, 1998 482,577 $ 10.82
============ ============
As of December 31, 1998, 149,833 options are vested and exercisable at
prices ranging from $4.50 to $12.88 per share under the July 1996 Plan.
All stock options have a maximum term of ten years and become fully
exercisable in accordance with a predetermined vesting schedule which
varies.
The per share weighted-average fair value of stock options granted
during 1996, 1997 and 1998 was $1.94, $9.05 and $11.27, respectively,
on the date of grant using the Black Scholes option-pricing model with
the following weighted-average assumptions:
40
MODTECH, INC.
Notes to Consolidated Financial Statements, Continued
1996 1997 1998
------- ------- -------
Expected dividend yield 0% 0% 0%
Average risk-free interest rate 7.8% 7.8% 5.6%
Volatility factor 72.66% 73.06% 71.15%
Expected life 4 years 4 years 4 years
======= ======= =======
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net income would have
been reduced to the pro forma amounts indicated below:
1996 1997 1998
-------------- -------------- --------------
Net Income
As Reported $ 4,269,032 $ 13,008,285 $ 16,530,083
Pro Forma 3,657,659 12,044,970 15,424,671
============== ============== ==============
Basic earnings per share
As Reported $ 0.77 $ 1.47 $ 1.68
Pro forma 0.67 1.36 1.57
============== ============== ==============
Diluted earnings per share
As Reported $ 0.47 $ 1.31 $ 1.50
Pro Forma 0.40 1.22 1.40
============== ============== ==============
Pro forma net income reflects only options granted since January 1,
1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above because compensation cost is reflected
over the options' vesting period of four years and compensation cost
for options granted prior to January 1, 1995 is not considered.
(11) 5% CONVERTIBLE PREFERRED STOCK
In May of 1994, in a private transaction without registration under the
Securities Act, the Company sold 2,850,000 shares of Series A 5%
Convertible Preferred Stock. The Preferred Stock was sold at $1.00 per
share with proceeds before costs and expenses of $2,850,000. All of the
Series A 5% Convertible Preferred Stock was converted into Common Stock
during 1996. In connection with this private placement of the Series A
5% Preferred Stock, the shareholders were granted warrants to purchase
an aggregate of 1,385,000 shares of common stock at $1.50 (subject to
adjustment in certain events), as well as warrants to purchase an
aggregate of 1,375,000 additional shares at $2.00 per share (subject to
adjustments in certain events). All warrants were either exercised or
expired during 1996. Dividends in the amount of $47,500 were declared
for the year ended December 31, 1996.
(12) EARNINGS PER SHARE
41
MODTECH, INC.
Notes to Consolidated Financial Statements, Continued
As discussed in Note 1, the Company adopted SFAS No. 128 effective
December 31, 1997. The following table illustrates the calculation of
basic and diluted earnings per common share under the provisions of
SFAS No. 128:
1996 1997 1998
----------- ----------- -----------
BASIC
Net income $ 4,269,032 $13,008,285 $16,530,083
Dividends on preferred stock (note 11) (47,500) -- --
----------- ----------- -----------
Net income available to common stock $ 4,221,532 $13,008,285 $16,530,083
=========== =========== ===========
Weighted-average common shares outstanding 5,461,007 8,853,786 9,857,422
=========== =========== ===========
Basic earnings per common share $ 0.77 $ 1.47 $ 1.68
=========== =========== ===========
DILUTED
Net income available to common stock $ 4,221,532 $13,008,285 $16,530,083
=========== =========== ===========
Weighted-average common shares outstanding 5,461,007 8,853,786 9,857,422
Add:
Exercise of options 3,580,077 1,044,149 1,130,880
----------- ----------- -----------
Adjusted weighted-average common shares outstanding 9,041,084 9,897,935 10,988,302
=========== =========== ===========
Diluted earnings per common share $ 0.47 $ 1.31 $ 1.50
=========== =========== ===========
(13) MAJOR CUSTOMER
Sales to two major customers represented the following percentage of
net sales:
1996 1997 1998
--------- --------- ---------
Customer A 13% 4% 11%
Customer B 4% 11% 5%
========= ========= =========
(14) SUPPLEMENTAL CASH FLOW DISCLOSURES
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1996 1997 1998
----------- ----------- -----------
Cash paid during the year for:
Interest $ 470,248 $ 1,058,256 $ 209,677
=========== =========== ===========
Income taxes $ 24,320 $ 8,400,000 $13,755,000
=========== =========== ===========
42
MODTECH, INC.
Notes to Consolidated Financial Statements, Continued
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
During 1996, 2,850,000 shares of Series A 5% convertible Preferred
Stock were converted into 2,850,000 shares of common stock, in
accordance with the private placement (note 11).
