Modtech Holdings, Inc.

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Modtech Holdings, Inc.

2830 Barrett Avenue
Perris, California 92571
U.S.A.
Telephone: (951) 943-4014
Toll Free: (800) 929-0998
Fax: (951) 940-0427
Web site: http://www.modtech.com

Public Company
Incorporated: 1984 as Modtech, Inc.
Employees: 901
Sales: $185.2 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: MODT
NAIC: 321992 Prefabricated Wood Building Manufacturing

Based in Perris, California, Modtech Holdings, Inc. specializes in permanent and relocatable modular buildings, especially classrooms. The structures also are used as temporary offices at factories or construction sites; serve various purposes for the military, police, Homeland Security, and other federal, state, and local agencies; act as doctor's offices, rural medical clinics, or small hospital additions; and also have been employed as banks, retail kiosks, strip malls, fast-food restaurants, convenience stores, motel rooms, and remote restrooms. The structures can be built in one- or two-story configurations, and are available in a variety of exterior and interior finishes. They also meet the same strict building codes as site-built structures. The company maintains six factories located in California, Arizona, Florida, and Texas. Modtech is a public company listed on the NASDAQ.

1970S' CALIFORNIA LEGISLATION CREATING MODULAR SCHOOL MARKET

The demand for modular classrooms in the California market grew out of the passage of the Leroy F. Greene State School Building Lease Purchase Act of 1976, which stipulated that 30 percent of all school construction funds had to be spent on relocatable classrooms. The legislation was an answer to what was occurring in many large cities along the coast regions. Area schools were finding themselves increasingly empty as Baby Boomers grew up and moved further inland to raise their families where housing was less expensive, such as in the San Fernando Valley and Riverside area. Furthermore, in 1978, California voters approved Proposition 13, which resulted in the scaling back of property taxes, a traditional source of school funding. School districts, faced with tighter budgets, had to find ways to stretch their resources. Modular classrooms were less expensive to build than traditional brick-and-mortar schools, and had the extra advantage of being able to be moved to where they were needed, due to the state's shifting population. Bonds to finance new school construction were then put on the ballot for voter consideration in 1982, making a greater pool of money available for modular classrooms.

In the same year that funds became available, Gerald B. Bashaw founded Modtech, and incorporated it two years later, in 1984, as Modtech, Inc. Bashaw was no stranger to modular buildings. In 1965 he had cofounded Aurora Modular Industries, which produced modular houses and buildings, mobile homes, and office trailers, as well as modular classrooms. Bashaw served as vice-president of operations, then president of the company, before striking out on his own. He was not alone in viewing modular classrooms as a tremendous business opportunity, as a bevy of companies cropped up during the 1980s hoping to get a share of California's school construction funds. There were a number of other compelling factors that attracted these entrepreneurs. California's student population was growing by more than 200,000 new students a year, a trend that was expected to last well into the 1990s. It meant that California would have to build more than 6,500 new classrooms to meet the need. Not only did the state mandate that 30 percent of all new school construction be relocatable, it required that temporary trailers, which were estimated to number as many as 20,000, be phased out by 1993.

GOING PUBLIC IN 1990

There were many small players in the modular classroom field, none of which stood out until Modtech emerged by the end of the 1980s. In 1989 the company produced just 1,000 classrooms, but Bashaw was setting it up for greater growth. He brought in Evan M. Gruber, a certified public accountant, in January 1989 to serve as his chief financial officer and later in the year Modtech completed its first acquisition, buying Q.E.D. Industries in a deal worth approximately $3.3 million. Gruber then became chief executive officer in January 1990 and prepared Modtech for an initial public offering of stock that would make it the only public company among California's modular classroom builders. Underwritten by Los Angeles-based Seidler Amdec Securities Inc., Modtech went public at $10 a share in July 1990, grossing approximately $40 million.

