10-K 1 a80412e10-k.txt FORM 10-K FISCAL YEAR ENDED DECEMBER 31, 2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended DECEMBER 31, 2001 [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from N/A to N/A Commission File No. 000-25161 MODTECH HOLDINGS, INC. (Exact name of registrant as specified in its charter) DELAWARE 33-0825386 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2830 BARRETT AVENUE, PERRIS, CALIFORNIA 92571 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (909) 943-4014 ------------------------ Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 25, 2002 was $94,736,725. As of March 25, 2002, shares entitled to cast an aggregate of 13,457,615 votes were outstanding, including 13,457,615 shares of registrant's Common Stock. Certain portions of the registrant's definitive proxy statement to be filed not later than 120 days after the end of the fiscal year covered hereby are incorporated by reference in Part III of this Form 10-K report. PART I Item 1. BUSINESS GENERAL The Company is one of the leading modular building manufacturers in the country with a wide array of products. The Company is a leading provider of modular classrooms in the State of California and a significant provider of commercial and light industrial modular buildings in California, Nevada, Arizona, New Mexico, Utah, Colorado, Texas, Florida and other neighboring states. The Company designs, manufactures, markets and installs modular relocatable classrooms. The Company's classrooms are sold primarily to California school districts directly and to third parties and the State of California primarily for lease to California's school districts. The Company's products include standardized classrooms, as well as customized structures for use as libraries, gymnasiums, computer rooms and bathroom facilities. The Company believes that its modular structures can be substituted for virtually any part of a school. The Company's classrooms are engineered and constructed in accordance with structural and seismic safety specifications adopted by the California Department of State Architects which regulates all school construction on public land, standards which are more rigorous than the requirements for other relocatable units. As a result of net enrollment increases in California schools and budgetary constraints experienced by the State of California which limit the availability of funds for the addition of new classrooms, California's schools are reported to be among the most crowded in the nation. As the State budget deficit has ameliorated, the legislature has increased funding for new classrooms in an effort to reduce the average number of students per class. State funding initiatives include funds from both (i) the State's operating budget, such as the proposed $28.3 billion allocated for the 2000-2001 school year for both general operations and school facilities, and (ii) the sale of statewide bond issues, such as the $9.2 billion bond issue for school construction, including the addition of classrooms which was approved in November 1998. See "Business -- Legislation and Funding." These factors have combined to increase the demand for modular relocatable classrooms, which cost significantly less and take much less time to construct and install than conventional site built school facilities, and which permit a school district to relocate the units as student enrollments shift. In addition, the Company's products provide added flexibility to school districts in financing the costs of adding classroom space, since modular relocatable classrooms are considered personal property which can be financed out of a district's operating budget in addition to its capital budget. In recognition of these advantages, California legislation currently requires, with certain exceptions, that 20% of all classroom space in the district, not just new space added, consist of relocatable classrooms. See "Business -- Legislation and Funding." The Company is also a designer, manufacturer and wholesaler of commercial and light industrial modular buildings. The Company designs and builds modular buildings to customer specifications for a wide array of uses, including corporate and professional office space; governmental, education, recreational and religious facilities; and construction site offices. The modular buildings serve as temporary, semi-permanent and permanent facilities and can function as free-standing buildings or additions to existing structures. The commercial and light industrial modular buildings are distributed through national, regional and local dealers. These dealers lease or sell modular buildings to a diverse end-user market. SPI Merger. On February 16, 1999, Modtech, Inc. (Modtech) and SPI Holdings, Inc., a Colorado corporation (SPI) merged pursuant to the Agreement and Plan of Reorganization and Merger, dated as of September 28, 1998 (the Merger Agreement), between Modtech and SPI.. Pursuant to the Merger Agreement, SPI merged with a subsidiary of Modtech Holdings, Inc. (Holdings), a Delaware corporation (the SPI Merger). Concurrently, Modtech merged with a separate subsidiary of Holdings (the Modtech Merger). Pursuant to the mergers, both SPI and Modtech became wholly owned subsidiaries of Holdings. In connection with the SPI Merger, SPI stockholders received approximately $8 million in cash and approximately 4.6 million shares of Holdings Common Stock. Holdings refinanced approximately $32 million of SPI debt. In connection with the Modtech Merger, Modtech stockholders received approximately $40 million in cash, approximately 8.3 million shares of Holdings Common Stock and 388,939 shares of Holdings Series A Preferred Stock. In connection with both mergers, Holdings incurred a total of approximately $51 million of debt. The purchase price for the SPI Merger, including acquisition costs, was approximately $89 million. The SPI Merger has been accounted for as a purchase and, accordingly, the results of operations of SPI are included in the Company's consolidated statements of income from the date of acquisition. The excess of fair value of net assets acquired was approximately $115.2 million, and is being amortized on a straight-line basis over 40 years through December 31, 2001. See "New Accounting Pronouncements." 2 Coastal Acquisition. On March 22, 1999, Holdings purchased 100% of the stock of Coastal Modular Buildings, Inc. (Coastal). Coastal designs and manufactures modular relocatable classrooms and other modular buildings for commercial use. The acquisition of Coastal has been accounted for as a purchase and, accordingly, the results of operations of Coastal are included in the Company's consolidated statements of income from the date of acquisition. IMS Acquisition. On March 8, 2001, the Company purchased 100% of the stock of Innovative Modular Structures, Inc. (IMS). IMS designs and manufactures modular relocatable classrooms and other modular buildings for commercial use. IMS is based in St. Petersburg, Florida. The acquisition of IMS has been accounted for as a purchase and, accordingly, the results of operations of IMS are included in the Company's consolidated statements of income from the date of acquisition. INDUSTRY OVERVIEW In recent years, the growth in population in California, both from births and from immigration, has led to increasing school enrollments. As a result, classrooms in many California school districts currently are reported to be among the most crowded in the nation, with an average of 29 students per class compared to a national average class size of 17. The California Department of Finance has estimated that student enrollment in grades kindergarten through 12 will increase by approximately 18% over the period from 1995 through 2005. Additionally, changes in population demographics have left many existing permanent school facilities in older residential areas with excess capacity due to declining enrollments, while many new residential areas are faced with a continuing shortage of available classrooms. Consequently, it has become necessary to add additional classrooms at many existing facilities, and to build a number of new schools. The construction of new schools and the addition of classrooms at existing schools are tied to the sources and levels of funding available to California school districts. The availability of funding for new school and classroom additions, in turn, is determined in large measure by the amount of tax revenue raised by the State, the level of annual allocations for education from the State's budget which is determined by educational policies that are subject to political concerns, and the willingness of the California electorate to approve state and local bond issues to raise money for school facilities. In 1978, California voters approved Proposition 13, which rolled back local property taxes (a traditional source of funding for school districts) and limited the ability of local school districts to raise taxes to finance the construction of school facilities. The passage of Proposition 13, coupled with growing student populations, has increased the need for local school districts to find ways to reduce the cost of adding classrooms. The California legislature has adopted several statutes designed to alleviate some of the problems associated with the shortage of classrooms and lack of local funding alternatives. For example, in 1976, California adopted legislation that through November 1998 required, with certain exceptions, that at least 30% of all new classroom space added using State funds must be relocatable structures. This requirement was satisfied through the purchase or lease of the Company's classrooms. See "Business -- Legislation and Funding - Authority for Bond Financing." Additionally, in 1979 the California legislature adopted legislation that provides for State funding for the purchase of relocatable classrooms that could be leased to local school districts. When compared to the construction of a conventionally built classroom, modular classrooms offer a number of advantages, including, among others: Lower Cost -- The cost of the Company's standard classroom may be as low as $29,000 installed, as compared to $100,000 to $120,000 for conventional site built construction of a comparable classroom; Shorter Construction Time -- A modular classroom can be built and ready for occupancy in a shorter period of time than that needed for state approval and construction of a site built conventional school facility; Flexibility of Use -- Modular relocatable classrooms enable a school district to use the units for short or long term needs and to move them if necessary to meet shifts in student populations; and Ease of Financing -- As personal rather than real property, modular classrooms may be leased on a long or short-term basis from manufacturers and leasing companies. This allows school districts to finance modular classrooms out of both their operating and capital budgets. For the Company's commercial and light industrial buildings, the growth in the nonresidential modular market has resulted from the wide-spread acceptance of modular structures as an alternative to traditional site construction and the increasing number of applications for modular buildings across a broad spectrum of industries. Because modular buildings are constructed in a factory using an assembly line process, construction is typically not subject to the delays caused by weather and site conditions. Modular buildings can, therefore, generally be built faster than conventional buildings, at a lower cost and with more consistent quality. 3 Modular buildings can generally be relocated more easily to meet the changing needs of end users and be quickly joined to other modular buildings to meet increased space requirements. CALIFORNIA MODULAR RELOCATABLE CLASSROOMS The Company's California modular relocatable classrooms are designed, engineered and constructed in accordance with structural and seismic specifications and safety regulations adopted by the California Department of State Architects, standards which are more rigorous than the requirements for other portable buildings. The Department of State Architects, which regulates all school construction on public land, has prescribed extensive regulations regarding the design and construction of school facilities, setting minimum qualifications for the preparation of plans and specifications, and reviews all plans for the construction or material modifications to any school building. Construction authorization is not given unless the school district's architect certifies that a proposed project satisfies construction cost and allowable area standards. The Company interfaces with each school district's architect or engineer to process project specifications through the Department of State Architects. The Company believes that the regulated environment in which the Company's classrooms are manufactured serves as a significant barrier to market entry by prospective competitors. See "Business -- Competition." Conventional site built school facilities constructed by school districts using funds from the State Office of Public School Construction typically require two to three years for approval and funding. By contrast, factory-built school buildings like the Company's standard classrooms may be pre-approved by the State for use in school construction. Once plans and specifications for a given classroom have been pre-approved, school districts can thereafter include in their application to obtain State funds for new facilities a notification that they intend to use pre-approved, standardized factory-built classrooms. This procedure reduces the time required in the State's approval process to as little as 90 days, thereby providing an additional incentive to use factory-built relocatable classrooms. In all cases, continuous inspection by a licensed third party is required during actual manufacture of the classrooms, with the school district obligated to hire and pay for such inspection costs. The Company's California classrooms are manufactured and installed in accordance with the applicable state building codes and Department of State Architects interpretive regulations, which supersedes all local building codes for purposes of school construction. The classrooms must comply with accessibility requirements for the handicapped, structural, seismic and fire code requirements. The Company manufactures and installs standard, largely pre-fabricated modular relocatable classrooms, as well as customized classrooms, which are modular in design, but assembled on-site using components manufactured by the Company together with components purchased from third party suppliers. The Company's classrooms vary in size from two modular units containing a total of 960 square feet to 20 units that can be joined together to produce a facility comprising 9,600 square feet. Larger configurations are also possible. Typical prices for the Company's standard classrooms range from $29,000 to $34,000, while prices for a custom classroom generally exceed $50,000, depending upon the extent of customization required. The two basic structural designs for standard and custom modular classrooms are a rigid frame structure and a shear wall structure. The rigid frame structure uses a steel floor and roof system, supported at each corner with square steel tubing. These buildings have curtain walls to enclose the interior from the outside, and have the advantage of unlimited width and length. Rigid frame structures may be used for multipurpose rooms and physical education buildings as well as standard classrooms. Shear wall classrooms have a maximum width of 48 feet (four 12-foot modules) and a maximum length of 60 feet. These classrooms use the exterior and interior walls to produce the required structural strength and can be built at lower costs than rigid frame structures. The Company's most popular factory-built classroom is a rigid frame design, with two modules connected side by side to complete a 24 by 40-foot classroom. Custom built classrooms, libraries and gymnasiums contain design variations and dimensions such as ceiling height, roof pitch, overall size and interior configuration. These units typically are not assembled at the factory but instead are shipped in pieces, including floors, walls and roofs, and assembled on-site. Contracts for custom-built units may include the design, engineering and layout for an entire school or an addition to a school, and involve site preparation, grading, concrete and asphalt work and landscaping. Customized classrooms are generally more expensive and take longer to complete than the Company's standard classrooms. Additionally, the Company has developed and manufactured two-story modular classroom buildings. A two-story complex may include cantilevered balconies, soffits, parapets and mansards. They typically include a modular elevator system as well as stairways. The Company's two-story structures offer a variety of material and design options such