<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 12 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended March 31, 1998
Commission File Number 000 - 18680
MODTECH, INC.
- --------------------------------------------------------------------------------
California 33 - 0044888
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
2830 Barrett Avenue, Perris, CA 92572
- ------------------------------- ---------
(Address of principal executive (Zip Code
office)
Registrant's telephone number: (909) 943 - 4014
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 March 31, 1998, there were 9,856,169 of the Registrant's Common Stock
outstanding.
<PAGE> 2
MODTECH, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
PART I. STATEMENT REGARDING FINANCIAL INFORMATION
The financial statements included herein have been prepared by MODTECH,
INC. (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
financial statements and notes thereto included in the Company's Annual report
on Form 10-K for the year ended December 31, 1997 as filed with the Securities
and Exchange Commission.
<PAGE> 3
MODTECH, INC.
Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ ------------
Audited Unaudited
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash $ 11,629,000 $ 20,576,000
Contracts receivable, net, including costs in excess
of billings of $16,021,000 and $20,486,000 in 1997 37,531,000 37,281,000
and 1998, respectively
Inventories 3,932,000 1,458,000
Due from affiliates 1,098,000 2,203,000
Deferred tax asset 2,094,000 2,094,000
Other current assets 310,000 248,000
------------ ------------
Total current assets 56,594,000 63,860,000
------------ ------------
Property and equipment, net 11,229,000 11,866,000
Other Assets
Investment in subsidiary -- 750,000
Advances to subsidiary -- 250,000
Deferred tax asset 99,000 99,000
Other assets 298,000 244,000
------------ ------------
$ 68,220,000 $ 77,069,000
============ ============
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 11,763,000 $ 15,252,000
Billings in excess of costs 6,997,000 9,019,000
Current portion of long-term debt 1,417,000 885,000
------------ ------------
Total current liabilities 20,177,000 25,156,000
Stockholders Equity
Common stock, shares authorized, $.01 par. Authorized
20,000,000 shares; issued and outstanding 9,819,959
and 9,856,169 in 1997 and 1998, respectively 98,000 99,000
Additional paid-in capital 39,331,000 39,352,000
Retained earnings 8,614,000 12,462,000
------------ ------------
Total shareholders' equity 48,043,000 51,913,000
------------ ------------
$ 68,220,000 $ 77,069,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
MODTECH, INC.
Condensed Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Net sales $ 25,813,000 $ 33,394,000
Cost of goods sold 21,437,000 26,342,000
------------ ------------
Gross profit 4,376,000 7,052,000
Selling, general, and administrative expenses 1,038,000 1,107,000
------------ ------------
Income from operations 3,338,000 5,945,000
------------ ------------
Other income (expense):
Interest income (expense), net (219,000) 206,000
Other - net 16,000 6,000
------------ ------------
(203,000) 212,000
------------ ------------
Income before income taxes 3,135,000 6,157,000
Income taxes (1,223,000) (2,309,000)
------------ ------------
Net income $ 1,912,000 $ 3,848,000
============ ============
Basic earnings per share $ 0.22 $ 0.39
============ ============
Weighted-average shares outstanding 8,670,000 9,856,000
============ ============
Diluted earnings per share $ 0.20 $ 0.34
============ ============
Weighted-average shares outstanding 9,350,000 11,200,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 5
MODTECH, INC. AND SUBSIDIARIES
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,912,000 $ 3,848,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 128,000 285,000
(Increase) decrease in operating assets and
liabilities:
Contracts receivable (8,055,000) 250,000
Inventories (2,062,000) 2,474,000
Due from affiliates (21,000) (1,355,000)
Other assets 11,000 116,000
Deferred tax asset -- --
Accounts payable and accrued liabilities 2,349,000 3,489,000
Billings in excess of costs 3,041,000 2,022,000
------------ ------------
Net cash provided by (used in) operating (2,697,000) 11,129,000
activities
------------ ------------
Cash flows from investing activities:
Proceeds from sale of equipment 12,000 --
Purchase of property and equipment (483,000) (922,000)
Investment in subsidiary -- (750,000)
------------ ------------
Net cash used in investing activities (471,000) (1,672,000)
------------ ------------
Cash flows from financing activities:
Net principal borrowings (payments) under revolving 3,772,000 (42,000)
credit lines
Principal payments on long-term debt (100,000) (490,000)
Conversion of stock options 57,000 22,000
------------ ------------
Net cash provided by (used in) financing activities 3,729,000 (510,000)
------------ ------------
Net increase in cash 561,000 8,947,000
Cash at beginning of period 405,000 11,629,000
------------ ------------
Cash at end of period $ 966,000 $ 20,576,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 6
MODTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1998
1) Management Opinion
In the opinion of management, the condensed 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 three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the full fiscal
year.
