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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, 2002
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 (Zip Code)
office)
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 12, 2002, there were 13,491,157 of the Registrant's Common Stock
outstanding.
MODTECH HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
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 consolidated 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, 2002 and 2001 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, 2001 as filed with
the Securities and Exchange Commission.
MODTECH HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, June 30,
2001 2002
- --------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 130,000 $ 787,000
Contracts receivable, net, including costs in excess of billings
of $10,110,000 and $17,077,000 in 2001 and 2002, respectively 44,305,000 48,456,000
Inventories 8,668,000 9,995,000
Due from affiliates 479,000 --
Deferred tax assets 3,575,000 3,575,000
Other current assets 1,206,000 1,172,000
--------------- --------------
Total current assets 58,363,000 63,985,000
--------------- --------------
Property and equipment, net 15,292,000 15,017,000
Other assets
Goodwill, net 109,612,000 72,384,000
Covenants not to compete, net 506,000 237,000
Debt issuance costs, net 1,414,000 1,304,000
Deferred tax assets 558,000 558,000
Other assets 651,000 775,000
--------------- --------------
$ 186,396,000 $ 154,260,000
=============== ==============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 14,777,000 $ 20,380,000
Billings in excess of costs 2,221,000 2,723,000
Current revolving credit line 9,100,000 7,500,000
Current maturities of long-term debt 7,000,000 7,000,000
--------------- --------------
Total current liabilities 33,098,000 37,603,000
Long-term debt, excluding current portion 19,000,000 15,500,000
--------------- --------------
Total liabilities 52,098,000 53,103,000
--------------- --------------
Shareholders' Equity:
Series A preferred stock, $.01 par. Authorized 5,000,000 shares;
issued and outstanding 388,939 in 2001 and 2002 4,000 4,000
Common stock, $.01 par. Authorized 25,000,000 shares; issued and
outstanding 13,456,365 and 13,491,157 in 2001 and 2002,
respectively 135,000 135,000
Additional paid-in capital 78,590,000 78,696,000
Retained earnings 55,569,000 22,322,000
--------------- --------------
Total shareholders' equity 134,298,000 101,157,000
--------------- --------------
$ 186,396,000 $ 154,260,000
=============== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
MODTECH HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2002 2001 2002
- -------------------------------------------------------------------------------------------------------------------------------
Net sales $ 61,084,000 $ 44,569,000 $ 103,764,000 $ 79,928,000
Cost of goods sold 50,059,000 37,928,000 86,667,000 68,216,000
-------------- --------------- --------------- -------------
Gross profit 11,025,000 6,641,000 17,097,000 11,712,000
Selling, general, and administrative expenses 2,277,000 1,915,000 3,972,000 3,629,000
Goodwill and covenant amortization 925,000 73,000 1,851,000 268,000
-------------- --------------- --------------- -------------
Income from operations 7,823,000 4,653,000 11,274,000 7,815,000
-------------- --------------- --------------- -------------
Other income (expense):
Interest expense, net (837,000) (377,000) (1,742,000) (867,000)
Other, net 33,000 13,000 46,000 21,000
-------------- --------------- --------------- -------------
(804,000) (364,000) (1,696,000) (846,000)
-------------- --------------- --------------- -------------
Income before income taxes and cumulative
effect of a change in an accounting principle 7,019,000 4,289,000 9,578,000 6,969,000
Income taxes (3,299,000) (1,801,000) (4,502,000) (2,927,000)
-------------- --------------- --------------- -------------
Income before cumulative effect of a change in
an accounting principle 3,720,000 2,488,000 5,076,000 4,042,000