as stucco, brick veneer, fiber cement panels or traditional wood siding. The interior and exterior of all of the Company's modular classrooms can be customized by employing different materials, design features and floor plans. Most classrooms are open, but the interior of the buildings can be divided into individual rooms by permanent 4 or relocatable partitions. The floor covering is usually carpet but may be sheet vinyl or ceramic tile depending upon the intended use of the classroom. Interior wall material is usually vinyl covered firtex over gypsum board, while other finishes such as porcelain enamel or painted hardboard may be used in such places as restrooms and laboratories. Electrical wiring, air conditioning, windows, doors, fire sprinklers and plumbing are installed during the manufacturing process. The exterior of the units is typically plywood siding, painted to the customer's specifications, but other common exterior finishes may also be applied. CALIFORNIA CLASSROOM CUSTOMERS The Company markets and sells its modular classrooms primarily to California school districts. The Company also sells its classrooms to the State of California and leasing companies, both of which lease the classrooms principally to California school districts. Sales of classrooms to California school districts, the State of California and leasing companies accounted for 52.9%, 49.9% and 49.0% of the Company's total net sales for the years ended December 31, 1999, 2000 and 2001. The Company's customers typically pay cash from general operating funds or the proceeds of local bond issues, or lease classrooms through banks, leasing companies and other private funding sources. See " Business -- Legislation and Funding." Sales of classrooms to individual California school districts accounted for approximately 38.3%, 36.7% and 36.9%, respectively, of the Company's net sales during the years ended December 31, 1999, 2000 and 2001, respectively, with sales of classrooms to third party lessors to California school districts during these periods accounting for approximately 9.1%, 5.6% and 5.7%, respectively, of the Company's net sales. The mix of school districts to which the Company sells its products varies somewhat from year to year. Sales of classrooms directly to the State of California during 2001 represented approximately 5.7% of the Company's net sales, compared to approximately 5.6% of the Company's 2000 and 1999 net sales. Sales of classrooms to private schools, day care providers and out-of-state customers accounted for less than one percent of the Company's net sales during the years ended December 31, 1999, 2000 and 2001. One of the lessors to which the Company sells classrooms for lease to California school districts is affiliated with the Company through ownership by one of the Company's officers. During the years ended December 31, 1999, 2000 and 2001, sales of classrooms to this affiliated leasing company comprised approximately 3.8%, 1.8% and 0.8%, respectively, of the Company's net sales. COMMERCIAL, LIGHT INDUSTRIAL MODULAR BUILDINGS AND RELOCATABLE CLASSROOMS FOR OTHER STATES The Company is also a designer, manufacturer and wholesaler of commercial and light industrial modular buildings. The Company designs and builds modular buildings to customer specifications for a wide array of uses, including governmental, healthcare, educational, airport and correctional facilities; office and retail space; daycare centers; libraries; churches; construction trailers; golf clubhouses; police stations; convenience stores; fast food restaurants; classrooms and sales offices. The modular buildings serve as temporary, semi-permanent and permanent facilities and can function as free-standing buildings or additions to existing structures. These modular buildings range in size and complexity from a basic single-unit 100-square foot module to a 50,000-square foot building combining several structures and containing multiple stories. The price at which the Company's modular buildings are sold to dealers ranges from $2,000 to over $25,000 per module. SALES AND MARKETING California Classroom Sales Force At December 31, 2001 the Company's classroom sales force was divided into three marketing regions: Northern, Central and Southern California. At December 31, 2001 the Company employed five classroom salespersons, each of whom is compensated on a commission basis. These salespersons maintain contact with the individual school districts in their respective marketing regions on a quarterly basis. They are also in contact with architects and construction management firms employed by the school districts, as well as school officials who may be in a position to influence purchasing decisions. Most of the Company's contracts are awarded on an open bid basis. The marketing process for many of the Company's contracts begins prior to the time the bid process begins. After the Company selects bids or contracts that it desires to pursue, the Company's marketing and engineering personnel interface directly with various school boards, superintendents or architects during the process of formulating bid or contract specifications. The Company prepares its bids or proposals using various criteria, including current material prices, historical overhead costs and a targeted profit margin. Substantially all of the Company's contracts are turnkey, including engineering and design, manufacturing, transportation and installation. Open bid contracts are normally awarded to the lowest responsible bidder. 5 Dealer Network The Company's commercial and light industrial modular buildings are sold to users through a dealer network of sales and leasing companies to a wide range of end users. The Company's dealers include national, regional and local dealers. The Company believes that larger dealers are becoming increasingly more inclined to do business with fewer manufacturers and to place their orders with manufacturers who have a history of consistent performance. Certain dealers have developed stringent quality control programs for the modular buildings they distribute. The Company believes its products currently meet or exceed existing dealer quality control standards. Certain states require the Company's dealers to be licensed to sell or lease the Company's products. Historically, these dealers have had sufficient capital resources to support the purchase of modular structures and the maintenance of the structures retained in their lease fleets. Typically, dealers arrange for, and bear the cost of, transporting and installing structures purchased from the Company. Because of its strong dealer relationships, the Company does not maintain an extensive internal sales force for the sale of commercial and light industrial modular buildings. Instead, the Company maintains an internal marketing and estimating staff whose primary responsibility is to maintain contact with the dealer community and to respond to requests from dealers for price quotations for production of modular buildings for end-users. The Company has few formal marketing or other agreements with its dealers, and substantially all of the Company's dealers also market and sell products of other manufacturers. MANUFACTURING AND ON-SITE INSTALLATION The Company uses an assembly-line approach in the manufacture of its standardized classrooms. The process begins with the fabrication of the steel floor joists. The floor joists are welded to steel frames to form the floor sub-assembly, which is covered by plywood flooring. Metal roof trusses and structural supports are fabricated separately and added as the unit progresses down the assembly-line. Installation of walls, insulation, suspended grid ceilings, electrical wiring, air conditioning, windows, doors, plumbing and chalkboards follow, with painting and finishing crews completing the process. Once construction of a standard classroom commences, the building can be completed in as little as three days. The construction of custom units on-site, from pre-manufactured components, is similar to factory-built units in its progressively-staged assembly process but may involve more extensive structural connections and finish work depending upon the size and type of building, and typically takes 30 to 60 days to complete. The Company is vertically-integrated in the manufacture of its standardized modular classrooms, in that the Company fabricates substantially all of its own metal components at its facility in Perris, California, including structural floor and roof joists, exterior roof panels, gutters, vents, ramps, stairs and railings. The Company believes that the ability to fabricate its own metal components helps it reduce the costs of its products and to control their quality and delivery schedules. The Company maintains a quality control system throughout the manufacturing process, under the supervision of its own quality control personnel and inspectors engaged by its customers. In addition, the Company tracks the status of all classrooms from sale through installation. Completed standard classroom units, or components used in customized units, are loaded onto specially designed flatbed trailers for towing by trucks to the school building site. Upon arrival at the site, the units are structurally connected, or components are assembled, and the classroom is installed on its foundation. Connection with utilities is completed in the same manner as in conventional on-site construction. Installation of the modular classrooms may be on a separate foundation, or several units may be incorporated on a common foundation under a unified roof, so that upon installation they appear to be an integral part of an existing school facility or function as a larger building, such as a gymnasium or cafeteria. The Company oversees installation of its modular classrooms on-site, using its own employees for job supervision as a general contractor and, whenever possible, for utility hook-ups and other tasks. In many custom projects, the Company performs or supervises subcontracted electrical, plumbing, grading, paving and foundation work, landscaping and other site preparation work and services. Sub-contractors are typically used for larger utility, grading, concrete and landscaping jobs. The Company has a general contractor's license in the State of California. In addition to approvals by the Department of State Architects, licensed inspectors representing various school districts are on-site at each manufacturing facility of the Company to continuously inspect the construction of classrooms for structural integrity. On-site inspections after installation are also made by local fire departments for purposes of determining adequate accessibility. The Company's commercial and light industrial modular buildings are also produced by a continuous flow assembly line process. Multiple structures are assembled simultaneously at various stations along the assembly line. Depending upon the complexity of the design for a particular modular building, the average construction time from receipt of the order to shipment ranges from 30 to 45 days. Once construction of a typical modular building commences, the building can be completed in as few as seven to nine days. 6 At December 31, 2001 the Company had eight manufacturing facilities. Two are located in Southern California, in Perris, California, which is approximately 60 miles east of Los Angeles. The Company has another facility near Lathrop, California. Lathrop is located approximately 75 miles east of San Francisco. The fourth manufacturing facility is located in Phoenix, Arizona and the fifth manufacturing facility is located in Glendale, Arizona, which are both located in the Phoenix Metropolitan area. The Company has another facility in Glen Rose, Texas. Glen Rose is located approximately 75 miles east of Dallas. The seventh and eighth manufacturing facilities are located in St. Petersburg, Florida, which is located in the Tampa area. The standard contractual warranty for the Company's modular buildings is one year, although it may be varied by contract specifications. Purchased equipment installed by the Company, such as air conditioning units, carry the manufacturers' standard warranty. Warranty costs have not been material in the past. The Company believes that there are multiple sources of supplies available for all raw materials and equipment used in manufacturing its modular buildings, most of which are standard construction items such as steel, plywood and wallboard. BACKLOG The Company manufactures classrooms and other buildings to fill existing orders only, and not for inventory. As of December 31, 2001 and 2000, the backlog of sales orders was approximately $80 million, up from approximately $60 million at December 31, 1999. Only orders, which are scheduled for completion during the following 12-month period, are included in the Company's backlog. The rate of booking new contracts can vary from month to month, and customer changes in delivery schedules can occur. For these reasons, among others, the Company's backlog as of any particular date may not be representative of actual sales for any succeeding period. COMPETITION The modular relocatable classroom industry is highly competitive, with the market divided among a number of privately-owned companies whose share of the market is smaller than that of the Company. The Company believes that the nature of the bidding process, the level of performance bonding required, and the industry's regulated environment serve as barriers to market entry, and that the expertise of its management gives it an advantage over competitors. The Company believes that, based upon 2000 net sales, it is the largest modular relocatable classroom manufacturer in California. Nevertheless, the Company believes that additional competitors may enter the market in the future, some of whom may have significantly greater capital and other resources than are available to the Company, and that competition may therefore increase. The Company also believes that its expertise in site preparation and on-site installation gives it a competitive advantage over many manufacturers of higher-priced, customized modular units, while its vertically integrated, assembly-line approach to manufacturing enables the Company to be one of the low cost producers of standardized, modular relocatable classrooms in California. Unlike many of its competitors, the Company manufactures most of its own metal components which allows the Company to maintain quality control over these components and to produce them at a lower average cost than that at which they could be obtained from outside sources. The Company also believes that the quality and appearance of its buildings, and its reputation for reliability in completion of its contracts, enable it to maintain a favorable position among its competition. The Company categorizes its current competition based upon the geographic market served (Northern California versus Southern California), as well as upon the relative degree of customization of products sold. Beyond a radius of approximately 300 miles, the Company believes that transportation costs typically will either significantly increase the prices at which it bids for given projects, or will substantially erode the Company's gross profit margins. The primary competitors of the Company for standardized classrooms are believed to be Aurora Modular Industries in Southern California and American Modular Systems in Northern California. Profiles Structures, Inc. in Southern California and Design Mobile Systems in Northern California are the Company's primary competitors in the market for higher-priced, customized classrooms. Each of these four competitors is a privately-owned company. With respect to the commercial and light industrial modular buildings, the nonresidential modular building industry is highly competitive. For the Company's highly customized modular buildings, the main competitive factor is the ability to meet end user requirements in a timely manner, while price is the main competitive factor for less customized structures. Because the cost of transporting completed modular buildings is substantial, most manufacturers limit their distribution to dealers located within a 400-mile radius of their manufacturing facility. As a result, the nonresidential modular building industry is highly fragmented and is composed primarily of small, regionally-based private companies maintaining a single manufacturing facility. 