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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, 1997
[ ] 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)
CALIFORNIA 33-0044888
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2830 BARRETT AVENUE, PERRIS, CALIFORNIA 92572
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (909) 943-4014
------------------------
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 27, 1998 was $98,036,818. As of March 27, 1998, shares
entitled to cast an aggregate of 9,856,169 votes were outstanding, including
9,856,169 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. Based upon 1996 net sales, the Company believes that it is the
largest manufacturer of modular relocatable classrooms in California. The
Company's classrooms are sold primarily to California school districts and to
third parties and the State of California principally for lease to California's
school districts. The Company's products include standardized classrooms, as
well as customized structures for use as libraries, gymnasiums, computer rooms
and bathroom facilities. The Company believes that its modular structures can be
substituted for virtually any part of a school. The Company's products are
engineered and constructed in accordance with structural and seismic safety
specifications adopted by the California Department of State Architects which
regulates all school construction on public land, standards which are more
rigorous than the requirements for other portable units.
As a result of net enrollment increases in California schools and budgetary
constraints experienced by the State of California which limited the
availability of funds for the addition of new classrooms over the last few years
prior to 1996, California's schools are reported to be among the most crowded in
the nation. As the State budget deficit has ameliorated, the legislature has
increased funding for new classrooms in an effort to reduce the average number
of students per class. State funding initiatives include funds from both (i) the
State's operating budget, such as the $200 million allocated for construction or
addition of classrooms out of the total of $822 million spent under the Class
Size Reduction Program for the 1996-1997 school year and as much as $1.5 billion
allocated for the 1997-1998 school year for both general operations and school
facilities, and (ii) the sale of statewide bond issues, such as the $8.2 billion
bond issue for school construction, including the addition of classrooms,
proposed as part of a package of legislation for inclusion on the June 1998
ballot. See "Business -- Legislation and Funding."
These factors have combined to increase the demand for modular relocatable
classrooms, which cost significantly less and take much less time to construct
and install than conventional school facilities, and which permit a school
district to relocate the units as student enrollments shift. In addition, the
Company's products provide added flexibility to school districts in financing
the costs of adding classroom space, since modular relocatable classrooms are
considered personal property which can be financed out of a district's operating
budget in addition to its capital budget. In recognition of these advantages,
California legislation currently requires, with certain exceptions, that at
least 30% of all new classroom space added using state funds must be relocatable
structures. See "Business -- Legislation and Funding."
INDUSTRY OVERVIEW
In recent years, the growth in population in California, both from births and
from immigration, has led to increasing school enrollments. As a result,
classrooms in many California school districts currently are reported to be
among the most crowded in the nation, with an average of 29 students per class
compared to a national average class size of 17. The California Department of
Finance has estimated that student enrollment in grades kindergarten through 12
will increase by approximately 18% over the period from 1995 through 2005.
Additionally, changes in population demographics have left many existing
permanent school facilities in older residential areas with excess capacity due
to declining enrollments, while many new residential areas are faced with a
continuing shortage of available classrooms. Consequently, it has become
necessary to add additional classrooms at many existing facilities, and to build
a number of new schools.
The construction of new schools and the addition of classrooms at existing
schools are tied to the sources and levels of funding available to California
school districts. The availability of funding for new school and classroom
additions, in turn, is determined in large measure by the amount of tax revenue
raised by the State, the level of annual allocations for education from the
State's budget which is determined by educational policies that are subject to
political concerns, and the willingness of the California electorate to approve
state and local bond issues to raise money for school facilities.
In 1978, California voters approved Proposition 13, which rolled back local
property taxes (a traditional source of funding for school districts) and
limited the ability of local school districts to raise taxes to finance the
construction of school facilities. The passage of Proposition 13, coupled with
growing student populations, has increased the need for local school districts
to find ways to reduce the cost of adding classrooms. The California legislature
has adopted several statutes designed to alleviate some of the problems
associated with the shortage of classrooms and lack of local funding
alternatives. For example, in 1976, California adopted
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legislation that currently requires, with certain exceptions, that at least 30%
of all new classroom space added using State funds must be relocatable
structures. This requirement may be satisfied through the purchase or lease of
the Company's classrooms. See "Business -- Legislation and Funding."
Additionally, in 1979 the California legislature adopted legislation that
provides for State funding for the purchase of relocatable classrooms that could
be leased to local school districts.
As the number of students enrolled in California schools continued to increase
throughout the 1990's, the State of California and California school districts
experienced increasing budget shortfalls. The resulting shortage of funding
available at both the State and local level led to declining sales of modular
relocatable classrooms, by the Company and on an industry-wide basis. However,
as the State budget deficit ameliorated, funding for modular relocatable
classrooms began to increase. This growth was accelerated when the California
Class Size Reduction Program was implemented in November 1996, the goal of which
is to reduce class sizes to 20 students in public elementary schools at the
kindergarten through third grade levels. For the 1996-1997 school year, the
State spent $822 million under this program, including $200 million specifically
for facilities, which may be relocatable classrooms. The Company believes that
total State funding under the Class Size Reduction Program for the 1997-1998
school year will be as high as $1.5 billion for both general operations and
school facilities. See Legislation and School Funding."
When compared to the construction of a conventionally built classroom, modular
classrooms offer a number of advantages, including, among others:
Lower Cost -- The cost of the Company's standard classroom may
be as low as $29,000 installed, as compared to
$80,000 to $100,000 for conventional
construction of a comparable classroom;
Shorter Construction -- A modular classroom can be built and ready for
Time occupancy in a shorter period of time than
that required for state approval and
construction of a conventional facility;
Flexibility of Use -- Modular relocatable classrooms enable a school
district to use the units for short or long term
needs and to move them if necessary to meet
shifts in student populations; and
Ease of Financing -- As personal rather than real property, modular
classrooms may be leased on a long or short-term
basis from manufacturers and leasing companies.
This allows school districts to finance modular
classrooms out of both their operating and
capital budgets.
MODULAR RELOCATABLE CLASSROOMS
The Company's modular relocatable classrooms are designed, engineered and
constructed in accordance with structural and seismic safety specifications
adopted by the California Department of State Architects, standards which are
more rigorous than the requirements for other portable units. The Department of
State Architects, which regulates all school construction on public land, has
prescribed extensive regulations regarding the design and construction of school
facilities, setting minimum qualifications for the preparation of plans and
specifications, and reviews all plans for the construction of material
modifications to any school building. Construction authorization is not given
unless the school district's architect certifies that a proposed project
satisfies construction cost and allowable area standards. The Company
subcontracts with structural engineering firms to interface with each school
district's architect or engineer to process project specifications through the
Department of State Architects. The Company believes that the regulated
environment in which the Company's classrooms are manufactured serves as a
significant barrier to market entry by prospective competitors. See "Business --
Competition."
Conventional school facilities constructed by school districts using funds from
the State Office of Public School Construction typically require two to three
years for approval and funding. By contrast, factory-built school buildings like
the Company's standard classrooms may be pre-approved by the State for use in
school construction. Once plans and specifications for a given classroom have
been pre-approved, school districts can thereafter include in their application
to obtain State funds for new facilities a notification that they intend to use
pre-approved, standardized factory-built classrooms. This procedure reduces the
time required in the State's approval process to as little as 90 days, thereby
providing an additional incentive to use factory-built relocatable
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classrooms. In all cases, continuous on-site inspection by a licensed architect
or structural engineer is required during actual manufacture of the classrooms,
with the school district obligated to reimburse the Department for the costs of
such inspection.
The Company's classrooms are manufactured and installed in accordance with the
applicable Department of State Architects building code, which supersedes all
local building codes for purposes of school construction. The classrooms must
comply with accessibility requirements for the handicapped, seismic and fire
code requirements.
The Company manufactures and installs standard, largely pre-fabricated modular
relocatable classrooms, as well as customized classrooms, which are modular in
design, but assembled on-site using components manufactured by the Company
together with components purchased from third party suppliers. The Company's
classrooms vary in size from two modular units containing a total of 960 square
feet to 20 units that can be joined together to produce a facility comprising
9,600 square feet. Larger configurations are also possible. Typical prices for
the Company's standard classrooms range from $29,000 to $34,000, while prices
for a custom classroom generally exceed $50,000, depending upon the extent of
customization required.
The two basic structural designs for standard and custom modular classrooms are
a rigid frame structure and a shear wall structure. The rigid frame structure
uses a steel floor and roof system, supported at each corner with square steel
tubing. These buildings have curtain walls to enclose the interior from the
outside, and have the advantage of unlimited width and length. Rigid frame
structures may be used for multipurpose rooms and physical education buildings
as well as standard classrooms. Shear wall classrooms have a maximum width of 48
feet (four 12 foot modules) and a maximum length of 60 feet. These classrooms
use the exterior and interior walls to produce the required structural strength
and can be built at lower costs than rigid frame structures. The Company's most
popular factory-built classroom is a rigid frame design, with two modules
connected side by side to complete a 24 by 40 foot classroom.
Custom built classrooms, libraries and gymnasiums contain design variations and
dimensions such as ceiling height, pitch, overall size and interior
configuration. These units typically are not assembled at the factory but
instead are shipped in pieces, including floors, walls and roofs, and assembled
on-site. Contracts for custom built units may include the design, engineering
and layout for an entire school or an addition to a school, and involve site
preparation, grading, concrete and asphalt work and landscaping. Customized
classrooms are generally more expensive and take longer to complete than the
Company's standard classrooms.
The interior and exterior of all of the Company's modular classrooms can be
customized by employing different materials, design features and floor plans.