Cumulative effect of a change in an accounting principle -- -- -- (37,288,000)
-------------- --------------- --------------- -------------
Net income (loss) $ 3,720,000 $ 2,488,000 $ 5,076,000 $ (33,246,000)
-------------- --------------- --------------- -------------
Series A Preferred stock dividend 39,000 39,000 78,000 78,000
-------------- --------------- --------------- -------------
Net income (loss) available to common
stockholders $ 3,681,000 $ 2,449,000 $ 4,998,000 $ (33,324,000)
============== =============== =============== =============
Basic earnings per common share before cumulative
effect of a change in an accounting principle $ 0.27 $ 0.18 $ 0.37 $ 0.29
============== =============== =============== =============
Cumulative effect of a change in an accounting
principle per common share - basic -- -- -- (2.77)
============== =============== =============== =============
Basic earnings (loss) per common share $ 0.27 $ 0.18 $ 0.37 $ (2.48)
============== =============== =============== =============
Basic weighted-average shares outstanding 13,387,000 13,469,000 13,369,000 13,463,000
============== =============== =============== =============
Diluted earnings per common share before cumulative
effect of a change in an accounting principle $ 0.26 $ 0.17 $ 0.36 $ 0.28
============== =============== =============== =============
Cumulative effect of a change in an accounting
principle per common share - diluted -- -- -- (2.52)
============== =============== =============== =============
Diluted earnings (loss) per common share $ 0.26 $ 0.17 $ 0.36 $ (2.24)
============== =============== =============== =============
Diluted weighted-average shares outstanding 14,517,000 14,885,000 14,374,000 14,768,000
============== =============== =============== =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
MODTECH HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2001 2002
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 5,076,000 $ (33,246,000)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Cumulative effect of a change in an accounting principle -- 37,288,000
Depreciation and amortization 3,127,000 1,353,000
Gain on sale of equipment (20,000) --
(Increase) decrease in assets, net of effects from
acquisitions:
Contracts receivable (7,974,000) (4,151,000)
Inventories (875,000) (1,327,000)
Due from affiliates 691,000 479,000
Other current and noncurrent assets (413,000) (91,000)
Increase (decrease) in liabilities, net of effects from
acquisitions:
Accounts payable and accrued liabilities (2,846,000) 5,603,000
Billings in excess of costs (419,000) 502,000
------------- --------------
Net cash (used in) provided by operating activities (3,653,000) 6,410,000
------------- --------------
Cash flows from investing activities:
Proceeds from sale of equipment 25,000 --
Purchase of property and equipment (405,000) (672,000)
Purchase of covenants not to compete (25,000) --
Acquisition of subsidiaries, net of cash acquired (3,406,000) (60,000)
------------- --------------
Net cash used in investing activities (3,811,000) (732,000)
------------- --------------
Cash flows from financing activities:
Net principal borrowings (payments) under revolving credit line 11,775,000 (1,600,000)
Principal payments on long-term debt (4,200,000) (3,500,000)
Payment of debt issuance costs -- (27,000)
Proceeds from exercise of stock options 324,000 106,000
------------- --------------
Net cash provided by (used in) financing activities 7,899,000 (5,021,000)
------------- --------------
Net increase in cash and cash equivalents 435,000 657,000
Cash and cash equivalents at beginning of period 416,000 130,000
------------- --------------
Cash and cash equivalents at end of period $ 851,000 $ 787,000
============= ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
MODTECH HOLDINGS, INC.
Notes To Condensed Consolidated Financial Statements
June 30, 2002
1) Basis of Presentation
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, 2001
and 2002 are not necessarily indicative of the results to be expected for
the full fiscal years.