7 The primary competitors of the Company for commercial and light industrial modular buildings are believed to be Modular Structures International, Walden Structures, Miller Building Systems and Indicom Building Systems. PERFORMANCE BONDS A substantial portion of the Company's sales require that the Company provide bonds to ensure that the contracts will be performed and completed in accordance with contract terms and conditions, and to assure that subcontractors and materialmen will be paid. In determining whether to issue a performance bond on behalf of the Company, bonding companies consider a variety of factors concerning the specific project to be bonded, as well as the Company's levels of working capital, shareholders' equity and outstanding indebtedness. From time to time the Company has had, and in the future may again encounter, difficulty in obtaining bonding for a given project. Although it has had no difficulty in obtaining the necessary bonding in the last twelve months, the Company believes that its difficulty in obtaining bonding for certain large projects from time to time in the past has been attributable to the Company's levels of working capital, shareholders' equity and indebtedness, and not to concerns about the Company's ability to perform the work required under the contract. To assist the Company in obtaining performance bonds in certain instances, the Company's executive officers have been required to indemnify the bonding companies against all losses they might suffer as a result of providing performance bonds for the Company. REGULATION OF CLASSROOM CONSTRUCTION In 1933, the California Legislature adopted the Field Act, which generally provides that school facilities must be constructed in accordance with more rigorous structural and seismic safety specifications than are applicable to general commercial buildings. Under the Field Act, the Department of General Services, through the Department of State Architects, has prescribed extensive regulations regarding the design and construction of school facilities, and reviews all plans for the construction of material modifications to any school building. Construction authorization is not given unless the school district's architect certifies that a proposed project satisfies construction cost and allowable area standards. In addition, the Field Act provides for the submittal of complete plans, cost estimates, and filing fees by the school district to the Department of General Services, for the adoption of regulations setting minimum qualifications for the preparation of plans and specifications, and the supervision of school construction by a licensed architect or structural engineer. Additionally, California legislation provides that certain factory-built school buildings may be pre-approved by the State for use in school construction. Once plans and specifications for a given classroom have been pre-approved by the Department of General Services, school districts can thereafter include in their application to obtain State funds for new facilities a notification that they intend to use pre-approved, standardized factory-built classrooms. This procedure reduces the time required in the State's approval process thereby providing additional incentive to use factory-built relocatable classrooms. The Department of General Services provides for the continuous on-site inspection during actual manufacturing of the classrooms, with the school districts obligated to reimburse the Department for the costs of such inspection. LEGISLATION AND FUNDING The demand for modular relocatable classrooms in California is affected by various statutes. These statutes, among other things, prescribe the methods by which the Company's customers, primarily individual school districts, obtain funding for the construction of new school facilities, and the manner in which available funding is to be spent by the school districts. In 1978, Proposition 13 was approved, which rolled back property taxes and limited the ability of local school districts to rely upon revenue from such taxes to finance the construction of school facilities. As a result, financing for new school construction and rehabilitation of existing schools by California school districts is currently provided, at the state level, by funds derived from general revenue sources or statewide bond issues, and, at the local level, by local bond issues and fees imposed on the developers of residential, commercial and industrial real property ("Developer Fees"). Historically, the primary source of financing for the purchase or lease of relocatable classrooms has been state funding. STATE FUNDING. A source of funding at the State level for new school facilities is through the issuance and sale of statewide general obligation bonds which are repaid out of the State's General Funds. Proposals to issue such bonds are placed on statewide ballots from time-to-time in connection with general or special elections, and require approval by a majority of the votes cast in connection with such proposals. 8 AUTHORITY FOR BOND FINANCING. Under the School Building Lease - Purchase Law of 1976, the State Allocation Board is empowered to purchase or lease school facilities using funds from the periodic issuance of general obligation bonds of the State of California. These purchased or leased school facilities may be made available by the State Allocation Board to school districts. Certain matching funds, usually derived from Developer Fees, are required to be supplied by the school districts seeking state funded facilities. If the school districts acquire relocatable structures using Developer Fees, the amount of the required matching funds is reduced by the cost of such facilities. This reduction in matching funds is intended to provide an incentive for school districts to lease relocatable classrooms. Prior to November 1998, as a condition of funding any project under this program, at least 30% of new classroom space to be added must be comprised of relocatable structures, unless relocatable structures are not available or special conditions of terrain, climate or unavailability of space make the use of relocatable structures impractical. In addition, State funds under this program are not available to school districts which are determined to have an adequate amount of square footage available for their student population. Senate Bill 50, which was passed in November 1998 by the California Legislature, revised the School Building Lease - Purchase Law of 1976 by eliminating the requirement that at least 30% of all new classroom space being added using California state funds must be relocatable classrooms. In general, it replaced this provision with a requirement that, in order for school districts to increase the amount of funds to be received from developers in excess of the current statutory level, the school districts must show that 20% of all classroom space in the district, not just new space added, consists of relocatable classrooms. The bill also placed a $9.2 billion bond issue on the November 1998 ballot, which was approved by the voters. The bill allocated from the bond issue $2.9 billion for growth and new construction, and $2.2 billion for modernization and reconstruction through the year 2001. In addition, it allocated $700 million for class-size reductions to fully implement the program from kindergarten through third grade. The costs to implement the foregoing will include land acquisition costs, hiring of new teachers, remodeling of existing structures and construction of new permanent and relocatable structures. The bill does not designate the specific usage of funds, and the actual amount spent on relocatable classrooms will vary among school districts. Implementation of Senate Bill 50 began the third week of January 1999. The implementation of Senate Bill 50 did not significantly change the Company's operating results. In response to the adoption of Proposition 13, the State of California adopted the California Emergency Classroom Law of 1979, pursuant to which the State Allocation Board may spend up to $35 million per year from available funds to purchase relocatable classrooms to be leased to school districts. Relocatable classrooms are not available to school districts under this program if the school district has available local bond proceeds that could be used to purchase classroom facilities, unless the district has approved projects pending under the School Building Lease - Purchase Law of 1976. The State has, in the past, funded this program primarily from the proceeds of statewide bond issues approved by voters. BUDGET ALLOCATIONS. Proposition 98, which was approved in 1988, requires the State of California to allocate annually from the State's budget, for the support of school districts and community college districts, a minimum amount equal to the same percentage of funds as was appropriated for the support of those institutions in fiscal year 1986-87. While this requirement may be suspended for a given year by emergency legislation, it has the effect of limiting the ability of the California legislature to reduce the level of school funding from that in existence in 1986-87. The State raises the necessary funds through proceeds from the sale of statewide bond issues, income tax revenues and other revenues. A recent reduction in California's corporate tax rates, and a proposed reduction in personal income tax rates, may affect future levels of the State's income tax revenues. LOCAL FUNDING. Local school districts in California have the ability to issue local general obligation bonds for the acquisition and improvement of real property for school construction. These bond issues require the approval of 55% of the voters in the district and are repaid using the proceeds of increases in local property taxes. A local school district may also levy Developer Fees on new development projects in the district, subject to a maximum rate set by state law. The Developer Fees can only be levied if the project can be shown to contribute to the need for additional school facilities and the fee levied is reasonably related to such need. In addition, California law provides for the issuance of bonds by Community Facilities Districts which can be formed by a variety of local government agencies, including school districts. These districts, known as "Mello-Roos" districts, can have flexible boundaries and the tax imposed to repay the bonds can be based on property use, acreage, population density or other factors. OTHER LEGISLATION California has taken steps to encourage local school districts to adopt year-round school programs to help increase the use of existing school facilities and reduce the need for additional school facilities. School districts requesting state funding under the School Building Lease - Purchase Law of 1976 or the Emergency Classroom Law of 1979 discussed above must submit a study examining the feasibility of implementing in the district a year-round educational program that is designed to increase pupil capacity in the district or in overcrowded high school attendance areas. The feasibility study requirement is waived, however, if the district demonstrates that emergency or urgent conditions exist in the district that necessitate the immediate need for relocatable buildings. The demand for new school facilities, including relocatable classrooms, would be adversely affected in the event that a significant 9 number of California school districts implemented year-round school programs. In addition, a significant increase in the level of voluntary or mandatory busing of students from overcrowded schools to schools with excess capacity could adversely affect demand for new school facilities. ENVIRONMENTAL MATTERS The Company is subject to a variety of federal, state and local governmental regulations related to the storage, use and disposal of any hazardous materials used by the Company in connection with the manufacture of its products. Both the governmental regulations and the costs associated with complying with such regulations are subject to change in the future. EMPLOYEES At December 31, 2001, the Company had 1,068 employees. The Company's employees are not represented by a labor union, and it has experienced no work stoppages. The Company believes that its employee relations are good. ITEM 2. PROPERTIES The Company's principal executive and administrative facilities are located in approximately 17,000 square feet of modular buildings at its primary manufacturing facility located in Perris, California. This manufacturing facility occupies twenty-five acres, with approximately 226,000 square feet of covered production space under roof, pursuant to a lease expiring in 2014. A second facility in Perris occupies approximately thirty acres, with approximately 120,000 square feet of covered production space under roof, pursuant to a lease expiring in 2014. This second facility also includes approximately 80,000 square feet under roof used as a metal working facility. The Company's third plant consists of a 400,000 square foot manufacturing facility, with approximately 160,000 square feet of covered production space under roof, on a 30-acre site in Lathrop, California that is leased through 2019. The fourth plant consists of approximately 50,000 square feet of covered production space under roof, on a 10-acre site in Phoenix, Arizona, pursuant to a lease expiring in 2002. The fifth plant consists of approximately 30,000 square feet of covered production space under roof on a 4-acre site in Glendale, Arizona, pursuant to a lease expiring in 2002. The sixth plant consists of approximately 80,000 square feet of manufacturing area on a 20-acre site in Glen Rose, Texas, outside the Dallas-Fort Worth metropolitan area. The Texas lease expires in 2008. The seventh plant consists of approximately 119,000 square feet of manufacturing area on a 10-acre site in St. Petersburg, Florida that is leased through 2003. The eighth plant consists of approximately 70,000 square feet of manufacturing area on a 10-acre site in St. Petersburg, Florida that is owned by the Company. The Company believes that its facilities are well maintained and in good operating condition, and meet the requirements for its immediately foreseeable business needs. The Company also believes it will be able to renew or renegotiate the leases expiring in 2002 on terms that are acceptable to the Company. Two of the Company's facilities at December 31, 2001 are leased from an affiliate. The Phoenix facility leased by the Company is located within a 25-square-mile area listed by the Arizona Department of Environmental Quality on the state priority list for contaminated sites. According to a recent environmental site assessment report pertaining to the Phoenix facility and commissioned by the Company, neither the Company nor the prior operators or owners of the property have been identified as potentially responsible parties at this site. Additionally, the environment site assessment report identifies no historical activity on the property leased by the Company that was likely to have been a source of the contaminants at the site. ITEM 3. LEGAL PROCEEDINGS The Company is from time to time involved in various lawsuits related to its ongoing business operations, primarily collection actions or vendor disputes. In the opinion of management, no pending lawsuit will result in any material adverse effect upon the Company or its financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock was traded on the NASDAQ National Market System under the symbol "MODT" at December 31, 2001. The range of high and low sales prices for the common stock as reported by the National Association of Securities Dealers, Inc. for the periods indicated below, are as follows:
QUARTER ENDED HIGH LOW ------------- ------ ----- 3/31/00 10.000 5.875 6/30/00 11.875 7.250 9/30/00 11.000 8.000 12/31/00 10.938 6.125 3/31/01 10.500 6.063 6/30/01 12.500 6.760 9/30/01 10.250 7.000 12/31/01 9.800 6.800
On December 31, 2001, the closing sales price on The NASDAQ National Market for a share of the Company's Common Stock was $8.25. The approximate number of holders of record of the Company's Common Stock as of December 31, 2001, was 50. DIVIDEND POLICY The Company has not paid cash dividends on its Common Stock since 1990. The Board of Directors currently intends to follow a policy of retaining all earnings, if any, to finance the continued growth and development of the Company's business and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. Any future determination as to the payment of cash dividends will be dependent upon the Company's financial condition and results of operations and other factors deemed relevant by the Board of Directors. 11 ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The selected income statement and balance sheet data set forth below for the three years ended December 31, 1999, 2000 and 2001 have been derived from the audited consolidated financial statements of the Company included elsewhere herein. The selected income statement and balance sheet data set forth below for the years ended December 31, 1997 and 1998 have been derived from audited financial statements of the Company that are not included herein. The selected income statement and balance sheet data set forth below should be read in conjunction with those consolidated financial statements (including the notes thereto) and with "Management's Discussion and Analysis of Results of Operations and Financial Condition" also included elsewhere herein.
