Modtech Holdings, Inc. (Modtech) (Nasdaq:MODTE) has filed with the
Securities and Exchange Commission its Annual Report on Form 10-K
for the fiscal year ended December 31, 2004, and its Quarterly
Report on Form 10-Q for the quarter ended March 31, 2005. The
submission of the Annual Report on Form 10-K for the fiscal year
ended December 31, 2004, was delayed due to several issues,
including the completion of Management's Report on Internal
Controls over Financial Reporting and finalization of the audits by
KPMG, Modtech's former independent registered public accounting
firm of the financial statements for the year ended December 31,
2004, and on the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004. As described more
fully in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2004, KPMG's reports on the above-referenced audits
expressed an unqualified opinion on the 2004 financial statements
and an unqualified opinion on management's assessment of, and an
adverse opinion on the effective operation of, internal control
over financial reporting as of December 31, 2004. The Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 2005,
was delayed to follow the release of the Form 10-K for the fiscal
year ended December 31, 2004. Cost overruns on the Heritage High
School construction project, contracted to the Liberty Union
Unified School District in Northern California, resulted in
adjustments to the previously reported results for the fourth
quarter and year ended December 31, 2004. These overruns are
included in the 2004 results because they relate to certain
contract conditions that existed as of December 31, 2004, and
subsequent information obtained during April and May 2005 allowed
for the refinement of the loss estimate on this contract prior to
the issuance of our audited consolidated financial statements. This
refinement is made pursuant to paragraph 82 of the AICPA's
Statement of Position 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts, which
states that cost estimate refinements obtained subsequent to the
balance sheet date should be included as an adjustment to the
unissued financial statements. In addition to the negative impact
on operating income, the resulting losses required an adjustment to
the valuation reserve for our net deferred tax assets. The Heritage
project was originally contracted in October 2003 for $13.8
million. Modtech recognized in the quarter ended September 30,
2004, an estimated $4.0 million cost overrun, due to specific items
such as plant labor, material costs, additional setup requirements,
and transportation costs. Of the estimated $4.0 million cost
overrun, $3.0 million was associated with project cost overruns in
the factory and in the field, and $1.0 million was reserved for
engineering tests that the Department of State Architect required
on the joints supporting the corner columns of the buildings.
During January, February, and into March of 2005, there were
significant pauses in the project due to additional testing called
for by the owner, architect, and by the Department of State
Architect. This testing, which resulted in the destruction of the
units tested, had to be carried out on several units to prove that
the previously inspected and approved welding techniques were
compatible with the code load requirements for this facility. The
structural tests were concluded on March 20, 2005, with a result
favorable to us when the Department of State Architect determined
that the Modtech welding structural integrity met with all code
requirements. In addition to the $4.0 million recognized in the
quarter ended September 30, 2004, Modtech has, or will incur,
additional costs of $6.6 million on the Heritage project. Of the
$6.6 million overrun, $0.4 million was for the additional work
outside of the contract amount for which change orders will or have
been submitted. Approximately $3.8 million represent costs
associated with accelerating the remaining work to complete the
project within the contracted timeframe, and to repair the damage
caused by other destructive testing ordered by the inspectors. The
majority of these costs are labor-related at California prevailing
wage rates. Approximately $0.5 million in cost overruns are
associated with remediation of water intrusion due to the heavy
winter rains. The balance of the cost overruns is associated with
quality issues that required remediation during March, April, May,
and June. The Heritage project is now substantially complete. There
will be some minor punch list and project close-out work that is
expected to take place in October of 2005, when the other prime
contractor has completed their scope of work on the project, and
Modtech is able to return and finish Modtech's scope of work.
