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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 June 30, 2001
Commission File Number 000 - 25161
MODTECH HOLDINGS, INC.
- --------------------------------------------------------------------------------
Delaware 33 - 0825386
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of 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
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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 August 9, 2001, there were 13,452,099 of the Registrant's Common Stock
outstanding.
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MODTECH HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
PART I. STATEMENT REGARDING FINANCIAL INFORMATION
The condensed consolidated 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 accounting principles generally accepted in the
United States of America has been omitted pursuant to such rules and
regulations. However, the Company believes that the condensed consolidated
financial statements, including the disclosures herein, are adequate to make the
information presented not misleading. The results of operations for the three
and six months ended June 30, 2001 and 2000 are not necessarily indicative of
the results to be expected for the full fiscal years. The condensed consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000 as filed with
the Securities and Exchange Commission.
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MODTECH HOLDINGS, INC.
Condensed Consolidated Balance Sheets
December 31, June 30,
2000 2001
------------ ------------
(Audited) (Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 416,000 $ 851,000
Contracts receivable, net, including costs
in excess of billings of $9,724,000 and
$14,460,000 in 2000 and 2001, respectively 43,813,000 52,313,000
Inventories 9,815,000 11,535,000
Due from affiliates 702,000 11,000
Deferred tax assets 3,407,000 3,407,000
Other current assets 1,010,000 1,341,000
------------ ------------
Total current assets 59,163,000 69,458,000
------------ ------------
Property and equipment, net 14,538,000 15,676,000
Other assets
Goodwill, net 111,157,000 111,099,000
Covenants not to compete, net 1,188,000 820,000
Debt issuance costs, net 1,205,000 1,015,000
Deferred tax assets 56,000 56,000
Other assets 395,000 531,000
------------ ------------
$187,702,000 $198,655,000
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 23,107,000 $ 21,503,000
Billings in excess of costs 4,003,000 3,584,000
Current revolving credit line 6,500,000 18,275,000
Current maturities of long-term debt 8,400,000 9,000,000
------------ ------------
Total current liabilities 42,010,000 52,362,000
Long-term debt, excluding current portion 23,600,000 18,800,000
------------ ------------
Total liabilities 65,610,000 71,162,000
------------ ------------
Shareholders' Equity:
Series A preferred stock, $.01 par. Authorized
5,000,000 shares; issued and outstanding
388,939 in 2000 and 2001 4,000 4,000
Common stock, $.01 par. Authorized 25,000,000
shares; issued and outstanding 13,348,015 and
13,452,099 in 2000 and 2001, respectively
133,000 135,000
Additional paid-in capital 78,008,000 78,331,000
Retained earnings 43,947,000 49,023,000
------------ ------------
Total shareholders' equity 122,092,000 127,493,000
------------ ------------
$187,702,000 $198,655,000
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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MODTECH HOLDINGS, INC.
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ --------------------------------
2000 2001 2000 2001
------------ ------------ ------------- -------------
Net sales $ 65,182,000 $ 61,084,000 $ 108,904,000 $ 103,764,000
Cost of goods sold 55,463,000 50,059,000 93,363,000 86,667,000
------------ ------------ ------------- -------------
Gross profit 9,719,000 11,025,000 15,541,000 17,097,000
Selling, general, and administrative expenses 1,988,000 2,277,000 3,828,000 3,972,000
Goodwill and covenant amortization 925,000 925,000 1,851,000 1,851,000
------------ ------------ ------------- -------------
Income from operations 6,806,000 7,823,000 9,862,000 11,274,000
------------ ------------ ------------- -------------
Other income (expense):
Interest expense, net (1,210,000) (837,000) (2,224,000) (1,742,000)
Other, net 19,000 33,000 27,000 46,000
------------ ------------ ------------- -------------
(1,191,000) (804,000) (2,197,000) (1,696,000)
------------ ------------ ------------- -------------
Income before income taxes 5,615,000 7,019,000 7,665,000 9,578,000
Income taxes (2,583,000) (3,299,000) (3,526,000) (4,502,000)
------------ ------------ ------------- -------------
Net income $ 3,032,000 $ 3,720,000 $ 4,139,000 $ 5,076,000
============ ============ ============= =============
Series A Preferred stock dividend 39,000 39,000 78,000 78,000
Net income available to common stock $ 2,993,000 $ 3,681,000 $ 4,061,000 $ 4,998,000
============ ============ ============= =============
Basic earnings per common share $ 0.23 $ 0.27 $ 0.31 $ 0.37
============ ============ ============= =============
Basic weighted-average shares outstanding 13,196,000 13,387,000 13,176,000 13,369,000
============ ============ ============= =============