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 1997 1998 1999 2000 2001 --------- --------- --------- --------- --------- INCOME STATEMENT DATA: Net sales .......................................... $ 134,050 $ 127,620 $ 167,228 $ 234,734 $ 201,116 Cost of goods sold ................................. 107,367 97,765 138,668 198,501 165,068 --------- --------- --------- --------- --------- Gross profit ....................................... 26,683 29,855 28,560 36,233 36,048 Selling, general and administrative expenses ....... 5,156 4,731 6,834 8,011 8,093 Goodwill and covenant amortization ................. -- 8 3,213 3,702 3,751 Income from operations ............................. 21,527 25,116 18,513 24,520 24,204 Interest income (expense), net ..................... (909) 1,097 (3,083) (4,928) (3,067) Other income (expense) ............................. 92 25 85 61 91 --------- --------- --------- --------- --------- Income before income taxes ......................... 20,711 26,238 15,515 19,653 21,228 Income taxes ....................................... (7,703) (9,708) (7,128) (9,237) (9,606) --------- --------- --------- --------- --------- Net income ......................................... 13,008 16,530 8,387 10,416 11,622 --------- --------- --------- --------- --------- Net income available for common Stockholders (1) ................................. $ 13,008 $ 16,530 $ 8,251 $ 10,260 $ 11,466 ========= ========= ========= ========= ========= Basic earnings per common share .................... $ 1.47 $ 1.68 $ 0.64 $ 0.78 $ 0.85 Basic weighted-average shares outstanding (in thousands) ......................................... 8,854 9,857 12,986 13,238 13,411 Diluted earnings per common share .................. $ 1.31 $ 1.50 $ 0.59 $ 0.72 $ 0.82 Diluted weighted-average shares outstanding (in thousands) ......................................... 9,898 10,988 14,204 14,357 14,422
AS OF DECEMBER 31, ----------------------------------------------------------------- 1997 1998 1999 2000 2001 --------- --------- --------- --------- --------- BALANCE SHEET DATA: Working capital ..................................... $ 36,417 $ 52,129 $ 11,231 $ 17,153 $ 25,265 Total assets ........................................ 68,220 82,873 168,723 187,702 186,396 Total liabilities ................................... 20,177 17,777 58,050 65,610 52,099 Long-term debt, excluding current portion ........... -- -- 32,000 23,600 19,000 Shareholders' equity ................................ 48,043 65,097 110,672 122,092 134,297
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 1997 1998 1999 2000 2001 --------- --------- --------- --------- --------- SELECTED OPERATING DATA: Gross margin ......................................... 19.9% 23.4% 17.1% 15.4% 17.9% Operating margin ..................................... 16.1% 19.7% 11.1% 10.4% 12.0% Backlog at period end(2) ............................. $ 71,000 $ 25,000 $ 60,000 $ 80,000 $ 80,000
(1) After deduction of preferred stock dividends accrued of $136,000, $156,000 and $156,000 for the years ended December 31, 1999, 2000 and 2001, respectively. (2) The Company manufactures classrooms and other buildings to fill existing orders only, and not for inventory. Backlog consists of sales orders scheduled for completion during the next 12 months. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL On February 16, 1999, the Company completed the SPI Merger and on March 22, 1999, the Company completed the Coastal acquisition. The SPI Merger and the Coastal acquisition were both accounted for as purchases, and accordingly, the results of operations of SPI and Coastal are included in the Company's consolidated statements of income from the respective dates of acquisition. Due to the magnitude of these acquisitions and the integration of the acquired operations with the Company, results of operations for prior periods are not necessarily comparable to or indicative of results of operation for current or future periods. On March 8, 2001, the Company completed the IMS acquisition. The IMS acquisition was accounted for as a purchase, and accordingly, the results of operations of IMS are included in the Company's consolidated statements of income from the date of acquisition. Due to the integration of the acquired operation with the Company, results of operations for prior periods are not necessarily comparable to or indicative of results of operation for current or future periods. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages of net sales represented by certain items in the Company's statements of operations. PERCENTAGE OF NET SALES
YEARS ENDED DECEMBER 31, ---------------------------------- 1999 2000 2001 ------ ------ ------ Net sales ......................... 100.0% 100.0% 100.0% Cost of sales ..................... 82.9 84.6 82.1 ------ ------ ------ Gross profit ...................... 17.1 15.4 17.9 Selling, general and administrative expenses ........................ 4.1 3.4 4.0 Goodwill and covenant amortization 1.9 1.6 1.9 ------ ------ ------ Income from operations ............ 11.1 10.4 12.0 Interest expense, net ............. (1.8) (2.1) (1.5) Other income ...................... -- -- -- ------ ------ ------ Income before income taxes ........ 9.3 8.4 10.5 Income taxes ...................... 4.3 3.9 4.7 ------ ------ ------ Net income ........................ 5.0% 4.4% 5.8% ====== ====== ======
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Net sales for the year ended December 31, 2001 decreased to $201.1 million, a decrease of $33.6 million, or approximately 14.3%, from $234.7 million in 2000. The decrease in 2001 is attributable to the continuing shift in product mix toward lower volume, higher gross margin customized buildings, as well as the general business and economic decline and the resulting slowdown in September of new orders and customers delaying deliveries. For the year ended December 31, 2001, gross profit was $36.0 million, a decrease of $184,000, or approximately 0.5%, over 2000 gross profit of $36.2 million. Gross profit as a percentage of net sales increased to 17.9% in 2001 from 15.4% in 2000. The increase in gross profit as a percentage of net sales is the result of continued improvement in operational efficiencies and a shift in product mix for 2001. In 2001, selling, general and administrative expenses increased to $8.1 million from $8.0 million in 2000. Certain additional costs have been incurred in 2001 in the marketing of a new product for the Florida market, as well as the integration of IMS with the Company. As a percentage of net sales, selling, general and administrative expenses increased to 4.0% in 2001 from 3.4% in 2000. Goodwill and covenant amortization for the year ended December 31, 2001 was $3.75 million, compared to $3.7 million for 2000. The increase in 2001 is primarily attributable to goodwill amortization for the IMS acquisition. As a percentage of net sales, goodwill 13 and covenant amortization increased to 1.9% in 2001 from 1.6% in 2000. Goodwill was recorded for the SPI Merger, the Coastal acquisition and the IMS acquisition and is being amortized from the respective dates of acquisition. In 2001, interest expense, net decreased to $3.1 million from $4.9 million in 2000. The decrease is attributable to decreased line of credit borrowings, decreased long-term debt due to repayments and decreased interest rates for the year ended December 31, 2001. As a percentage of net sales, interest expense, net decreased to 1.5% in 2001 from 2.1% in 2000. The provision for income taxes was $9.6 million for the year ended December 31, 2001, compared to $9.2 million for 2000. The Company's effective tax rate decreased to 45.3% for the year ended December 31, 2001 from 47.0% for the year ended December 31, 2000. YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Net sales for the year ended December 31, 2000 increased to $234.7 million, an increase of $67.5 million, or approximately 40.4%, from $167.2 million in 1999. The increase in 2000 is attributable to increased sales from the public school system in California where funds from the 1998 California School Construction Bond have begun and continue to flow. Sales outside of California increased, spurred by the growth of the national economy. Additionally, net sales for the year ended December 31, 2000 increased as the year ended December 31, 1999 only included net sales for SPI and Coastal from their respective dates of acquisition. For the year ended December 31, 2000, gross profit was $36.2 million, an increase of $7.7 million, or approximately 26.9%, over 1999 gross profit of $28.6 million. Gross profit as a percentage of net sales decreased to 15.4% in 2000 from 17.1% in 1999. The decrease in gross profit as a percentage of net sales was primarily attributable to the shift in product mix for 2000. In 2000, selling, general and administrative expenses increased to $8.0 million from $6.8 million, due primarily to the increase in net sales for the year, as well as an increase in the number of employees. Selling, general and administrative expenses for the year ended December 31, 2000 also increased as the year ended December 31, 1999 only included selling, general and administrative expenses for SPI and Coastal from their respective dates of acquisition. As a percentage of net sales, selling, general and administrative expenses decreased to 3.4% in 2000 from 4.1% in 1999. Goodwill and covenant amortization for the year ended December 31, 2000 was $3.7 million, compared to $3.2 million for 1999. As a percentage of net sales, goodwill and covenant amortization decreased to 1.6% in 2000 from 1.9% in 1999. Goodwill was recorded for both the SPI Merger and the Coastal acquisition and is being amortized from the respective dates of acquisition. In 2000, interest expense, net increased to $4.9 million from $3.1 million, due primarily to debt incurred as a result of the SPI Merger; which occurred in February 1999, increased line of credit borrowings and higher interest rates. As a percentage of net sales, interest expense, net increased to 2.1% in 2000 from 1.8% in 1999. The provision for income taxes was $9.2 million for the year ended December 31, 2000, compared to $7.1 million for 1999. The Company's effective tax rate increased to 47.0% for the year ended December 31, 2000 from 46.0% for the year ended December 31, 1999. LIQUIDITY AND CAPITAL RESOURCES To date, the Company has funded its operations and capital expenditures with cash generated internally by operations, supplemented by borrowings under various credit facilities and public offerings. During the years ended December 31, 1999, 2000 and 2001, the Company's operations provided cash in the amounts of approximately $14.4 million, $2.1 million and $8.1 million, respectively. At December 31, 2001, the Company had approximately $130,000 in cash and cash equivalents. The Company has a $66 million credit facility with a bank. The credit facility provides for a $40 million revolving credit line. The credit facility is secured by all the Company's assets, as well as the Company's stock ownership in its subsidiaries. The credit facility expires in December 2006. At December 31, 2001, $9,100,000 was outstanding under the revolving credit line. The Company had working capital of $11.2 million, $17.2 million and $25.3 million at December 31, 1999, 2000 and 2001, respectively. In 2001, current assets decreased by $0.8 million, with a decrease of $1.1 million in inventories, a decrease of $0.3 million in cash and cash equivalents and a decrease of $0.2 million in due from affiliates, offset by an increase of $0.4 million in costs and estimated earnings in excess of billings on contracts, an increase in contract receivables, net of $0.1 million, an increase of $0.2 million in deferred tax assets and an increase of $0.2 million in prepaid and other assets. Current liabilities decreased by $8.9 million, with a decrease of $8.3 million in accounts payable and accrued liabilities, a $1.8 million decrease in billings in excess of costs and 14 estimated earning on contracts, a decrease of $1.4 million in current maturities of long-term debt, offset by an increase of $2.6 million in current revolving credit line. In 2000, current assets increased by $21.9 million, with an increase of $15.2 million in contracts receivable, an increase of $3.4 million in costs and estimated earnings in excess of billings and an increase of $3.2 million in inventories. Current liabilities increased by $16.0 million, with an increase of $6.5 million in accounts payable and accrued liabilities, an increase of $6.5 million in current revolving credit line, an increase of $2.7 million in income tax payable and an increase of $1.4 million in current maturities of long-term debt, offset by a $1.1 million decrease in billings in excess of costs and estimated earning on contracts. Capital expenditures amounted to $2.3 million, $2.6 million and $1.2 million during the years ended December 31, 1999, 2000 and 2001, respectively. In 1999, the majority of expenditures were as a result of construction of a production line at one of the Perris, California facilities and the addition of metal fabrication machinery at the Glendale, Arizona and St. Petersburg, Florida facilities. In 2000 and 2001, the majority of expenditures were as a result of expanding production capacity at the Company's various facilities. Management believes that the Company's existing product lines and manufacturing capacity will enable the Company to generate sufficient cash through operations, supplemented by the Company's bank line of credit, to finance the Company's business over the next twelve months. However, additional cash resources may be required if the Company's rate of growth exceeds currently anticipated levels. Moreover, it may prove necessary for the Company to construct or acquire additional manufacturing facilities in order for the Company to compete effectively in new market areas or states which are beyond a 300 mile radius from one of its production facilities. The construction or acquisition of new facilities could require significant additional capital. For these reasons, among others, the Company may need additional debt or equity financing in the future. There can be, however, no assurance that the Company will be successful in obtaining such additional financing, or that any such financing will be available on terms acceptable to it. COMMITMENTS AND CONTINGENCIES The following table represents a comprehensive list of the Company's contractual obligations and commitments as of December 31, 2001:
