Deerfield-based Modular Technology Inc. is the company that went public too soon.
Modular Technology boasts now of higher earnings and sales, but the maker of mobile buildings still is trying to shake off an unwanted title of being one of the 10 worst initial public offerings in 1986.
”We weren`t just one of the 10 worst,” said the company`s president, Frederick H. Goldberger, of Forbes magazine`s ranking of the best and worst new issues. ”We were at, or rather near, the bottom of the list. We were ninth.”
It`s still too early to tell whether the company has the makings of a comeback. But Modular Technology`s case offers some insights into the workings of a small manufacturer. It had hopes of taking Wall Street by storm, only to find itself ill-prepared for the seasonal swings in its industry and in need of a new management strategy.
Modular Technology made its initial public offering in April, 1986, at $7.25 a share. Of the 1.6 million shares sold, 400,000 belonged to existing shareholders, who nevertheless kept 55 percent of the company. The
underwriters, Blunt Ellis & Loewi Inc. and Rodman & Renshaw Inc., had an option to buy about 240,000 additional shares.
The public offering raised about $14.4 million, and Modular Technology used about $4.6 million to buy Office Space Inc., a California-based maker of mobile office buildings.
Office Space had about $10.9 million in sales. The purchase gave Modular Technology the boost it needed to expand its mainly local mobile-structures business and to compete nationally.
With a concept much like that of a mobile home, Modular Technology manufactures structures that provide additional space at schools, offices, construction work sites, dormitories of minimum security prisons, medical centers and day-care facilities.
”We design the units to the specifications of our customers,”
Goldberger said. ”I can`t say we have a product per se in stock. Where instant space is needed we`re able to fill that void with one of our units.” Goldberger said there never was a problem with Modular Technology`s product. Instead, he said, the company`s low period was linked to management`s zeal in pursuing one purchase after another.
A relative newcomer to the company, Goldberger chooses his words carefully in telling the company`s story. Goldberger was named president and a director in March. He succeeded one of the company`s founders, Harvey T. Lyon. Before coming to Modular Technology, Goldberger was chief financial officer of Odyssey Co., a mobile company that was sold to a Canadian group.
In the four years Modular Technology was privately held, the company was under the guardianship of its three founders, Lyon, Sheldon Gray and Otto M. Miller.
”It was a business going through an entrepreneurial stage with little direction and many, many plans,” Goldberger said. ”A professional management stage has to come in if a company is to move on. When the board brought me in, I represented the professional management stage of the company. It didn`t take long for me to figure out what was wrong, and I hit the ground running to make changes.
”There was a kind of euphoria about going public here in the beginning,” Goldberger said. ”Sometimes as a private company the perks are higher than they should be for key executives, and the old guard has trouble changing when they are asked to.”
Goldberger wouldn`t elaborate on these perquisites, saying: ”I still have a good working relationship with the founders.”
The changes at Modular Technology under Goldberger came when he altered management`s plans on acquisitions.
”We backed away from making acquisitions,” he said. ”That doesn`t mean we are not interested in growth and expansion. We are, but at the present we are not making acquisitions a priority.”
Goldberger said the company paid too much attention to seeking companies to buy and not enough attention to daily operations of the business.
Before going public, the company bought Sioux Falls Structures Inc., a manufacturer of movable structures, in 1985. The company`s purchase of California`s Office Space Inc. gave Modular Technology a presence in one of the industry`s most popular geographic areas.
In September, 1986, Modular Technology bought Lawhead Electrical Distributing, then sold it in June. ”The company showed continuing unprofitable operating results,” Goldberger said.
”When the company wasn`t involved in closing a deal, they were still actively looking for a company to buy,” Goldberger said. ”With everyone tuned into that part of the business, there was no one minding the store.”
Thomas Hau, a partner in the small-business division of Arthur Andersen & Co. in Chicago, said purchases can strain the management of any young company.
Hau said: ”Often, an environment is created where the workings of a company gets out of control because there are too many balls in the air.”
But acquisitions weren`t Modular Technology`s only concern. Problems in real estate and the oil business caused the company to lose most of its business in Texas, one of its strongest areas for movable buildings.
In December, Modular Technology suspended its Texas operations. ”There was insufficient product demand,” Goldberger said.
Seemingly uncomfortable in discussing the company`s low points, Goldberger twisted a button on his jacket and said: ”Well, we had problems, and we didn`t have to be hit the way we were.”
Modular Technology`s sales were $22.8 million in fiscal 1986, $16.7 million in 1985 and $11.8 million in 1984. It made $643,521, or 25 cents a share, in 1986; $785,176, or 31 cents a share, in 1985; and lost $29,701 in 1984.
But Goldberger said he now feels the company is on track.
”Modular Technology is moving in the right direction,” he said. ”We lacked direction before and leadership. The company has a chance to live up to its potential. Our timing is right.”
For the quarter ended Sept. 30, sales were $9.6 million, up from to $9.4 million a year earlier. Earnings for the quarter were $688,963, or 17 cents a share, up from to $254,724, or 6 cents a share, a year earlier.
Not everyone is sure that Modular Technology is out of the woods.
”The clock is still ticking on Mr. Goldberger to get things done in the company and to at least keep it at its level of growth,” said John P. Larsen, an analyst with Blunt Ellis in Milwaukee.
But there does appear to be reason for some optimism. ”They`ve been creative in finding new markets for their products,” said Paul Weium , an analyst with Illinois Co. in Chicago, ”and have come back after having to write down the purchase price of (Office Space Inc.).”
Goldberger said increased sales, improved gross profit margins, reduced expenses and a lower federal income tax rate are other factors that have helped bring the company along.
The company`s comeback, however, may be tempered by the stock market`s downturn in October.
The company`s stock had steadied itself in the range of $3 a share several months before the market crashed Oct. 19. The company`s stock fell to an all-time low in October of $1.75 a share and made a feeble rebound to $2.12 a share at the month`s end. Modular Technology closed Friday at $2 in over-the-counter trade.
”Although the stock has been down because of the market, we have a strong balance sheet,” Goldberger said. ”The market`s downturn has not affected orders, and the company still intends to build a new manufacturing facility in Vermont.”
Modular Technology has manufacturing facilities in California, Indiana, Pennsylvania and South Dakota.
”We may not have been ready before to take on all the responsibilities that go with being public, but we are more prepared now,” Goldberger said.
Richard D. Durkin, president of Capital Access Inc., which specializes in helping small and mid-size companies find financing, noted that ”there are generally two windows of opportunity to go public. When research and development are done and the company can demonstrate that it has products that are ready for presentation to the marketplace, and when they have a record of progress, a track record to support future expectations.
”There can be variables that enter into the picture that can change everything, and sometimes a company should wait before going public,” said Durkin, a former regional administrator of the Small Business Administration. Fred Walz, a Chicago partner in Grant Thornton`s Capital Markets Group, said the transition from private to public is never easy, and some companies suffer, no matter how well prepared they are.
The Forbes magazine survey of initial public offerings appeared in its March 9 issue and rated the new issues according to their offering price, the recent share price, the company`s offer value, actual percentage gain and the percentage gain relative to Standard & Poor`s 500.
(Though Modular Technology was ranked 9 out of the 10 worst new issues, it managed to outdistance Trans Leasing International Inc., a Northbrook-based company that leases medical and scientific equipment to physicians.)
Modular Technology operates as a holding company that runs its business through Miller Structures Inc. and Office Space Inc. It sells to about 50 dealers across the country and makes its single movable units from aluminum, wood and steel. It employs 325 people.