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:
2001 2002
--------------- --------------
Raw materials $ 7,692,000 $ 8,181,000
Work in process 968,000 1,814,000
Finished goods 8,000 --
--------------- --------------
$ 8,668,000 $ 9,995,000
=============== ==============
3) Earnings (Loss) Per Share
The following table illustrates the calculation of basic and diluted
earnings (loss) per common share under the provisions of SFAS No. 128:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2002 2001 2002
------------ ------------- ------------- --------------
BASIC
Income before cumulative effect of a
change in an accounting principle $ 3,720,000 $ 2,488,000 $ 5,076,000 $ 4,042,000
Cumulative effect of a change in an
accounting principle -- -- -- (37,288,000)
------------ ------------- ------------- --------------
Net income (loss) 3,720,000 2,488,000 5,076,000 (33,246,000)
Dividends on preferred stock (39,000) (39,000) (78,000) (78,000)
------------ ------------- ------------- --------------
Net income (loss) available to
common stockholders $ 3,681,000 $ 2,449,000 $ 4,998,000 $ (33,324,000)
============ ============= ============= ==============
Basic weighted-average common shares
outstanding 13,387,000 13,469,000 13,369,000 13,463,000
============ ============= ============= ==============
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2002 2001 2002
------------ ------------- ------------- --------------
Basic earnings per common share
before cumulative effect of a
change in an accounting principle $ 0.27 $ 0.18 $ 0.37 $ 0.29
============ ============= ============= ==============
Cumulative effect of a change in an
accounting principle per common
share - basic -- -- -- (2.77)
------------ ------------- ------------- --------------
Basic earnings (loss) per common share
$ 0.27 $ 0.18 $ 0.37 $ (2.48)
============ ============= ============= ==============
DILUTED
Net income (loss) $ 3,720,000 $ 2,488,000 $ 5,076,000 $ (33,246,000)
============ ============= ============= ==============
Weighted-average common shares
outstanding 13,387,000 13,469,000 13,369,000 13,463,000
Add:
Conversion of preferred stock 389,000 389,000 389,000 389,000
Exercise of stock options 741,000 1,027,000 616,000 916,000
------------ ------------- ------------- --------------
Diluted weighted-average shares
outstanding 14,517,000 14,885,000 14,374,000 14,768,000
============ ============= ============= ==============
Diluted earnings per common share
before cumulative effect of a
change in an accounting principle $ 0.26 $ 0.17 $ 0.36 $ 0.28
============ ============= ============= ==============
Cumulative effect of a change in an
accounting principle per common
share - diluted -- -- -- (2.52)
------------ ------------- ------------- --------------
Diluted earnings (loss) per common
share $ 0.26 $ 0.17 $ 0.36 $ (2.24)
============ ============= ============= ==============
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, and options to purchase 198,000 shares of common stock were
outstanding during the three and six months ended June 30, 2002, but were
not included in the computation of diluted earnings (loss) 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) Debt
The credit facility contains various covenants. The Company was in
compliance with such covenants as of June 30, 2002.
5) 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 was
accounted for as a purchase.
6) Recently Adopted Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, "Business
Combinations", (SFAS No. 141) and Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142).
SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations consummated after June 30, 2001. SFAS No. 141
specifies criteria that intangible assets acquired in a business
combination must meet to be recognized and reported separately from
goodwill. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No.
142. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 121 and subsequently, SFAS No. 144 after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and
SFAS No. 142 as of January 1, 2002. Upon adoption of SFAS No. 142, the
Company was required to evaluate its existing intangible assets and
goodwill that were acquired in purchase business combinations, and make
any necessary reclassifications in order to conform with the new
classification criteria in SFAS No. 141 for recognition separate from
goodwill. The Company was required to reassess the useful lives and
residual values of all intangible assets acquired, and make any necessary
amortization period adjustments by the end of the first interim period
after adoption. If an intangible asset was identified as having an
indefinite useful life, the Company was required to test the intangible
asset for impairment in accordance with the provisions of SFAS No. 142
within the first interim period. Impairment is measured as the excess of
carrying value over the fair value of an intangible asset with an
indefinite life. Any impairment loss was measured as of the date of
adoption and recognized as the cumulative effect of a change in accounting
principle in the first interim period.