Diluted earnings per common share $ 0.21 $ 0.26 $ 0.29 $ 0.36
============ ============ ============= =============
Diluted weighted-average shares outstanding 14,399,000 14,517,000 14,332,000 14,374,000
============ ============ ============= =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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MODTECH HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
----------------------------
2000 2001
------------ ------------
Cash flows from operating activities:
Net income $ 4,139,000 $ 5,076,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,918,000 3,127,000
Gain on sale of equipment -- (20,000)
(Increase) decrease in assets, net of effects
from acquisitions:
Contracts receivable (28,310,000) (7,974,000)
Inventories (4,988,000) (875,000)
Due from affiliates 256,000 691,000
Other current and noncurrent assets 56,000 (413,000)
Increase (decrease) in liabilities, net of
effects from acquisitions:
Accounts payable and accrued liabilities 13,957,000 (2,846,000)
Billings in excess of costs (1,571,000) (419,000)
------------ ------------
Net cash used in operating activities (13,543,000) (3,653,000)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of equipment -- 25,000
Purchase of property and equipment (1,983,000) (405,000)
Purchase of covenants not to compete -- (25,000)
Acquisition of subsidiaries, net of cash acquired -- (3,406,000)
------------ ------------
Net cash used in investing activities (1,983,000) (3,811,000)
------------ ------------
Cash flows from financing activities:
Net principal borrowings under revolving credit line 19,325,000 11,775,000
Net principal payments on long-term debt (3,500,000) (4,200,000)
Proceeds from exercise of stock options 130,000 324,000
------------ ------------
Net cash provided by financing activities 15,955,000 7,899,000
------------ ------------
Net increase in cash and cash equivalents 429,000 435,000
Cash and cash equivalents at beginning of period 1,198,000 416,000
------------ ------------
Cash and cash equivalents at end of period $ 1,627,000 $ 851,000
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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MODTECH HOLDINGS, INC.
Notes To Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2001
(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 three and six months ended June 30, 2000
and 2001 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:
2000 2001
---------- ----------
Raw materials $8,394,000 $ 8,262,000
Work in process 1,413,000 3,265,000
Finished goods 8,000 8,000
---------- ----------
$9,815,000 $11,535,000
========== ===========
(3) Earnings Per Share
The following table presents the calculation of basic and diluted earnings
per common share under the provisions of SFAS No. 128:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2000 2001 2000 2001
------------ ------------ ------------ ------------
BASIC
Net income $ 3,032,000 $ 3,720,000 $ 4,139,000 $ 5,076,000
Dividends on preferred stock (39,000) (39,000) (78,000) (78,000)
------------ ------------ ------------ ------------
Net income available to common
stock $ 2,993,000 $ 3,681,000 $ 4,061,000 $ 4,998,000
============ ============ ============ ============
Basic weighted-average shares
outstanding 13,196,000 13,387,000 13,176,000 13,369,000
============ ============ ============ ============
Basic earnings per common share $ 0.23 $ 0.27 $ 0.31 $ 0.37
============ ============ ============ ============
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Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 2001 2000 2001
----------- ----------- ----------- -----------
DILUTED
Net income $ 3,032,000 $ 3,720,000 $ 4,139,000 $ 5,076,000
=========== =========== =========== ===========
Basic weighted-average shares
outstanding 13,196,000 13,387,000 13,176,000 13,369,000
Add:
Conversion of preferred stock 389,000 389,000 389,000 389,000
Exercise of stock options 814,000 741,000 767,000 616,000
----------- ----------- ----------- -----------
Diluted weighted-average shares
outstanding 14,399,000 14,517,000 14,332,000 14,374,000
=========== =========== =========== ===========
Diluted earnings per common share $ 0.21 $ 0.26 $ 0.29 $ 0.36
=========== =========== =========== ===========
Options to purchase 204,000 and 547,000 shares of common stock were
outstanding during the three and six months ended June 30, 2000,
respectively, and options to purchase 218,000 and 611,000 shares of common
stock were outstanding during the three and six months ended June 30, 2001,
respectively, but were not included in the computation of diluted earnings
per share because the option exercise price was greater than the average
market price of the common shares and therefore, the effect would be
anti-dilutive.
(4) Acquisition
IMS Acquisition. On March 8, 2001, the Company purchased 100% of the stock
of Innovative Modular Structures, Inc. (IMS). IMS designs and manufactures
modular relocatable classrooms and other modular buildings for commercial
use. IMS is based in St. Petersburg, Florida. Pro forma amounts for the IMS
acquisition are not included, as the effect is not material to the
Company's consolidated financial statements. This acquisition has been
accounted for as a purchase.
