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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1996
[ ] 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. 000-18680
MODTECH, INC.
(Exact name of registrant as specified in its charter)
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CALIFORNIA 33-0044888
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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2830 BARRETT AVENUE, PERRIS, CALIFORNIA 92572
(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 28, 1997 was $30,746,093. As of March 28, 1997, shares
entitled to cast an aggregate of 8,670,306 votes were outstanding, including
8,670,306 shares of registrant's Common Stock.
The documents incorporated by reference into this Form 10-K and the Parts
hereof into which such documents are incorporated are: The information required
by Part III of form 10-K is incorporated herein by reference to registrant's
definitive proxy statement to be filed not later than 120 days after the end of
the fiscal year covered hereby.
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PART I
ITEM 1. BUSINESS
GENERAL
The Company designs, manufactures, markets and installs modular
relocatable classrooms. The Company's classrooms are sold 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. Modular classrooms are also sold
to day care facilities and private schools.
Many of the modular classrooms manufactured by the Company are
standardized factory-built units. The Company also constructs and installs
more expensive custom-built units that are fabricated on-site, allowing for
more varied dimensions and customization of both the interior and the exterior
to meet the specialized needs of customers. The Company's classrooms vary in
size from two modular units containing a total of 960 square feet to 20 units
which can be joined together to produce a facility comprising 9,600 square
feet. Larger configurations are also possible. After the components or
completed units are manufactured, they are transported to the customer's school
site on trucks. Upon delivery, the classrooms are assembled or secured to a
foundation, structurally connected and completed under the Company's
supervision. The Company's classrooms can also be designed and constructed to
blend in with the permanent portion of the school buildings being constructed
by incorporating a classroom under a common roof extension creating the
appearance that it is an integral part of the school facility. The majority of
the Company's business historically has consisted of orders for additional
classrooms to accommodate enrollment growth at existing schools.
The manufacturing process of the Company is vertically integrated in
that the Company fabricates many of the components used in the construction of
its classrooms. The Company believes that this capability enables it to be one
of the low cost producers in California of standardized modular relocatable
classrooms. In addition, the Company's expertise in site preparation and
on-site installation enables it to market and sell higher-priced customized
classroom units that are modular in design but have custom features that are
typically constructed on-site.
The Company's executive offices are located at 2830 Barrett Avenue,
Perris, California 92572, and its telephone number is (909) 943-4014.
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INDUSTRY OVERVIEW
In recent years, the growth in population in California, both from
births and from immigration, has led to increasing school enrollments. In
1989, there were approximately 4,668,000 students in grades kindergarten
through 12 in public schools in California. Enrollment increased approximately
17% in public schools for grades kindergarten through 12 from 1979 to 1989. As
a result, classrooms in many California school districts currently are reported
to be among the most crowded in the nation. The California Department of
Finance projects that student enrollment in grades kindergarten through 12 will
increase by approximately 48% through the end of the decade. 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 Official Summary of the March 1996 California ballot pamphlet
reported that, as of May 1995, applications submitted by school districts to
the State of California for funding of new school buildings totalled
approximately $5.3 billion and applications for state funding to reconstruct or
modernize school buildings totalled approximately $1.8 billion. See
"Regulation--State Funding."
Proposition 13, a ballot measure approved by California voters in
1978, 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 costs of adding
additional 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. 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.
Additionally, in 1986, California adopted legislation that requires, with
certain exceptions, that 30% of all new classrooms constructed using state
funds be relocatable structures. This requirement may be satisfied through the
purchase or lease of the Company's classrooms. See "Regulation."
For these reasons, among others, the demand for modular relocatable
classrooms increased during the later half of the 1980's. Based upon published
industry data and other information available to the Company, the Company
believes that sales of modular relocatable classrooms within California were in
excess of $175,000,000 during the year ended December 31, 1989. However, due
in large part to the increasing budget shortfalls that the State of
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California and many California school districts have experienced over the
recent past, the Company believes that sales of modular classrooms within
California had declined to approximately $125,000,000 during the year ended
December 31, 1992. As the State of California budget deficit has been
ameliorated, the industry has begun to benefit. Additionally, in July 1996,
the State of California enacted the Class Size Reduction Program. The goal of
which will reduce class size in elementary school - kindergarten through the
third grade level. This has also increased the demand for relocatable
classrooms. The Company believes that sales of modular classrooms within
California grew to approximately $175,000,000 during the year ended December
31, 1996.
The market for modular classrooms in California is divided among a
number of companies whose share of the market is smaller than that of Modtech.
The Company believes that it is currently the largest modular classroom
manufacturer in the State of California. See "Competition."
When compared to the construction of a conventionally built classroom,
modular classrooms offer a number of advantages, including, among others:
Shorter Construction Time -- A modular classroom can be built
and ready for occupancy in a shorter period of time than that
required for state approval and construction of a conventional
facility;
Lower Cost -- The cost of the Company's standard classroom may
be as low as $25,000 installed as compared to $60,000 to
$70,000 for conventional construction of a comparable
classroom;
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 -- Modular classrooms may be leased on a
long or short-term basis from manufacturers and leasing
companies. In addition, relocatable classroom lease payments
made by California school districts pending funding and
completion of permanent facilities may be credited against
matching contributions required to be made by school districts
seeking funding for school construction from the State. See
"Regulation."
MODULAR CLASSROOMS
The Company manufactures and installs both standard, largely
pre-fabricated modular relocatable classrooms, and 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.
Typical prices for the
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Company's standard classrooms range from $25,000 to $29,000, while prices for a
custom classroom generally exceed $40,000, 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 shear wall
design, with two modules connected side by side to complete a 24 by 40 foot
classroom. Classrooms with other dimensions are produced from time to time to
satisfy particular school design requirements.
Custom built classrooms contain design variations and dimensions such
as ceiling height, pitch, overall size and interior configuration. These units
typically are not assembled at the factory but instead are shipped in pieces,
including floors, walls and roofs, and assembled on-site. Contracts for custom
built units often include the design, engineering and layout for an entire
school or an addition to a school, and involve site preparation, grading,
concrete and asphalt work and landscaping. Customized classrooms are generally
more expensive and take longer to complete than the Company's standard
classrooms.
The interior and exterior of all of the Company's modular classrooms
can be customized by employing different materials, design features and floor
plans. Most classrooms are open, but the interior of the buildings can be
divided into individual rooms by permanent or relocatable partitions. The
floor covering is usually carpet but may be linoleum or wood depending upon the
intended use of the classroom. Interior wall material is usually vinyl covered
firtex over gypsum board, while other finishes such as porcelain enamel or
painted hardboard may be used in such places as restrooms and laboratories.
The exterior of the units is typically plywood siding, painted to the
customer's specifications, but other common siding material may also be
applied.
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
to California school districts. One of these leasing companies is affiliated
with the Company through common ownership of two of the companies directors.
The Company's
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classrooms are also sold to day care facilities and private schools. Because
of transportation costs, the Company believes that it can market and compete
cost-effectively within a radius of approximately 300 miles from any one of its
production facilities. Parts of Nevada, including Las Vegas and Reno, and
Arizona, including metropolitan Phoenix, are within this distance. Although
the Company has not had any sales in either of these areas, it is continuing to
explore the feasibility of entering those markets.
During the year ended December 31, 1996, sales to individual school
districts and third party lessors to school districts was approximately 85% of
the Company's net sales, of which sales to affiliated leasing companies
accounted for approximately 3%. In 1995 sales to School Districts was
approximately 91% and Third Party lessors was approximately 3% of the Company's
net sales. See "Management - Certain Transactions." Sales directly to the
State of California during fiscal 1996 increased to approximately 13% of the
Company's net sales as compared to 9% in 1995.
Conventional school facilities constructed by school districts using
funds from the State Office of Public School Construction formerly known as the
Office of Local Assistance typically require two to three years for approval
and funding. Because modular relocatable classrooms are treated by the State
of California as personal property for purposes of capital expenditures, this
process can be shortened to as little as 90 days. 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 "Regulation."