Most classrooms are open, but the interior of the buildings can be divided into
individual rooms by permanent or relocatable partitions. The floor covering is
usually carpet but may be linoleum or wood depending upon the intended use of
the classroom. Interior wall material is usually vinyl covered firtex over
gypsum board, while other finishes such as porcelain enamel or painted hardboard
may be used in such places as restrooms and laboratories. Electrical wiring, air
conditioning, windows, doors, fire sprinklers and plumbing are installed during
the manufacturing process. The exterior of the units is typically plywood
siding, painted to the customer's specifications, but other common siding
material may also be applied.
CLASSROOM CUSTOMERS
The Company markets and sells its modular classrooms primarily to California
school districts. The Company also sells its classrooms to the State of
California and leasing companies, both of which lease the classrooms principally
to California school districts. Sales of classrooms accounted for 90.5%, 94.2%
and 98.1% of the Company's total net sales for the years ended December 31,
1995, 1996 and 1997. The Company's customers typically pay cash from general
operating funds or the proceeds of local bond issues, or lease classrooms
through banks, leasing companies and other private funding sources. See
"Legislation and Funding."
Sales of classrooms to individual California school districts accounted for
approximately 80.7%, 74.5% and 71.1%, respectively, of the Company's net sales
during the years ended December 31, 1995, 1996 and 1997, with sales of
classrooms to third party lessors to California school districts during these
periods accounting for approximately 3.1%, 7.2% and 19.1%, respectively, of the
Company's net sales. The mix of school districts to which the Company sells its
products varies somewhat from year to year. Sales of classrooms directly to the
State of California during 1997 represented approximately 7.9% of the Company's
net sales for the period, compared to approximately 12.5% of the Company's 1996
net sales and approximately 6.7% of the Company's 1995 net sales. Sales of
classrooms to private schools, day care providers and out-of-state customers
accounted for less than one percent of the Company's net sales during the years
ended December 31, 1995, 1996 and 1997. One of the lessors to which the Company
sells classrooms for lease to California school districts is affiliated with the
Company through common ownership by two of the Company's directors. During
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the years ended December 31, 1995, 1996 and 1997, sales of classrooms to this
affiliated leasing company comprised approximately 3.1%, 2.9% and 2.2%,
respectively, of the Company's net sales. See "Management -- Certain
Transactions."
OTHER PRODUCTS
In addition to modular relocatable classrooms that are designed and manufactured
in accordance with the California Department of State Architects standards, the
Company also manufactures modular, portable buildings, which can be used as
office facilities and construction trailers and for other commercial purposes.
Currently, most of these non-classroom products are manufactured at the
Patterson, California plant, which the Company acquired in 1996. During the
years ended December 31, 1995, 1996 and 1997, sales of such modular, portable
buildings to commercial customers accounted, in the aggregate, for approximately
9.5%, 5.8% and 1.9%, respectively, of the Company's net sales. The Company also
manufactures a small number of modular structures that house and shelter
electronic equipment used in the wireless telecommunications industry. During
the years ended December 31, 1995, 1996 and 1997, sales of modular
telecommunications equipment shelters, which are included above in sales to
commercial customers, accounted for less than one percent of the Company's net
sales for each period.
SALES AND MARKETING
The Company's classroom sales force is currently divided into three marketing
regions: Northern, Central and Southern California. The Company currently
employs three classroom salespersons, each of whom is compensated on a
commission basis. These salespersons maintain contact with the individual school
districts in their respective marketing regions on a quarterly basis. They are
also in contact with architects and building inspectors employed by the school
districts, as well as school officials who may be in a position to influence
purchasing decisions.
Most of the Company's contracts are awarded on an open bid basis. The marketing
process for many of the Company's contracts begins prior to the time the bid
process begins. After the Company selects bids or contracts that it desires to
pursue, the Company's marketing and engineering personnel interface directly
with various school boards, superintendents or architects during the process of
formulating bid or contract specifications. The Company prepares its bids or
proposals using various criteria, including current material prices, historical
overhead costs and a targeted profit margin. Substantially all of the Company's
contracts are turnkey, including engineering and design, manufacturing,
transportation, installation and necessary site work. Open bid contracts are
normally awarded to the lowest responsible bidder.
A fourth salesperson is charged with increasing the Company's sales of buildings
to the commercial and telecommunications markets. In addition, the Company
recently has hired two additional salespeople whose focus will be the sale of
classrooms in Nevada and Arizona, and to private schools and day care operators
in California.
MANUFACTURING AND ON-SITE INSTALLATION
The Company uses an assembly-line approach in the manufacture of its
standardized classrooms. The process begins with the fabrication of the steel
floor joists. The floor joists are welded to steel frames to form the floor
sub-assembly, which is covered by plywood flooring. Metal roof trusses and
structural supports are fabricated separately and added as the unit progresses
down the assembly-line. Installation of walls, insulation, suspended grid
ceilings, electrical wiring, air conditioning, windows, doors, fire sprinklers,
plumbing and chalkboards follow, with painting and finishing crews completing
the process. Once construction of a standard classroom commences, the building
can be completed in as little as three days. The construction of custom units
on-site, from pre-manufactured components, is similar to factory-built units in
its progressively-staged assembly process but may involve more extensive
structural connections and finish work depending upon the size and type of
building, and typically takes 30 to 60 days to complete.
The Company is vertically-integrated in the manufacture of its standardized
modular classrooms, in that the Company fabricates substantially all of its own
metal components at its facility in Perris, California, including structural
floor and roof joists, exterior roof panels, gutters, down spouts, vents, ramps,
stairs and railings. The Company believes that the ability to fabricate its own
metal components helps it reduce the costs of its products and to control their
quality and delivery schedules. The Company maintains a quality control system
throughout the manufacturing process, under the supervision of its own quality
control personnel and inspectors engaged by its customers. In addition, the
Company tracks the status of all classrooms from sale through installation.
Completed standard classroom units, or components used in customized units, are
loaded onto specially designed flatbed trailers for
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towing by trucks to the school building site. Upon arrival at the site, the
units are structurally connected, or components are assembled, and the classroom
is installed on its foundation. Connection with utilities is completed in the
same manner as in conventional on-site construction. Installation of the modular
classrooms may be on a separate foundation, or several units may be incorporated
on a common foundation under a unified roof, so that upon installation they
appear to be an integral part of an existing school facility or function as a
larger building, such as a gymnasium or cafeteria.
The Company oversees installation of its modular classrooms on-site, using its
own employees for job supervision as a general contractor and, whenever
possible, for utility hook-ups and other tasks. In many custom projects, the
Company performs or supervises subcontracted electrical, plumbing, grading,
paving and foundation work, landscaping and other site preparation work and
services. Sub-contractors are typically used for larger utility, grading,
concrete and landscaping jobs. The Company has a general contractor's license in
the State of California.
In addition to approvals by the Department of State Architects, licensed
inspectors representing various school districts are on-site at each
manufacturing facility of the Company to continuously inspect the construction
of classrooms for structural integrity. On-site inspections after installation
are also made by local fire departments for purposes of determining adequate
accessibility.
The Company currently has four manufacturing facilities. Two are located in
Southern California, in Perris, California, which is approximately 60 miles east
of Los Angeles. The Company has another two facilities near Lathrop, California.
Lathrop is located approximately 75 miles east of San Francisco. The Company
currently has a total of seven production lines in operation, with new
production line in Perris completed at the end of 1997. An eighth production
line is scheduled to be added at the Lathrop plant in late 1998.
The standard contractual warranty for the Company's modular relocatable
classrooms is one year, although it may be varied by contract specifications.
Purchased equipment installed by the Company, such as air conditioning units,
carry the manufacturers' standard warranty. Warranty costs have not been
material in the past.
The Company believes that there are multiple sources of supplies available for
all raw materials and equipment used in manufacturing its classrooms, most of
which are standard construction items such as steel, plywood and wallboard.
BACKLOG
The Company manufactures classrooms to fill existing orders only, and not for
inventory. As of December 31, 1997, the backlog of sales orders was
approximately $71.0 million, up from approximately $4.1 million at December 31,
1995 and $58.0 million 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 Company believes that, based upon 1996 net sales, it is the largest modular
relocatable classroom manufacturer in California. However, the modular
relocatable classroom industry is highly competitive, with the market divided
among a number of privately-owned companies whose share of the market is smaller
than that of the Company. The Company believes that the nature of the bidding
process, the level of performance bonding required, and the industry's regulated
environment serve as barriers to market entry, and that the expertise of its
management gives it an advantage over competitors. Nevertheless, the Company
believes that additional competitors may enter the market in the future, some of
whom may have significantly greater capital and other resources than are
available to the Company, and that competition may therefore increase.
The Company also believes that its expertise in site preparation and on-site
installation gives it a competitive advantage over many manufacturers of
higher-priced, customized modular units, while its vertically integrated,
assembly-line approach to manufacturing enables the Company to be one of the low
cost producers of standardized, modular relocatable classrooms in California.
Unlike many of its competitors, the Company manufactures most of its own metal
components which allows the Company to maintain quality control over these
components and to produce them at a lower average cost than that at which they
could be obtained from outside sources. The Company also believes that the
quality and appearance of its buildings, and its reputation for reliability in
completion of its contracts, enable it to maintain a favorable position among
its competition.
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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 primary competitors of the Company for standardized classrooms are believed
to be Aurora Modular Industries in Southern California and American Modular
Systems in Northern California. Profiles Structures, Inc. in Southern California
and Design Mobile Systems in Northern California are the Company's primary
competitors in the market for higher-priced, customized classrooms. Each of
these four competitors is a privately-owned company.
