<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 1999
Commission File Number 000 - 25161
MODTECH HOLDINGS, INC.
- --------------------------------------------------------------------------------
Delaware 33 - 0825386
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
2830 Barrett Avenue, Perris, CA 92571
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number: (909) 943-4014
- --------------------------------------------------------------------------------
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
--- ---
As of November 11, 1999, there were 12,890,307 of the Registrant's Common Stock
outstanding.
<PAGE> 2
MODTECH HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
PART I. STATEMENT REGARDING FINANCIAL INFORMATION
The financial statements included herein have been prepared by Modtech
Holdings, Inc. and subsidiaries (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information normally included in financial statements prepared in accordance
with generally accepted accounting principles has been omitted pursuant to such
rules and regulations. However, the Company believes that the financial
statements, including the disclosures herein, are adequate to make the
information presented not misleading. It is suggested that the financial
statements be read in conjunction with the Company's predecessor, Modtech,
Inc.'s financial statements and notes thereto included in the Company's Annual
report on Form 10-K for the year ended December 31, 1998 as filed with the
Securities and Exchange Commission.
<PAGE> 3
MODTECH HOLDINGS, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
Assets
<S> <C> <C>
Current assets:
Cash $ 40,142,000 $ 2,471,000
Contracts receivable, net, including costs in
excess of billings of $3,800,000 and $6,021,000
in 1998 and 1999, respectively 16,747,000 39,046,000
Inventories 4,442,000 10,989,000
Due from affiliates 2,389,000 2,947,000
Income tax receivable 2,368,000 426,000
Deferred tax asset 3,440,000 3,440,000
Other current assets 280,000 380,000
------------ ------------
Total current assets 69,808,000 59,699,000
------------ ------------
Property and equipment, net 12,314,000 13,767,000
Other assets
Other assets 751,000 5,054,000
Costs in excess of net assets of business
acquired, net -- 110,388,000
------------ ------------
$ 82,873,000 $188,908,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 10,541,000 $ 26,380,000
Billings in excess of costs 7,138,000 8,492,000
Current portion of long-term debt -- 11,250,000
------------ ------------
Total current liabilities 17,679,000 46,122,000
Deferred tax liability 97,000 97,000
Long-term debt -- 35,750,000
------------ ------------
Total liabilities 17,776,000 81,969,000
------------ ------------
Stockholders' Equity:
Series A preferred stock, $.01 par
Authorized 5,000,000 shares; issued and
outstanding 388,939 in 1999 -- 4,000
Common stock, $.01 par. Authorized 25,000,000
shares; issued and outstanding 9,871,409 and
12,854,951 in 1998 and 1999, respectively 99,000 128,000
Additional paid-in capital 39,854,000 74,347,000
Retained earnings 25,144,000 32,460,000
------------ ------------
Total stockholders' equity 65,097,000 106,939,000
------------ ------------
$ 82,873,000 $188,908,000
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE> 4
MODTECH HOLDINGS, INC.
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------------
1998 1999 1998 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 37,243,000 $ 59,331,000 $ 113,119,000 $ 129,198,000
Cost of goods sold 28,408,000 48,390,000 87,083,000 106,596,000
------------ ------------ ------------- -------------
Gross profit 8,835,000 10,941,000 26,036,000 22,602,000
Selling, general, and administrative expenses 1,102,000 2,040,000 3,843,000 5,548,000
Goodwill amortization -- 701,000 -- 1,732,000
------------ ------------ ------------- -------------
Income from operations 7,733,000 8,200,000 22,193,000 15,322,000
------------ ------------ ------------- -------------
Other income (expense):
Interest income (expense), net 305,000 (1,084,000) 694,000 (2,142,000)
Other, net 3,000 5,000 18,000 7,000
------------ ------------ ------------- -------------
308,000 (1,079,000) 712,000 (2,135,000)
------------ ------------ ------------- -------------
Income before income taxes 8,041,000 7,121,000 22,905,000 13,187,000
Income taxes (2,862,000) (3,129,000) (8,511,000) (5,871,000)
------------ ------------ ------------- -------------
Net income $ 5,179,000 $ 3,992,000 $ 14,394,000 $ 7,316,000
------------ ------------ ------------- -------------
5% Preferred stock dividend -- 39,000 -- 97,000
------------ ------------ ------------- -------------
Net income available to common stock $ 5,179,000 $ 3,953,000 $ 14,394,000 $ 7,219,000
============ ============ ============= =============
Basic earnings per common share $ 0.52 $ 0.31 $ 1.46 $ 0.57
============ ============ ============= =============
Basic weighted-average shares outstanding 9,871,000 12,772,000 9,871,000 12,685,000
============ ============ ============= =============
Diluted earnings per common share $ 0.48 $ 0.29 $ 1.31 $ 0.52
============ ============ ============= =============