MARKETING
Most of the Company's contracts are awarded on an open bid basis. The
marketing process for many of the Company's contracts begins prior to the time
the bid process begins. After the Company selects bids or contracts that it
desires to pursue, the Company's marketing and engineering personnel interface
directly with various school boards, superintendents or architects during the
process of formulating bid or contract specifications. The Company prepares
its bids or proposals using various criteria, including current material
prices, historical overhead costs and a targeted profit margin. Substantially
all of the Company's contracts are turnkey, including engineering and design,
manufacturing, transportation, installation and necessary site work. Open bid
contracts are normally awarded to the lowest responsible bidder.
The Company's classroom sales force is currently divided into three
marketing regions: Northern, Central and Southern California. The Company
currently employs three salesmen, each of whom is compensated on a commission
basis. Further, the Company employs an additional salesman whose focus is the
sale of buildings to the telecommunications and commercial markets.
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PERFORMANCE BONDS
A substantial portion of the Company's sales require that the Company
provide bonds to ensure that the contracts will be performed and completed in
accordance with contract terms and conditions, and to assure that
subcontractors and materialmen will be paid. From time to time, the Company's
bonding capacity has limited its ability to bid for large jobs and perform work
concurrently on a large number of contracts. To assist the Company in
obtaining performance bonds, Messrs. Gruber, Bashaw, Goldenetz and Rhodes, the
Company's principal shareholders/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. See "Item 7 - Management's Discussion and
Analysis of Results of Operations and Financial Condition - Liquidity and
Capital Resources - Bonding Capacity."
DESIGN AND ENGINEERING DEPARTMENT
The California Department of State Architects regulates all school
construction on public land. See "Regulation." The Company subcontracts with
structural engineering firms to interface with each school district's architect
or engineer to process project specifications through the Department of State
Architects.
The Company's classrooms are also manufactured and installed in
accordance with the applicable state uniform building code, which supersedes
all local building codes for purposes of school construction. The classrooms
must also comply with accessibility requirements for the handicapped, seismic
and fire code requirements. The Company has also standardized the designs and
many of the materials of its classrooms to facilitate efficiency in its
manufacturing process. See "Regulation."
MANUFACTURING
The Company uses an assembly-line approach in the manufacture of its
standardized classrooms. The process begins with the fabrication of the steel
floor joists. The floor joists are welded to steel frames to form the floor
sub-assembly, which is covered by plywood flooring. Metal roof trusses and
structural supports are fabricated separately and added as the unit progresses
down the assembly-line. Installation of walls, insulation, suspended grid
ceilings, electrical wiring, air conditioning, windows, doors, fire sprinklers,
plumbing and chalk boards follow, with painting and finishing crews completing
the process. The average number of months required to complete a typical
contract for the manufacture and installation of one to ten classrooms is
approximately six months. 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.
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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,
downspouts, 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 currently has four manufacturing facilities. Two are
located in Southern California, in Perris which is approximately 60 miles east
of Los Angeles. The Company has another two facilities near Lathrop,
California. Lathrop is located approximately 75 miles east of San Francisco.
The Company's plants currently have a total of seven assembly lines. However,
with the decline in sales in 1991 through 1995, the Company initiated a cost
control program which included lay-offs of approximately 80% of the staff as
compared to its June 1991 work force, has temporarily closed it's Lathrop
plant. It will reopen the Lathrop plant in early 1997. The Company's plants
operate five days per week.
The Company believes that there are multiple sources of supplies
available for all raw materials and equipment used in manufacturing its
classrooms, most of which are standard construction items such as steel,
plywood and wallboard. 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.
The standard contractual warranty for the Company's modular classrooms
is one year, although it may be varied by contract specifications. Purchased
equipment installed by the Company, such as air conditioning units, carry the
manufacturers' standard warranty. Warranty costs have not been material in the
past.
ON-SITE INSTALLATION
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.
Completed standard classroom units, or components used in customized
units, are loaded onto specially designed flat-bed 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
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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.
BACKLOG
The Company manufactures classrooms to fill existing orders only, and
not for inventory. As of December 31, 1994 the backlog of sales orders was
approximately $7,000,000. The backlog at December 31, 1995 declined to
$4,000,000 and increased to approximately $55,000,000 at December 31, 1996.
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 and
as firms in our industry compete for market share in a declining market,
margins decrease. The market is divided among a number of companies whose
share of the market is smaller than that of Modtech. The Company believes that
the nature of the industry's bidding process and its regulated environment
serve as barriers to market entry, and that the expertise of its management
gives it a competitive advantage over competitors. Nevertheless, the Company
believes that additional competitors may enter the market in the future, some
of whom may have significantly greater capital and other resources than are
available to the Company, and that competition may therefore increase.
The Company believes that, based upon 1996 net sales, it is the
largest modular classroom building manufacturer in California. 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.
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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 ability to compete cost-effectively in Northern California was
also a primary motivation behind the Company's decision to build a new
manufacturing facility in Lathrop, California.
The primary competitors of the Company are believed to be Aurora
Modular Industries and American Modular Systems in the market for standardized
classrooms; and Profiles Structures, Inc. and Design Mobile Systems in the
market for higher-priced, customized classrooms.
REGULATION
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, the
manner in which available funding is to be spent by the school districts and
the way in which school classrooms are to be manufactured. Shortages of
financial resources at either state or local levels or changes in legislation
could have a material adverse effect on the Company.
FINANCING AND EXPENDITURES
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"). In 1978, Proposition 13 was approved, rolling back property taxes and
limiting the ability of local school districts to rely upon revenue from such
taxes to finance the construction of school facilities. As a result, school
districts have been forced to rely extensively upon state assistance, the
imposition of developer fees and the approval of local bond issues, in order to
raise the capital required to construct new classrooms. Historically, the
primary source of financing for the purchase or lease of relocatable classrooms
has been state funding.
STATE FUNDING
In 1988, Proposition 98 was approved, requiring the State to allocate
annually from the State's budget, for the support of school districts and
community college districts, a minimum amount
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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 affect 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. However, during 1991, the State incurred a
deficit. Governor Wilson's deputy finance director, Cynthia Katz, stated "the
California economy is in the worst slump since the 1930's."
The State of California is empowered to issue general obligation bonds
to finance school facilities programs. The most important source of funding at
the State level for new school facilities has historically been the issuance of
statewide general obligation bonds. 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. General obligation bonds are repaid out of the State's
general funds. In early 1996, the California State Legislature agreed to place
on the March 1996 ballot, $3.0 billion of bonds for new school construction.
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 these 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. As a condition of funding any project under this
program, at least 30% of classrooms to be constructed 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. The Company's classrooms qualify as
relocatable structures. However, there are alternative structures that are
less modular in nature than the Company's classrooms that may also satisfy this
requirement. State funds under this program are not available to school
districts which have an adequate amount of square footage available. However,
when determining the available square footage of a school district, square
footage attributable to relocatable classrooms currently leased by the school
district or leased prior to January 1, 1991 is excluded from the calculation.
This method of making the calculation encourages the use of relocatable
classrooms.
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Recently, the State 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 below must submit a study examining the feasibility of implementing
in the district a year-round educational program that is designed to increase
pupil capacity in the district or in overcrowded high school attendance areas.
The feasibility study requirement is waived, however, if the district
demonstrates that emergency or urgent conditions exist in the district that
necessitate the immediate need for relocatable buildings. The demand for new
school facilities, including relocatable classrooms, would be adversely
affected in the event that a significant number of California school districts
implemented year-round school programs. In addition, a significant increase in
the level of voluntary or mandatory busing of students from overcrowded schools
to schools with excess capacity could adversely affect demand for new school
facilities. At this point in time, it is too early to tell whether the
adoption of year round school programs would have an effect upon the
seasonality of the Company's operations. See "Item 7 - Management's Discussion
and Analysis of Results of Operations and Financial Condition - Results of
Operations - Seasonality."