PERFORMANCE BONDS
A substantial portion of the Company's sales require that the Company provide
bonds to ensure that the contracts will be performed and completed in accordance
with contract terms and conditions, and to assure that subcontractors and
materialmen will be paid. In determining whether to issue a performance bond on
behalf of the Company, bonding companies consider a variety of factors
concerning the specific project to be bonded, as well as the Company's levels of
working capital, shareholders' equity and outstanding indebtedness. From time to
time the Company has had, and in the future may again encounter, difficulty in
obtaining bonding for a given project. Although it has had no difficulty in
obtaining the necessary bonding in the last twelve months, the Company believes
that its difficulty in obtaining bonding for certain large projects from time to
time in the past has been attributable to the Company's levels of working
capital, shareholders' equity and indebtedness, and not to concerns about the
Company's ability to perform the work required under the contract. To assist the
Company in obtaining performance bonds in certain instances, the Company's
executive officers have been required to indemnify the bonding companies against
all losses they might suffer as a result of providing performance bonds for the
Company. The proceeds to the Company from the November 1997 Secondary Offering
are expected to enhance the Company's ability to obtain performance bonds,
furnish security, and meet other financial requirements associated with bidding
for larger contracts and performing work simultaneously under a greater number
of contracts.
REGULATION OF CLASSROOM CONSTRUCTION
In 1933, the California Legislature adopted the Field Act, which generally
provides that school facilities must be constructed in accordance with more
rigorous structural and seismic safety specifications than are applicable to
general commercial buildings. Under the Field Act, the Department of General
Services, through the Department of State Architects, has prescribed extensive
regulations regarding the design and construction of school facilities, and
reviews all plans for the construction of material modifications to any school
building. Construction authorization is not given unless the school district's
architect certifies that a proposed project satisfies construction cost and
allowable area standards. In addition, the Field Act provides for the submittal
of complete plans, cost estimates, and filing fees by the school district to the
Department of General Services, for the adoption of regulations setting minimum
qualifications for the preparation of plans and specifications, and the
supervision of school construction by a licensed architect or structural
engineer.
Additionally, California legislation provides that certain factory-built school
buildings may be pre-approved by the State for use in school construction. Once
plans and specifications for a given classroom have been pre-approved by the
Department of General Services, school districts can thereafter include in their
application to obtain State funds for new facilities a notification that they
intend to use pre-approved, standardized factory-built classrooms. This
procedure reduces the time required in the State's approval process thereby
providing additional incentive to use factory-built relocatable classrooms. The
Department of General Services provides for the continuous on-site inspection
during actual manufacturing of the classrooms, with the school districts
obligated to reimburse the Department for the costs of such inspection.
LEGISLATION AND FUNDING
The demand for modular relocatable classrooms in California is affected by
various statutes. These statutes, among other things, prescribe the methods by
which the Company's customers, primarily individual school districts, obtain
funding for the construction of new school facilities, and the manner in which
available funding is to be spent by the school districts.
In 1978, Proposition 13 was approved, which rolled back property taxes and
limited the ability of local school districts to rely upon revenue from such
taxes to finance the construction of school facilities. As a result, financing
for new school construction and
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rehabilitation of existing schools by California school districts is currently
provided, at the state level, by funds derived from general revenue sources or
statewide bond issues, and, at the local level, by local bond issues and fees
imposed on the developers of residential, commercial and industrial real
property ("Developer Fees"). Historically, the primary source of financing for
the purchase or lease of relocatable classrooms has been state funding.
STATE FUNDING. Until the adoption of the Class Size Reduction Program in 1996,
the most important source of funding at the State level for new school
facilities was through the issuance and sale of statewide general obligation
bonds which are repaid out of the State's General Funds. Proposals to issue such
bonds are placed on statewide ballots from time-to-time in connection with
general or special elections, and require approval by a majority of the votes
cast in connection with such proposals. As in the case of the Class Size
Reduction Program, the State also may annually allocate funds from the State's
budget for the support of school districts and community college districts.
AUTHORITY FOR BOND FINANCING. Under the School Building Lease -- Purchase Law of
1976, the State Allocation Board is empowered to purchase or lease school
facilities using funds from the periodic issuance of general obligation bonds of
the State of California. These purchased or leased school facilities may be made
available by the State Allocation Board to school districts. Certain matching
funds, usually derived from Developer Fees, are required to be supplied by the
school districts seeking state funded facilities. If the school districts
acquire relocatable structures using Developer Fees, the amount of the required
matching funds is reduced by the cost of such facilities. This reduction in
matching funds is intended to provide an incentive for school districts to lease
relocatable classrooms. As a condition of funding any project under this
program, at least 30% of new classroom space to be added must be comprised of
relocatable structures, unless relocatable structures are not available or
special conditions of terrain, climate or unavailability of space make the use
of relocatable structures impractical. In addition, State funds under this
program are not available to school districts which are determined to have an
adequate amount of square footage available for their student population.
Recently, a package of bills was introduced that would, among other things, (i)
revise the School Building Lease-Purchase Law of 1976 including elimination of
the requirement that at least 30% of all classroom space to be added using State
funds be relocatable classrooms, (ii) place an $8.2 billion bond issue for
school construction on the June 1998 ballot, and (iii) include a proposed
amendment to the California Constitution on the June 1998 ballot. The proposed
Constitutional amendment would modify Proposition 13 by reducing the percentage
vote required for approval of tax increases to support local bond issuances from
two-thirds to a simple majority. However, both houses of the California
Legislature passed different versions of this package of bills, which were
returned to a conference committee. Each bill must still be approved by both
houses of the Legislature as revised by the conference committee. In addition,
none of these bills would become operative as currently proposed unless the $8.2
billion bond issue is approved by a majority of the California voters and the
proposed amendment to the California Constitution is approved by two-thirds of
the California voters. The Governor and Legislative leadership were unable to
reach an agreement in time to place the proposals on the June 1998 ballot. The
next opportunity to place proposals on the ballot would be November 1998.
In response to the adoption of Proposition 13, the State of California adopted
the California Emergency Classroom Law of 1979, pursuant to which the State
Allocation Board may spend up to $35 million per year from available funds to
purchase relocatable classrooms to be leased to school districts. Relocatable
classrooms are not available to school districts under this program if the
school district has available local bond proceeds that could be used to purchase
classroom facilities, unless the district has approved projects pending under
the School Building Lease-Purchase Law of 1976. The State has, in the past,
funded this program primarily from the proceeds of statewide bond issues
approved by voters.
BUDGET ALLOCATIONS. Proposition 98, which was approved in 1988, requires the
State to allocate annually from the State's budget, for the support of school
districts and community college districts, a minimum amount equal to the same
percentage of funds as was appropriated for the support of those institutions in
fiscal year 1986-87. While this requirement may be suspended for a given year by
emergency legislation, it has the effect of limiting the ability of the
California legislature to reduce the level of school funding from that in
existence in 1986-87. The State raises the necessary funds through proceeds from
the sale of statewide bond issues, income tax revenues and other revenues. A
recent reduction in California's corporate tax rates, and a proposed reduction
in personal income tax rates, may affect future levels of the State's income tax
revenues.
In November 1996, California implemented the Class Size Reduction Program in
response to overcrowding in classrooms in the state and its assumed negative
impact on learning. An additional impetus for the program was a study conducted
by Tennessee State University which indicated that students in small classrooms
outperformed their peers from larger classes at least through the eighth
<PAGE> 9
grade on standardized tests in math and reading. The goal of the California
Class Size Reduction Program is to reduce public elementary school class sizes
in kindergarten through the third grade. Under this program, schools that reduce
class size to 20 students in those grades will receive additional funds. For the
1996-1997 school year, a school district was entitled to receive $25,000 for
each new classroom added which reduced the average class size for a specified
grade level to 20 students or less. Among other ways new classrooms can quickly
and inexpensively be added, school districts may reconfigure existing space to
convert it to classrooms from other uses, or purchase or lease a modular
relocatable classroom.
LOCAL FUNDING. Local school districts in California have the ability to issue
local general obligation bonds for the acquisition and improvement of real
property for school construction. These bond issues require the approval of
two-thirds of the voters in the district and are repaid using the proceeds of
increases in local property taxes. A local school district may also levy
Developer Fees on new development projects in the district, subject to a maximum
rate set by state law. The Developer Fees can only be levied if the project can
be shown to contribute to the need for additional school facilities and the fee
levied is reasonably related to such need. In addition, California law provides
for the issuance of bonds by Community Facilities Districts which can be formed
by a variety of local government agencies, including school districts. These
districts, known as "Mello-Roos" districts, can have flexible boundaries and the
tax imposed to repay the bonds can be based on property use, acreage, population
density or other factors.
OTHER LEGISLATION
California legislation adopted in 1989 provides that school districts which
currently lease any building which does not meet the prescribed structural
standards must have replaced nonconforming buildings with conforming ones by
September 1, 1990. However, any district has the right to request a one-time
waiver for a maximum of three years upon presentation of satisfactory evidence
to the State Allocation Board that the district is proceeding in a timely
fashion with a program that will eliminate the need for the nonconforming
facilities within that time period. The State has authorized districts to renew
these waivers through 2000 and may grant further waivers. The Company
understands that a number of school districts have requested and been granted
such waivers. Based upon information received by the State Allocation Board from
school districts and provided to the Company, it is believed that there are 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.
California has taken steps to encourage local school districts to adopt
year-round school programs to help increase the use of existing school
facilities and reduce the need for additional school facilities. School
districts requesting state funding under the School Building Lease-Purchase Law
of 1976 or the Emergency Classroom Law of 1979 discussed above must submit a
study examining the feasibility of implementing in the district a year-round
educational program that is designed to increase pupil capacity in the district
or in overcrowded high school attendance areas. The feasibility study
requirement is waived, however, if the district demonstrates that emergency or
urgent conditions exist in the district that necessitate the immediate need for
relocatable buildings. The demand for new school facilities, including
relocatable classrooms, would be adversely affected in the event that a
significant number of California school districts implemented year-round school
programs. In addition, a significant increase in the level of voluntary or
mandatory busing of students from overcrowded schools to schools with excess
capacity could adversely affect demand for new school facilities.