Diluted weighted-average shares outstanding 10,800,000 14,000,000 11,000,000 14,000,000
============ ============ ============= =============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements
<PAGE> 5
MODTECH HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,394,000 $ 7,316,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 890,000 3,530,000
Loss on sale of equipment -- 8,000
(Increase) decrease in assets, net of effects
from acquisitions:
Contracts receivable 3,966,000 (18,037,000)
Inventories 1,104,000 (547,000)
Due from affiliates 404,000 (557,000)
Income tax receivable -- 2,760,000
Other current and noncurrent assets 72,000 (1,728,000)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 2,071,000 10,129,000
Billings in excess of costs (595,000) 1,355,000
------------ ------------
Net cash provided by operating activities 22,306,000 4,229,000
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (1,882,000) (850,000)
Acquisition of subsidiaries -- (48,622,000)
------------ ------------
Net cash used in investing activities (1,882,000) (49,472,000)
------------ ------------
Cash flows from financing activities:
Net principal borrowings under revolving credit lines -- 4,500,000
Net principal borrowings (payments) on long-term debt (1,417,000) 42,500,000
Investment in affiliate (250,000) --
Dividends paid on common stock -- (39,928,000)
Proceeds from exercise of stock options 64,000 500,000
------------ ------------
Net cash provided by (used in)
financing activities (1,603,000) 7,572,000
------------ ------------
Net increase (decrease) in cash 18,821,000 (37,671,000)
Cash at beginning of period 11,629,000 40,142,000
------------ ------------
Cash at end of period $ 30,450,000 $ 2,471,000
============ ============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements
<PAGE> 6
MODTECH HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
1) Management Opinion
In the opinion of management, the condensed consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position and
results of operations as of and for the periods presented.
The results of operations for the quarter and nine months ended September
30, 1999 are not necessarily indicative of the results to be expected for
the full fiscal year.
Certain statements in this report constitute "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such forward looking
statements involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance, or achievements
of the Company to be materially different from any future results,
performance, or achievements, expressed or implied by such forward -
looking statements.
2) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Raw materials $ 4,442,000 $ 8,306,000
Work in process -- 2,523,000
Finished goods -- 160,000
----------- -----------
$ 4,442,000 $10,989,000
=========== ===========
</TABLE>
3) Earnings Per Share
The following table illustrates the calculation of basic and diluted
earnings per common share under the provisions of SFAS No. 128:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1999 1998 1999
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
BASIC
Net income $ 5,179,000 $ 3,392,000 $14,394,000 $ 7,316,000
Dividends on preferred stock -- (39,000) -- (97,000)
----------- ------------ ----------- ------------
Net income available to common
stock $ 5,179,000 $ 3,953,000 $14,394,000 $ 7,219,000
=========== ============ =========== ============
Weighted-average common shares
outstanding 9,871,000 12,772,000 9,871,000 12,685,000
=========== ============ =========== ============
Basic earnings per common share $ 0.52 $ 0.31 $ 1.46 $ 0.57
=========== ============ =========== ============
DILUTED
Net income $ 5,179,000 $ 3,992,000 $14,394,000 $ 7,316,000
=========== ============ =========== ============
Weighted-average common shares
outstanding 9,871,000 12,772,000 9,871,000 12,685,000
Add:
Conversion of preferred stock -- 389,000 -- 389,000
Exercise of options 929,000 839,000 1,129,000 926,000
----------- ------------ ----------- ------------
Adjusted weighted-average common
shares outstanding 10,800,000 14,000,000 11,000,000 14,000,000
=========== ============ =========== ============
Diluted earnings per common share $ 0.48 $ 0.29 $ 1.31 $ 0.52
=========== ============ =========== ============
</TABLE>
<PAGE> 7
4) Acquisitions
SPI Merger. On February 16, 1999, Modtech, Inc. ("Modtech") and SPI
Holdings, Inc., a Colorado corporation ("SPI") merged pursuant to the
Agreement and Plan of Reorganization and Merger, dated as of September
28, 1998 (the "Merger Agreement"), between Modtech and SPI. SPI is a
designer, manufacturer and wholesaler of commercial and light industrial
modular buildings. Pursuant to the Merger Agreement, SPI was merged with
a subsidiary of Modtech Holdings, Inc. ("Holdings"), a newly formed
Delaware corporation (the "SPI Merger"). Concurrently, Modtech was merged
with a separate subsidiary of Holdings (the "Modtech Merger"). Pursuant
to the mergers, both SPI and Modtech became wholly owned subsidiaries of
Holdings. The SPI Merger is accounted for by the purchase method of
accounting.