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 $35,000,000 per year from available
funds to purchase relocatable classrooms (the classrooms manufactured by the
Company are relocatable for purposes of this statute) 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. At present, the State has fully
utilized all funds available under this program to purchase relocatable
classrooms under this statute.
In July 1996, California enacted the Class Size Reduction Program.
The goal of this program will reduce Class Size in elementary school -
kindergarten through the third grade level. $295,000,000 was budgeted to cover
the costs of additional classrooms which may be modular classrooms.
LOCAL FUNDING
Local school districts in California have the ability to issue local
general obligation bonds for the acquisition and improvement
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of real property for school construction. These bond issues require the
approval of two-thirds of the voters in the district and are repaid using the
proceeds of increases in local property taxes. A local school district may
also levy developer fees on new development projects in the district, subject
to a maximum rate set by state law. The developer fees can only be levied if
the project can be shown to contribute to the need for additional school
facilities and the fee levied is reasonably related to such need. In addition,
California law provides for the issuance of bonds by Community Facilities
Districts which can be formed by a variety of local government agencies,
including school districts. These districts, known as "Mello-Roos" districts,
can have flexible boundaries and the tax imposed to repay the bonds can be
based on property use, acreage, size of the family or other additional factors.
CONSTRUCTION OF SCHOOLS
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 manufacturer obligated to reimburse the Department for
the costs of such inspection.
Legislation adopted in 1989 provides that school districts which
currently lease any building which does not meet the prescribed structural
standards must have replaced nonconforming
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buildings with conforming ones by September 1, 1990. However, any district has
the right to request a one-time waiver for a maximum of three years upon
presentation of satisfactory evidence to the State Allocation Board that the
district is proceeding in a timely fashion with a program that will eliminate
the need for the nonconforming facilities within that time period. During
1992, the State authorized districts to renew the waiver for one additional
period of three years. The Company understands that a number of school
districts have requested and been granted such waivers. Based upon information
received by the State Allocation Board from school districts and provided to
the Company, it is believed that there are more than 4,500 trailers currently
being used as classrooms by school districts throughout California that
eventually must be replaced with conforming facilities by these school
districts.
In addition to approvals by the Department of State Architects,
licensed inspectors representing various school districts regularly visit each
manufacturing facility of the Company to inspect classrooms for structural
integrity. On-site inspections after installation are also made by local fire
departments for purposes of determining adequate accessibility.
The Company has a general contractor's license in the State of
California.
EMPLOYEES
As of December 31, 1995, the Company had 93 employees, as compared to
460 employees in June 1991, including 69 in manufacturing, 5 in sales, 12 in
operations and 7 in general management and administration. At December 31,
1996, the Company had 536 employees, including 504 in manufacturing, 4 in
sales, 14 in operations and 14 in general management and administration.
The Company's employees are not represented by a labor union, and it
has experienced no work stoppage. The Company believes that its employee
relations are good.
ITEM 2. PROPERTIES
The Company's principal executive and administrative facilities are
located in approximately 11,400 square feet of modular buildings at its primary
manufacturing facility located in Perris, California. The Company's main
manufacturing facility in Perris occupies twenty-five acres, with approximately
200,000 square feet of covered production space under roof, pursuant to a lease
expiring in 2014. The Company's 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 as a metal
working facility. All of the Company's current facilities are leased from
14
<PAGE> 15
affiliates. The Company's third plant which has been temporarily closed,
consists of 400,000 square foot manufacturing facility on a 30-acre site in
Lathrop, California. The fourth plant, which was leased in October 1996,
consists of approximately 50,000 square feet of manufacturing areas on a 4 acre
site in Patterson, California.
The Company believes that its existing facilities are well-maintained
and in good operating condition. The Company believes that its facilities
exceed the requirements for its immediately foreseeable business needs.
Currently the Company is utilizing two of the six production lines.
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.
15
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market
System under the symbol MODT. 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:
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
3/31/96 3-5/8 2-1/4
6/30/96 6-1/4 2-7/8
9/30/96 9-5/8 3-1/2
12/31/96 9-1/2 6-7/8
</TABLE>
As of March 28, 1997, the price per share was $ 12-1/8.
There were 81 shareholders as of record as of December 31, 1996.
Since the closing of its initial public offering on July 21, 1990, the Company
has not declared cash dividends on its Common Stock and does not expect to pay
cash dividends on its Common Stock in the foreseeable future.
16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
Income Statement Data
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales $31,192 $19,658 $20,355 $19,386 49,886
Cost of sales 30,601 21,764 17,766 16,400 42,629
------- ------- ------- ------- -------
Gross profit/(loss) 591 (2,106) 2,589 2,986 7,257
Selling, general &
administrative expenses 2,193 1,871 1,554 1,613 2,345
Restructuring Charge - 2,470 - - -
------- ------- --- ------ -------
Income/(Loss) from operations (1,602) (6,447) 1,035 1,373 4,912
Interest income (expense), net (705) (565) (471) (388) (422)
Other income (expense) (19) 47 42 1 (13)
------- ------ -------- ------ --------
Income/(Loss) before Income taxes (2,326) (6,965) 606 984 4,477
Income (taxes) (40) (1) (4) (19) (208)
---- ------- ------ -------- ---------
Net income/(loss) $(2,366) $(6,966) $602 $965 $ 4,269
======== ======= ==== ==== =========
Earnings/(Loss) per share $ (.64) $ (1.97) $ .11 $ .14 $ .47
======== ======== ====== ===== =======
Weighted average shares outstanding 3,701 3,529 5,294 6,712 9,041
- - - -
</TABLE>
- ----------------------------------------
17
<PAGE> 18
Balance Sheet Data
(In thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ----- ----
<S> <C> <C> <C> <C> <C>
Working Capital $6,158 $ 3,063 $ 4,403 $ 4,388 $ 14,069
Total Assets 28,903 16,620 15,919 15,153 34,029
Long Term Obligations 6,075 6,505 4,400 3,590 7,844
Shareholders' Equity 11,709 4,732 8,019 8,743 15,313
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
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.
<TABLE>
<CAPTION>
Percentage of Net Sales
For Years Ended December 31
---------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Gross profit 12.7 15.4 14.6
Selling, general
& administrative
expenses 7.6 8.4 4.7
Income from
operations 5.1 7.0 9.8
Interest income/
(expense), net (2.3) (2.5) (.8)
Income before
income taxes 3.0 5.0 9.0
</TABLE>
Net sales for the year ended December 31, 1996 increased to
$49,886,000 from $19,386,000 in 1995, an increase of 157%. Net sales for the
year ended December 31, 1995 decreased to $19,386,000, from $20,355,000 in
1994, a decrease of $969,000 or 4%. Net sales for the year ended December 31,
1994 increased to $20,355,000, from $19,658,000 in 1993, an increase of
$697,000 or 4%. The change in 1996 was due principally to the amelioration of
the State of California budget deficit and to the newly enacted Class Size
Reduction Program in California elementary schools - kindergaten through third
grade levels.
18
<PAGE> 19
Gross profit as a percentage of net sales was a profit of 12.7% in
1994, 15.4% in 1995 and 14.6% in 1996. The increase of gross profit in 1995 is
principally due to the realization of cost cutting measures and in 1996, the
decrease principally due to product mix.
In 1994 selling, general and administrative expense, as a percentage
of net sales, decreased to 7.6%. The decrease reflects the reductions in
compensation paid to employees, the number of employees and other cost cutting
measures. In 1995, selling, general and administrative expenses increased by
$59,000 or 3.7% and increased as a percentage of sales from 7.6% to 8.4%. This
increase reflects the additional costs associated with the increase in the
number of employees. In 1996, selling, general and administrative expenses
increased by $732,000 to $2,345,000 due to the increase in the number of
employees and an increase in selling costs. As a percentage of sales, selling
general and administractive expenses decreased to 4.7% from 8.4%.
