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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 March 31, 1999
Commission File Number 000 - 25161
MODTECH HOLDINGS, INC.
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Delaware 33 - 0825386
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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)
(909) 943-4014
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Registrant's telephone number
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(Former name, 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
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As of May 14, 1999, there were 12,622,158 of the Registrant's Common Stock
outstanding.
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MODTECH HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
PART I. 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.
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MODTECH HOLDINGS, INC.
Condensed Consolidated Balance Sheets
December 31, March 31,
1998 1999
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(Audited) (Unaudited)
Assets
Current assets
Cash $ 40,142,000 $ 2,036,000
Contracts receivable, net, including costs
in excess of billings of $3,800,000 and
$8,911,000 in 1998 and 1999, respectively 16,747,000 20,771,000
Inventories 4,442,000 10,744,000
Due from affiliates 2,389,000 466,000
Income tax receivable 2,368,000 2,478,000
Deferred tax asset 3,440,000 3,440,000
Other current assets 280,000 567,000
------------ ------------
Total current assets 69,808,000 40,502,000
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Property and equipment, net 12,314,000 14,325,000
Other assets
Other assets 751,000 4,796,000
Costs in excess of net assets of business
acquired, net -- 111,790,000
------------ ------------
$ 82,873,000 $171,413,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 10,541,000 $ 18,109,000
Billings in excess of costs 7,138,000 7,539,000
Current portion of long-term debt -- 6,250,000
------------ ------------
Total current liabilities 17,679,000 31,898,000
Deferred tax liability 97,000 97,000
Note payable -- 22,000
Long-term debt -- 39,250,000
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Total liabilities 17,776,000 71,267,000
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Stockholders' Equity
Series A preferred stock, $.01 par.
Authorized 5,000,000 shares; issued and
outstanding 388,939 in 1999 -- 4,000
Common stock, $.01 par. Authorized 25,000,000 shares;
issued and outstanding 9,871,409 and 12,622,158 in
1998 and 1999, respectively 99,000 126,000
Additional paid-in capital 39,854,000 73,849,000
Retained earnings 25,144,000 26,167,000
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Total stockholders' equity 65,097,000 100,146,000
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$ 82,873,000 $171,413,000
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The accompanying notes are an integral part of these financial statements.
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MODTECH HOLDINGS, INC.
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
----------------------------
1998 1999
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Net sales $ 33,394,000 $ 20,952,000
Cost of goods sold 26,342,000 17,456,000
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Gross profit 7,052,000 3,496,000
Selling, general and administrative expenses 1,107,000 1,645,000
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Income from operations 5,945,000 1,851,000
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Other income (expense):
Interest income (expense), net 206,000 (89,000)
Other, net 6,000 2,000
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212,000 (87,000)
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Income before income taxes 6,157,000 1,764,000
Income taxes (2,309,000) (741,000)
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Net income $ 3,848,000 $ 1,023,000
============ ============
5% Preferred stock dividend -- 19,000
Net income available to common stock $ 3,848,000 $ 1,004,000
============ ============
Basic earnings per common share $ 0.39 $ 0.08
============ ============
Basic weighted-average shares outstanding 9,856,000 12,622,000
============ ============
Diluted earnings per common share $ 0.34 $ 0.07
============ ============
Diluted weighted-average shares outstanding 11,200,000 14,024,000
============ ============
The accompanying notes are an integral part of these financial statements.
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MODTECH HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
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1998 1999
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Cash flows from operating activities:
Net income $ 3,848,000 $ 1,023,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 285,000 782,000
(Increase) decrease in assets:
Contracts receivable 250,000 237,000
Inventories 2,474,000 (301,000)
Due from affiliates (1,355,000) 1,923,000
Income tax receivable -- 708,000
Other current and noncurrent assets 116,000 (1,175,000)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 3,489,000 1,859,000
Billings in excess of costs 2,022,000 401,000
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Net cash provided by operating activities 11,129,000 5,457,000
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Cash flows from investing activities:
Purchase of property and equipment (922,000) (515,000)
Acquisition of subsidiaries (750,000)
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Net cash used in investing activities (1,672,000)
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Cash flows from financing activities:
Net principal borrowings (payments) under revolving (42,000) --
credit lines
Principal borrowings on long-term debt -- 47,000,000
Principal payments on long-term debt (490,000) (1,500,000)
Common stock repurchase --
Proceeds from exercise of stock options 22,000 --
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Net cash provided by (used in)
financing activities (510,000) 45,500,000
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Net increase (decrease) in cash 8,947,000 (38,106,000)
Cash at beginning of period 11,629,000 40,142,000
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Cash at end of period $ 20,576,000 $ 2,036,000
============ ============
The accompanying notes are an integral part of these financial statements
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MODTECH HOLDINGS, INC.