2) 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.
3) 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 and convertible securities. Diluted earnings per share
is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been restated to
conform to the SFAS No. 128 requirement.
<PAGE> 7
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 Statements of
Income as a percent of net sales.
<TABLE>
<CAPTION>
Percent of Net Sales
Three Months Ended
March 31,
1997 1998
------------ ------------
<S> <C> <C>
Net sales 100.0% 100.0%
Gross profit 16.9 21.1
Selling, general and administrative 4.0 3.3
Income from operations 12.9 17.8
Interest income (expense), net (0.8) 0.6
Income before taxes on income 12.1 18.4
</TABLE>
Net sales for the three months ended March 31, 1998, increased by $7,581,000 or
29.4%. The increase in revenue is attributable to the growth in the school
population and the Class Size Reduction program.
Gross profit as a percentage of net sales for the three months ended March 31,
1998 increased to 21.1% from 16.9% for the same period in 1997. The increase was
due principally to the utilization of the manufacturing facilities and the
realization of manufacturing efficiencies.
Selling, general and administrative expenses increased for the three months
ended March 31, 1998 by $69,000, an increase of 6.6%. The increase is primarily
due to the increase in sales expense as well as the increase in the number of
employees. In addition, as a percentage of sales, selling, general, and
administrative expenses decreased from 4.0% in the first three months of 1997 to
3.3% in 1998.
Due to a higher cash balance and reduced line of credit borrowing, the first
three months of 1998 reflects net interest income of $206,000 compared to net
interest expense of $219,000 for the same period in 1997, a favorable increase
of $425,000 or 194.6%.
On March 20, 1998, the Company purchased an 80% interest in Trac Modular
Manufacturing, Inc (Trac). The purchase price approximated the fair value of net
assets on the purchase date. Trac is based in Glendale, Arizona. The financial
activity for this subsidiary has not been included in the Company's financial
statements for the quarter, due to the minimal number of business days remaining
between the purchase date and the end of the first quarter. Trac will be
consolidated with Modtech, Inc. on a go forward basis, beginning on April 1,
1998.
<PAGE> 8
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 March 31, 1998, the Company had $20,576,000
in cash. During the three months ended March 31, 1998, the Company provided cash
from operating activities of $11,379,000.
The Company has a revolving loan commitment that will expire September 1998. The
Company is entitled to borrow, from time to time up to $20,000,000 with actual
borrowings limited to specified percentages of eligible accounts receivables,
equipment and inventories. On March 31, 1998, no amounts were outstanding under
this loan.
During the quarter an officer of the Company exercised 35,000 options for a
total of $22,000.
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 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 determined the adoption
of SFAS 130 has not had a material impact on the Company's combined financial
statement 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
<PAGE> 9
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.
<PAGE> 10
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, Inc.
Date: May 14, 1998 by: /s/ Michael G. Rhodes
------------------- ----------------------
Michael G. Rhodes
Chief Financial Officer
<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 From 8-K
None
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 20,756,000
<SECURITIES> 0
<RECEIVABLES> 37,281,000
<ALLOWANCES> 0
<INVENTORY> 1,458,000
<CURRENT-ASSETS> 63,860,000
<PP&E> 11,866,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 77,069,000
<CURRENT-LIABILITIES> 25,156,000
<BONDS> 0
0
0
<COMMON> 51,913,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 77,069,000
<SALES> 33,394,000
<TOTAL-REVENUES> 33,394,000
<CGS> 26,342,000
<TOTAL-COSTS> 26,342,000
<OTHER-EXPENSES> 1,107,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,157,000
<INCOME-TAX> 2,309,000
<INCOME-CONTINUING> 3,848,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,848,000
<EPS-PRIMARY> 0.39<F1>
<EPS-DILUTED> 0.34
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC
</FN>
</TABLE>