The decline in net sales in 1993, coupled with a substantial reduction
in gross profit margin without corresponding reductions in selling, general and
administrative expenses, led the Company to report a loss from operations of
$6,447,000 in 1993. In September 1991, the Company announced plans to lay off
approximately 15% of its workforce, and in November 1991 increased the layoffs
to approximately 30%. In March 1992, the Company increased the total layoffs
to approximately 40% when compared to the workforce at June 30, 1991. By
January 1993, the workforce decreased to 218, which represented total layoffs
of 53%. In addition, each of Messrs. Bashaw, Goldenetz and Gruber agreed to a
25% salary reduction, Mr. Goldenetz took a leave of absence without salary for
the balance of 1992, and each of the Company's other top management personnel
agreed to a 10% salary reduction. The remaining executive officers have now
reduced their salaries by at least 50%. The cost cutting measures were taken
to improve the Company's short term liquidity. In the third quarter of 1993,
the Company determined that there was no longer any further economic benefit of
the purchase of "Del-Tec" nor the non-competition agreements due to the
continued decline in that market segment. The write-off resulted in a
restructuring charge in 1993 of $2,470,000, primarily due to the
non-competition agreements and the acquisition of "Del-Tec".
Net interest expense for the year ended December 31, 1994 decreased
from $565,000 in 1993, to $471,000 in 1994, a 17% decrease, as borrowing
decreased during part of the year due to the decline in sales. Net interest
expense further decreased in 1995 to $388,000, a 17% decrease, as the Company
used the proceeds from its Convertible preferred stock issuance to decrease its
borrowings. In 1996, net interest expense increased by $34,000 due to slightly
higher borrowings. The Company continues to borrow under its bank revolving
line of credit to support its accounts receivable and work-in-progress
inventories. See "Liquidity and Capital Resources."
19
<PAGE> 20
SEASONALITY
Historically, the Company's quarterly revenues have been highest in
the second and third quarters of each calendar year because a large number of
orders for modular classrooms placed by school districts require that
classrooms be constructed, delivered and installed in time for the upcoming new
school year which generally commences in September. The Company has typically
been able to add employees as needed to respond to the corresponding increases
in manufacturing output required by such seasonality to meet currently
foreseeable increases in this seasonal demand. In addition, the Company's
operating margins may vary on a quarterly basis depending upon the mix of
revenues between standardized classrooms and higher margin customized
classrooms and the timing of the completion of large, higher margin customized
contracts.
INFLATION
During the past three years, the Company has not been adversely
affected by inflation, because it has been generally able to pass along to its
customers increases in the costs of labor and materials.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF WORKING CAPITAL AND CAPITAL EXPENDITURES.
In 1994, the Company had a credit agreement with a finance company
expiring in March 31, 1996 permitting maximum advances of $4,000,000 with the
actual borrowing limited to specific percentages of eligible receivables,
inventory and equipment. The amount available at December 31, 1994 was the
maximum credit amount of $4,000,000. At December 31, 1994, the Company had
outstanding advances of $1,900,000.
In 1995, the Company entered into a new revolving loan commitment that,
as amended at March 1997, will expire September 1999. The Company is entitled
to borrow, from time to time, up to $15,000,000 with the actual borrowings
limited to specific percentages of eligible receivables, inventory and
equipment. On December 31, 1996, borrowings were limited to $8,135,892 and
actual outstanding borrowings were $5,943,853. The interest rate is calculated
at the prime lending rate (8.25%) at December 31, 1996) plus two percent (2%)
per annum.
In addition, the Company has one standby letter of credit with the
bank for $2,035,845 on which no amounts were outstanding as of December 31,
1996.
20
<PAGE> 21
As the Company markets and sells its modular classrooms primarily to
California school districts, the Company's liquidity could be effected,
possibly adversely, by the State of California's ability to raise funds from
the sale of bond issues or tax revenues.
21
<PAGE> 22
BONDING CAPACITY.
Many of the contracts on which the Company bids require the Company to
provide various forms of performance bonds which ensure that the contracts will
be completed in accordance with their terms. The Company typically seeks to
obtain these bonds from bonding companies. 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 level of working capital, shareholders' equity and outstanding
indebtedness. From time to time, the Company has had difficulty in obtaining
bonding for a given project. The Company believes that its periodic difficulty
in obtaining the necessary bonding has been attributable to the levels of its
working capital and shareholders' equity, and not to concerns about the
Company's ability to perform the work required under the contract.
INDUSTRIAL DEVELOPMENT BOND FINANCING.
On June 13, 1990, the Industrial Development Authority of the County
of San Joaquin, California issued $4,200,000 of Industrial Development Bonds,
the net proceeds of approximately $4,000,000 were loaned to the Company to
finance the construction of a 405,000 square foot manufacturing facility in
Lathrop, California. The facility was constructed on land leased to the
Company by a partnership owned, in part, by the Company's three executive
officers. The lease is for a term of 30 years and expires December 31, 2019.
The loan proceeds, together with approximately $2,000,000 of the net proceeds
to the Company from the initial public offering, was used to complete the
construction of this facility, which was substantially completed in January
1991, and to purchase and install related manufacturing and other capital
equipment. The loan to the Company must be repaid over a 26 year period, and
bears interest at a variable rate (initially 6.75% per annum), which is
repriced weekly, subject to conversion to a fixed rate at the option of the
Company under certain conditions. The Company's obligation to make payments of
principal and interest on this loan is secured by an irrevocable letter of
credit obtained by the Company from its lender, Union Bank of California N.A.
Accordingly, the Company's borrowing capacity will be reduced during the period
the letter of credit is outstanding.
CAPITAL RESOURCES.
Management believes that the Company's existing product lines and
manufacturing capacity will enable the Company to generate sufficient cash
through operations, supplemented by continued use of its existing line of
credit, to finance the Company's business at current levels over the next
twelve months. The Company does not expect to make significant purchases of
plant, property or equipment during the next twelve months.
22
<PAGE> 23
However, additional cash resources may be required if the Company's rate of
growth exceeds currently anticipated levels. For example, it will be 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 would require significant
additional capital. For these reasons, among others, the Company may seek
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
the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, along with the notes thereto
and the report of Independent Certified Public Accountants thereon, required to
be filed in response to this Item 8 are attached hereto as exhibits under Item
14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
23
<PAGE> 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item is set forth in the Proxy Statement
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is 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 is set forth in the Proxy Statement
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is set forth in the Proxy Statement
and is incorporated herein by reference.
24
<PAGE> 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits and Financial Statement Schedules
1 & 2. Index to Financial Statements
The following financial statements and financial statement schedules
of the Company, along with the notes thereto and the Independent Auditors'
Reports, are filed herewith, as required by Part II, Item 8 hereof.
Financial Statements
Independent Auditors' Reports
Balance Sheets - December 31, 1995 and 1996
Statements of Income - For the Years Ended December 31, 1994, 1995 and
1996
Statements of Shareholders' Equity - For the Years Ended December 31,
1994, 1995 and 1996
Statements of Cash Flows - For the Years Ended December 31, 1994, 1995
and 1996
Summary of Significant Accounting Policies
Notes to Financial Statements
Schedules Included - For the Years Ended December 31, 1994, 1995 and
1996
Schedule II - Valuation and Qualifying Accounts
All other Financial Statement Schedules have been omitted because the
required information is shown in the financial statements or notes thereto, the
amounts involved are not significant, or the schedules are not applicable.
3. Exhibits
All of the exhibits appearing in the Registration Statement on Form
S-1 filed with the Commission on June 5, 1990 as Registration Number 33-35239
are incorporated herein by this reference.
25
<PAGE> 26
All of the exhibits appearing in the Registration Statement on Form
S-3 filed with the Commission on January 6, 1995.
All of the exhibits appearing int the Registration Statement on Form
S-8 filed with the Commission on November 26,1996.
(b) Reports on Form 8-K
Form 8-K, dated January 5, 1993, regarding change in accountants, in
connection with entering into non-binding letter of intent pertaining to a
stock for stock merger of the Company and Besteel Industries, is attached
hereto.