In connection with the SPI Merger, SPI stockholders received
approximately $8 million in cash and approximately 4.3 million shares of
the Company's Common Stock. The Company refinanced approximately $32
million of SPI debt. In connection with the Modtech Merger, Modtech
stockholders received approximately $40 million in cash, approximately
8.3 million shares of the Company's Common Stock and 388,939 shares of
the Company's Series A Preferred Stock. In connection with both mergers,
the Company incurred a total of approximately $51 million of debt.
Following are the unaudited pro forma combined results, which are based
upon the historical consolidated financial statements of Modtech, Inc.
and SPI Manufacturing, Inc., combined, and are adjusted to give effect to
the mergers. In addition, pro forma adjustments have been made for the
acquisitions consummated by SPI prior to the merger.
<TABLE>
<CAPTION>
Modtech Holdings, Inc.
Unaudited Pro Forma Combined Selected Financial Data
--------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------------
1998 1999 1998 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 57,860,000 $ 59,330,000 $ 175,660,000 $ 134,830,000
Income from operations 9,250,000 8,200,000 26,520,000 14,970,000
Interest expense, net (700,000) (1,080,000) (2,240,000) (2,570,000)
Income before income taxes 8,560,000 7,120,000 24,340,000 12,400,000
Net income 5,070,000 3,990,000 14,430,000 6,860,000
Diluted earnings per common share 0.36 0.29 1.02 0.49
Diluted weighted-average shares outstanding 14,100,000 14,000,000 14,100,000 14,000,000
</TABLE>
Coastal Acquisition. On March 22, 1999, the Company purchased 100% of the
stock of Coastal Modular Buildings, Inc. ("Coastal"). Coastal designs and
manufactures modular relocatable classrooms and other modular buildings
for commercial use. Coastal is based in St. Petersburg, Florida. The
acquisition is accounted for by the purchase method of accounting.
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The following table sets forth certain items in the Condensed
Consolidated Statements of Income as a percent of net sales.
<TABLE>
<CAPTION>
Percent of Net Sales Percent of Net Sales
-------------------- --------------------
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 23.7 18.4 23.0 17.5
Selling, general and administrative
expenses 3.0 3.4 3.4 4.3
Goodwill amortization -- 1.2 -- 1.3
Income from operations 20.8 13.8 19.6 11.9
Interest income (expense), net 0.8 (1.8) 0.6 (1.7)
Income before taxes on income 21.6 12.0 20.2 10.2
</TABLE>
Net sales for the quarter and nine months ended September 30, 1999, increased by
$22,088,000 or 59.3% and $16,079,000 or 14.2%, respectively. The increase in net
sales is attributable to comparing merged results for 1999 to historical
Modtech, Inc. 1998 net sales. On February 16, 1999, the Company completed the
SPI Merger and on March 22, 1999, the Company completed the Coastal Acquisition.
Gross profit as a percentage of net sales for the quarter and nine months ended
September 30, 1999 decreased to 18.4% and 17.5% from 23.7% and 23.0% for the
same period in 1998. The decrease was due principally to the shift in product
mix for 1999.
Selling, general and administrative expenses increased for the quarter and nine
months ended September 30, 1999 by $938,000 and $1,705,000, an increase of 85.1%
and 44.4%, respectively. The increase is primarily due to the integration of SPI
Manufacturing, Inc. and Coastal Modular Buildings, Inc. with the Company. As a
percentage of sales, selling, general, and administrative expenses for the
quarter and nine months ended September 30, 1999 are 3.4% and 4.3%,
respectively. The percentages were 3.0% and 3.4% for the same period in 1998.
Goodwill amortization for the quarter and nine months ended September 30, 1999
was $701,000 and $1,732,000, respectively. As a percentage of net sales,
goodwill amortization for the quarter and nine months ended September 30, 1999
was 1.2% and 1.3%, respectively. There was no goodwill amortization in 1998.
Due to the combination of a reduced cash balance and debt incurred as a result
of the SPI Merger, the quarter and nine months ended September 30, 1999 reflect
net interest expense of $1,084,000 and $2,142,000 compared to net interest
income of $305,000 and $694,000 for the same period in 1998.
<PAGE> 9
INFLATION
In the past, the Company has not been adversely affected by inflation, because
it has been generally able to pass along to its customers increases in the costs
of labor and materials.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has generated cash to meet its needs from operations, bank
borrowings and public offerings. At September 30, 1999, the Company had
$2,471,000 in cash. During the nine months ended September 30, 1999, the Company
provided cash from operating activities of $4,229,000.
The Company has a $100,000,000 credit facility, of which $30,000,000 represents
a revolving loan commitment. The credit facility expires in February 2004. On
September 30, 1999, $4,500,000 was outstanding under the revolving loan
commitment.