Because of the results of the Heritage project, actions were taken
as early as September of 2004 by the new management team to insure
that a project similar to Heritage will not occur again. Additional
measures have been taken in 2005 to move the company's focus away
from complex, multi-story projects with a significant field
construction or installation component such as Heritage. Levels of
authority and restrictions on scope and project type have been in
effect for several months, and as a result, the projects that have
been sold in 2005, as well as those currently being bid, have a
reduced scope which limits risk and provides for faster project
completion. Modtech previously released results for the year ended
December 31, 2004, in a press release on March 30, 2005. Due to the
impact of adjustments recorded in connection with subsequent events
related to the Heritage project, the final financial statements for
the year ended December 31, 2004, included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2004, have been
updated to reflect these adjustments. A summary of these changes
are provided on the following table: -0- *T Summary Results for
2004 Previously Impact from Annual Report Released on Heritage on
Form 10-K March 30 Project for Fiscal Year 2004 -------------
------------- ------------- Net sales $186,718,000 $( 1,524,000)
$185,194,000 Cost of goods sold 183,938,000 4,176,000 188,114,000
------------- ------------- ------------- Gross profit 2,780,000 (
5,700,000) (2,920,000) Selling, general, and administrative
expenses 14,495,000 -- 14,495,000 Gain on sale of property and
equipment (745,000) -- (745,000) Covenant amortization 29,000 --
29,000 ------------- ------------- ------------- Loss from
operations (10,999,000) (5,700,000) (16,699,000) -------------
------------- ------------- Other (expense) income: Interest
expense (2,867,000) -- (2,867,000) Interest income 31,000 -- 31,000
Other, net 881,000 -- 881,000 ------------- -------------
------------- (1,955,000) -- (1,955,000) -------------
------------- ------------- Loss before income taxes (12,954,000)
(5,700,000) (18,654,000) Income tax benefit 5,075,000 (4,967,000)
108,000 ------------- ------------- ------------- Net loss
(7,879,000) (10,667,000) (18,546,000) ------------- -------------
------------- Series A preferred stock dividend 221,000 -- 221,000
Net loss applicable to common shareholders $(8,100,000)
$(10,667,000) $(18,767,000) ============= =============
============= *T The results for the Quarter Ended March 31, 2005,
as reported on the Quarterly Report on Form 10-Q for the First
Quarter 2005 are as follows: Revenues for the quarter were $50.5
million, compared to $29.4 million for first-quarter 2004, largely
spurred by incremental growth outside of the California education
market. Cost of sales rose to $48.2 million, from $29.6 million for
the same period last year primarily as a result of the $21.1
million of incremental revenue. Cost of sales includes
approximately $1.9 million of non-recurring costs not associated
with volume increases of which $0.9 million was from additional
cost overruns on the Heritage project incurred in 2005, $0.6
million was for overtime in California associated with record rains
for the region, and $0.4 million was due to a roofing repair
required on an older project that is not yet closed. Details of the
two non-Heritage costs recorded during the first quarter follow: --
Approximately $0.6 million in overtime for California was due to
record rainfall in the State. Because of an inability to get on
project sites for more than 3 weeks in January and February,
on-site and in-factory overtime was necessary to accelerate
projects both in the factory and in the field, resulting in
increased costs associated with these projects. Actions have been
taken to provide greater protection from future rain in the
factory. Given that this year was the heaviest rain in history for
the region, it is not expected that we will see similar rains of
this magnitude or impact in the future, and that the actions taken
as a result of these rains will be sufficient to prevent future
lost time in manufacturing. -- A reserve in the amount of $0.4
million for the repair of a roof on a project that was completed in
2003 was recorded in the first quarter. The excessively heavy
winter rains caused the roof to leak, which required a significant
repair of the roof. We anticipate that the work will be complete
and the project will be closed out before the end of the third
quarter, 2005. In addition, $0.5 million associated with the
financial and internal control audit work performed by our former
auditors was charged to SG&A during the quarter ended March 31,
2005. It is felt that the additional cost of sales and SG&A
expenses described above are non-recurring, and that sufficient
actions have been taken by management to avoid similar costs of
this magnitude in the future. Aside from the Heritage project cost
overruns and the other non-recurring costs described above, the
operations of the business were roughly on-track with management's
estimates for performance on the quarter. On a pro-forma basis
excluding the extraordinary costs outlined above, gross margin
would have been 8.4% and EBITDA would have been a positive $1.3
million. Total backlog at April 30, 2005, was $180 million,
compared to $158 million a year ago. California education backlog
accounted for $130 million of this backlog. As Lean Enterprise
efforts continue throughout the company, there will be less focus
on backlog and more focus on throughput and pipeline. For the first
quarter 2005, California booked $26.6 million of business, compared
to $22.4 million in 2004. Arizona booked $5.6 million, compared to
$3.2 million in 2004. Texas booked $3.6 million of business,
compared to $1.9 million in 2004; and Florida booked $13.3 million,
compared to $1.9 million in first quarter of 2004. Under the strict
project size and margin requirements that have been in effect since
October 2004, the projects that are being booked are at an
increased gross margin, with a reduced scope and a lower field
component of work. Due to the slow-turning nature of California
education projects, our California business has not yet benefited
significantly from the projects booked in the past 6 months. We are
now finishing several older California projects bid at lower
margins with greater scope and field components. As we begin to
work on newer, recently booked California projects, we should begin
to see an increase in gross margin attained. Our projects in
Florida have shown a significant increase in gross margin attained.
For the first quarter of 2005, Florida projects attained gross
margins of $2.6 million, or 19.4%, on $13.3 million of sales. This
is compared to a gross loss of $0.7 million, or a 36.6% loss in the
first quarter, 2004. For the first quarter of 2005, Arizona
projects attained $0.6 million in gross margin, or 10.6%, compared
to $0.2 million in gross margin, or 7.6%, in the first quarter,
2004. Our Texas business incurred a gross loss of 7.2%, or $0.3
million, on sales of $3.6 million in the first quarter of 2005,
compared to a gross loss of 13.8%, or $0.3 million, in the first
quarter of 2004. Our California projects attained a gross loss of
$0.6 million, or 2.1%, on sales of $28.0 million, compared to a
gross margin of $0.5 million, or 2.1%, in first quarter 2004.
