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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 September 30, 1998
Commission File Number 000 - 18680
MODTECH, INC.
- --------------------------------------------------------------------------------
California 33-0044888
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
2830 Barrett Avenue, Perris, CA 92572
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(Address of principal executive office) (Zip Code
Registrant's telephone number: (909) 943-4014
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(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 September 30, 1998, there were 9,871,409 of the Registrant's Common Stock
outstanding.
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MODTECH, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 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.
2
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MODTECH, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
- -------------------------------------------------------------------------------------------------
Audited Unaudited
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash $11,629,000 $30,450,000
Contracts receivable, net, including costs in excess of
billings of $16,021,000 and $13,738,000 in 1997 and 37,531,000 33,565,000
1998, respectively
Inventories 3,932,000 2,828,000
Due from affiliates 1,098,000 694,000
Deferred tax asset 2,094,000 2,094,000
Other current assets 310,000 402,000
----------- -----------
Total current assets 56,594,000 70,033,000
----------- -----------
Property and equipment, net 11,229,000 12,221,000
Other Assets
Deferred tax asset 99,000 99,000
Other assets 298,000 134,000
----------- -----------
$68,220,000 $82,487,000
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $11,763,000 $13,834,000
Billings in excess of costs 6,997,000 6,402,000
Current portion of long-term debt 1,417,000 --
----------- -----------
Total current liabilities 20,177,000 20,236,000
Stockholders Equity
Common stock, shares authorized, $.01 par. Authorized
20,000,000 shares; issued and outstanding 9,856,000
and 9,871,000 in 1997 and 1998, respectively 98,000 100,000
Additional paid-in capital 39,331,000 39,573,000
Retained earnings 8,614,000 22,578,000
----------- -----------
Total shareholders' equity 48,043,000 62,251,000
----------- -----------
$68,220,000 $82,487,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
MODTECH, INC.
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- --------------------------------------------------------------------------------------------------------------
1997 1998 1997 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 39,805,000 $ 37,243,000 $ 98,711,000 $ 113,119,000
Cost of goods sold 31,235,000 28,408,000 78,923,000 87,083,000
------------- ------------- ------------- -------------
Gross profit 8,570,000 8,835,000 19,788,000 26,036,000
Selling, general, and
administrative expenses 1,362,000 1,102,000 3,544,000 3,843,000
------------- ------------- ------------- -------------
Income from operations 7,208,000 7,733,000 16,244,000 22,193,000
------------- ------------- ------------- -------------
Other income (expense):
Interest income (expense), net (274,000) 305,000 (823,000) 694,000
Other - net 8,000 3,000 72,000 18,000
------------- ------------- ------------- -------------
(266,000) 308,000 (751,000) 712,000
------------- ------------- ------------- -------------
Income before income taxes 6,942,000 8,041,000 15,493,000 22,905,000
Income taxes (2,456,000) (2,862,000) (5,812,000) (8,511,000)
------------- ------------- ------------- -------------
Net income $ 4,486,000 $ 5,179,000 $ 9,681,000 $ 14,394,000
============= ============= ============= =============
Basic earnings per share $ 0.47 $ 0.52 $ 1.01 $ 1.46
============= ============= ============= =============
Weighted-average shares outstanding 9,611,000 9,871,000 9,611,000 9,871,000
============= ============= ============= =============
Diluted earnings per share $ 0.47 $ 0.48 $ 1.00 $ 1.33
============= ============= ============= =============
Weighted-average shares outstanding 9,647,000 10,800,000 9,647,000 11,000,000
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE> 5
MODTECH, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
- -------------------------------------------------------------------------------------------
1997 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,681,000 $ 14,394,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 866,000 890,000
(Increase) decrease in operating assets and
liabilities:
Contracts receivable (21,779,000) 3,966,000
Inventories (1,394,000) 1,104,000
Due from affiliates (490,000) 404,000
Other assets (35,000) 72,000
Deferred tax asset -- --
Accounts payable and accrued liabilities 3,255,000 2,071,000
Billings in excess of costs 4,827,000 (595,000)
------------ ------------
Net cash provided by (used in) operating
activities (5,069,000) 22,306,000
------------ ------------
Cash flows from investing activities:
Proceeds from sale of equipment -- --
Purchase of property and equipment (981,000) (1,882,000)
------------ ------------
Net cash used in investing activities (981,000) (1,882,000)
------------ ------------
Cash flows from financing activities:
Net principal borrowings (payments) under revolving
credit lines 6,064,000 --
Principal payments on long-term debt -- (1,417,000)
Investment in affiliate -- (250,000)
Conversion of stock options 96,000 64,000
------------ ------------
Net cash provided by (used in) financing activities 6,160,000 (1,603,000)
------------ ------------
Net increase in cash 110,000 18,821,000
Cash at beginning of period 405,000 11,629,000
------------ ------------
Cash at end of period $ 515,000 $ 30,450,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
5
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MODTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 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 nine months ended September 30, 1998 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) 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.
6
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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 Percent of Net Sales
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1997 1998 1997 1998
-------------------- ---------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 21.5 23.7 20.0 23.0
Selling, general and administrative 3.4 3.0 3.6 3.4
Income from operations 18.1 20.8 16.5 19.6
Interest income (expense), net (0.7) 0.8 (0.8) 0.6
Income before taxes on income 17.4 21.6 15.7 20.2
</TABLE>
Net sales decreased by $2,562,000 or 6.4% for the three months and increased by
$14,408,000 or 14.6% for the nine months ended September 30, 1998. The overall
increase in revenue is attributable to the growth in the school population, the
Class Size Reduction program and a diversification of our product line. The
three month decrease was primarily due to the delay by the California
Legistrature in the adoption of the California state fiscal budget for
1998/1999.