Management believes that the Company's existing product lines and manufacturing
capacity will enable the Company to generate sufficient cash through operations,
supplemented by periodic use of its existing bank line of credit, to finance the
Company's business at current levels over the next 12 months. Additional cash
resources may be required if the Company is able to expand its business beyond
current levels. For example, it will be necessary for the Company to construct
or acquire additional manufacturing facilities in order for the Company to
compete effectively in new market areas or states which are beyond a 300 mile
radius from one of its production facilities. The construction or acquisition of
new facilities would require significant additional capital. For these reasons,
among others, the Company may need additional debt or equity financing in the
future. There can be, however, no assurance that the Company will be successful
in obtaining such additional financing, or that any such financing will be
available on terms acceptable to the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting
and reporting standards for derivative instruments embedded in other contracts,
and hedging activities. SFAS 133, as amended, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Application of SFAS 133
is not expected to have a material impact on the Company's financial position,
results of operations or liquidity.
YEAR 2000
The "year 2000" issue concerns the potential exposures related to the automated
generation of business and financial misinformation resulting from the
application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions. When
the year 2000 begins, programs with such date-related logic will not be able to
distinguish between the years 1900 and 2000, potentially causing software and
hardware to fail, generating erroneous calculations or presenting information in
an unusable format.
The Company is dependent on multiple computer servers and the third-party
computer programs running on them to provide data in support of its accounting
and engineering functions. In recognition of the potential year 2000 problem, in
November 1997, the Company began a program to replace all of its existing
engineering and accounting software with new software that is warranted by its
vendors as being year 2000 compliant. The software replacement program was
completed in November 1998 at a total cost of approximately $250,000. The
transfer of SPI's computer data to the Company's computer system was completed
during the third quarter of 1999 at a cost of approximately $150,000.
The Company has relationships with various third parties on whom it relies to
provide goods and services necessary for the manufacture and distribution of its
products. These include suppliers and vendors. As part of its determination of
year 2000 readiness, the Company had identified material relationships with
third-party vendors and assessed the status of their compliance through the use
of questionnaires. This process was completed by the third quarter of 1999 at a
cost of approximately $100,000.
The total cost of the Company's year 2000 efforts, including hardware, software,
related consulting costs, assessment of third-party compliance, and transfer of
SPI data is estimated to be about $500,000, and is not material to the Company's
financial condition.
The Company's construction materials are available through numerous independent
sources. Due to the broad diversification of these sources, the risk associated
with potential business interruptions as a result of year 2000 non-compliance by
one or more sources is not considered significant.
<PAGE> 10
The Company's primary customers are California school districts, each of which
obtains its funds for paying the Company's invoices through the computer system
operated by the State of California. If this system does not properly function
after January 1, 2000, it could result in a temporary shutdown of portions of
the state government, in which case, payment of the Company's invoices would be
delayed, and new purchase orders may not be processed. If the shutdown lasted
for more than 60 days, the Company would experience a severe cash shortage and a
material decline in revenue during the period of the government shutdown. The
cash shortage can be alleviated to some degree by borrowings from Holding's line
of credit and by reductions in work force and possible temporary plant closures.
The Company does not believe it can design or implement any other contingency
plans that will mitigate the effects of such a government shutdown.
It is anticipated that the steps the Company has taken and is continuing to take
deal with the year 2000 problem will reduce the risk of significant business
interruption, but there is no assurance that this outcome will be achieved.
Failure to detect and correct all internal instances of non-compliance or the
inability of third parties to achieve timely compliance could result in the
interruption of normal business operations which could, depending on its
duration, have a material adverse effect on the Company's financial condition.
<PAGE> 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE> 12
SIGNATURES
Pursuant to the requirements 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.
Modtech Holdings, Inc.
Date: November 12, 1999 By: /s/ Shari L. Walgren
- ----------------------- -------------------------------
Shari L. Walgren
Chief Financial Officer
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,471,000
<SECURITIES> 0
<RECEIVABLES> 39,046,000
<ALLOWANCES> 728,000
<INVENTORY> 10,989,000
<CURRENT-ASSETS> 59,699,000
<PP&E> 20,316,000
<DEPRECIATION> 6,549,000
<TOTAL-ASSETS> 188,908,000
<CURRENT-LIABILITIES> 46,122,000
<BONDS> 0
0
4,000
<COMMON> 128,000
<OTHER-SE> 106,807,000
<TOTAL-LIABILITY-AND-EQUITY> 188,908,000
<SALES> 59,331,000
<TOTAL-REVENUES> 59,331,000
<CGS> 48,390,000
<TOTAL-COSTS> 48,390,000
<OTHER-EXPENSES> 2,741,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,084,000
<INCOME-PRETAX> 7,121,000
<INCOME-TAX> 3,129,000
<INCOME-CONTINUING> 3,992,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,992,000
<EPS-BASIC> 0.31
<EPS-DILUTED> 0.29
</TABLE>