(15) COMMITMENTS AND CONTINGENCIES
LAND LEASES
The Company has entered into agreements to lease land at its
manufacturing facilities in Perris and Lathrop, California. Minimum
lease payments under these noncancelable operating leases for the next
five years and thereafter are as follows:
Year ending December 31:
1999 $ 487,000
2000 487,000
2001 487,000
2002 487,000
2003 487,000
Thereafter 6,244,000
----------
$ 8,679,000
==========
Of the $8,679,000 in future rental payments, substantially all is
payable to related parties (note 8). Rent expense for the years ended
December 31, 1996, 1997 and 1998 was $447,000, $522,000 and $713,000,
respectively.
(16) SECONDARY STOCK OFFERING
In November 1997 the Company held a secondary offering of 1,000,000
shares of common stock, which were sold at $20 per share. The net
proceeds to the Company were $18,600,000, after the deduction of
underwriting discounts, commissions and offering expenses paid by the
Company.
The Company used a portion of the proceeds to repay amounts outstanding
under the Company's $20,000,000 revolving loan agreement with a bank
(note 5). The remaining net proceeds were used as additions to working
capital.
(17) WARRANTY
The Company provides a one year warranty relating to the workmanship on
their modular units. Purchased equipment installed by the Company, such
as air conditioning units, carry the manufacturers' standard warranty.
To date, warranty costs incurred on completed contracts have been
immaterial.
(18) 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.
43
MODTECH, INC.
Notes to Consolidated Financial Statements, Continued
(19) SUBSEQUENT EVENTS
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, and the
mergers contemplated therein. SPI is a designer, manufacturer and
wholesaler of commercial and light industrial modular buildings.
Pursuant to the Merger Agreement, SPI was merged with a subsidiary of
Modtech Holdings, Inc. ("Holdings"), a newly formed Delaware
corporation (the "SPI Merger"). Concurrently, Modtech was merged with a
separate subsidiary of Holdings (the "Modtech Merger"). Pursuant to the
mergers, both SPI and Modtech became wholly owned subsidiaries of
Holdings. The SPI Merger will be accounted for by the purchase method
of accounting.
In connection with the SPI Merger, SPI stockholders received
approximately $8 million in cash and approximately 4.3 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.
Coastal Acquisition. In March 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. Coastal is based in St. Petersburg,
Florida. The acquisition will be accounted for by the purchase method
of accounting.
44
Schedule II
MODTECH, INC.
Valuation and Qualifying Accounts
Years ended December 31, 1996, 1997, and 1998
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, 1996 $408,090 $ -- $ 5,866 $ (583) $413,373
======== ============== ============== ======== ========
Year ended December 31, 1997 $413,373 $ -- $ -- $ (3,254) $410,119
======== ============== ============== ======== ========
Year ended December 31, 1998 $410,119 $ 30,988 $ -- $(12,000) $429,107
======== ============== ============== ======== ========
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) Amendment to Loan and Security Agreement.
10.7(6) Industrial Development Bond agreements.
10.8(6) Lease between the Company and Pacific Continental Modular Enterprises,
relating to the Barrett Street property in Perris, California.
10.9(6) Lease between the Company and Gerald Bashaw, relating to the Morgan Street
property in Perris, California.
10.10(6) Lease between the Company and BMG, relating to the property in Lathrop, California.
10.11(6) Form of Indemnity Agreement between the Company and its executive officers and directors.
10.12(3) Financial Advisory Services Agreement.
10.13 Credit Agreement.
27 Financial Data Schedule
- -------------
(1) Incorporated by reference to Modtech Holdings, Inc.'s Registration
Statement on Form S-4 filed with the Commission on October 27, 1998
(Commission File No. 333-69033).
(2) Incorporated by reference to Modtech, Inc.'s Registration Statement on Form
S-8 filed with the Commission on December 11, 1996 (Commission File No.
333-17623).
(3) Incorporated by reference to Amendment No. 2 to Modtech Holdings, Inc.'s
Registration Statement on Form S-4, filed with the Commission on January
11, 1999 (Commission File No. 333-69033).
(4) Incorporated by reference to Amendment No. 1 to Modtech Holdings, Inc.'s
Registration Statement on Form S-4, filed with the Commission on December
15, 1998 (Commission File No. 333-69033).
(5) Incorporated by reference to Modtech, Inc.'s Registration Statement on Form
S-1 filed with the Commission on October 9, 1997 (Commission File No.
333-37473).
(6) Incorporated by reference to Modtech, Inc.'s Registration Statement on Form
S-1 filed with the Commission on June 6, 1990 (Commission File No.
033-035239).