ENVIRONMENTAL MATTERS
The Company is subject to a variety of federal, state and local governmental
regulations related to the storage, use and disposal of any hazardous materials
used by the Company in connection with the manufacture of its products. Both the
governmental regulations and the costs associated with complying with such
regulations are subject to change in the future.
EMPLOYEES
At December 31, 1997, the Company had 795 employees, including 744 in
manufacturing, 5 in sales, 20 in operations and 26 in general management and
administration. The Company's employees are not represented by a labor union,
and it has experienced no work stoppages. The Company believes that its employee
relations are good.
<PAGE> 10
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. This manufacturing
facility occupies twenty-five acres, with approximately 200,000 square feet of
covered production space under roof, pursuant to a lease expiring in 2014. A
second facility in Perris occupies approximately thirty acres, with
approximately 120,000 square feet of covered production space under roof,
pursuant to a lease expiring in 2014. This second facility also includes
approximately 80,000 square feet under roof used as a metal working facility.
The Company's third plant consists of a 400,000 square foot manufacturing
facility on a 30-acre site in Lathrop, California that is leased through 2019.
The fourth plant, which was leased for up to five years in October 1996,
consists of approximately 50,000 square feet of manufacturing areas on a 4 acre
site in Patterson, California. The Company believes that its existing facilities
are well-maintained and in good operating condition, and, with the additional
production lines currently being added or planned for addition in 1998, meet the
requirements for its immediately foreseeable business needs. Each of the
Company's current facilities other than the Patterson plant is leased from an
affiliate. See "Management -- Certain Transactions."
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in various lawsuits related to
its ongoing business operations, primarily collection actions or vendor
disputes. In the opinion of management, no pending lawsuit will result in any
material adverse effect upon the Company or its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE> 11
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>
3/31/97 13.875 7.875
6/30/97 13.000 10.625
9/30/97 25.250 11.625
12/31/97 29.750 17.500
</TABLE>
On December 31, 1997, the closing sales price on The NASDAQ National Market for
a share of the Company's Common Stock was $19.50. The approximate number of
holders of record of the Company's Common Stock as of December 31, 1997, was 73.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock since 1990. The
Board of Directors currently intends to follow a policy of retaining all
earnings, if any, to finance the continued growth and development of the
Company's business and does not anticipate paying cash dividends in the
foreseeable future. Any future determination as to the payment of cash dividends
will be dependent upon the Company's financial condition and results of
operations and other factors deemed relevant by the Board of Directors.
Moreover, the Company's Credit Facility currently prohibits the payment of cash
dividends.
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected income statement data set forth below for the three years
ended December 31, 1995, 1996 and 1997 have been derived from the audited
financial statements of the Company included elsewhere herein. The selected
income statement data set forth below for the years ended December 31, 1993 and
1994 have been derived from audited financial statements of the Company that are
not included herein. The selected balance sheet data set forth below for the
years ended December 31, 1996 and 1997 have been derived from the audited
financial statements of the Company included elsewhere herein. The selected
balance sheet data set forth below for the years ended December 31, 1993, 1994
and 1995 have been derived from the audited financial statements of the Company
that are not included herein. The selected income statement and balance sheet
data set forth below should be read in conjunction with those financial
statements (including the notes thereto) and with "Management's Discussion and
Analysis of Results of Operations and Financial Condition" also included
elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales ............................. $ 19,658 $ 20,355 $ 19,386 $ 49,886 $ 134,050
Cost of goods sold .................... 21,764 17,766 16,401 42,629 107,367
--------- --------- --------- --------- ---------
Gross profit (loss) ................... (2,106) 2,589 2,985 7,257 26,683
Selling, general and administrative
expenses ............................ 1,871 1,554 1,613 2,345 5,156
Restructuring charge(1) ............... 2,470 -- -- -- --
--------- --------- --------- --------- ---------
Income (loss) from operations ......... (6,447) 1,035 1,372 4,912 21,527
Interest expense, net ................. (565) (471) (387) (422) (909)
Other income (expense) ................ 47 42 (1) (13) 92
--------- --------- --------- --------- ---------
Income (loss) before income taxes ..... (6,965) 606 984 4,477 20,711
Income taxes .......................... 1 4 19 208 (7,703)
--------- --------- --------- --------- ---------
Net income (loss) ..................... (6,966) 602 965 4,269 13,008
========= ========= ========= ========= =========
Net income (loss) available
for Common Stock(2) ................. $ (6,966) $ 602 $ 799 $ 4,221 $ 13,008
========= ========= ========= ========= =========
Basic earnings (loss) per share (3)(7). $ (2.02) $ 0.19 $ 0.25 $ 0.77 $ 1.47
Weighted average shares outstanding
(in thousands)(3)(7) ................. 3,455 3,209 3,170 5,461 8,854
Diluted earnings (loss) per common
share(3)(7) ........................... $ (2.02) $ 0.11 $ 0.14 $ 0.47 $ 1.31
Weighted average shares outstanding
(in thousands)(3)(7) ................. 3,455 5,294 6,712 9,041 9,898
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ....................... $ 3,063 $ 4,403 $ 4,383 $ 14,069 $ 36,417
Total assets .......................... 16,620 15,919 15,154 34,029 68,220
Total liabilities ..................... 11,889 7,900 6,411 18,716 20,177
Long-term debt, excluding current
portion(4) ....................... 6,506 4,400 3,590 7,844 --
Shareholders' equity .................. 4,732 8,019 8,743 15,313 48,043
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Gross margin ...................... (10.7%) 12.7% 15.4% 14.5% 19.9%
Operating margin ................. (32.8%) 5.1% 7.1% 9.8% 16.1%
Standard classrooms sold(5) ...... 680 698 605 1,610 4,514
Backlog at period end(6) ......... $ 6,000 $ 7,000 $ 4,100 $ 58,000 $ 71,000
</TABLE>
- ----------------
(1) Reflects the write-off of intangible assets related to the Company's 1989
purchase of "Del-Tec", which manufactured more extensively customized,
higher priced units, whose operations were discontinued in the third quarter
of 1993.
<PAGE> 13
(2) After deduction of preferred stock dividends paid or accrued of $166,000 and
$48,000 for the years ended December 31, 1995 and 1996, respectively. No
shares of the Company's preferred stock were outstanding during 1997, and no
shares currently are outstanding. See Note 11 of Notes to Financial
Statements.
(3) Computed on a fully diluted basis.
(4) For a description of the Company's long-term debt, see Notes 5 and 6 of
Notes to Financial Statements.
(5) Determined by dividing the total square footage of floors sold during the
year by 960 square feet, the floor area of a standard classroom. See
"Business -- Modular Classrooms."
(6) The Company manufactures classrooms to fill existing orders only, and not
for inventory. Backlog consists of sales orders scheduled for completion
during the next 12 months.
(7) Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share". All prior periods have
been restated accordingly.
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
GENERAL
Since its inception in 1982, the Company's principal business has been the
design, manufacture, marketing and installation of modular relocatable
classrooms. The Company's primary customers consist of individual school
districts located in California and the State of California. The need for new
classrooms in California school districts is generally governed by the number of
students per class, which is a function of the net migration of families into
and out of school districts and the total number of new students entering the
school system in any given year.
Specific provisions of California legislation govern the amount of the
State's budget which must be directed toward the public school system. A portion
of these funds may be allocated for the addition of new classrooms. In addition,
the State can raise funds to build or add new classrooms through the issuance of
general obligation bonds. One condition currently governing the receipt of State
funding for new classroom additions is that at least 30% of the classroom space
to be added must be relocatable structures, unless the school district can
demonstrate that the use of such structures is not practical in any given
situation. See "Business -- Legislation and Funding."
In the early to mid 1990's, California suffered through a recession that
resulted in statewide budgetary constraints. During this period, the amount of
State funds available for the addition of new classrooms was severely limited.
As a result, the Company experienced a decline in net sales in 1992 and 1993,
and net sales in 1994 and 1995 were essentially the same as those generated in
1993. In response, the Company initiated a cost control program which included
layoffs of approximately 80% of its staff as compared to the June 1991 work
force, and temporarily closed its plant in Lathrop, California. In addition, the
Chief Executive Officer of the Company agreed to a 50% salary reduction and each
of the Company's other top management personnel agreed to a 10% salary
reduction.
Due in large measure to the amelioration of the State budget crises and the
realization that the need for new classrooms in California far exceeded supply,
beginning in the second half of 1996 and continuing into 1997, the State has
increased the amount of funds targeted specifically for the addition of new
classrooms. In November 1996, the State implemented the Class Size Reduction
Program, the goal of which is to reduce public school class sizes in
kindergarten through the third grade. For the 1996-1997 school year the State
spent $822 million under this program, including $200 million specifically for
facilities, which may be relocatable classrooms. Primarily as a result of the
implementation of the Class Size Reduction Program, the Company's net sales
increased to $134.0 million in 1997 as compared to $49.9 million for the year
ended December 31, 1996 and $19.4 million in 1995. Although the State's upcoming
budget has not been finalized, based upon information available to it, the
Company believes that total State funding under the Class Size Reduction Program
for the 1997-1998 school year will be as high as $1.5 billion for both general
operations and school facilities. In addition, an $8.2 billion school
construction bond issue has been proposed, as part of a package of legislation,
for inclusion on the June 1998 California ballot, the proceeds of which, if on
the ballot and approved by the voters, would be used to construct and modernize
existing school facilities, acquire land to build new schools, and construct or
add classrooms. . The Governor and Legislative leadership were unable to reach
an agreement in time to place the proposals on the June 1998 ballot. The next
opportunity to place proposals on the ballot would be November 1998. See
"Business -- Legislation and Funding." In response to the increased demand for
its modular relocatable classrooms, the Company re-opened the Northern
California Lathrop plant in 1997, has expanded its Southern California
production capacity in Perris, and intends to further expand production capacity
at the Lathrop plant in late 1998.