The merger negotiations with Besteel Industries under the non-binding
letter of intent were subsequently terminated.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: MARCH 28, 1997 MODTECH, INC.,
------------
a California corporation
By: /S/ MICHAEL G. RHODES
----------------------
Michael G. Rhodes
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been duly signed below by he following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME CAPACITIES DATE
- ---- ---------- ----
<S> <C> <C>
/S/ JAMES D. GOLDENETZ Director, Secretary MARCH 28, 1997
- --------------------------------
James D. Goldenetz
/S/ EVAN M. GRUBER Director, Chief Executive MARCH 28, 1997
- ---------------------------------- Officer
Evan M. Gruber
/S/ GERALD B. BASHAW Director, Chairman of the MARCH 28, 1997
- --------------------------------- Board
Gerald B. Bashaw
/S/ JAMES M. PHILLIPS, JR. Director MARCH 28, 1997
- ---------------------------------
James M. Phillips, Jr.
/S/ ROBERT W. CAMPBELL Director MARCH 28, 1997
- ---------------------------------
Robert W. Campbell
/S/ Myron A. Wick III Director MARCH 28, 1997
- ---------------------------------
Myron A. Wick III
/S/ CHARLES C. McGETTIGAN Director MARCH 28, 1997
- ---------------------------------
Charles C. McGettigan
</TABLE>
27
<PAGE> 28
MODTECH, INC.
Annual Report - Form 10K
Financial Statements and Schedule
December 31, 1994, 1995 and 1996
(With Independent Auditors' Report Thereon)
<PAGE> 29
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Modtech, Inc.:
We have audited the accompanying balance sheets of Modtech, Inc. as of December
31, 1995 and 1996 and the related statements of income, shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1996. In connection with our audits of the financial statements, we have also
audited the financial statement schedule as listed in the accompanying index.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial statements referred to above present fairly, in
all material respects, the financial position of Modtech, Inc. as of December
31, 1995 and 1996 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1996, in conformity
with generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG PEAT MARWICK LLP
Orange County, California
March 21, 1997
<PAGE> 30
MODTECH, INC.
Balance Sheets
December 31, 1995 and 1996
<TABLE>
<CAPTION>
ASSETS (NOTE 5) 1995 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 561,420 $ 404,981
Contracts receivable, less allowance for contract adjustments of
$408,090 in 1995 and $413,373 in 1996 (note 2) 3,168,876 10,309,861
Costs and estimated earnings in excess of billings on contracts
(notes 3 and 8)
1,453,921 9,102,733
Inventories 646,296 4,166,700
Due from affiliates (note 8) 765,040 754,067
Notes receivable from affiliates (note 8) 483,413 45,212
Prepaid assets 72,574 136,960
Other current assets 52,296 20,305
----------- -----------
Total current assets 7,203,836 24,940,819
----------- -----------
Property and equipment, net (note 4) 7,157,653 8,552,720
----------- -----------
Notes receivable from affiliates (note 8) 237,600 --
Other assets 554,683 535,235
----------- -----------
Total other assets 792,283 535,235
----------- -----------
$15,153,772 $34,028,774
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 31
MODTECH, INC.
Balance Sheets
December 31, 1995 and 1996
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1996
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,105,239 $ 6,409,422
Accrued liabilities 955,808 3,214,477
Billings in excess of costs and estimated earnings on
contracts (notes 3 and 8) 759,602 1,148,050
Current maturities of long-term debt (notes 6 and 8) -- 100,000
------------ ------------
Total current liabilities 2,820,649 10,871,949
Note payable (note 5) 1,590,010 5,943,853
Long-term debt, less current maturities (notes 6 and 8) 1,999,952 1,899,952
------------ ------------
Total liabilities 6,410,611 18,715,754
------------ ------------
Shareholders' equity:
5% Convertible preferred stock, Series A. Authorized 5,000,000
shares; issued and outstanding 2,850,000 shares in 1995
and 1996 (note 11) 2,685,000 --
Common stock, $.01 par. Authorized 20,000,000 shares; issued and
outstanding 3,053,350 and 8,649,436 in 1995 and 1996
(notes 10 and 11) 1,055,232 4,014,751
Additional paid-in capital 13,618,929 15,692,737
Accumulated deficit (note 11) (8,616,000) (4,394,468)
------------ ------------
Total shareholders' equity 8,743,161 15,313,020
Commitments and contingencies (notes 3, 5, 8 and 14)
------------ ------------
$ 15,153,772 $ 34,028,774
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 32
MODTECH, INC.
Statements of Income
Years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales (notes 8 and 12) $ 20,355,518 $ 19,386,027 $ 49,885,858
Cost of goods sold (note 8) 17,766,091 16,400,588 42,628,970
------------ ------------ ------------
Gross profit 2,589,427 2,985,439 7,256,888
Selling, general, and administrative expenses 1,553,920 1,612,792 2,345,182
------------ ------------ ------------
Income from operations 1,035,507 1,372,647 4,911,706
------------ ------------ ------------
Other income (expense):
Interest expense (575,977) (486,323) (445,631)
Interest income (note 8) 105,037 98,510 23,704
Other - net 41,764 (937) (13,116)
------------ ------------ ------------
(429,176) (388,750) (435,043)
------------ ------------ ------------
Income before income taxes 606,331 983,897 4,476,663
Income taxes (note 7) (4,250) (19,098) (207,631)
------------ ------------ ------------
Net income $ 602,081 $ 964,799 $ 4,269,032
------------ ------------ ------------
5% Convertible preferred stock dividend
(note 11) -- (166,320) (47,500)
Net income available for common stock
$ 602,081 $ 798,479 $ 4,221,532
============ ============ ============
Primary earnings per share $ 0.12 $ 0.16 $ 0.49
============ ============ ============
Weighted-average shares outstanding 5,098,007 6,027,419 8,708,669
============ ============ ============
Fully diluted earnings per share $ 0.11 $ 0.14 $ 0.47
============ ============ ============
Weighted-average shares outstanding 5,294,193 6,712,155 9,041,084
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 33
MODTECH, INC.
Statements of Shareholders' Equity
Years ended December 31, 1994, 1995 And 1996
<TABLE>
<CAPTION>
5% CONVERTIBLE STOCK
PREFERRED STOCK COMMON STOCK PURCHASE ADDITIONAL
-------------------- ----------------------- NOTES PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL DEFICIT
------- ------- ----------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 -- $ -- 3,209,338 $ 1,109,141 $ (273,594) $ 13,912,872 $(10,016,560)
Sale of preferred
stock (note 11) 2,850,000 2,685,000 -- -- -- -- --
Net income -- -- -- -- -- -- 602,081
--------- ---------- ---------- ----------- ----------- ------------ ------------
Balance, December 31, 1994 2,850,000 2,685,000 3,209,338 1,109,141 (273,594) 13,912,872 (9,414,479)
Adjustment of stock
purchase notes receivable -- -- (155,988) (53,909) 273,594 (293,943) --
Dividend (note 11) -- -- -- -- -- -- (166,320)
Net income -- -- -- -- -- -- 964,799
--------- ---------- ---------- ----------- ----------- ------------ ------------
Balance, December 31, 1995 2,850,000 2,685,000 3,053,350 1,055,232 -- 13,618,929 (8,616,000)
Conversion of preferred
stock (note 11) (2,850,000) (2,685,000) 2,850,000 2,685,000 -- -- --
Conversion of options and
warrants (notes 10 and 11) -- -- 2,746,086 274,519 -- 2,073,808 --
Dividend (note 11) -- -- -- -- -- -- (47,500)
Net income -- -- -- -- -- -- 4,269,032
--------- ---------- ---------- ----------- ----------- ------------ ------------
Balance, December 31, 1996 -- $ -- 8,649,436 $4,014,751 $ -- $ 15,692,737 $ (4,394,468)
========= ========== ========== ========== =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 34
MODTECH, INC.