PAYMENTS DUE BY YEAR ------------------------------------------------------------------------------------------- (amounts in thousands) TOTAL 2002 2003 2004 2005 2006 THEREAFTER ------- ------- ------- ------- ------- ------- ---------- Long-term debt ................... $26,000 $ 7,000 $ 7,000 $ 6,000 $ 4,000 $ 2,000 Operating leases ................. 12,133 1,788 1,379 941 941 941 $ 6,143 ------- ------- ------- ------- ------- ------- -------- Total contractual cash obligations $38,133 $ 8,788 $ 8,379 $ 6,941 $ 4,941 $ 2,941 $ 6,143 ======= ======= ======= ======= ======= ======= ========
CRITICAL ACCOUNTING POLICIES In December 2001, the Securities and Exchange Commission (SEC) requested that all registrants list their most "critical accounting policies" in Management's Discussion and Analysis of Financial Condition and Results of Operations. The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of the Company's financial condition and results of operations and requires management's most difficult, subjective or complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe our most critical accounting policies related to: - Allowance for Contract Adjustments - Revenue Recognition on Construction Contracts We use a combination of historical results and anticipated future events to estimate and make assumptions relating to our critical accounting policies. Actual results could differ from our estimates. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141), and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 15 142). SFAS 141 requires that all business combinations be accounted for under a single method - the purchase method. Use of the pooling-of-interests method is no longer permitted. SFAS 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. SFAS 142 requires that goodwill no longer be amortized to earnings, but instead reviewed for impairment. Under SFAS 142, the amortization of goodwill ceases upon adoption of the Statement and is effective for fiscal years beginning after December 15, 2001, which for calendar year-end companies, will be January 1, 2002. The Company has historically amortized its goodwill over its estimated useful lives. Beginning with the adoption of SFAS 142, the Company will cease amortizing its goodwill. The Company recorded goodwill amortization expense in the amount of $2,916,000 and $2,945,000 for the years ended December 31, 2000 and 2001, respectively. To the extent that no impairment charges are recorded upon adoption or application of SFAS 142, similar amounts of amortization will not be recorded in future periods. The Company is currently analyzing the impact of adopting SFAS 142 and has not determined whether the adoption will have a material impact on the Company's financial position. In September 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 is effective for fiscal years beginning after June 15, 2002, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Management has not assessed whether the application of this standard will have a material effect on the Company's financial position, results of operations or liquidity. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 is effective for fiscal years beginning after December 15, 2001. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Management has not assessed whether the application of this standard will have a material effect on the Company's financial position, results of operations or liquidity. SEASONALITY Historically, the Company's quarterly revenues have been highest in the second and third quarters of each calendar year because a large number of orders for modular classrooms placed by school districts require that classrooms be constructed, delivered and installed in time for the upcoming new school year which generally commences in September. The Company has typically been able to add employees as needed to respond to the corresponding increases in manufacturing output required by such seasonality to meet currently foreseeable increases in this seasonal demand. The Company's first and fourth quarter revenues are typically lower due to greater number of holidays and days of inclement weather during such periods. In addition, the Company's operating margins may vary on a quarterly basis depending upon the mix of revenues between standardized classrooms and higher margin customized classrooms and the timing of the completion of large, higher margin customized contracts. INFLATION During the past three years, the Company has not been adversely affected by inflation, because it has been generally able to pass along to its customers increases in the costs of labor and materials. However, there can be no assurance that the Company's business will not be affected by inflation in the future. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks related to fluctuation in interest rates on our $66 million credit facility. During 2001, we did not use interest rate swaps or other types of derivative financial instruments. The carrying value of the credit facility approximates fair value as the interest rate is variable and resets frequently. Indebtedness under the credit facility bears interest at LIBOR plus additional interest of between 1.25% and 1.75%, or the Federal funds rate plus additional interest of between 0% to 0.5%. The additional interest charge is based upon certain financial ratios. We estimate that the average amount of debt outstanding under the credit facility for 2002 will be $40 million. Therefore, a one percentage point increase in interest rates would result in an increase in interest expense of $400,000 for the year. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Company, along with the notes thereto and the Independent Auditors' Report thereon, required to be filed in response to this Item 8 are attached hereto as exhibits under Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference. 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Exhibits and Financial Statement Schedules 1 & 2. Index to Financial Statements The following financial statements and financial statement schedule of the Company, along with the notes thereto and the Independent Auditors' Reports, are filed herewith, as required by Part II, Item 8 hereof. Financial Statements Independent Auditors' Reports Consolidated Balance Sheets - December 31, 2000 and 2001 Consolidated Statements of Income - For the Years Ended December 31, 1999, 2000 and 2001 Consolidated Statements of Shareholders' Equity - For the Years Ended December 31, 1999, 2000 and 2001 Consolidated Statements of Cash Flows - For the Years Ended December 31, 1999, 2000 and 2001 Notes to Consolidated Financial Statements Schedule Included - For the Years Ended December 31, 1999, 2000 and 2001 Schedule II - Valuation and Qualifying Accounts All other Financial Statement Schedules have been omitted because the required information is shown in the consolidated financial statements or notes thereto, the amounts involved are not significant, or the schedules are not applicable. 3. Exhibits
EXHIBIT NUMBER NAME OF EXHIBIT ------- ---------------------------------------------------------------- 3.1(1) Certificate of Incorporation of Modtech Holdings, Inc. 3.2(1) Bylaws of Modtech Holdings, Inc. 10.1(2) Modtech, Inc.'s 1996 Stock Option Plan. 10.2(3) Transaction Advisory Agreement. 10.3(4) Employment Agreement between the Company and Evan M. Gruber. 10.4(4) Employment Agreement between the Company and Patrick Van Den Bossche. 10.5(4) Employment Agreement between the Company and Michael G. Rhodes. 10.6(5) Lease between the Company and Pacific Continental Modular Enterprises, relating to the Barrett Street property in Perris, California. 10.7(5) Lease between the Company and BMG, relating to the property in Lathrop, California. 10.8(5) Form of Indemnity Agreement between the Company and its executive officers and directors.
18
10.9(3) Financial Advisory Services Agreement. 10.10(6) Credit Agreement, dated February 16, 1999 10.11 Credit Agreement, dated December 26, 2001 23.1 Independent Auditors' Consent
_________________________ (1) Incorporated by reference to Modtech Holdings, Inc.'s Registration Statement on Form S-4 filed with the Commission on October 27, 1998 (Commission File No. 333-69033). (2) Incorporated by reference to Modtech, Inc.'s Registration Statement on form S-8 filed with the Commission on December 11, 1996 (Commission File No. 333-17623). (3) Incorporated by reference to Amendment No. 2 to Modtech Holdings, Inc.'s Registration Statement on Form S-4, filed with the Commission on January 11, 1999 (Commission File No. 333-69033). (4) Incorporated by reference to Amendment No. 1 to Modtech Holdings, Inc.'s Registration Statement on Form S-4, filed with the Commission on December 15, 1998 (Commission File No. 333-69033). (5) Incorporated by reference to Modtech, Inc.'s Registration Statement on Form S-1 filed with the Commission on June 6, 1990 (Commission File No. 033-35239). (6) Incorporated by reference to Modtech Holdings, Inc.'s Form 10-K filed with the Commission on April 15, 1999 (Commission File No. 000-25161). 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 29, 2002 MODTECH HOLDINGS, INC., a Delaware corporation By:/s/ SHARI L. WALGREN -------------------- Shari L. Walgren Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by he following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME CAPACITIES DATE ------------------------- ------------------------------ -------------- /s/ EVAN M. GRUBER Director, Chairman of the March 29, 2002 ------------------------- Board, Chief Executive Officer Evan M. Gruber /s/ ROBERT W. CAMPBELL Director March 29, 2002 ------------------------- Robert W. Campbell /s/ DANIEL J. DONAHOE Director March 29, 2002 ------------------------- Daniel J. Donahoe /s/ STANLEY GAINES Director March 29, 2002 ------------------------- Stanley Gaines /s/ CHARLES R. GWIRTSMAN Director March 29, 2002 ------------------------- Charles R. Gwirtsman /s/ CHARLES A. HAMILTON Director March 29, 2002 ------------------------- Charles A. Hamilton /s/ CHARLES C. McGETTIGAN Director March 29, 2002 ------------------------- Charles C. McGettigan /s/ MICHAEL G. RHODES Director, President, March 29, 2002 ------------------------- Chief Operating Officer Michael G. Rhodes /s/ MYRON A. WICK III Director March 29, 2002 ------------------------- Myron A. Wick III
20 MODTECH HOLDINGS, INC. AND SUBSIDIARIES Annual Report - Form 10-K Consolidated Financial Statements and Schedule December 31, 1999, 2000 and 2001 (With Independent Auditors' Report Thereon) INDEPENDENT AUDITORS' REPORT The Board of Directors Modtech Holdings, Inc.: We have audited the accompanying consolidated balance sheets of Modtech Holdings, Inc. and subsidiaries as of December 31, 2000 and 2001, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001. In connection with our audits of the consolidated financial statements, we have also audited the accompanying financial statement schedule for the three-year period ended December 31, 2001. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Modtech Holdings, Inc. and subsidiaries as of December 31, 2000 and 2001 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Orange County, California February 28, 2002 MODTECH HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2000 and 2001
ASSETS (NOTE 8) 2000 2001 ---- ---- Current assets: Cash and cash equivalents $ 415,965 $ 129,772 Contracts receivable, less allowance for contract adjustments of $703,119 in 2000 and $1,425,000 in 2001 (note 3) 34,088,649 34,195,202 Costs and estimated earnings in excess of billings on contracts (notes 4 and 10) 9,724,089 10,110,110 Inventories (note 5) 9,814,587 8,667,555 Due from affiliates (note 10) 657,314 478,809 Note receivable from affiliates (note 10) 45,212 -- Prepaid assets 691,486 857,540 Deferred tax assets (note 9) 3,406,756 3,574,631 Other current assets 319,092 349,751 ------------ ------------ Total current assets 59,163,150 58,363,370 ------------ ------------ Property and equipment, net (note 6) 14,538,234 15,292,051 Goodwill, net (notes 2 and 7) 111,156,928 109,612,025 Covenants not to compete, net 1,187,910 505,903 Debt issuance costs, net (note 8) 1,204,908 1,413,604 Deferred tax assets (note 9) 55,991 557,934 Other assets 395,055 651,010 ------------ ------------ $187,702,176 $186,395,897 ============ ============
See accompanying notes to consolidated financial statements. MODTECH HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2000 and 2001