14
<PAGE> 15
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages of
net sales represented by certain items in the Company's statements of
operations.
PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Net sales ............... 100.0% 100.0% 100.0%
Cost of goods sold ...... 84.6 85.5 80.1
----- ----- -----
Gross profit ............ 15.4 14.5 19.9
Selling, general and
administrative expenses.. 8.3 4.7 3.8
----- ----- -----
Income from operations .. 7.1 9.8 16.1
Interest expense, net ... (2.0) (0.8) (0.7)
Other income ........... -- -- --
Income before income taxes 5.1 9.0 15.4
Income taxes............. 0.1 0.4 5.7
----- ----- -----
Net income .............. 5.0% 8.6% 9.7%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales for the year ended December 31, 1997 increased to $134.0 million, an
increase of $84.1 million, or approximately 169%, from $49.9 million in 1996.
The increase in 1997 was due principally to the amelioration of the State of
California budget deficit and the implementation during the year of the Class
Size Reduction Program for kindergarten through third grade classes in
California's public elementary schools.
For the year ended December 31, 1997, gross profit was $26.7 million, an
increase of $19.4 million, or approximately 266%, over 1996 gross profit of $7.3
million. Gross profit percentage of net sales increased to 19.9% in 1997 from
14.5% in 1996. The increase in gross profit as a percentage of net sales was
primarily attributable to the increased volume, utilization of a previously idle
facility, and the realization of manufacturing efficiencies.
In 1997, selling, general and administrative expenses increased to $5.2 million
from $2.3 million, due to increases in the number of employees and an increase
in selling costs. However, as a percentage of net sales, selling, general and
administrative expenses decreased to 3.8% in 1997 from 4.7% in 1996.
Due to increased volume and average borrowings outstanding, net interest expense
increased from $422,000 in 1996 to $909,000 for 1997.
Income tax expense was $7.7 million for the year ended December 31, 1997,
compared to $208,000 for 1996. The Company's effective tax rate increased to
37.2% for the year ended December 31, 1997 from 4.6% for the year ended December
31, 1996. The effective tax rate in both periods was positively impacted by the
utilization for federal income tax purposes of net operating loss carryforwards
generated in prior years.
15
<PAGE> 16
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales for the year ended December 31, 1996 increased to $49.9 million, an
increase of $30.5 million, or approximately 157%, from $19.4 million in 1995.
The increase in 1996 was due principally to the amelioration of the State of
California budget deficit and the implementation during the year of the Class
Size Reduction Program for kindergarten through third grade classes in
California's public elementary schools.
For the year ended December 31, 1996, gross profit was $7.3 million, an increase
of $4.3 million, or approximately 143%, over 1995 gross profit of $3.0 million.
However, as a percentage of net sales, gross profit declined to 14.5% in 1996,
from 15.4% in 1995. The decline of gross profit as a percentage of net sales was
primarily attributable to a change in product mix as the Company focused its
resources on manufacturing more standardized classrooms which could be sold in
greater numbers.
In 1996, selling, general and administrative expenses increased to $2.3 million
from $1.6 million, due to increases in the number of employees and an increase
in selling costs. However, because net sales increased substantially during the
year, selling, general and administrative expenses as a percentage of net sales
decreased to 4.7% in 1996 from 8.3% in 1995.
For the year ended December 31, 1996, net interest expense increased by $35,000,
from $387,000 in 1995 to $422,000 in 1996, due to slightly higher borrowings to
finance growing levels of accounts receivables and work-in-progress inventories
attributable to the large 1996 increase in net sales.
The provision for income taxes was $208,000 for the year ended December 31,
1996, compared to $19,000 for the year ended December 31, 1995. The Company's
effective tax rate increased to 4.6% for the year ended December 31, 1996, from
1.9% for the year ended December 31, 1995, due to differences between financial
and tax accounting treatment of certain items, primarily accrued liabilities.
The effective tax rate in both periods was positively impacted by the
utilization for federal income tax purposes of net operating loss carryforwards
generated in prior years.
INFLATION
The Company does not believe that inflation had a material effect on its results
of operations during the past two years. However, there can be no assurance that
the Company's business will not be affected by inflation in the future.
LIQUIDITY AND CAPITAL RESOURCES
Since the 1994 Financing described below, the Company has funded its
operations and capital expenditures with cash generated internally by
operations, supplemented by borrowings under various credit facilities. During
the years ended December 31, 1995, 1996 and 1997, the Company's operations
provided (used) cash in the amounts of approximately $1.2 million, ($4.9
million) and $2.0 million, respectively. At December 31, 1997, the Company had
approximately $11.6 million in cash.
In September 1997, the Company amended its Credit Facility to increase the
amount which the Company is entitled to borrow thereunder and extend the term of
the commitment to September 30, 2000. The Company is entitled to borrow, from
time to time, up to $20.0 million, with actual borrowings limited to specified
percentages of eligible accounts receivable, equipment and inventories. On
December 31, 1997, the Company was entitled to
16
<PAGE> 17
borrow up to the maximum amount of the Credit Facility, and approximately
$42,000 was outstanding. Interest on outstanding balances is payable at a
floating rate equal to 0.75% above the lender's reference rate. Borrowings are
secured by substantially all of the Company's assets.
The Company had working capital of $4.4 million, $14.1 million and $36.4
million at December 31, 1995, 1996 and 1997, respectively. In 1997, current
assets increased by $31.7 million, with an increase of $11.2 million in cash, an
increase of $11.2 million in contracts receivable, an increase of $6.9 million
in costs and estimated earnings in excess of billings, an increase of $2.1
million in deferred tax assets and a decrease of $0.2 million in inventories.
Current liabilities increased by $9.3 million, with various accrued liabilities
and billings in excess of costs and estimated earnings increasing by $6.1
million and $5.8 million, respectively, as a result of the higher level of net
sales) offset by a $4.0 million decrease in accounts payable. In 1996, contracts
receivable, costs and estimated earnings in excess of billings on contracts, and
inventories increased by $7.1 million, $7.6 million, and $3.5 million,
respectively, as the Company's net sales increased significantly during the
second half of the year following implementation of the State's Class Size
Reduction Program. Accounts payable and accrued liabilities increased by $5.3
million and $2.3 million, respectively, in 1996, also as a result of the
increase in net sales.
Capital expenditures amounted to $482,000, $2.0 million and $4.1 during the
years ended December 31, 1995, 1996 and 1997, respectively. In 1995, the
majority of these expenditures was concentrated on maintenance of equipment.
Capital expenditures increased significantly in 1996 primarily as a result of
the re-opening of the Company's Lathrop, California manufacturing facility. In
September 1997, the Company began construction of an additional production line
at one of its Perris, California facilities. The Company expects that capital
expenditures in 1998 will be approximately $2.0 million, which includes the
costs of adding a new production line at the Northern California plant in
Lathrop in late 1998.
The Company has a $4.0 million Industrial Development Bond issued by the
Industrial Development Authority of the County of San Joaquin, California, the
net proceeds of which were used to partially finance the $6.0 million cost of
construction of the Company's Lathrop, California facility. The loan 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 bond agreement was amended in 1997 requiring repayment of the
balance by December 31, 1998. 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 Union Bank of California N.A. Accordingly,
the Company's borrowing capacity will be reduced during the period the letter of
credit is outstanding. As of December 31, 1997, $42,000 principal amount of this
revolving loan remained outstanding.
In May 1994, the Company raised net proceeds of approximately $2.7 million
through the sale of 2,850,000 shares of Series A Preferred Stock to several
private investors who are Selling Shareholders in this Offering (the "1994
Financing"). In April 1996, all of the Series A Preferred Stock was converted
into 2,850,000 shares of Common Stock. In December 1996, warrants issued to the
investors in connection with the 1994 Financing were exercised, resulting in
cash proceeds to the Company of approximately $1.6 million and the issuance of
2,204,000 additional shares of Common Stock.
Management believes that the Company's existing product lines and
manufacturing capacity will enable the Company to generate sufficient cash
through operations, supplemented by the net proceeds to the Company from this
Offering and continued use of its existing line of credit, to finance the
Company's business over the next twelve months. However, additional cash
resources may be required if the Company's rate of growth exceeds currently
anticipated levels. Moreover, it may prove necessary for the Company to
construct or acquire additional manufacturing facilities in order for the
Company to compete effectively in new market areas or states which are
17
<PAGE> 18
beyond a 300 mile radius from one of its production facilities. The construction
or acquisition of new facilities could require significant additional capital.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. SFAS 130 requires all items that are required to
be recognized under accounting standards as components of comprehensive income
to be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS 130 does not require a specific
format for that financial statement but requires that an enterprise display an
amount representing total comprehensive income for the period covered by that
financial statement. SFAS 130 requires an enterprise to (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Management has not determined whether the
adoption of SFAS 130 will have a material impact on the Company's combined
financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for public business enterprises to
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS 131 requires, among other items, that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets, information about the revenues derived from the enterprise's
products or services, and major customers. SFAS 131 also requires that the
enterprise report descriptive information about the way that the operating
segments were determined and the products and services provided by the operating
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS 131 need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. Management has not determined whether the adoption of SFAS 131
will have a material impact on the Company's segment reporting.
YEAR 2000
Many computer programs use only the last two digits of a year to store or
process dates. This is the case with the accounting program used by the Company.