Statements of Cash Flows
Years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 602,081 $ 964,799 $ 4,269,032
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 607,730 563,104 540,421
Decrease in allowance for contract adjustments (274,610) (17,300) (5,283)
Loss (gain) on sale of equipment (38,577) (20,084) 17,265
Changes in assets and liabilities:
(Increase) decrease in contracts receivable 1,362,448 (65,105) (7,135,702)
(Increase) decrease in costs and estimated earnings
in excess of billings (551,068) 329,641 (7,648,812)
(Increase) decrease in inventories (173,862) 337,697 (3,520,404)
(Increase) decrease in amounts due from affiliates (289,675) (255,607) 686,774
(Increase) decrease in prepaids and other assets 183,287 54,088 (12,947)
Increase (decrease) in accounts payable (1,583,319) (436,234) 5,304,183
Increase in accrued liabilities 474,878 35,451 2,258,669
Increase (decrease) in billings in excess of costs
and earnings 109,163 (276,306) 388,448
----------- ----------- -----------
Net cash provided by (used in) operating
activities 428,476 1,214,144 (4,858,356)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of equipment 81,354 46,416 5,550
Purchase of property and equipment (200,605) (481,533) (1,958,303)
----------- ----------- -----------
Net cash provided used in investing
activities (119,251) (435,117) (1,952,753)
----------- ----------- -----------
</TABLE>
(Continued)
<PAGE> 35
MODTECH, INC.
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Net principal borrowings (payments) under revolving credit
lines $(1,803,824) $ (309,990) $ 4,353,843
Principal payments on long-term debt and notes payable
(1,185,259) (502,735) --
(Adjustment of) stock purchase note receivable by exchange of
common stock -- (74,258) --
Net proceeds from issuance of common stock -- -- 2,348,327
Declared dividends -- (166,320) (47,500)
Net proceeds from sale of convertible preferred stock (note 11)
2,685,000 -- --
----------- ----------- -----------
Net cash provided by (used in) financing
activities (304,083) (1,053,303) 6,654,670
----------- ----------- -----------
Net increase (decrease) in cash 5,142 (274,276) (156,439)
Cash at beginning of year 830,554 835,696 561,420
----------- ----------- -----------
Cash, end of year $ 835,696 $ 561,420 $ 404,981
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 36
MODTECH, INC.
Notes to Financial Statements
December 31, 1994, 1995 and 1996
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Modtech, Inc. (the Company) designs, manufactures, markets and installs
modular relocatable classrooms.
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.
Effective October 1, 1996, the Company acquired substantially all of
the operating assets of Miller Structure, Inc. - California. In
addition, the Company assumed certain liabilities. The Company entered
into a lease agreement to rent the manufacturing facility. Miller
Structure, Inc. - California manufactures and markets factory-built
buildings.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months
or less to be cash equivalents. Substantially all cash deposits are
maintained in one financial institution.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, contracts receivable and notes receivable,
costs and estimated earnings in excess of billings on contracts,
prepaid and other assets, accounts payable, accrued liabilities,
billings in excess of estimated earnings on contracts and notes payable
are measured at cost which approximates their fair value.
CONSTRUCTION CONTRACTS
The accompanying financial statements have been prepared 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. Most
contracts are completed within one year.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general, and
administrative costs are charged to expense as incurred. At the time a
loss on a contract becomes known, the entire amount of the estimated
ultimate loss is recognized in the financial statements.
1
<PAGE> 37
MODTECH, INC.
Notes to Financial Statements, Continued
The current asset, "Costs and Estimated Earnings in Excess of Billings
on Contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in Excess of Costs and
Estimated Earnings on Contracts," represents billings in excess of
revenues recognized.
The current contra asset, "Allowance for Contract Adjustments," is
management's estimated adjustments to contract amounts due to disputes
and or litigation.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method. Inventories,
generally include only raw materials, as any work-in-process or
finished goods are accounted for in percentage of completion
allocations. The Company held finished inventory of $202,130 and $0 at
December 31, 1995 and 1996, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization is provided using the straight-line and accelerated
methods over the following estimated useful lives:
<TABLE>
<CAPTION>
<S> <C>
Leasehold improvements 15 to 31 years
Machinery and equipment 5 to 7 years
Trucks and automobiles 3 to 5 years
Office equipment 5 to 7 years
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standard No. 121 (SFAS No. 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on
January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount of fair value less costs
to sell. Adoption of this Statement did not have a material impact on
the Company's financial position, results of operations, or liquidity.
STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option
plan 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
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted Statement of Financial Accounting Standard No. 123
(SFAS No. 123), "Accounting for Stock-Based Compensation," which
permits entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company
2
<PAGE> 38
MODTECH, INC.
Notes to Financial Statements, Continued
has elected to continue to apply the provision of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
TAXES ON INCOME
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
EARNINGS PER SHARE
Earnings per share are computed on the basis of the weighted average
number of common and dilutive common equivalent shares outstanding
during each year.
RECLASSIFICATION
Certain amounts in the 1995 financial statements have been reclassified
to conform to the 1996 presentation.
(2) CONTRACTS RECEIVABLE
Contracts receivable consisted of customer billings for:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Completed contracts $ 675,397 $ 7,722,927
Contracts in progress 2,612,912 2,102,766
Retentions 288,657 897,541
------------ ------------
3,576,966 10,723,234
Less allowance for contract adjustments (408,090) (413,373)
------------ ------------
$ 3,168,876 $ 10,309,861
============ ============
</TABLE>
3
<PAGE> 39
MODTECH, INC.
Notes to Financial Statements, Continued
(3) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON CONTRACTS
Net costs and estimated earnings in excess of billings on contracts
consisted of:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Net costs and estimated earnings on
uncompleted contracts $ 22,743,601 $ 39,093,050
Billings to date (22,212,302) (31,173,406)
------------ ------------
531,299 7,919,644
Net unbilled receivables from completed contracts 163,020 35,039
------------ ------------
$ 694,319 $ 7,954,683
============ ============
</TABLE>
These amounts are shown in the accompanying balance sheets under the
following captions:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Costs and estimated earnings in excess of billings on uncompleted
contracts $ 1,253,579 $ 8,971,196
Costs and estimated earnings in excess of billings on completed
contracts 200,342 131,537
----------- -----------
Costs and estimated earnings in excess of billings 1,453,921 9,102,733
----------- -----------
Billings in excess of costs and estimated earnings on uncompleted
contracts (722,280) (1,051,552)
Billings in excess of costs and estimated earnings on completed
contracts (37,322) (96,498)
----------- -----------
Billings in excess of costs and estimated earnings (759,602) (1,148,050)
----------- -----------
$ 694,319 $ 7,954,683
=========== ===========
</TABLE>
4
<PAGE> 40
MODTECH, INC.
Notes to Financial Statements, Continued
(4) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Leasehold improvements $ 7,240,744 $ 7,580,830
Machinery and equipment 2,491,751 3,535,623
Trucks and automobiles 163,772 107,024
Office equipment 468,875 222,123
Construction in progress 261,287 567,137
------------ ------------
10,626,429 12,012,737
Less accumulated depreciation and amortization (3,468,776) (3,460,017)
------------ ------------
$ 7,157,653 $ 8,552,720
============ ============
</TABLE>
(5) NOTE PAYABLE - REVOLVING CREDIT AGREEMENT
In 1995 the Company entered into a new revolving loan commitment that
will expire in September 1998. The Company is entitled to borrow, from
time to time, up to $10,000,000 with actual borrowings limited to
specific percentages of eligible contracts receivable, equipment and
inventories. On December 31, 1996, borrowings were limited to
$8,135,892 and actual outstanding borrowings were $5,943,853. The
interest rate is calculated at the prime lending rate (8.25% at
December 31, 1996) plus two percent (2%) per annum. The loan is secured
by substantially all of the Company's assets.
In addition, the Company has one standby letter of credit with the bank
for $2,035,845 on which no amounts were outstanding as of December 31,
1996.