In connection with SFAS No. 142's transitional goodwill impairment
evaluation, SFAS No. 142 required the Company to perform an assessment of
whether there was an indication that goodwill was impaired as of the date
of adoption, January 1, 2002. To accomplish this, the Company identified
its reporting units and determined the carrying value of each reporting
unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of January 1,
2002. The Company determined the fair value of each reporting unit and
compared it to the carrying amount of the reporting unit. To the extent
the carrying amount of a reporting unit exceeded the fair value of the
reporting unit, an indication existed that the reporting unit goodwill may
be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company compared the
implied fair value of the reporting unit goodwill with the carrying amount
of the reporting unit goodwill, both of which were measured as of the date
of adoption. The implied fair value of goodwill was determined by
allocating the fair value of the reporting unit to all of the assets
(recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with SFAS No.
141. The residual fair value after this allocation was the implied fair
value of the reporting unit goodwill. Any transitional impairment loss was
recognized as the cumulative effect of a change in accounting principle in
the Company's 2002 consolidated statement of operations for the three
months ended March 31, 2002.
In accordance with SFAS No. 142, quoted market prices in active markets
are the best evidence of fair value and shall be used as the basis for
measurement, if available. The Company used quoted market prices to
perform the assessment of whether there was an indication that goodwill
may be impaired. As a result of this assessment, there was an indication
that goodwill was impaired. As required by SFAS No. 142, the Company
performed a fair market valuation analysis, using market multiples, and
other factors, on its business that had previously recorded goodwill. As a
result of this analysis, the Company recorded a one time charge of
$37,288,000. The impairment loss was recognized as the cumulative effect
of a change in accounting principle in the Company's 2002 consolidated
statement of operations.
The Company recorded goodwill amortization expense in the amount of
$2,916,000 and $2,945,000 for the years ended December 31, 2000 and 2001,
respectively and $729,000 and $1,458,000 for the three and six months
ended June 30, 2001, respectively. No goodwill amortization was recorded
for the three and six months ended June 30, 2002.
The changes in the carrying amount of goodwill are as follows:
Balance as of January 1, 2002 $ 109,612,000
Goodwill acquired during the period 60,000
Impairment loss (37,288,000)
-----------------
Balance as of June 30, 2002 $ 72,384,000
=================
The following table reconciles previously reported net income (loss) as if
the provisions of SFAS No. 142 were in effect in 2001:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ------------------------------
2001 2002 2001 2002
----------- ------------ ------------- --------------
Reported net income (loss) $ 3,720,000 $ 2,488,000 $ 5,076,000 $ (33,246,000)
Add back: Goodwill amortization, net of taxes 774,000 -- 1,325,000 --
Add back: Cumulative effect of a change in an
accounting principle -- -- -- 37,288,000
----------- ------------ ------------- --------------
Adjusted net income $ 4,494,000 $ 2,488,000 $ 6,401,000 $ 4,042,000
=========== ============ ============= ==============
Reported basic earnings (loss) per common share $ 0.27 $ 0.18 $ 0.37 $ (2.48)
Add back: Goodwill amortization, net of taxes 0.06 -- 0.10 --
Add back: Cumulative effect of a change in an
accounting principle -- -- -- 2.77
----------- ------------ ------------- --------------
Adjusted basic earnings per common share $ 0.33 $ 0.18 $ 0.47 $ 0.29
=========== ============ ============= ==============
Reported diluted earnings (loss) per common share $ 0.26 $ 0.17 $ 0.36 $ (2.24)
Add back: Goodwill amortization, net of taxes 0.05 -- 0.08 --
Add back: Cumulative effect of a change in an
accounting principle -- -- -- 2.52
----------- ------------ ------------- --------------
Adjusted diluted earnings per common share $ 0.31 $ 0.17 $ 0.44 $ 0.28
=========== ============ ============= ==============
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 Operations as a percent of net sales.