As the only public company in a highly fragmented industry, Modtech appeared well positioned to prosper in the 1990s and was embraced by the investment community. The company employed 450 by the end of 1990, and sales for the year totaled $50 million. A reflection of Modtech's strength came in January 1991, when California awarded $14 million in contracts for modular relocatable schools. Modtech was expected to land $3 million to $5 million of that total, but instead was awarded the entire $14 million.

Unfortunately for Modtech and its competitors the California economy was in rapid decline and belt tightening became the order of the day. Because of a state budget crisis, funds for school construction dried up and business soured for Modtech. Sales dropped in 1992 and again in 1993, totaling just $19.6 million, at which level the company remained for the next two years. Modtech had no choice but to cut costs in an attempt to weather the storm. The workforce was slashed from 450 to just 90 in 1993, and its Lathrop plant in northern California was shuttered. In addition, top managers accepted 10 percent reductions in pay. For his part, Gruber cut his own salary in half. The company lost money in 1991, 1992, and 1993, but managed to turn a profit of $602,000 in 1994 and $965,000 in 1995.

California's economy began to rebound in the mid-1990s and the state's finances improved, and as a result Modtech's prospects increased dramatically. Due to several years of limited classroom construction, the state found itself in dire need of new classrooms, since demand by now far outweighed supply. The California Legislature approved a $1 billion increase in school spending for the 1995–96 school year and a $3 billion bond issue earmarked for school construction was approved by voters to help alleviate overcrowded schools. Moreover, California Governor Pete Wilson pushed through the legislature the Class Size Reduction Program, which he signed into law in July 1996. It called for the allocation of $200 million for the construction of new classrooms aimed at reducing classes to 20 students for children in kindergarten through third grade. Schools also would receive a bonus if they achieved that goal, prompting officials to turn to modular classrooms, which could be erected much faster than traditional buildings.

COMPANY PERSPECTIVES

We have been manufacturing permanent modular buildings for over two decades. We have six factories with over 1.2 million square feet of manufacturing capacity located on approximately 132 acres in four states.

Modtech experienced a surge in school business and was once again a darling of investors, who bid up the price of Modtech stock 100 percent from the summer of 1995 to the summer of 1996. In 1996 alone the price of Modtech surged an impressive 270 percent, from $2.13 a share at the start of the year to $7.88 by the end. Modtech was then able to go back to the public market and ask for $20 a share in a secondary offering of stock in 1997. The company was also more attractive because it had taken steps to diversify beyond the school business. In 1996, for example, it completed a $1 million canopy project for Hertz Rent A Car at the San Francisco International Airport. It also began to erect remote cellular telephone equipment shelters for Air-Touch and L.A. Cellular. Nevertheless, the company's bread and butter remained the construction of modular classrooms. Fat state contracts led to an expansion of the workforce and the reopening of the Lathrop facility. In October 1996 Modtech bought another northern California plant, located in the city of Patterson, paying $1.3 million to Elkhart, Indiana-based Miller Building Systems Inc.

Business was booming for Modtech in 1997. Sales more than doubled to $134 million, net income tripled to $13 million, and the company ended the year with a backlog of orders worth $71 million, making it in all likelihood the largest California manufacturer of modular relocatable classrooms. In addition, the company carried almost no debt and had $11 million in cash on hand. Business fell off somewhat in 1998, due in large measure to a delay in passing the state budget. Although revenues slipped to $127.6 million, net income increased to $16.5 million. Modtech also took a step in March 1998 to expand beyond the California borders to neighboring states in an effort to spread some of its risk by acquiring an 80 percent controlling stake in Trac Modular of Glendale, Arizona, a provider of modular buildings to commercial customers. Thus the deal not only provided entry into the Nevada and Arizona markets but it also helped Modtech diversify its product line.