(6) LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Industrial development bonds $1,999,952 $ 1,999,952
Less current portion of long-term debt -- (100,000)
---------- -----------
$1,999,952 $ 1,899,952
========== ===========
</TABLE>
In June 1990, the Industrial Development Authority of the County of San
Joaquin, California issued $4,200,000 of Industrial Development Bonds.
The net proceeds of approximately $4,000,000 were used to fund the
construction of a manufacturing facility on leased property located in
Lathrop, California. The Company fully utilized the bonds at December
31, 1991. The Company has executed financing statements covering the
plant and equipment financed, as security for repayment of the bonds.
The bonds are secured by a $2 million letter of credit, and bear
interest at an initial rate of 6.75% and fluctuate weekly. The
5
<PAGE> 41
MODTECH, INC.
Notes to Financial Statements, Continued
interest rate was 3.75% at December 31, 1996. Repayment of the bonds
will be $100,000 per year through 2015, with the remaining balance paid
off in 2016.
Annual maturities of long-term debt outstanding at December 31, 1996
are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $ 100,000
1998 100,000
1999 100,000
2000 100,000
2001 100,000
Thereafter 1,499,952
----------
$1,999,952
==========
</TABLE>
(7) INCOME TAXES
The components of the 1994, 1995 and 1996 provision for Federal and
state income taxes computed in accordance with Financial Accounting
Standard No. 109 are summarized below:
<TABLE>
<CAPTION>
1994 1995 1996
-------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ -- $ (14,210) $ (90,483)
State (4,250) (4,888) (117,148)
-------- --------- ---------
Deferred:
Federal -- -- --
State -- -- --
-------- --------- ---------
$ (4,250) $ (19,098) $(207,631)
======== ========= =========
</TABLE>
Income tax expense 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:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------- ------
<S> <C> <C> <C>
Taxes, U.S. statutory rates (34.0%) (34.0%) (34.0%)
State taxes, less Federal benefit -- -- --
Utilization of income tax benefit relating to
loss carryover 34.0 34.0 34.0
Other (0.7) (1.9) (4.6)
----- ---- ----
Total taxes on income (0.7%) (1.9%) (4.6%)
===== ==== ====
</TABLE>
6
<PAGE> 42
MODTECH, INC.
Notes to Financial Statements, Continued
Deferred tax liabilities, which amounted to approximately $68,000 and
$270,000 at December 31, 1995 and 1996, respectively, primarily result
from temporary differences between financial and tax accounting
treatment of revenue recognition on contracts and depreciation.
Deferred tax assets, which amounted to approximately $2,819,000 and
$1,429,000 at December 31, 1995 and 1996, respectively, were mainly
comprised of net operating loss carryforwards and accrued liabilities.
The Company's net operating loss carryforward at December 31, 1996
amounted to approximately $615,000, and expires in 2008 and 2009.. For
the years ended December 31, 1995 to 1996 the Company reduced the net
deferred tax asset to zero by a valuation allowance. The valuation
allowance for the net deferred tax assets as of December 31, 1995 was
$2,751,000. The net change for the year ended December 31, 1996 was a
decrease of $1,592,000.
(8) TRANSACTIONS WITH RELATED PARTIES
SALES
The Company sells modular classrooms to certain companies and
partnerships, the shareholders and partners of which are either
officers, shareholders or key employees of the Company. The buildings
are then leased to various school districts by the related companies
and partnerships.
The table below summarizes the classroom sales to related parties:
<TABLE>
<CAPTION>
1994 1995 1996
---------- -------- ----------
<S> <C> <C> <C>
Sales $1,008,577 $600,228 $1,452,868
Cost of goods sold 878,577 531,152 1,239,425
Gross profit percentage 12.89% 11.51% 14.7%
========== ======== ==========
</TABLE>
The related party purchases modular relocatable classrooms from the
Company, upon standard terms and at standard wholesale prices.
Due from affiliates includes a portion of unpaid invoices as a result
of the above transactions. As of December 31, 1995 and 1996 these
amounts totaled $377,252 and $431,755, respectively. Additional amounts
arising from these transactions are included in the following captions:
<TABLE>
<CAPTION>
1995 1996
------- ---------
<S> <C> <C>
Costs and estimated earnings in excess of billings
on uncompleted contracts $ -- $ 417,780
Billings in excess of costs and estimated earnings
on uncompleted contracts (29,855) (12,572)
======= =========
</TABLE>
NOTES RECEIVABLE
At December 31, 1995, the Company had two notes receivable from a
related party partnership aggregating $483,413. The partnership is
composed of officers and shareholders of the Company. One note was paid
in full during 1996 and the other note, which bears interest at 10% and
is payable upon demand, remained outstanding at December 31, 1996.
7
<PAGE> 43
MODTECH, INC.
Notes to Financial Statements, Continued
At December 31, 1995 the Company also had demand notes receivable of
$132,600 and $105,000 due from related party partnerships. These notes
were paid in full during 1996.
Unpaid interest related to the above notes totaled $390,278 at December
31, 1995 and $322,312 at December 31, 1996 and are included in due from
affiliates. The Company is negotiating payment terms on the accrued
interest and anticipates full payment during 1997.
OPERATING LEASES
The Company leases various land at its manufacturing facilities. The
present manufacturing facility leases are with the Company's primary
shareholder and partnerships composed of officers and shareholders. All
related party leases require monthly payments which aggregate $67,000.
In connection with the lease at the Lathrop facility, the Company made
a $83,000 security deposit during 1990.
In 1994 due to declines in real estate values the Company's primary
shareholder and partnerships reduced the monthly lease rates for the
manufacturing facilities to an aggregate of $36,250. The reduced rents
will continue for as long as real estate values remain depressed.
Future minimum lease payments under these leases are discussed in note
14. Included in cost of sales is $417,535, $435,000 and $446,500 in
rent expense paid to related parties for the years ended December 31,
1994, 1995, and 1996.
(9) 401(K) PLAN
The Company has a tax deferred savings plan under Section 401(k) of the
Internal Revenue Code. Eligible employees can contribute up to 12% of
gross annual earnings. Company contributions, made on a 50% matching
basis, are determined annually. The Company's contributions were
$41,223, $36,937 and $53,031 in 1994, 1995, and 1996, respectively.
(10) STOCK OPTIONS
In 1989, the Company's shareholders approved a stock option plan (the
1989 Plan). The 1989 Plan provides for the grant of both incentive and
non-qualified options to purchase up to 400,000 shares of the Company's
common stock. The incentive stock options can be granted only to
employees, including officers of the Company, while non-qualified stock
options can be granted to employees, non-employee officers and
directors, consultants, vendors, customers and others expected to
provide significant services to the Company.
The exercise price of the stock options cannot be less than the fair
market at the date of the grant (110% if granted to an employee who
owns 10% or more of the common stock).
8
<PAGE> 44
MODTECH, INC.
Notes to Financial Statements, Continued
Stock options outstanding under this 1989 Plan are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
December 31, 1993 400,000 $ 1.91
Granted 75,000 1.50
Terminated (75,000) 1.45
-------- ---------
December 31, 1994 400,000 1.92
Granted 45,000 2.125
Terminated (45,000) 3.00
-------- ---------
December 31, 1995 400,000 1.82
Granted -- --
Terminated -- --
Exercised (109,500) 1.84
-------- ---------
December 31, 1996 290,500 $ 1.82
======== =========
</TABLE>
As of December 31, 1996, 210,900 options are vested and exercisable at
prices ranging from $.625 to $10.00 per share under the 1989 Plan.
In March of 1994, pursuant to a vote of the Board of Directors, a
nonqualified option plan was approved (the March 1994 Plan). The March
1994 Plan provides for the grant of 200,000 options to purchase shares
of the Company's common stock. The exercise price of the stock options
cannot be less than the fair market at the date of the grant. All of
these options were granted during 1994.