Percent of Net Sales Percent of Net Sales
Three Months Ended Six Months Ended
June 30, June 30,
2001 2002 2001 2002
---------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 18.0 14.9 16.5 14.7
Selling, general and administrative expenses 3.7 4.3 3.8 4.5
Goodwill and covenant amortization 1.5 0.2 1.8 0.3
Income from operations 12.8 10.4 10.9 9.8
Interest expense, net (1.4) (0.8) (1.7) (1.1)
Income before income taxes and cumulative
effect of a change in an accounting principle 11.5 9.6 9.2 8.7
Income taxes 5.4 4.0 4.3 3.7
Income before cumulative effect of a change in
an accounting principle 6.1 5.6 4.9 5.1
Net sales for the three and six months ended June 30, 2002, decreased by
$16,515,000 or 27.0% and $23,836,000 or 23.0%, respectively. The decline in net
sales was attributable to lower sales of commercial and industrial buildings,
reflecting the general business decline in the non-residential building sector
and the overall economy.
Gross profit as a percentage of net sales for the three and six months ended
June 30, 2002 decreased to 14.9% and 14.7%, respectively, from 18.0% and 16.5%,
for the same periods in 2001. The percentage decrease in gross profit was due
principally to a decrease in production. The Company was unable to recover a
portion of its fixed production facility costs through billings to customers.
Selling, general and administrative expenses decreased for the three and six
months ended June 30, 2002 by $362,000 or 15.9% and $343,000 or 8.6%,
respectively. As a percentage of net sales, selling, general, and administrative
expenses for the three and six months ended June 30, 2002 are 4.3% and 4.5%,
respectively. The percentages were 3.7% and 3.8%, for the same periods in 2001.
The percentage increase in selling, general and administrative expenses was due
principally to a decrease in net sales. The Company was unable to recover a
portion of its fixed selling, general and administrative costs through billings
to customers.
Goodwill was recorded for both the SPI Merger and the Coastal Acquisition in
1999 and for the IMS acquisition in 2001 and was amortized from the respective
dates of acquisition through December 31, 2001. SFAS No. 142 requires that
goodwill no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. Accordingly, no
goodwill amortization was recorded for the three and six months ended June 30,
2002. In accordance with SFAS No. 142, the Company took a one-time impairment
charge to goodwill of $37,288,000, which was recognized as a cumulative effect
of a change in an accounting principle in the three month period ended March 31,
2002. The Company continues to amortize its covenants no to compete over their
respective useful lives.
Interest expense, net decreased for the three and six months ended June 30, 2002
by $460,000 or 55.0% and $875,000 or 50.2%, 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, 2002. As a
percentage of net sales, interest expense decreased from 1.4% and 1.7% in the
three and six months ended June 30, 2001, respectively, to 0.8% and 1.1% in the
three and six months ended June 30, 2002, respectively.
Income before income taxes and cumulative effect of a change in an accounting
principle for the three and six months ended June 30, 2002 decreased by
$2,730,000, or 38.9% and $2,609,000 or 27.2%, respectively. As a percentage of
net sales, income before income taxes and cumulative effect of a change in an
accounting principle decreased from 11.5% and 9.2% in the three and six months
ended June 30, 2001, respectively, to 9.6% and 8.7% in the three and six months
ended June 30, 2002, respectively.
Income taxes for the three and six months ended June 30, 2002 decreased by
$1,498,000, or 45.4% and $1,575,000 or 35.0%, respectively. As a percentage of
net sales, income taxes decreased from 5.4% and 4.3% in the three and six months
ended June 30, 2001, respectively, to 4.0% and 3.7% in the three and six months
ended June 30, 2002, respectively.
Income before cumulative effect of a change in an accounting principle for the
three and six months ended June 30, 2002 decreased by $1,232,000, or 33.1% and
$1,034,000 or 20.4%, respectively. As a percentage of net sales, income before
cumulative effect of a change in an accounting principle decreased from 6.1% in
the three months ended June 30, 2001 to 5.6% in the three months ended June 30,
2002. As a percentage of net sales, income before cumulative effect of a change
in an accounting principle increased from 4.9% in the six months ended June 30,
2001 to 5.1% in the six months ended June 30, 2002.