LATE 1990S AND EARLY 2000S: EXTERNAL GROWTH

During 1998 Modtech negotiated another acquisition, which came to completion in 1999, the $90 million cash and stock purchase of SPI Manufacturing Inc., a Rancho Cucamonga-based manufacturer of commercial and light industrial modular buildings that was owned by Colorado-based SPI Holdings, Inc. Again, Modtech added to its nonschool product lines and expanded geographically, taking advantage of SPI's recent acquisitions: Rosewood Industries of Phoenix, Baron Homes in California, and Glenrose, Texas-based Office Master. A month after the SPI acquisition closed, in March 1999, Modtech completed another purchase, picking up St. Petersburg, Florida-based Coastal Modular Buildings, Inc., which designed and manufactured both relocatable classrooms and modular buildings for commercial use. Once more, Modtech moved into a new market while expanding its product lines. Also in 1999 Modtech began the process of acquiring Miller Building Systems, from which it had bought its Patterson plant. Miller was an attractive prospect because it had a telecommunications shelter that customers found acceptable, unlike Modtech, which had struggled to stake out a significant slice of this market. In addition, Miller operated plants in what would be several new markets for Modtech, including Indiana, New York, Pennsylvania, South Dakota, and Vermont. But the merger proved difficult. After being on and off again for several months, the deal was scuttled in August 2000 when Modtech withdrew its offer after a group of Miller shareholders blocked the sale in hopes of finding a better price. Modtech's successful acquisitions, however, helped to boost sales to $167.2 million in 1999, although sales dipped to $8.4 million. Also of note, the company changed its name in February 1999 to Modtech Holdings, Inc. to serve as a holding company for the different subsidiaries.

The future appeared bright for Modtech as it entered the new century. Funds for new school construction were plentiful in California, where money was becoming available from the 1998 California School Construction Bond. In addition, the strong U.S. economy spurred sales for the company outside of the state. As a result, revenues increased in 2000 to $235.7 million and net income climbed to $10.3 million.

Due in large part to a downturn in the economy, business eroded for Modtech in 2001, as sales fell to $201.1 million. The company did manage to increase net income to $11.6 million, and it also completed an acquisition. In March 2001 it bought Innovative Modular Structures, Inc., another St. Petersburg, Florida-based manufacturer of modular structures for both school and commercial use.

KEY DATES

1982:: The company is founded by Gerald Bashaw.
1984:: The company is incorporated in California.
1990:: An initial public offering of stock is completed.
1999:: SPI Manufacturing is acquired.
2001:: Innovative Modular Structures, Inc. is acquired.
2004:: David Buckley is named CEO.

The poor economy continued to take its toll on Modtech in 2002 and 2003, as declines in sales of structures for industrial and commercial use resulted in revenues dropping to $168 million in 2002 and $160 million in 2003. The company also lost $29.3 million in 2002, in part due to a switch in the way the company marketed its products. Instead of relying on independent dealers, the company began to sell directly to customers. Modtech returned to profitability, albeit marginally, in 2003, posting net income of $1.5 million.

Although business picked up somewhat in 2004 it was not enough for Gruber to keep his job. In August 2004 he stepped down as CEO, although he stayed on as a director and a consultant. Within a month, the company hired his replacement, David M. Buckley, a Wharton School of Business graduate and General Electric Company executive with expertise in supply-chain management, operations and facilities management, and new business development. Especially keen on viewing the business from the perspective of customers, Buckley quickly took steps to evaluate Modtech and began overhauling the way it did business with its customers. By the end of the year the company was beginning to see a turnaround. All told, sales improved to $185.2 million in 2004, although the company took a loss of $18.5 million, due primarily to the company underbidding on some projects, which ended up costing considerably more than expected because of a spike in the price of steel and other raw materials.

More changes followed in 2005, as Buckley detected inefficiencies and overlap in Modtech's California manufacturing operations. As a result, the Lathrop plant was closed and its business transferred to the Perris facility. Buckley was also successful in renegotiating some contracts, so that the higher cost of raw materials was paid by customers. Although Modtech continued to improve geographic diversification and grew less reliant on the school market, it appeared to be positioning itself under Buckley for a strong future. Unlike a number of competitors, such as Aurora Modular, who went out of business, Modtech had proven to be a survivor and now looked to take advantage of a less crowded marketplace.