As a result, the programs may treat dates after 1999 as earlier than dates
before 2000. This could adversely affect routines such as calculating
depreciation or aging accounts receivable. The company has engaged a consulting
firm to correct this defect in the Company's program, and the Company expects
the defect will be corrected without material cost before the year 2000. The
Company's customers, suppliers and service providers may use computer programs
with similar defects which, to the extent not corrected, could adversely affect
the Company's operations, such as the receipt of supplies, services, purchase
orders and payments of accounts receivable.
18
<PAGE> 19
SEASONALITY
Historically, the Company's quarterly revenues have been highest in the second
and third quarters of each calendar year because a large number of orders for
modular classrooms placed by school districts require that classrooms be
constructed, delivered and installed in time for the upcoming new school year
which generally commences in September. The Company has typically been able to
add employees as needed to respond to the corresponding increases in
manufacturing output required by such seasonality to meet currently foreseeable
increases in this seasonal demand. In addition, the Company's operating margins
may vary on a quarterly basis depending upon the mix of revenues between
standardized classrooms and higher margin customized classrooms and the timing
of the completion of large, higher margin customized contracts.
INFLATION
During the past three years, the Company has not been adversely affected by
inflation, because it has been generally able to pass along to its customers
increases in the costs of labor and materials.
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.
19
<PAGE> 20
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.
20
<PAGE> 21
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, 1996 and 1997
Statements of Income - For the Years Ended December 31, 1995, 1996 and
1997
Statements of Shareholders' Equity - For the Years Ended December 31,
1995, 1996 and 1997
Statements of Cash Flows - For the Years Ended December 31, 1995, 1996
and 1997
Summary of Significant Accounting Policies
Notes to Financial Statements
Schedule Included - For the Years Ended December 31, 1995, 1996 and 1997
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.
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 in the Registration Statement on Form S-1
filed with the Commission on November 3, 1997.
All of the exhibits appearing in the Registration Statement on Form S-8
filed with the Commission on November 26,1996.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: MARCH 27, 1998 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 the 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/ GERALD B. BASHAW Director, Chairman of the MARCH 27, 1998
- ------------------------------------ Board
Gerald B. Bashaw
/S/ ROBERT W. CAMPBELL Director MARCH 27, 1998
- ------------------------------------
Robert W. Campbell
/S/ DANIEL J. DONAHOE Director MARCH 27, 1998
- ------------------------------------
Daniel J. Donahoe
/S/ JAMES D. GOLDENETZ Director, Secretary MARCH 27 , 1998
- ------------------------------------
James D. Goldenetz
/S/ EVAN M. GRUBER Director, Chief Executive MARCH 27, 1998
- ------------------------------------ Officer
Evan M. Gruber
/S/ CHARLES C. McGETTIGAN Director MARCH 27, 1998
- ------------------------------------
Charles C. McGettigan
/S/ MYRON A. WICK III Director MARCH 27, 1998
- ------------------------------------
Myron A. Wick III
</TABLE>
22
<PAGE> 23
MODTECH, INC.
Annual Report - Form 10K
Financial Statements and Schedule
December 31, 1995, 1996 and 1997
(With Independent Auditors' Report Thereon)
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Modtech, Inc.:
We have audited the accompanying balance sheets of Modtech, Inc. as of December
31, 1996 and 1997 and the related statements of income, shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1997. 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, 1996 and 1997 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1997, 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 18, 1998
<PAGE> 25
MODTECH, INC.
Balance Sheets
December 31, 1996 and 1997
<TABLE>
<CAPTION>
ASSETS (NOTE 5) 1996 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 404,981 $11,628,851
Contracts receivable, less allowance for contract
adjustments of $413,373 in 1996 and $410,119 in 1997 10,309,861 21,510,146
(note 2)
Costs and estimated earnings in excess of billings on
contracts (notes 3 and 8) 9,102,733 16,020,986
Inventories 4,166,700 3,931,505
Due from affiliates (note 8) 754,067 1,052,634
Note receivable from affiliates (note 8) 45,212 45,212
Prepaid assets 136,960 268,295
Deferred tax asset (note 7) -- 2,094,059
Other current assets 20,305 42,274
----------- -----------
Total current assets 24,940,819 56,593,962
----------- -----------
Property and equipment, net (notes 4 and 6) 8,552,720 11,229,163
Other assets 535,235 298,258
Deferred tax asset (note 7) -- 98,874
----------- -----------
$34,028,774 $68,220,257
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 26
MODTECH, INC.
Balance Sheets
December 31, 1996 and 1997
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1997
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 6,409,422 $ 2,421,346
Accrued compensation 1,369,441 3,616,498
Accrued insurance expense 551,580 1,470,725
Other accrued liabilities 1,089,439 3,237,255
Income tax payable 204,017 1,017,027
Billings in excess of costs and estimated earnings on
contracts (notes 3 and 8) 1,148,050 6,997,350
Current note payable (note 5) -- 42,185
Current maturities of long-term debt (notes 6 and 8) 100,000 1,374,952
------------ ------------
Total current liabilities 10,871,949 20,177,338
Note payable (note 5) 5,943,853 --
Long-term debt, less current maturities (notes 6 and 8) 1,899,952 --
------------ ------------
Total liabilities 18,715,754 20,177,338
------------ ------------
Shareholders' equity:
Common stock, $.01 par. Authorized 20,000,000 shares;
issued and outstanding 8,649,436 and 9,819,959 in
1996 and 1997 (notes 10 and 11) 86,494 98,200
Additional paid-in capital 19,620,994 39,330,902
(Accumulated deficit) retained earnings (4,394,468) 8,613,817
------------ ------------
Total shareholders' equity 15,313,020 48,042,919
------------ ------------
Commitments and contingencies (notes 3, 5, 8, and 14)
------------ ------------
$ 34,028,774 $ 68,220,257
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 27
MODTECH, INC.
Statements of Income
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales (notes 8 and 12) $ 19,386,027 $ 49,885,858 $ 134,050,485
Cost of goods sold (note 8) 16,400,588 42,628,970 107,367,035
------------- ------------- -------------
Gross profit 2,985,439 7,256,888 26,683,450
Selling, general, and administrative
expenses 1,612,792 2,345,182 5,155,987
------------- ------------- -------------
Income from operations 1,372,647 4,911,706 21,527,463
------------- ------------- -------------
Other income (expense):
Interest expense (486,323) (445,631) (1,004,198)
Interest income (note 8) 98,510 23,704 95,551
Other - net (937) (13,116) 92,103
------------- ------------- -------------
(388,750) (435,043) (816,544)
------------- ------------- -------------
Income before income taxes 983,897 4,476,663 20,710,919
Income taxes (note 7) (19,098) (207,631) (7,702,634)
------------- ------------- -------------
Net income $ 964,799 $ 4,269,032 $ 13,008,285
------------- ------------- -------------
5% Convertible preferred stock dividend
(note 11) (166,320) (47,500) --
Net income available for common
stock $ 798,479 $ 4,221,532 $ 13,008,285
============= ============= =============
Basic earnings per share $ 0.25 $ 0.77 $ 1.47
============= ============= =============
Weighted-average shares outstanding 3,169,593 5,461,007 8,853,786
============= ============= =============
Diluted earnings per share $ 0.14 $ 0.47 $ 1.31
============= ============= =============
Weighted-average shares outstanding 6,712,155 9,041,084 9,897,935
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 28
MODTECH, INC.
Statements of Shareholders' Equity
Years ended December 31, 1995, 1996 And 1997
<TABLE>
<CAPTION>
5% CONVERTIBLE STOCK (ACCUMULATED
PREFERRED STOCK COMMON STOCK PURCHASE ADDITIONAL DEFICIT)
---------------------- ------------------------- NOTES PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL EARNINGS
---------- ----------- ------------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 2,850,000 2,685,000 3,209,338 $ 32,094 $ (273,594) $ 14,989,919 $ (9,414,479)
Adjustment of stock purchase notes -- -- (155,988) (1,560) 273,594 (346,292) --
receivable
Dividend (note 11) -- -- -- -- -- -- (166,320)
Net income -- -- -- -- -- --
964,799
---------- ----------- ------------ ----------- ------------ ------------ ------------
Balance, December 31, 1995 2,850,000 2,685,000 3,053,350 30,534 -- 14,643,627 (8,616,000)
Conversion of preferred stock (2,850,000) (2,685,000) 2,850,000 28,500 -- 2,656,500 --
(note 11)
Exercise of options and warrants -- -- 2,746,086 27,460 -- 2,320,867 --
Dividend (note 11) -- -- -- -- -- -- (47,500)
Net income -- -- -- -- -- -- 4,269,032
---------- ----------- ------------ ----------- ------------ ------------ ------------
Balance, December 31, 1996 -- -- 8,649,436 86,494 -- 19,620,994 (4,394,468)
Exercise of options, including
tax benefit of -- -- 170,523 1,706 -- 1,119,890 --
$753,874 (notes 7, 10 and 11)
Secondary offering - Net (note 15) -- -- 1,000,000 10,000 -- 18,590,018
Net income -- -- -- -- -- -- 13,008,285
---------- ----------- ------------ ----------- ------------ ------------ ------------
Balance, December 31, 1997 -- -- 9,819,959 $ 98,200 $ -- $ 39,330,902 $ 8,613,817
========== =========== ============ ========== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 29
MODTECH, INC.