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, 2002, the Company had $787,000
in cash and cash equivalents. During the six months ended June 30, 2002, the
Company generated cash from operating activities of $6,410,000.
The Company has a $66,000,000 credit facility, of which $40,000,000 represents a
revolving loan commitment. 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 December 2006. On June 30, 2002, $7,500,000 was outstanding
under the revolving loan commitment. The credit facility contains various
covenants. The Company was in compliance with such covenants as of June 30,
2002.
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.
COMMITMENTS AND CONTINGENCIES
The following table represents a list of the Company's contractual obligations
and commitments as of June 30, 2002:
Payments Due by Year
(amounts in thousands)
Total 2002 2003 2004 2005 2006 Thereafter
Long-term debt $ 22,500 $ 3,500 $ 7,000 $ 6,000 $ 4,000 $ 2,000 --
Operating leases 11,239 894 1,379 941 941 941 $ 6,143
-------------------------------------------------------------------------
Total contractual cash obligations $ 33,739 $ 4,394 $ 8,379 $ 6,941 $ 4,941 $ 2,941 $ 6,143
=========================================================================
CRITICAL ACCOUNTING POLICIES
In December 2001, the Securities and Exchange Commission (SEC) requested that
all registrants list their most "critical accounting policies" in Management's
Discussion and Analysis of Financial Condition and Results of Operations. The
SEC indicated that a "critical accounting policy" is one which is both important
to the portrayal of the Company's financial condition and results of operations
and requires management's most difficult, subjective or complex judgements,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain. We believe our most critical accounting policies
related to:
.. Allowance for Contract Adjustments
.. Revenue Recognition on Construction Contracts
We use a combination of historical results and anticipated future events to
estimate and make assumptions relating to our critical accounting policies.
Actual results could differ from our estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 is
effective for fiscal years beginning after June 15, 2002, which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. Management has not assessed whether the application of this standard will
have a material effect on the Company's financial position, results of
operations or liquidity.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
(SFAS 145). This statement eliminates the automatic classification of gain or
loss on extinguishment of debt as an extraordinary item of income and requires
that such gain or loss be evaluated for extraordinary classification under the
criteria of Accounting Principles Board No. 30 "Reporting Results of
Operations". This statement also requires sale-leaseback accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions, and makes various other technical corrections to
existing pronouncements. The Company is required to adopt SFAS 145 for the year
ending December 31, 2003. The adoption of this statement is not expected to have
a material effect on the Company's results of operations or financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of such costs covered by the standard include lease termination costs
and certain employee severance costs associated with a restructuring,
discontinued operations, plant closings or other exit or disposal activities.
SFAS 146 is effective prospectively for exit and disposal activities initiated
after December 31, 2002, with earlier application encouraged. As the provisions
of SFAS 146 are to be applied prospectively after adoption date, the Company
cannot determine the potential effects that adoption of SFAS 146 will have on
the Company's results of operations or financial position.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
We are exposed to market risks related to fluctuation in interest rates on our
$66 million credit facility. During the three and six months ended June 30,
2002, 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 LIBOR plus additional interest of between
1.25% and 1.75%, or the Federal funds rate plus additional interest of between
0% to 0.5%. The additional interest charge is based upon certain financial
ratios. We estimate that the average amount of debt outstanding under the credit
facility for 2002 will be $30 million. Therefore, a one percentage point
increase in interest rates would result in an increase in interest expense of
$300,000 for the year.
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
An annual meeting of the stockholders of Modtech Holdings, Inc. was
held on August 6, 2002 to consider and vote upon a proposal to
approve the Company's 2002 Nonstatutory Stock Option Plan. There
were 7,451,968 votes cast for and 2,136,311 votes cast against
approval. Additionally, there were 413,616 abstentions.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification on Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
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 14, 2002 By: /s/ SHARI L. WALGREN
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Shari L. Walgren
Chief Financial Officer
/s/ EVAN M. GRUBER
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Evan M. Gruber
Chief Executive Officer