Gross profit as a percentage of net sales for the three and nine months ended
September 30, 1998 increased to 23.7% and 23.0% from 21.5% and 20.0% for the
same period in 1997. The increase was due principally to the utilization of the
manufacturing facilities and the realization of manufacturing efficiencies and
product mix.
Selling, general and administrative expenses decreased for the three months
ended September 30, 1998 by $260,000 and increased for the nine months ended
September 30, 1998 by $299,000, a change of 19.1% and 8.4% respectively. The
increase is primarily due to the increase in sales expense as well as the
increase in the number of employees. As a percentage of sales, selling, general,
and administrative expenses for the three and nine months ended September 30,
are 3.0% and 3.4% for 1998. The percentages were 3.4% and 3.6% for the same
period in 1997.
Due to a higher cash balance and reduced line of credit borrowing, the nine
months ended September 30, 1998 reflects net interest income of $712,000
compared to net interest expense of $751,000 for the same period in 1997, a
favorable increase of $1,463,000 or 194.8%.
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 been included in the Company's financial
statements for the second and third quarter of 1998.
7
<PAGE> 8
Modtech, Inc. has announced that it has entered into a definitive agreement to
purchase 100% of the equity of SPI Manufacturing, Inc. ("SPI"), a provately held
company. SPI is a leading designer, manufacturer and wholesaler of commercial
and light industrial modular buildings. The transaction is scheduled to close in
December 1998 and is subject to shareholder and regulatory approval.
The acquisition will be structured as a merger transaction whereby each of
Modtech, Inc. and SPI will become wholly owned subsidiaries of a newly formed
public holding company, Modtech Holdings. Modtech holdings will acquire SPI for
consideration consisting of approximately $8 million in cash and approximately 5
million shares of holding company common stock. Modtech Holdings will also
refinance approximately $32 million of SPI debt. The merger agreement also
provides that Modtech, Inc. shareholders will receive approximately $3.66 per
share (in the aggregate, approximately $40 million) and that all of the
outstanding Modtech, Inc. shares will be converted into Modtech Holdings common
stock (approximately 10 million shares) at an effective ratio of approximately 1
Modtech, Inc. share to 0.85 shares of Modtech Holdings. Modtech Holdings shares
will be traded on NASDAQ in replacement of the existing Modtech, Inc. shares.
SPI had pro forma consolidated net sales of approximately $80 million for the
fiscal year ended March 31, 1998, which include the results of its California
operations, the Texas operation which was acquired in February 1998 and the
Arizona operation which was acquired in April 1998.
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, 1998, the Company had
$30,450,000 in cash. During the nine months ended September 30, 1998, the
Company provided cash in it's operating activities.
The Company has a revolving loan commitment that will expire in the year 2000.
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 September 30, 1998, no amounts were
outstanding under this loan.
During the three and nine months ended September 30, 1998,certain directors,
officers or employees exercised 14,575 and 49,575 common stock options for a
total of $41,688 and $63,738, respectively.
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
8
<PAGE> 9
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 will not
have 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 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.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132"). SFAS 132 revises employers' disclosures about pension
and other postretirement benefit plans. It does not change the measurement or
recognition of those plans. SFAS 132 is effective for fiscal years beginning
after December 15, 1997. SFAS 132, requiring only additional information
disclosures, is effective for the Company's fiscal year ending December 31,
1998.
In June 1998, the 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, including certain derivative instruments embedded in other
contracts, and hedging activities. SFAS 133 is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. 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 Company is currently working to resolve the potential impact of the Year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures.
The Company has investigated the impact of the Year 2000 problem on its
business, including the Company's operational, information and financial
systems. Based on this investigation, the Company does not expect the Year 2000
problem, including the cost of making the Company's computerized information
systems Year 2000 compliant, to have a material adverse impact on the Company's
financial position or results of operations in future periods. However, the
inability of the Company to resolve all potential Year 2000 problems in a timely
manner could have a material adverse impact on the Company.
The Company has also initiated communications with significant suppliers and
vendors on which the Company relies in an effort to determine the extent to
which the Company's business is vulnerable to the failure by these third
parties' to remediate their Year 2000
10
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problems. While the Company had not been informed of any material risks
associated with the Year 2000 problem on these entities, there can be no
assurance that the computerized information systems of these third parties will
be Year 2000 compliant on a timely basis. The inability of these third parties
to remediate their Year 2000 problems could have a material adverse impact on
the Company.
To the extent possible, the Company will be developing and executing contingency
plans designed to allow continued operation in the event of failure of the
Company's or third parties'
11
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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
11
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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: November 13, 1998 By: /s/ MICHAEL G. RHODES
----------------- --------------------------
Michael G. Rhodes
Chief Financial Officer
12
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 30,450,000
<SECURITIES> 0
<RECEIVABLES> 33,565,000
<ALLOWANCES> 0
<INVENTORY> 2,828,000
<CURRENT-ASSETS> 70,033,000
<PP&E> 12,221,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 82,487,000
<CURRENT-LIABILITIES> 20,236,000
<BONDS> 0
0
0
<COMMON> 62,251,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 82,487,000
<SALES> 113,119,000
<TOTAL-REVENUES> 113,119,000
<CGS> 87,083,000
<TOTAL-COSTS> 87,083,000
<OTHER-EXPENSES> 3,843,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 22,905,000
<INCOME-TAX> 8,511,000
<INCOME-CONTINUING> 14,394,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,394,000
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.31
</TABLE>