Statements of Cash Flows
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 964,799 $ 4,269,032 $ 13,008,285
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 563,104 540,421 1,344,098
Decrease in allowance for
contract adjustments (17,300) (5,283) 0
Loss (gain) on sale of equipment (20,084) 17,265 (9,177)
(Increase) decrease in assets:
Contracts receivable (65,105) (7,135,702) (11,200,285)
Costs and estimated earnings in
excess of billings 329,641 (7,648,812) (6,918,253)
Inventories 337,697 (3,520,404) 235,195
Amounts due from affiliates (255,607) 686,774 (298,567)
Prepaids and other assets 54,088 (12,947) 83,673
Deferred tax asset -- -- (2,192,933)
Increase (decrease) in
liabilities:
Accounts payable (436,234) 5,304,183 (3,988,076)
Accrued compensation 64,255 1,081,171 2,247,057
Accrued insurance expense (214,004) 526,813 919,145
Other accrued liabilities 166,102 465,766 2,147,816
Income tax payable 19,098 184,919 813,010
Billings in excess of costs and
estimated earnings (276,306) 388,448 5,849,300
------------ ------------ ------------
Net cash provided by
(used in) operating
activities 1,214,144 (4,858,356) 2,040,288
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of equipment 46,416 5,550 60,604
Purchase of property and
equipment (481,533) (1,958,303) (4,071,968)
------------ ------------ ------------
Net cash used in
investing activities (435,117) (1,952,753) (4,011,364)
------------ ------------ ------------
</TABLE>
(Continued)
<PAGE> 30
MODTECH, INC.
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net principal borrowings (payments)
under revolving credit lines $ (309,990) $ 4,353,843 $ (5,901,668)
Principal payments on long-term debt (502,735) -- (625,000)
(Adjustment of) stock purchase note
receivable by exchange of common (74,258) -- --
stock
Net proceeds from issuance of common -- 2,348,327 19,721,614
stock
Declared dividends (note 11) (166,320) (47,500) --
------------ ------------ ------------
Net cash provided by
(used in) financing
activities (1,053,303) 6,654,670 13,194,946
------------ ------------ ------------
Net increase (decrease)
in cash (274,276) (156,439) 11,223,870
Cash at beginning of year 835,696 561,420 404,981
------------ ------------ ------------
Cash at end of year $ 561,420 $ 404,981 $ 11,628,851
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 31
MODTECH, INC.
Notes to Financial Statements
December 31, 1995, 1996 and 1997
(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 and assumed certain liabilities of Miller Structure, Inc.
- California. The Company leased the manufacturing facility from
Miller Structure (note 18).
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.
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> 32
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.
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> 33
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.
EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). This
statement replaces the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per
share amounts have been restated to conform to the SFAS No. 128
requirements.
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.
RECLASSIFICATION
Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.
(2) CONTRACTS RECEIVABLE
Contracts receivable consisted of customer billings for:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Completed contracts $ 7,722,927 $ 9,226,114
Contracts in progress 2,102,766 9,444,794
Retentions 897,541 3,249,357
------------ ------------
10,723,234 21,920,265
Less allowance for contract
adjustments (413,373) (410,119)
------------ ------------
$ 10,309,861 $ 21,510,146
============ ============
</TABLE>
3
<PAGE> 34
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>
1996 1997
------------- -------------
<S> <C> <C>
Net costs and estimated earnings on
uncompleted contracts $ 39,093,050 $ 105,465,154
Billings to date (31,173,406) (96,144,454)
------------- -------------
7,919,644 9,320,700
Net under (over) billed receivables
from completed contracts 35,039 (297,064)
------------- -------------
$ 7,954,683 $ 9,023,636
============= =============
</TABLE>
These amounts are shown in the accompanying balance sheets under the
following captions:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 8,971,196 $ 15,832,818
Costs and estimated earnings in excess of
billings on completed contracts 131,537 188,168
------------ ------------
Costs and estimated earnings in excess of
billings 9,102,733 16,020,986
------------ ------------
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,051,552) (6,512,121)
Billings in excess of costs and estimated
earnings on completed contracts (96,498) (485,229)
------------ ------------
Billings in excess of costs and estimated
earnings (1,148,050) (6,997,350)
------------ ------------
$ 7,954,683 $ 9,023,636
============ ============
</TABLE>
4
<PAGE> 35
MODTECH, INC.
Notes to Financial Statements, Continued
(4) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Leasehold improvements $ 7,580,830 $ 10,764,783
Machinery and equipment 3,535,623 4,347,692
Trucks and automobiles 107,024 181,001
Office equipment 222,123 364,510
Construction in progress 567,137 354,826
------------ ------------
12,012,737 16,012,812
Less accumulated depreciation
and amortization (3,460,017) (4,783,649)
------------ ------------
$ 8,552,720 $ 11,229,163
============ ============
</TABLE>
(5) NOTE PAYABLE - REVOLVING CREDIT AGREEMENT
In 1995 the Company entered into a revolving loan commitment that expires
in September 1998. The Company is entitled to borrow, from time to time,
up to $20,000,000 with actual borrowings limited to specific percentages
of eligible contracts receivable, equipment and inventories. Actual
outstanding borrowings were $5,943,853 and $42,185 at December 31, 1996
and 1997, respectively. The interest rate is calculated at the prime
lending rate (8.5% at December 31, 1997) plus three quarters of a percent
(.75%) per annum. The loan is secured by substantially all of the
Company's assets.
(6) LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Industrial development bonds $ 1,999,952 $ 1,374,952
Less current portion of long-term debt (100,000) (1,374,952)
----------- -----------
$ 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 $1,299,275 letter of credit, and bear interest at an initial
rate of 6.75% and fluctuate weekly. The interest rate was 3.65% at
December 31, 1997. The bond agreement was amended in 1997 requiring
repayment of the balance by December 31, 1998.
5
<PAGE> 36
MODTECH, INC.
Notes to Financial Statements, Continued
(7) INCOME TAXES
The components of the 1995, 1996 and 1997 provision for Federal and state
income tax (expense) benefit computed in accordance with Financial
Accounting Standard No. 109 are summarized below:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ (14,210) $ (90,483) $(7,874,257)
State (4,888) (117,148) (2,021,309)
----------- ----------- -----------
(19,098) (207,631) (9,895,566)
Deferred:
Federal -- -- 1,634,085
State -- -- 558,847
----------- ----------- -----------
$ (19,098) $ (207,631) $(7,702,634)
=========== =========== ===========
</TABLE>
Income tax (expense) benefit attributable to income from operations
differed from the amounts computed by applying the U.S. Federal income tax
rate to pretax income from operations as a result of the following:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Taxes, U.S. statutory rates (34.0%) (34.0%) (35.0%)
State taxes, less Federal
benefit -- -- (4.5)
Utilization of income tax
benefit relating to
loss carryover 34.0 34.0 3.8
Other (1.9) (4.6) (1.5)
----- ----- -----
Total taxes on income (1.9%) (4.6%) (37.2%)
===== ===== =====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1996 and 1997 are as follows:
6
<PAGE> 37
MODTECH, INC.
Notes to Financial Statements, Continued
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals not
recognized for income tax
purposes $ 1,114,987 $ 2,490,821
Net operating loss carrryforwards 209,100 --
State taxes 75,065 474,653
Other 29,117 368,579
----------- -----------
Total gross deferred tax assets 1,428,269 3,334,053
Less valuation allowance (1,158,714) (1,059,576)
----------- -----------
Net deferred tax assets $ 269,555 $ 2,274,477
=========== ===========
Deferred tax liabilities:
Revenue recognition $ (171,360) $ (73,589)
Prepaids (98,195) (7,955)
----------- -----------
Totals gross deferred tax
liabilities (269,555) (81,544)
----------- -----------
Net deferred tax assets $ -- $ 2,192,933
=========== ===========
</TABLE>
These amounts have been presented in the balance sheet as follows:
<TABLE>
<CAPTION>
1996 1997
--------------- ----------
<S> <C> <C>
Current deferred tax asset $ -- $2,094,059
Noncurrent deferred tax asset -- 98,874
--------------- ----------
Total deferred tax assets $ -- $2,192,933
=============== ==========
</TABLE>
The net change in the total valuation allowance for the year ended
December 31, 1997 was a decrease of $99,138.
The Company's net operating loss carryforward amounted to $615,000 and $0
for the years ended December 31, 1996 and 1997, respectively.
7
<PAGE> 38
MODTECH, INC.
Notes to Financial Statements, Continued
(8) TRANSACTIONS WITH RELATED PARTIES
SALES
The Company sells modular classrooms to certain companies and
partnerships, where shareholders and partners are either shareholders or
an officer of the Company. The buildings are then leased to various school
districts by the related companies and partnerships.
The table below summarizes the classroom sales to related parties:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Sales $ 600,228 $1,452,868 $2,942,313
Cost of goods sold 531,152 1,239,425 2,530,803
Gross profit percentage 11.51% 14.69% 13.99%
========== ========== ==========
</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, 1996 and 1997 these amounts
totaled $431,755 and $825,963, respectively. Additional amounts arising
from these transactions are included in the following captions:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 417,780 $ 1,406,897
Billings in excess of costs and
estimated earnings on uncompleted
contracts (12,572) (65,405)
=========== ===========
</TABLE>
NOTE RECEIVABLE
At December 31, 1996 and 1997, the Company had one note receivable from a
related party partnership in the amount of $45,212. The partnership is
composed of an officer and shareholders of the Company. The note bears
interest at 10% and is payable upon demand. Unpaid interest related to
this note, and two other related party notes with principal repayment in
1996, totaled $322,312 at December 31, 1996 and $226,671 at December 31,
1997 and is included in due from affiliates. The Company has negotiated
payment terms on the accrued interest and is receiving regular interest
payments.
OPERATING LEASES
The Company leases various land at its manufacturing facilities. The
present manufacturing facility leases are with the Company's Chairman and
partnerships composed of an officer and shareholders. All related party
leases require monthly payments which aggregate $37,000. In connection
with the lease at the Lathrop facility, the Company made an $83,000
security deposit during 1990.