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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 Percent of Net Sales
-------------------- --------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 2001 2000 2001
----- ----- ----- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 14.9 18.0 14.3 16.5
Selling, general and administrative
expenses 3.0 3.7 3.5 3.8
Goodwill and covenant amortization 1.4 1.5 1.7 1.8
Income from operations 10.4 12.8 9.1 10.9
Interest expense, net (1.9) (1.4) (2.0) (1.7)
Income before income taxes 8.6 11.5 7.0 9.2
Net sales for the three and six months ended June 30, 2001, decreased by
$4,098,000 or 6.3% and $5,140,000 or 4.7%, respectively. The Company has seen a
shift in product mix from higher volume, lower gross margin standard units
toward a more customized unit. These customized units typically generate higher
margins.
Gross profit as a percentage of net sales for the three and six months ended
June 30, 2001 increased to 18.0% and 16.5%, respectively, from 14.9% and 14.3%
for the same periods in 2000. The increase was due to product mix as well as
certain operational efficiencies.
Selling, general and administrative expenses increased for the three and six
months ended June 30, 2001 by $289,000 or 14.5% and $144,000 or 3.8%,
respectively. As a percentage of net sales, selling, general, and administrative
expenses for the three and six months ended June 30, 2001 are 3.7% and 3.8%,
respectively. The percentages were 3.0% and 3.5% for the same periods in 2000.
Certain additional costs have been incurred in 2001 in the marketing of a new
product for the Florida market.
Goodwill was recorded for both the SPI Merger and the Coastal Acquisition in
1999 and for the IMS acquisition in 2001 and has been amortized from the
respective dates of acquisition.
Interest expense, net decreased for the three and six months ended June 30, 2001
by $373,000 or 30.8% and $482,000 or 21.7%, respectively. The decrease is
attributable to decreased line of credit borrowings, decreased long-term debt
due to repayments and decreased interest rates for the three and six months
ended June 30, 2001. As a percentage of net sales, interest expense decreased
from 1.9% and 2.0% in the three and six months ended June 30, 2000,
respectively, to 1.4% and 1.7% in the three and six months ended June 30, 2001,
respectively.
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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 from operations, bank borrowings and
public offerings to meet its needs. At June 30, 2001, the Company had $851,000
in cash and cash equivalents. During the six months ended June 30, 2001, the
Company used cash from operating activities of $3,653,000.
The Company has a $75,000,000 credit facility, of which $30,000,000 represents a
revolving loan commitment. For the period June 1 through December 31 of each
year, the revolving loan commitment increases to $41,000,000. The credit
facility is secured by all the Company's assets, as well as the Company's stock
ownership in its subsidiaries. The credit facility expires in February 2004. On
June 30, 2001, $18,275,000 was outstanding under the revolving loan commitment,
compared to $19,325,000 outstanding at June 30, 2000. The credit facility
contains various covenants. The Company was in compliance with such covenants as
of June 30, 2001.
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, as amended,
establishes accounting and reporting standards for derivative instruments,
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. The adoption of SFAS 133, as amended, did not have a
material impact on our consolidated financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" (SFAS 141), and Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141
requires that all business combinations be accounted for under a single method -
the purchase method. Use of the pooling-of-interests method is no longer
permitted. SFAS 141 requires that the purchase method be used for business
combinations initiated after June 30, 2001. SFAS 142 requires that goodwill no
longer be amortized to earnings, but instead reviewed for impairment. Under SFAS
142, the amortization of goodwill ceases upon adoption of the Statement and is
effective for fiscal years beginning after December 15, 2001, which for calendar
year-end companies, will be January 1, 2002.
The Company has historically amortized its goodwill over its estimated useful
lives. Beginning with the adoption of SFAS 142, the Company will cease
amortizing its goodwill. The Company recorded amortization expense in the amount
of $2,916,000 for the year ended December 31, 2000, $729,000 for the three
months ended June 30, 2001 and $1,458,000 for the six months ended June 30,
2001. To the extent that no impairment charges are recorded upon adoption or
application of SFAS 142, similar amounts of amortization will not be recorded in
future periods.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
We are exposed to market risks related to fluctuations in interest rates on our
$75 million credit facility. During the three and six months ended June 30,
2001, we did not use interest rate swaps or other types of derivative financial
instruments. The carrying value of the credit facility approximates fair value
as the interest rate is variable and resets frequently. Indebtedness under the
credit facility bears interest at the lower of (1) LIBOR plus additional
interest of between 1.5% and 2.25%, or (2) a rate equal to the greater of (i)
the Federal funds rate plus 0.5% or (ii) the bank's prime rate, plus in either
case an additional interest of between 0.25% to 1.0%. We estimate that the
average amount of debt outstanding under the credit facility for 2001 will be
$50 million. Therefore, a one percentage point increase in interest rates would
result in an increase in interest expense of $500,000 for the year.
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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
None
(b) Reports on Form 8-K
None
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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: August 10, 2001 by: /s/ Shari L. Walgren
--------------------------------
Shari L. Walgren
Chief Financial Officer
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