Notes To Condensed Consolidated Financial Statements
March 31, 1999
(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, 1999 are not
necessarily indicative of the results to be expected for the full fiscal
year.
(2) Inventories
Inventories consist of the following:
1998 1999
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Raw materials $ 4,442,000 $ 9,196,000
Work in process -- 1,303,000
Finished goods -- 245,000
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$ 4,442,000 $10,744,000
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(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:
Three Months Ended
March 31,
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1998 1999
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BASIC
Net income $ 3,848,000 $ 1,023,000
Dividends on preferred stock -- (19,000)
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Net income available to common
stock $ 3,848,000 $ 1,004,000
============ ============
Weighted-average common shares
outstanding 9,856,000 12,622,000
============ ============
Basic earnings per common share $ 0.39 $ 0.08
============ ============
DILUTED
Net income $ 3,848,000 $ 1,023,000
============ ============
Weighted-average common shares
outstanding 9,856,000 12,622,000
Add:
Conversion of preferred
stock -- 389,000
Exercise of options 1,344,000 1,013,000
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Adjusted weighted-average common
shares outstanding 11,200,000 14,024,000
============ ============
Diluted earnings per common share $ 0.34 $ 0.07
============ ============
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(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.
Modtech Holdings, Inc.
Unaudited Pro Forma Combined Selected Financial Data
Three Months Ended
March 31,
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1998 1999
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Net sales $52,250,000 $26,600,000
Income from operations 6,980,000 1,500,000
Interest expense, net (660,000) (520,000)
Income before income taxes 6,360,000 980,000
Net income 3,680,000 570,000
Diluted earnings per common share 0.26 0.04
Diluted weighted-average shares
outstanding 14,024,000 14,024,000
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.
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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
Consolidated Statements of Income as a percent of net sales.
Percent of Net Sales
Three Months Ended
March 31,
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1998 1999
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Net sales 100.0% 100.0%
Gross profit 21.1 16.7
Selling, general and administrative expenses 3.3 7.8
Income from operations 17.8 8.8
Interest income (expense), net 0.6 (0.4)
Income before income taxes 18.4 8.4
Net sales for the three months ended March 31, 1999, decreased by $12,442,000 or
37.3%. The decrease in revenue was due in part to the fact that the California
Legislature was more than two months late in passing the state budget.
Additionally, there was a delay in allocating the funds from the $9.2 billion
school construction bond issue which was passed in November 1998.
Gross profit as a percentage of net sales for the three months ended March 31,
1999 decreased to 16.7% from 21.1% for the same period in 1998. The decrease was
due principally to the decrease in net sales and a shift in product mix for the
quarter.
Selling, general and administrative expenses increased for the three months
ended March 31, 1999 by $538,000, an increase of 48.6%. 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 increased from 3.3% in the first three months of
1998 to 7.8% in 1999.
Due to the combination of a reduced cash balance and debt incurred as a result
of the SPI Merger, the first three months of 1999 reflects net interest expense
of $89,000 compared to net interest income of $206,000 for the same period in
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.
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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, 1999, the Company had $2,036,000
in cash. During the three months ended March 31, 1999, the Company provided cash
from operating activities of $5,457,000.
The Company has a revolving loan commitment that will expire February 2004. The
Company is entitled to borrow, from time to time up to $30,000,000 with actual
borrowings limited to specified percentages of eligible accounts receivables,
equipment and inventories. On March 31, 1999, no amounts were outstanding under
this loan.
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 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 "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. SPI's
computer data is currently being transferred to the Company's computer system.
The Company estimates that this transfer will be completed by the end of the
second quarter of 1999 at a cost of approximately $100,000.
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 is in the process of assessing the status of their
compliance through the use of questionnaires. The Company expects this process
will be completed by the second 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 statements.
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.
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
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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 statements.
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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
A special meeting of the stockholders of Modtech, Inc. was held on
January 28, 1999 to consider and vote upon a proposal to approve and
adopt the Agreement and Plan of Reorganization and Merger dated as
of September 28, 1998 between SPI Holdings, Inc. and Modtech, Inc.
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
Attached
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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 Holdings, Inc.
Date: May 14, 1999 by: /s/ MICHAEL G. RHODES
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Michael G. Rhodes
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number Description
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27 Financial Data Schedule