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 2001 ---- ---- Current liabilities: Accounts payable $ 10,442,194 $ 4,860,957 Accrued compensation 3,921,475 3,784,782 Accrued insurance expense 2,550,467 2,663,607 Income tax payable (note 9) 3,064,003 475,506 Other accrued liabilities 3,128,920 2,992,458 Billings in excess of costs and estimated earnings on contracts (notes 4 and 10) 4,003,065 2,221,449 Current revolving credit line (note 8) 6,500,000 9,100,000 Current maturities of long-term debt (note 8) 8,400,000 7,000,000 ------------ ------------ Total current liabilities 42,010,124 33,098,759 ------------ ------------ Long-term debt, excluding current portion (note 23,600,000 19,000,000 ------------ ------------ Total liabilities 65,610,124 52,098,759 ------------ ------------ Shareholders' equity: Series A preferred stock, $.01 par Authorized 5,000,000 shares; issued and outstanding 388,939 in 2000 and 2001 (note 13) 3,889 3,889 Common stock, $.01 par. Authorized 25,000,000 shares; issued and outstanding 13,348,015 and 13,456,365 in 2000 and 2001, respectively (note 12) 133,480 134,564 Additional paid-in capital 78,007,740 78,589,720 Retained earnings 43,946,943 55,568,965 ------------ ------------ Total shareholders' equity 122,092,052 134,297,138 Commitments and contingencies (notes 4, 10, 17, 18 and 19) ------------ ------------ $187,702,176 $186,395,897 ============ ============
See accompanying notes to consolidated financial statements. MODTECH HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 1999, 2000 and 2001
1999 2000 2001 ---- ---- ---- Net sales (notes 10 and 15) $167,227,690 $234,733,693 $201,116,076 Cost of goods sold (note 10) 138,667,671 198,501,243 165,067,663 ------------ ------------ ------------ Gross profit 28,560,019 36,232,450 36,048,413 Selling, general, and administrative expenses 6,833,608 8,010,917 8,092,780 Goodwill and covenant amortization (notes 2 and 7) 3,213,450 3,701,632 3,751,642 ------------ ------------ ------------ Income from operations 18,512,961 24,519,901 24,203,991 ------------ ------------ ------------ Other income (expense): Interest expense (note 8) (3,512,499) (4,987,629) (3,094,658) Interest income 429,599 59,324 27,049 Other, net 85,243 61,296 91,349 ------------ ------------ ------------ (2,997,657) (4,867,009) (2,976,260) ------------ ------------ ------------ Income before income taxes 15,515,304 19,652,892 21,227,731 Income taxes (note 9) (7,128,295) (9,236,858) (9,605,709) ------------ ------------ ------------ Net income $ 8,387,009 $ 10,416,034 $ 11,622,022 ------------ ------------ ------------ Series A preferred stock dividend (note 13) 136,128 155,576 155,576 Net income available to common stock $ 8,250,881 $ 10,260,458 $ 11,466,446 ============ ============ ============ Basic earnings per common share (note 14) $ 0.64 $ 0.78 $ 0.85 ============ ============ ============ Basic weighted-average shares outstanding (note 14) 12,986,067 13,237,867 13,411,368 ============ ============ ============ Diluted earnings per common share (note 14) $ 0.59 $ 0.72 $ 0.82 ============ ============ ============ Diluted weighted-average shares outstanding (note 14) 14,204,478 14,357,341 14,422,201 ============ ============ ============
See accompanying notes to consolidated financial statements. MODTECH HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years ended December 31, 1999, 2000 and 2001
ADDITIONAL SERIES A PREFERRED STOCK COMMON STOCK PAID-IN RETAINED ---------------- -------------------- ------- -------- SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ------ ------ ------ ------ ------- -------- Balance, December 31, 1998 -- $ -- 9,871,409 $ 98,714 $ 39,854,127 $25,143,900 Exercise of options, including tax benefit of $770,648 (notes 9 and 12) -- -- 268,149 2,682 1,368,040 -- Issuance of preferred stock (note 13) 388,939 3,889 -- -- -- -- Issuance of common stock in connection with acquisition (note 2) -- -- 4,587,824 45,878 75,694,171 -- Modtech Merger distribution (note 2) -- -- (1,593,022) (15,930) (39,910,100) -- Net income -- -- -- -- -- 8,387,009 ------- ------ ---------- --------- ------------ ----------- Balance, December 31, 1999 388,939 3,889 13,134,360 131,344 77,006,238 33,530,909 Exercise of options, including tax benefit of $645,714 (notes 9 and 12) -- -- 213,655 2,136 1,001,502 -- Net income -- -- -- -- -- 10,416,034 ------- ------ ---------- --------- ------------ ----------- Balance, December 31, 2000 388,939 3,889 13,348,015 133,480 78,007,740 43,946,943 Exercise of options, including tax benefit of $254,070 (notes 9 and 12) -- -- 108,350 1,084 581,980 -- Net income -- -- -- -- -- 11,622,022 ------- ------ ---------- --------- ------------ ----------- Balance, December 31, 2001 388,939 $3,889 13,456,365 $ 134,564 $ 78,589,720 $55,568,965 ------- ------ ---------- --------- ------------ -----------
See accompanying notes to consolidated financial statements. MODTECH HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1999, 2000 and 2001
1999 2000 2001 ------------ ----------- ----------- Cash flows from operating activities: Net income $ 8,387,009 $ 10,416,034 $ 11,622,022 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,270,027 5,968,290 6,417,154 Provision for contract adjustments 280,000 -- 683,363 Loss (gain) on sale of equipment 32,112 11,957 (41,101) (Increase) decrease in assets, net of effects from acquisitions Contracts receivable (1,987,086) (15,196,731) (263,710) Costs and estimated earnings in excess of billings on contracts (2,454,412) (3,446,313) (386,021) Inventories 3,167,029 (3,175,532) 1,991,816 Due from affiliates 1,381,060 305,594 223,717 Prepaids and other assets 948,173 (682,664) (400,233) Income tax receivable 3,185,950 -- -- Deferred tax assets 803,684 (826,232) (669,818) Increase (decrease) in liabilities, net of effects from acquisitions: Accounts payable (1,207,346) 4,183,569 (6,579,351) Accrued compensation 138,376 727,952 (136,693) Accrued insurance expense (1,052,549) 2,180,877 113,140 Income tax payable -- 3,374,343 (2,588,497) Other accrued liabilities (497,875) (549,575) (126,449) Billings in excess of costs estimated earnings on contracts (1,989,656) (1,145,421) (1,781,616) Deferred tax liabilities (31,171) (66,195) -- ------------ ----------- ----------- Net cash provided by operating activities 14,373,325 2,079,953 8,077,723 ------------ ----------- ----------- Cash flows from investing activities: Proceeds from sale of property and equipment 649,669 2,400 99,276 Purchase of property and equipment (2,268,112) (2,566,609) (1,237,209) Purchase of covenants not to compete (122,500) -- (125,000) Acquisition of subsidiaries (49,515,499) -- (3,406,224) ------------ ----------- ----------- Net cash used in investing activities (51,256,442) (2,564,209) (4,669,157) ------------ ----------- -----------
(Continued) MODTECH HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued
1999 2000 2001 ------------ ----------- ----------- Cash flows from financing activities: Net principal borrowings under revolving credit lines $ -- $ 6,500,000 $ 2,900,000 Net principal borrowings (payments) on long-term debt 39,000,000 (7,000,000) (6,300,000) ------------ ----------- ----------- Payment of debt issuance costs (1,733,258) (155,286) (623,753) Net proceeds from issuance of common stock 600,074 357,924 328,994 Modtech Merger distribution (39,928,471) -- -- Net cash used in financing activities (2,061,655) (297,362) (3,694,759) ------------ ----------- ----------- Net decrease in cash and cash equivalents (38,944,772) (781,618) (286,193) Cash and cash equivalents at beginning of year 40,142,355 1,197,583 415,965 ------------ ----------- ----------- Cash and cash equivalents at end of year $ 1,197,583 $ 415,965 $ 129,772 ============ =========== ===========
See accompanying notes to consolidated financial statements. MODTECH HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 2000 and 2001 (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Modtech Holdings, Inc. and its subsidiaries (the Company) design, manufacture, market and install modular relocatable classrooms and commercial and light industrial modular buildings. The Company's classrooms are sold primarily to California school districts. The Company also sells classrooms to the State of California and to leasing companies, who lease the classrooms principally to California school districts. The Company's modular classrooms include standardized units prefabricated at its manufacturing facilities, as well as customized units that are modular in design but constructed on site using components manufactured by the Company. The Company also designs and manufactures modular, portable buildings to customer specifications for a wide array of uses, including governmental, healthcare, educational, airport and correctional facilities; office and retail space; daycare centers; libraries; churches; construction trailers; golf clubhouses; police stations; convenience stores; fast food restaurants; and sales offices. The buildings are sold primarily through a network of sales and leasing companies to a wide range of end users. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial statements of Modtech Holdings, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash and cash equivalents, contracts receivable and note receivable, costs and estimated earnings in excess of billings on contracts, prepaid and other assets, accounts payable, accrued liabilities, billings in excess of estimated earnings on contracts, revolving credit line and long-term debt are measured at cost which approximates their fair value. REVENUE RECOGNITION Construction Contracts Contracts are recognized using the percentage-of-completion method of accounting and, therefore, take into account the costs, estimated earnings and revenue to date on contracts not yet completed. Revenue recognized is that percentage of the total contract price that cost expended to date bears to anticipated final total cost, based on current estimates of costs to complete. MODTECH HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling, general, and administrative costs are charged to expense as incurred. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is recognized in the consolidated financial statements. The current asset, "Costs and Estimated Earnings in Excess of Billings on Contracts," represents revenues recognized in excess of amounts billed. The current liability, "Billings in Excess of Costs and Estimated Earnings on Contracts," represents billings in excess of revenues recognized. The current contra asset, "Allowance for Contract Adjustments," is management's estimated adjustments to contract amounts due to disputes and or litigation. Other Products Sales of other products are recorded upon completion and transfer of title to the customer. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are calculated using the straight-line and accelerated methods over the following estimated useful lives: Buildings 15 to 39 years Land improvements 7 to 39 years Leasehold improvements 15 to 31 years Machinery and equipment 5 to 15 years Office equipment 3 to 7 years Trucks and automobiles 3 to 5 years
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS HELD FOR DISPOSAL Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. GOODWILL The costs in excess of the fair market value of net assets acquired for each acquisition is recorded as goodwill and amortized using the straight-line method over a period of 40 years. The Company evaluates the recoverability of these costs based upon expectations of non-discounted cash flows. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. MODTECH HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued DEBT ISSUANCE COSTS Debt issuance costs have been deferred and are being amortized over the term of the credit facility of five years. STOCK OPTION PLANS Prior to January 1, 1996, the Company accounted for stock option plans in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recognized on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provision of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. EARNINGS PER SHARE The Company accounts for earnings per share in accordance with SFAS No. 128, "Earnings per Share." This Statement requires the presentation of both basic and diluted net income per share for financial statement purposes. Basic net income per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted net income per share includes the effect of the potential common shares outstanding. INCOME TAXES Income taxes are accounted for under the asset and liability method of SFAS No. 109, "Accounting for Income Taxes". Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. SEGMENT INFORMATION The Company applies the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 establishes standards for reporting financial and descriptive information about an enterprise's operating segments in its annual financial statements and selected segment information in interim financial reports. In 2000 and 2001, the Company operated in one industry segment and in accordance with No. SFAS 131, only enterprise-wide disclosures have been provided. RECLASSIFICATION Certain amounts in the 1999 and 2000 consolidated financial statements have been reclassified to conform to the 2001 presentation. MODTECH HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (2) ACQUISITIONS SPI Merger In 1999, Modtech, Inc. (Modtech) and SPI Holdings, Inc., a Colorado corporation (SPI) merged pursuant to the Agreement and Plan of Reorganization and Merger (the Merger Agreement), between Modtech and SPI. SPI is a designer, manufacturer and wholesaler of commercial and light industrial modular buildings. Pursuant to the Merger Agreement, SPI merged with a subsidiary of Modtech Holdings, Inc. (Holdings), a newly formed Delaware corporation (the SPI Merger). Concurrently, Modtech merged with a separate subsidiary of Holdings (the Modtech Merger). Pursuant to the mergers, both SPI and Modtech became wholly owned subsidiaries of Holdings. In connection with the SPI Merger, SPI stockholders received approximately $8 million in cash and approximately 4.6 million shares of Holdings Common Stock. Holdings refinanced approximately $32 million of SPI debt. In connection with the Modtech Merger, Modtech stockholders received approximately $40 million in cash, approximately 8.3 million shares of Holdings Common Stock and 388,939 shares of Holdings Series A Preferred Stock. In connection with both mergers, the Company incurred a total of approximately $51 million of debt (see note 8). The following unaudited pro forma operating results for the Company assume the SPI Merger had been completed as of the beginning of the year presented. The pro forma operating results are adjusted to give effect to the mergers. Additionally, pro forma adjustments have been made for the acquisitions consummated by SPI prior to the merger. Pro forma net sales and net income, in thousands, are $172,870 and $7,930 for 1999, respectively. Pro forma diluted earnings per share are $0.57 for 1999. The purchase price for the SPI Merger, including acquisition costs, was approximately $89 million. The SPI Merger has been accounted for as a purchase and, accordingly, the results of operations of SPI are included in the Company's consolidated statements of income from the date of acquisition. The excess of fair value of net assets acquired was approximately $115.2 million, and is being amortized on a straight-line basis over 40 years. The purchase price allocation of the SPI Merger is as follows: Current assets $ 8,636,887 Property and equipment 1,499,721 Other tangible assets 189,278 Identifiable intangible assets 2,476,814 Current liabilities (4,724,118) Current portion of long-term debt (10,787,419) Long-term debt (23,462,179) ------------- Net liabilities assumed (26,171,016) Total Aggregate Purchase Price (89,017,553) ------------- Goodwill $ 115,188,569 =============
MODTECH HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Coastal Acquisition In 1999, the Company purchased 100% of the stock of Coastal Modular Buildings, Inc. (Coastal). Coastal designs and manufactures modular relocatable classrooms and other modular buildings for commercial use. Coastal is based in St. Petersburg, Florida. The acquisition of Coastal has been accounted for as a purchase and, accordingly, the results of operations of Coastal are included in the Company's consolidated statements of income from the date of acquisition. Pro forma amounts for the Coastal acquisition are not included, as the effect is not material to the Company's consolidated financial statements. IMS Acquisition On March 8, 2001, the Company purchased 100% of the stock of Innovative Modular Structures, Inc. (IMS). IMS designs and manufactures modular relocatable classrooms and other modular buildings for commercial use. IMS is based in St. Petersburg, Florida. The acquisition of IMS has been accounted for as a purchase and, accordingly, the results of operations of IMS are included in the Company's consolidated statements of income from the date of acquisition. Pro forma amounts for the IMS acquisition are not included, as the effect is not material to the Company's consolidated financial statements. (3) CONTRACTS RECEIVABLE Contracts receivable consisted of customer billings for:
2000 2001 ----------- ----------- Completed contracts $22,750,678 $16,722,192 Contracts in progress 8,538,451 16,010,780 Retentions 3,502,639 2,887,230 ----------- ----------- 34,791,768 35,620,202 Less allowance for contract adjustments (703,119) (1,425,000) ----------- ----------- $34,088,649 $34,195,202 =========== ===========
(4) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON CONTRACTS Net costs and estimated earnings in excess of billings on contracts consisted of:
2000 2001 ------------- ------------ Net costs and estimated earnings on uncompleted contracts $ 117,567,782 $ 99,216,210 Billings to date (112,324,879) (91,236,754) ------------- ------------ 5,242,903 7,979,456 Net under (over) billed receivables from completed contracts 478,121 (90,795) ------------- ------------ $ 5,721,024 $ 7,888,661 ============= ============
MODTECH HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued These amounts are shown in the accompanying consolidated balance sheets under the following captions:
2000 2001 ----------- ----------- Costs and estimated earnings in excess of billings on uncompleted contracts $ 9,217,246 $10,076,529 Costs and estimated earnings in excess of billings on completed contracts 506,843 33,581 ----------- ----------- Costs and estimated earnings in excess of billings on contracts 9,724,089 10,110,110 ----------- ----------- Billings in excess of costs and estimated earnings on uncompleted contracts (3,974,344) (2,097,073) Billings in excess of costs and estimated earnings on completed contracts (28,721) (124,376) ----------- ----------- Billings in excess of costs and estimated earnings on contracts (4,003,065) (2,221,449) ----------- ----------- $ 5,721,024 $ 7,888,661 =========== ===========
(5) INVENTORIES Inventories consist of:
2000 2001 ------------ ------------ Raw Materials $ 8,393,568 $ 7,691,781 Work in process 1,413,381 968,136 Finished Goods 7,638 7,638 ------------ ------------ $ 9,814,587 $ 8,667,555 ============ ============
(6) PROPERTY AND EQUIPMENT, NET Property and equipment, net consists of:
2000 2001 ------------ ------------ Leasehold improvements $ 13,944,566 $ 14,217,751 Machinery and equipment 6,330,923 6,638,119 Office equipment 1,617,383 1,855,283 Land -- 923,484 Construction in progress 516,866 975,474 Trucks and automobiles 626,407 587,769 Buildings -- 392,690 Land improvements -- 303,667 ------------ ------------ 23,036,145 25,894,237 Less accumulated depreciation and amortization (8,497,911) (10,602,186) ------------ ------------ $ 14,538,234 $ 15,292,051 ============ ============
MODTECH HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (7) GOODWILL Goodwill and accumulated amortization consists of the following:
2000 2001 ------------- ------------- Goodwill $ 116,618,973 $ 118,018,705 Less accumulated amortization (5,462,045) (8,406,680) ------------- ------------- $ 111,156,928 $ 109,612,025 ============= =============
(8) LONG-TERM DEBT AND REVOLVING CREDIT LINE The Company has a $66 million credit facility with a bank. The credit facility provides for a $40 million revolving credit line and a 5-year term loan of $26 million. The credit facility is secured by all the Company's assets, as well as the Company's stock ownership in its subsidiaries. The credit facility expires in December 2006. As of December 31, 2000 and 2001, $6,500,000 and $9,100,000, respectively, was outstanding on the revolving credit line. The Company has one standby letter of credit issued under the credit facility for $3,016,000 on which no amounts were outstanding as of December 31, 2001. Indebtedness under the credit facility bears interest at LIBOR plus additional interest of between 1.25% and 1.75%, or the Federal funds rate plus additional interest of between 0% to 0.5%. The additional interest charge is based upon certain financial ratios. The credit facility contains various financial covenants for which the Company was in compliance at December 31, 2001, including restrictions on additional borrowings. The term loans are subject to mandatory repayment in certain events, including from the proceeds of any securities offerings by the Company. Long-term debt consists of:
2000 2001 ------------ ------------ Term Loan $ 30,000,000 $ 26,000,000 Delayed Draw Term Loan 2,000,000 -- ------------ ------------ 32,000,000 26,000,000 Less current portion of long-term debt (8,400,000) (7,000,000) ------------ ------------ $ 23,600,000 $ 19,000,000 ============ ============
Long-term debt maturities for the next five years are as follows: $7,000,000 in 2002, $7,000,000 in 2003, $6,000,000 in 2004, $4,000,000 in 2005 and $2,000,000 in 2006. MODTECH HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (9) INCOME TAXES The components of the 1999, 2000 and 2001 provision for Federal and state income tax (expense) benefit computed in accordance with SFAS No. 109 are summarized below:
1999 2000 2001 ------------- ------------- ------------- Current: Federal $ (4,968,324) $ (8,704,450) $ (8,445,508) State (1,387,457) (1,424,835) (1,830,019) -------------- -------------- -------------- (6,355,781) (10,129,285) (10,275,527) Deferred: Federal (640,252) 755,446 507,114 State (132,262) 136,981 162,704 ------------- ------------- ------------- $ (7,128,295) $ (9,236,858) $ (9,605,709) ============= ============= =============
Income tax (expense) benefit attributable to income from operations differed from the amounts computed by applying the U.S. Federal income tax rate to pretax income from operations as a result of the following:
1999 2000 2001 ------ ------ ------ Taxes, U.S. statutory rates (35.0%) (35.0%) (35.0%) State taxes, less Federal benefit (4.5) (5.2) (5.1) Effect of non-deductible expenses (5.8) (5.3) (4.9) Other (0.7) (1.5) (0.3) ------ ------ ------ Total taxes on income (46.0%) (47.0%) (45.3%) ====== ====== ======
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 2000 and 2001 are as follows:
2000 2001 ----------- ----------- Deferred tax assets: Reserves and accruals not recognized for income tax purposes $ 2,605,029 $ 2,987,514 State taxes 418,134 657,886 Other 878,195 847,703 ----------- ----------- Total gross deferred tax assets 3,901,358 4,493,103 Less valuation allowance -- -- ----------- ----------- Net deferred tax assets $ 3,901,358 $ 4,493,103 ----------- -----------
MODTECH HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
Deferred tax liabilities: Prepaids $ (84,525) $ (116,842) Depreciation (308,209) (194,966) Revenue recognition (45,877) (48,730) ----------- ----------- Total gross deferred tax liabilities (438,611) (360,538) ----------- ----------- Total net deferred tax assets $ 3,462,747 $ 4,132,565 =========== ===========
These amounts have been presented in the consolidated balance sheets as follows:
2000 2001 ----------- ----------- Current deferred tax assets $ 3,406,756 $ 3,574,631 Noncurrent deferred tax assets 55,991 557,934 ----------- ----------- Total net deferred tax assets $ 3,462,747 $ 4,132,565 =========== ===========
Management believes the existing net deductible temporary differences will reverse during periods in which the Company will have the ability to utilize the deductions to offset other reversing temporary differences which give rise to taxable income. (10) TRANSACTIONS WITH RELATED PARTIES SALES One of the companies to which the Company sells modular classrooms is affiliated with the Company through ownership by one of the Company's officers. The buildings are then leased to various school districts by the related company. The table below summarizes the related party classroom sales:
1999 2000 2001 ----------- ----------- ----------- Sales $ 6,271,813 $ 4,128,935 $ 1,604,099 Cost of goods sold 5,128,455 3,213,731 1,258,635 Gross profit percentage 18.23% 22.17% 21.54% =========== =========== ===========
The related party purchases modular relocatable classrooms from the Company on standard terms and at standard wholesale prices. MODTECH HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Due from affiliates includes a portion of unpaid invoices as a result of the above transactions. As of December 31, 2000 and 2001 these amounts totaled $476,200 and $478,809, respectively. Additional amounts arising from these transactions are included in the following captions:
2000 2001 --------- --------- Costs and estimated earnings in excess of billings on uncompleted contracts $ 800,756 $ 161,623 Billings in excess of costs and estimated earnings on uncompleted contracts (21,312) (32,998) ========= =========