In 1994, due to declines in real estate values, the Company's Chairman and
partnerships reduced the monthly lease rates for the manufacturing
facilities to an aggregate of $37,000. The reduced rents will continue for
as long as real estate values remain depressed.
8
<PAGE> 39
MODTECH, INC.
Notes to Financial Statements, Continued
Future minimum lease payments under these leases are discussed in note 14.
Included in cost of sales is $435,000, $447,000 and $444,000 in rent
expense paid to related parties for the years ended December 31, 1995,
1996, and 1997, respectively.
(9) 401(k) PLAN
The Company has a tax deferred savings plan under Section 401(k) of the
Internal Revenue Code. Eligible employees can contribute up to 12% of
gross annual earnings. Company contributions, made on a 50% matching
basis, are determined annually. The Company's contributions were $36,937,
$53,031 and $77,016 in 1995, 1996, and 1997, respectively.
(10) STOCK OPTIONS
In 1989, the Company's shareholders approved a stock option plan (the 1989
Plan). The 1989 Plan provides for the grant of both incentive and
non-qualified options to purchase up to 400,000 shares of the Company's
common stock. The incentive stock options can be granted only to
employees, including officers of the Company, while non-qualified stock
options can be granted to employees, non-employee officers and directors,
consultants, vendors, customers and others expected to provide significant
services to the Company.
The exercise price of the stock options cannot be less than the fair
market at the date of the grant (110% if granted to an employee who owns
10% or more of the common stock).
Stock options outstanding under the 1989 Plan are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
-------- ---------
<S> <C> <C>
December 31, 1994 400,000 $ 1.92
Granted 45,000 2.125
Terminated (45,000) 3.00
-------- ---------
December 31, 1995 400,000 1.82
Exercised (114,500) 1.87
-------- ---------
December 31, 1996 285,500 1.82
Terminated (1,000) 1.50
Exercised (78,450) 2.12
-------- ---------
December 31, 1997 206,050 $ 1.70
======== =========
</TABLE>
As of December 31, 1997, 142,450 options are vested and exercisable at
prices ranging from $.625 to $10.00 per share under the 1989 Plan. With
respect to options issued pursuant to the Del-Tec acquisition, 50,000
options were exercised during 1997 and 75,000 options remained outstanding
as of December 31, 1997.
9
<PAGE> 40
MODTECH, INC.
Notes to Financial Statements, Continued
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, 1994 200,000 $ 1.22
Exercised -- --
-------- --------
December 31, 1995 200,000 1.22
Exercised (15,000) 1.19
-------- --------
December 31, 1996 185,000 1.22
Exercised (15,900) 1.40
-------- --------
December 31, 1997 169,100 $ 1.21
======== ========
</TABLE>
As of December 31, 1997, 126,600 options are vested and exercisable at
prices ranging from $1.19 to $1.50 per share under the March 1994 Plan.
In May of 1994, in conjunction with the offering of preferred stock (note
11) the Board of Directors voted and approved an additional stock option
plan (the May 1994 Plan). The May 1994 Plan provides for the grant of both
incentive and non-qualified options to purchase up to 500,000 shares of
the Company's common stock. The incentive stock options can be granted
only to employees, including officers of the Company, while non-qualified
stock options can be granted to employees, non-employee officers and
directors, consultants, vendors, customers and others expected to provide
significant services to the Company. The exercise price of the stock
options cannot be less than the fair market at the date of the grant (110%
if granted to an employee who owns 10% or more of the common stock).
Stock options outstanding under the May 1994 Plan, are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES 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
======== ============
</TABLE>
10
<PAGE> 41
MODTECH, INC.
Notes to Financial Statements, Continued
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, 1996 440,000 2.06
Granted 7,500 19.50
Exercised (9,375) 3.86
-------- ------------
December 31, 1997 438,125 $ 2.32
======== ============
</TABLE>
As of December 31, 1997, 216,675 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).
Stock options outstanding under the July 1996 Plan, are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
-------- --------------
<S> <C> <C>
December 31, 1995 -- $ --
Granted 110,000 4.50
-------- --------------
December 31, 1996 110,000 4.50
Granted 263,333 8.75
Terminated (4,202) 12.62
Exercised (16,798) 4.89
-------- --------------
December 31, 1997 352,333 $ 7.56
======== ==============
</TABLE>
As of December 31, 1997, 81,500 options are vested and exercisable at
prices ranging from $4.50 to $12.62 per share under the July 1996 Plan.
All stock options have a maximum term of ten years and become fully
exercisable in accordance with a predetermined vesting schedule which
varies.
The per share weighted-average fair value of stock options granted during
1996 and 1997 was $1.94 and $9.05, 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 expected life of
four years; 1996 - expected dividend yield 0%, risk-free interest rate of
7.80%, volatility factor of 72.66%, and an expected life of four years;
1997 - expected dividend yield 0%, risk-free interest rate of 7.80%,
volatility factor of 73.06%, and an expected life of four years. The
Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the
11
<PAGE> 42
MODTECH, INC.
Notes to Financial Statements, Continued
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 1997
----------- ------------- --------------
<S> <C> <C> <C>
Net Income
As Reported $ 964,799 $ 4,269,032 $ 13,008,285
Pro Forma 862,133 3,657,659 12,044,970
=========== ============= ==============
Basic earnings per
share
As Reported $ 0.25 $ 0.77 $ 1.47
Pro forma 0.27 0.67 1.36
=========== ============= ==============
Fully diluted
earnings per share
As Reported $ 0.14 $ 0.47 $ 1.31
Pro Forma 0.13 0.40 1.22
=========== ============= ==============
</TABLE>
Pro forma net income reflects only options granted since January 1, 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period of four years and compensation cost for options
granted prior to January 1, 1995 is not considered.
(11) 5% CONVERTIBLE PREFERRED STOCK
In May of 1994, in a private transaction without registration under the
Securities Act, the Company sold 2,850,000 shares of Series A 5%
Convertible Preferred Stock. The Preferred Stock was sold at
$1.00 per share 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.
(12) MAJOR CUSTOMER
The Company had sales to two major customers which represented the
following percentage of net sales:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- --------
<S> <C> <C> <C>
Customer A 9% 13% 4%
Customer B 0% 4% 11%
======== ======== ========
</TABLE>
12
<PAGE> 43
MODTECH, INC.
Notes to Financial Statements, Continued
(13) SUPPLEMENTAL CASH FLOW DISCLOSURES
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 248,443 $ 470,248 $1,058,256
========== ========== ==========
Income taxes $ -- $ 24,320 $8,400,000
========== ========== ==========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH 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>
<S> <C>
Year ending December 31:
1998 $ 569,000
1999 515,000
2000 513,000
2001 444,000
2002 444,000
Thereafter 6,002,000
-----------
$ 8,487,000
===========
</TABLE>
Of the $8,487,000 in future rental payments, substantially all is
to related parties (note 8). Rent expense for the years ended December 31,
1995, 1996 and 1997 was $435,000, $447,000 and $522,000, respectively.
The manufacturing facility in Patterson, California was purchased in
January 1998 (note 18), and is not included above.
13
<PAGE> 44
MODTECH, INC.
Notes to Financial Statements, Continued
(15) SECONDARY STOCK OFFERING
In November 1997 the Company sold 1,000,000 shares of common stock at $20
per share. The net proceeds to the Company were $18,600,000, after the
deduction of underwriting discounts, commissions and offering expenses
paid by the Company.
The Company used a portion of the proceeds to repay amounts outstanding
under the Company's $20,000,000 revolving loan agreement with a bank (note
5). The remaining net proceeds are expected to be used as additions to
working capital.
(16) 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.
(17) 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.
(18) SUBSEQUENT EVENTS
The manufacturing facility in Patterson, California was leased from Miller
Structures, Inc. from October 1996 through December 1997. The lease
payments are included in rent expense. The Company purchased the facility
in January 1998.
On March 2, 1998, the Company announced that it had signed an agreement to
purchase a majority interest in Trac Modular Manufacturing, Inc (Trac).
Trac is based in Glendale, Arizona. Subsequent to the completion of due
diligence, the transaction closed on March 20, 1998.
14
<PAGE> 45
Schedule II
MODTECH, INC.
Valuation and Qualifying Accounts
Years ended December 31, 1995, 1996, and 1997
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING CHARGED BALANCE AT
DESCRIPTION OF YEAR TO EXPENSE DEDUCTIONS END OF YEAR
- ------------------------------------ -------------- -------------- ---------- ---------------
Allowance for contract adjustments:
<S> <C> <C> <C> <C>
Year ended December 31, 1995 $425,390 $ -- $(17,300) $408,090
======== =============== ======== ========
Year ended December 31, 1996 $408,090 $ 5,866 $ (583) $413,373
======== =============== ======== ========
Year ended December 31, 1997 $413,373 $ -- $ (3,254) $410,119
======== =============== ======== ========
</TABLE>
<PAGE> 46
EXHIBIT INDEX
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,628,851
<SECURITIES> 0
<RECEIVABLES> 37,531,132
<ALLOWANCES> 0
<INVENTORY> 3,931,505
<CURRENT-ASSETS> 56,593,962
<PP&E> 16,012,812
<DEPRECIATION> 4,783,649
<TOTAL-ASSETS> 68,220,257
<CURRENT-LIABILITIES> 20,177,338
<BONDS> 0
0
0
<COMMON> 48,042,919
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 68,220,257
<SALES> 134,050,485
<TOTAL-REVENUES> 134,050,485
<CGS> 107,367,035
<TOTAL-COSTS> 107,367,035
<OTHER-EXPENSES> 5,155,987
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,004,198
<INCOME-PRETAX> 20,710,919
<INCOME-TAX> 7,702,634
<INCOME-CONTINUING> 13,008,285
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,008,285
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.31
</TABLE>