Stock options outstanding at December 31, 1996, under the March 1994
Plan are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
December 31, 1993
Granted 180,000 $ 1.19
Granted 20,000 1.50
-------- --------
December 31, 1994 200,000 1.22
Exercised -- --
-------- --------
December 31, 1995 200,000 1.22
Exercised (20,000) 1.19
-------- --------
December 31, 1996 180,000 $ 1.22
======== ========
</TABLE>
9
<PAGE> 45
MODTECH, INC.
Notes to Financial Statements, Continued
As of December 31, 1996, 95,000 options are vested and exercisable at
prices ranging from $1.19 to $1.50 per share under the March 1994 Plan.
In May of 1994, in conjunction with the offering of preferred stock
(note 11) the Board of Directors voted and approved an additional stock
option plan (the May 1994 Plan). The May 1994 Plan provides for the
grant of both incentive and non-qualified options to purchase up to
500,000 shares of the Company's common stock. The incentive stock
options can be granted only to employees, including officers of the
Company, while non-qualified stock options can be granted to employees,
non-employee officers and directors, consultants, vendors, customers
and others expected to provide significant services to the Company. The
exercise price of the stock options cannot be less than the fair market
at the date of the grant (110% if granted to an employee who owns 10%
or more of the common stock).
Stock options outstanding at December 31, 1996, under this May 1994
Plan, are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
December 31, 1994 285,000 $ 1.50
Granted 35,000 2.125
Terminated (35,000) 1.50
-------- ---------
December 31, 1995 285,000 1.60
Granted 205,000 2.59
Terminated (37,500) 1.50
Exercised (12,500) 1.50
-------- ---------
December 31, 1996 440,000 $ 2.06
======== =========
</TABLE>
As of December 31, 1996, 108,750 options are vested and exercisable at
prices ranging from $1.50 to $4.50 per share under the May 1994 Plan.
In July 1996, the Company's Board of Directors authorized the grant of
options to purchase up to 500,000 shares of the Company's common stock.
The non-statutory options may be granted to employees, non-employee
officers and directors, consultants, vendors, customers and others
expected to provide significant service to the Company. The exercise
price of the stock options cannot be less than the fair market value at
the date of the grant (110% if granted to an employee who owns 10% or
more of the common stock). At December 31, 1996, 110,000 options were
granted at an exercise price of $4.50 and of these, 30,000 options were
vested and exercisable.
10
<PAGE> 46
MODTECH, INC.
Notes to Financial Statements, Continued
The per share weighted-average fair value of stock options granted
during 1995 and 1996 was $1.28 and $1.94, respectively, on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions; 1995 - expected dividend yield 0%,
risk-free interest rate of 7.80%, volatility factor of 72.66%, and an
expected life of four years; 1996 - expected dividend yield 0%,
risk-free interest rate ranging from 6.57% to 7.80%, volatility factor
of 72.66%, and an expected life of four years. The Company applies APB
Opinion No. 25 in accounting for its Plan and, accordingly, no
compensation cost has been recognized for its stock options in the
financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under
SFAS No. 123, the Company's net income would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
-------- ------------
<S> <C> <C>
Net Income
As Reported $964,799 $4,269,032
Pro Forma 862,113 3,657,659
======== ============
Primary earnings per share
As Reported $ .16 $ .49
Pro forma .14 .42
======== ============
Fully diluted earnings per share
As Reported $ .14 $ .47
Pro Forma .13 .40
======== ============
</TABLE>
Pro forma net income reflects only options granted in 1995 and 1996.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period of four years and compensation cost for options
granted prior to January 1, 1995 is not considered.
(11) 5% CONVERTIBLE PREFERRED STOCK
In May of 1994, in a private transaction without registration under the
Securities Act, the Company sold 2,850,000 shares of Series A 5%
Convertible Preferred Stock. The Preferred Stock was sold at the price
of $1.00 per share resulting in proceeds before costs and expenses of
$2,850,000. All of the Series A 5% Convertible Preferred Stock was
converted into Common Stock during 1996. In connection with this
private placement of the Series A 5% Preferred Stock, the shareholders
were granted warrants to purchase an aggregate of 1,385,000 shares of
common stock at $1.50 (subject to adjustment in certain events), as
well as warrants to purchase an aggregate of 1,375,000 additional
shares at $2.00 per share (subject to adjustments in certain events).
All warrants were either exercised or expired during 1996. Dividends in
the amount of $166,320 and $47,500 were declared for the years ended
December 31, 1995 and 1996, respectively.
11
<PAGE> 47
MODTECH, INC.
Notes to Financial Statements, Continued
(12) MAJOR CUSTOMER
The Company had sales to one major customer which represented the
following percentage of net sales:
<TABLE>
<CAPTION>
1994 1995 1996
----- ---- ----
<S> <C> <C> <C>
State of California 28% 9% 13%
==== ==== ====
</TABLE>
(13) SUPPLEMENTAL CASH FLOW DISCLOSURES
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $530,673 $248,443 $421,014
======== ======== ========
Income taxes $ -- $ -- $ 24,320
======== ======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:
During 1995, $273,594 of notes receivable from officer shareholders was
repaid by delivery of 155,988 shares of common stock at market value.
During 1996, 2,850,000 shares of Series A 5% convertible Preferred
Stock were converted into 2,850,000 shares of common stock, in
accordance with the private placement (note 11).
(14) COMMITMENTS AND CONTINGENCIES
LAND LEASES
The Company has entered into agreements to lease land at its
manufacturing facilities in Perris and Lathrop, California. Minimum
lease payments under these noncancelable operating leases for the next
five years and thereafter are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $ 495,500
1998 489,000
1999 480,000
2000 435,000
2001 435,000
Thereafter 6,325,000
----------
$8,659,500
==========
</TABLE>
12
<PAGE> 48
MODTECH, INC.
Notes to Financial Statements, Continued
Of the $8,659,500 in future rental payments, substantially all is
payable to related parties (note 8). Rent expense for the years ended
December 31, 1994, 1995 and 1996 was $417,535, $435,000 and $446,500.
WARRANTY
The Company provides a one year warranty relating to the workmanship on
their modular units. To date, warranty costs incurred on completed
contracts have been immaterial.
PENDING CLAIMS AND LITIGATION
In the normal course of business, the Company has been named in several
claims and lawsuits arising out of the failure to pay subcontractors or
for alleged breach of assigned security. In the opinion of management,
the outcome of the claims will not have a material effect on the
Company's financial position or results of operations.
13
<PAGE> 49
Schedule II
MODTECH, INC.
Valuation and Qualifying Accounts
Years ended December 31, 1994, 1995, and 1996
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING CHARGED BALANCE AT
DESCRIPTION OF YEAR TO EXPENSE DEDUCTIONS END OF YEAR
- ----------------------------------------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for contract adjustments:
Year ended December 31, 1994 $700,000 $ -- $(274,610) $425,390
======== ====== ========= ========
Year ended December 31, 1995 $425,390 $ -- $ (17,300) $408,090
======== ====== ========= ========
Year ended December 31, 1996 $408,090 $5,866 $ (583) $413,373
======== ====== ========= ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 404,981
<SECURITIES> 0
<RECEIVABLES> 19,412,594
<ALLOWANCES> 0
<INVENTORY> 4,166,700
<CURRENT-ASSETS> 24,940,819
<PP&E> 12,012,737
<DEPRECIATION> 3,460,017
<TOTAL-ASSETS> 34,028,774
<CURRENT-LIABILITIES> 10,871,949
<BONDS> 7,843,805
0
0
<COMMON> 15,313,020
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 34,028,774
<SALES> 49,885,858
<TOTAL-REVENUES> 49,885,858
<CGS> 42,628,970
<TOTAL-COSTS> 42,628,970
<OTHER-EXPENSES> 2,345,182
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 445,631
<INCOME-PRETAX> 4,476,663
<INCOME-TAX> 207,631
<INCOME-CONTINUING> 4,269,032
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,269,032
<EPS-PRIMARY> .49
<EPS-DILUTED> .47
</TABLE>