NOTE RECEIVABLE At December 31, 2000, the Company had a note receivable from a related party partnership in the amount of $45,212. An officer of the Company is a partner in the partnership. Unpaid interest related to this note and two other related party notes with principal repayment in 1996 totaled $169,632 at December 31, 2000 and is included in due from affiliates. The note and interest were paid in full in 2001. OPERATING LEASES Certain manufacturing facilities are leased from related party partnerships under noncancellable operating leases through 2019. An officer of the Company is a partner in the partnerships. These related party leases require monthly payments which aggregate approximately $38,000. In connection with the lease at the Lathrop facility, the Company made an $83,000 security deposit during 1990. Future minimum lease payments under these leases are discussed in note 17. Included in cost of goods sold is $376,000, $409,000 and $457,000 in rent expense paid to related parties for the years ended December 31, 1999, 2000, and 2001, respectively. (11) 401(k) PLANS The Company has tax deferred savings plans under Section 401(k) of the Internal Revenue Code. Eligible employees can contribute up to 12% of gross annual earnings. Company contributions are made on a 50% matching basis of eligible contributions. The Company's contributions were $179,861, $369,430 and $342,018 in 1999, 2000, and 2001, respectively. (12) STOCK OPTIONS In 1989, the Company's shareholders approved a stock option plan (the 1989 Plan). The 1989 Plan provided for the grant of both incentive and non-qualified options to purchase up to 400,000 shares of the Company's common stock. The incentive stock options were granted only to employees, including officers of the Company, while non-qualified stock options were granted to employees, non-employee officers and directors, consultants, vendors, customers and others expected to provide significant services to the Company. The exercise price of the stock options cannot be less than the fair market value of the underlying stock at the date of the grant (110% if granted to an employee who owns 10% or more of the Company's common stock). All of these options were granted prior to 1999. In March of 1994, pursuant to a vote of the Board of Directors, a non-qualified option plan was approved (the March 1994 Plan). The March 1994 Plan provided for the grant of 200,000 options to purchase shares of the Company's common stock. The exercise price of the stock options cannot be less than the fair market value of the underlying stock at the date of the grant. All of these options were granted during 1994. MODTECH HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued In May of 1994, the Board of Directors voted and approved an additional stock option plan (the May 1994 Plan). The May 1994 Plan provided for the grant of both incentive and non-qualified options to purchase up to 500,000 shares of the Company's common stock. The incentive stock options were granted only to employees, including officers of the Company, while non-qualified stock options were granted to employees, non-employee officers and directors, consultants, vendors, customers and others expected to provide significant services to the Company. The exercise price of the stock options cannot be less than the fair market value of the underlying stock at the date of the grant (110% if granted to an employee who owns 10% or more of the Company's common stock). All of these options were granted prior to 1999. In July 1996, the Company's Board of Directors authorized the grant of options to purchase up to 500,000 shares of the Company's common stock. The non-statutory options were granted to employees, non-employee officers and directors, consultants, vendors, customers and others expected to provide significant service to the Company. The exercise price of the stock options cannot be less than the fair market value of the underlying stock at the date of the grant (110% if granted to an employee who owns 10% or more of the Company's common stock). All of these options were granted prior to 1999. In 1999, the Company's shareholders approved a stock option plan (the 1999 Plan). The 1999 Plan provides for the grant of non-statutory options to purchase up to 1,250,000 shares of the Company's common stock. The non-statutory options may be granted to employees, officers, directors, consultants, independent contractors and others expected to provide significant service to the Company. The exercise price of the stock options cannot be less than the fair market value of the underlying stock at the date of the grant (110% if granted to an employee who owns 10% or more of the Company's common stock). In 2000 and 2001, 368,747 and 577,809 shares were granted, respectively. Stock options outstanding under the Company's Stock Option Plans are summarized as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE --------- ---------------- December 31, 1998 1,360,027 $ 5.63 Granted 438,631 9.00 SPI Merger 389,909 2.26 Modtech Merger (178,864) 4.61 Exercised (268,149) 2.24 Terminated (71,513) 7.27 --------- -------- December 31, 1999 1,670,041 6.32 --------- -------- Granted 368,747 6.86 Exercised (213,655) 1.68 Terminated (3,532) 13.11 --------- -------- December 31, 2000 1,821,601 6.96 --------- -------- Granted 577,809 6.91 Exercised (108,350) 3.04 Terminated (85,326) 7.00 --------- -------- December 31, 2001 2,205,734 $ 7.14 ========= ========
MODTECH HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued All stock options have a maximum term of ten years and become fully exercisable in accordance with a predetermined vesting schedule which varies. The following information applies to options outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------- ----------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE ----------- ------------ -------- ----------- -------- Range of exercise prices $1.19 - $4.50 571,752 3.8 $ 2.17 517,752 $ 2.17 $6.00 - $10.00 1,436,341 8.1 7.56 466,002 8.15 $12.62 - $20.57 197,641 6.1 18.41 165,368 18.16 ---------- --------- 2,205,734 $ 7.14 1,203,122 $ 6.69 ========== =========
The per share weighted-average fair value of stock options granted during 1999, 2000 and 2001 was $5.06, $3.81 and $3.53, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
1999 2000 2001 ---- ---- ---- Expected dividend yield 0% 0% 0% Average risk-free interest rate 5.5% 6.2% 4.4% Volatility factor 69.40% 66.56% 61.56% Expected life 4 years 4 years 4 years ======= ======= =======
The Company applies APB Opinion No. 25 in accounting for its stock option plans and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1999 2000 2001 ----------- ------------ ------------ Net Income As Reported $ 8,387,009 $ 10,416,034 $ 11,622,022 Pro Forma 8,054,385 9,872,535 10,772,591 =========== ============ ============ Basic earnings per share As Reported $ 0.64 $ 0.78 $ 0.85 Pro forma 0.61 0.73 0.79 =========== ============ ============ Diluted earnings per share As Reported $ 0.59 $ 0.72 $ 0.82 Pro Forma 0.57 0.69 0.75 =========== ============ ============
MODTECH HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (13) SERIES A PREFERRED STOCK In conjunction with the Modtech Merger, 388,939 shares of Series A Preferred Stock were issued in February 1999. The Series A Preferred Stock has no voting rights, including, without limitation, the right to vote on the election of directors, mergers, reorganization or a sale of all or substantially all of the Company's assets. Dividends accrue on each share of Series A Preferred Stock at the rate of $0.40 per annum as declared. Dividends may not be paid on the Company's common stock until all accrued dividends on the Series A Preferred Stock are paid or declared and set aside for payment. Subject to proportional adjustments due to stock splits, reverse stock splits and similar transactions, each share of Series A Preferred Stock is convertible into one share of the Company's common stock at any time following two years after their date of issuance. Each outstanding share of Series A Preferred Stock will automatically be converted into the Company's common stock upon the fourth anniversary date of its issuance or upon a change in control. (14) EARNINGS PER SHARE The following table represents the calculation of basic and diluted earnings per common share under the provisions of SFAS No. 128:
1999 2000 2001 ----------- ----------- ----------- BASIC Net income $ 8,387,009 $10,416,034 $11,622,022 Dividends on preferred stock (note 13) 136,128 155,576 155,576 ----------- ----------- ----------- Net income available to common stock $ 8,250,881 $10,260,458 $11,466,446 =========== =========== =========== Basic weighted-average shares outstanding 12,986,067 13,237,867 13,411,368 =========== =========== =========== Basic earnings per common share $ 0.64 $ 0.78 $ 0.85 =========== =========== =========== DILUTED Net income $ 8,387,009 $10,416,034 $11,622,022 =========== =========== =========== Basic weighted-average shares outstanding 12,986,067 13,237,867 13,411,368 Add: Conversion of preferred stock 388,939 388,939 388,939 Exercise of stock options 829,472 730,535 621,894 ----------- ----------- ----------- Diluted weighted-average shares outstanding 14,204,478 14,357,341 14,422,201 =========== =========== =========== Diluted earnings per common share $ 0.59 $ 0.72 $ 0.82 =========== =========== ===========
Options to purchase 620,351 and 606,698 shares of common stock were outstanding during 2000 and 2001, respectively, but were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the common shares and therefore, the effect would be anti-dilutive. MODTECH HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (15) MAJOR CUSTOMER Sales to two major customers represented the following percentage of net sales:
1999 2000 2001 ---- ---- ---- Customer A 1% 6% 11% Customer B 8% 11% 11% ==== ==== ====
(16) SUPPLEMENTAL CASH FLOW DISCLOSURES SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1999 2000 2001 ----------- ----------- ------------ Cash paid during the year for: Interest $ 3,209,179 $ 4,587,398 $ 2,684,021 =========== =========== ============ Income taxes $ 2,320,000 $ 6,766,998 $ 12,160,000 =========== =========== ============
(17) COMMITMENTS AND CONTINGENCIES LAND LEASES The Company has entered into various noncancellable agreements to lease land at its manufacturing facilities through 2019. Minimum lease payments under these noncancellable operating leases for the next five years and thereafter are as follows: Year ending December 31: 2002 $ 1,788,000 2003 1,379,000 2004 941,000 2005 941,000 2006 941,000 Thereafter 6,143,000 ----------- $12,133,000 ===========
Of the $12,133,000 in future rental payments, $7,122,000 is payable to related parties (note 10). Rent expense for the years ended December 31, 1999, 2000 and 2001 was $2,139,000, $2,380,000 and $2,318,000, respectively. (18) WARRANTY The standard contractual warranty for the Company's modular buildings is one year, although it may be varied by contract specifications. Purchased equipment installed by the Company, such as air conditioning units, carry the manufacturers' standard warranty. To date, warranty costs incurred have been immaterial. MODTECH HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (19) PENDING CLAIMS AND LITIGATION The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the outcome of the claims will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. (20) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) In thousands, except per share amounts:
FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER -------------- ------------- -------------- ------------- 2001: Net sales $33,793 $63,559 $61,084 $42,680 Gross profit 6,498 12,453 11,025 6,072 Net income 1,821 4,725 3,720 1,356 Earnings per common share: Basic $ 0.13 $ 0.35 $ 0.27 $ 0.10 Diluted 0.13 0.33 0.26 0.10 2000: Net sales $49,380 $76,450 $65,182 $43,722 Gross profit 7,381 13,310 9,719 5,822 Net income 1,747 4,530 3,032 1,107 Earnings per common share: Basic $ 0.13 $ 0.34 $ 0.23 $ 0.08 Diluted 0.12 0.31 0.21 0.08
Schedule II MODTECH HOLDINGS, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 1999, 2000, and 2001
BALANCE AT ACQUIRED AMOUNTS BEGINNING THROUGH CHARGED BALANCE AT DESCRIPTION OF YEAR ACQUISITION TO EXPENSE DEDUCTIONS END OF YEAR -------------------------------------------------------------------------------------------------- Allowance for contract adjustments: Year ended December 31, 1999 $ 429,107 $ 50,000 $ 280,000 $ (30,988) $ 728,119 ========= ========= ========= ========== ========== Year ended December 31, 2000 $ 728,119 $ -- $ -- $ (25,000) $ 703,119 ========= ======== ======== ========== ========== Year ended December 31, 2001 $ 703,119 $ 50,000 $ 683,363 $ (11,482) $1,425,000 ========= ========= ========= ========== ==========
EXHIBIT NUMBER NAME OF EXHIBIT 3.1(1) Certificate of Incorporation of Modtech Holdings, Inc. 3.2(1) Bylaws of Modtech Holdings, Inc. 10.1(2) Modtech, Inc.'s 1996 Stock Option Plan. 10.2(3) Transaction Advisory Agreement. 10.3(4) Employment Agreement between the Company and Evan M. Gruber. 10.4(4) Employment Agreement between the Company and Patrick Van Den Bossche. 10.5(4) Employment Agreement between the Company and Michael G. Rhodes. 10.6(5) Lease between the Company and Pacific Continental Modular Enterprises, relating to the Barrett Street property in Perris, California. 10.7(5) Lease between the Company and BMG, relating to the property in Lathrop, California. 10.8(5) Form of Indemnity Agreement between the Company and its executive officers and directors. 10.9(3) Financial Advisory Services Agreement. 10.10(6) Credit Agreement, dated February 16, 1999 10.11 Credit Agreement, dated December 26, 2001 23.1 Independent Auditors' Consent (1) Incorporated by reference to Modtech Holdings, Inc.'s Registration Statement on Form S-4 filed with the Commission on October 27, 1998 (Commission File No. 333-69033). (2) Incorporated by reference to Modtech, Inc.'s Registration Statement on form S-8 filed with the Commission on December 11, 1996 (Commission File No. 333-17623). (3) Incorporated by reference to Amendment No. 2 to Modtech Holdings, Inc.'s Registration Statement on Form S-4, filed with the Commission on January 11, 1999 (Commission File No. 333-69033). (4) Incorporated by reference to Amendment No. 1 to Modtech Holdings, Inc.'s Registration Statement on Form S-4, filed with the Commission on December 15, 1998 (Commission File No. 333-69033). (5) Incorporated by reference to Modtech, Inc.'s Registration Statement on Form S-1 filed with the Commission on June 6, 1990 (Commission File No. 033-35239). (6) Incorporated by reference to Modtech Holdings, Inc.'s Form 10-K filed with the Commission on April 15, 1999 (Commission File No. 000-25161).