Modtech President and Chief Executive Officer David Buckley
commented: "We are clearly disappointed with the cost overruns on
the Heritage project. This type of project was attractive due to
the associated large revenues, but what was not understood was the
complexity and associated costs of the field work necessary to
complete such a project. These issues, coupled with the
difficulties experienced with the other interested parties on the
project, have led to a project cost overrun that cannot ever be
repeated. We have put our most experienced project management
personnel on this project and we are now substantially complete
with this incredibly difficult project. "Our focus now is getting
on to the work ahead of us," Buckley continued. "I am very
encouraged by the progress in Florida and Arizona. Texas is
starting to see an increase in volume, and California is starting
recently booked projects that should produce much better numbers.
The fundamentals of the business are improving on a daily basis,
and we are starting to see improvements in productivity and
throughput from our Lean Enterprise efforts." Buckley went on to
state: "The losses on Heritage have lengthened our timeline for
recovery. The lessons learned and the fundamental changes brought
on by the project will be extremely beneficial for the business in
the future. The best way we can overcome the effects of the
Heritage project is to accelerate our internal improvements and
deliver on our commitments for the remainder of the year. We are
actively attacking costs in direct and indirect materials. We are
addressing productivity and eliminating waste at every opportunity
through our Lean Enterprise efforts. We are implementing metrics
and controls that tie performance to targeted results at all levels
of the company. We feel we are making the necessary fundamental
process changes, the proof of which is in the improving financial
performance of the company." Dennis Shogren, Modtech's Chief
Financial Officer, remarked: "The fundamental flaws in the previous
business model for California education were clearly demonstrated
in the Heritage project. All of the risks associated with complex
projects, with multiple stories, multiple prime contractors, and a
significant percentage of work in the field all came together on
this project. The labor costs necessary to complete this project
demonstrate very clearly the benefits of work in the factory, and
the need to restrict the portion of work performed in the field."
Shogren added: "In our operations outside of California, namely
Arizona, Texas, and Florida, we had a combined increase in revenues
from $7.0 million in the first quarter of 2004 to $22.5 million in
the first quarter of 2005. This was accompanied by an improvement
in gross profit for these three regions from a loss of $0.7 million
in the first quarter of 2004 to a gross profit of $2.9 million in
the first quarter of 2005, or an improvement of $3.6 million in
gross profit year over year. "These improvements were achieved in
regions where the projects have a much shorter life-cycle, and the
backlog turn is much faster than in California. We expect to
realize improvements in California as the region works through the
older backlog and begins to work on the projects booked in the same
period," Shogren said. Shogren continued: "In April and May, we
experienced an unusually high rate of employee turnover brought on
by an increased level of scrutiny at the National level by the
Social Security Administration and Immigration and Naturalization
Service. Our second quarter results have been somewhat hampered by
our difficulties in hiring and replacing our labor force, but the
actions we have taken on this front in April and May should
mitigate the impact." Shogren concluded by saying: "We expect to
see continued improvements into the third quarter and full year in
both sales and operating income." The Company will hold a
teleconference on June 23, 2005, at 1:30 p.m. PDT (4:30 p.m. EDT)
to provide further information about the Company's operations,
financial, and business and growth strategies. To participate in
the teleconference, please call toll-free 800-291-8929 (or
706-634-0478 for international callers) approximately 10 minutes
prior to the above start time. You may also listen to the
teleconference live via the Internet at www.earnings.com. For those
unable to attend, this website will host an archive of the call. A
telephone playback will be available beginning at 5 p.m. PDT on
June 23. To hear the playback, call 800-642-1687 (or 706-645-9291
for international callers) and provide Conference ID 7161775. About
Modtech Holdings, Inc. Modtech(TM) is a leading national designer
and manufacturer of modular buildings, both permanent and
relocatable. In the school industry, the Company has advanced
typical modular building technology to greater dimensions of
flexibility and architectural integrity. Modtech(TM) has
substantial product and geographic diversification throughout the
southwestern states and a growing presence in Florida and Texas.
Modtech's commercial and industrial buildings are sold to a diverse
end-user market and may be leased through national, regional, and
local dealers. The Company also designs and manufactures modular
buildings to customer specifications for a wide variety of uses.
Some statements in this press release may constitute
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties, and
other factors that 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 forward-looking statements. Refer to the Company's filings with
the Securities and Exchange Commission for further discussion of
such factors. The forward-looking statements are made as of the
date of this press release and the Company assumes no obligation to
update such statements. -0- *T MODTECH HOLDINGS, INC. Condensed
Consolidated Balance Sheets (Unaudited) March 31, December 31, 2005
2004 Assets Current assets: Cash and cash equivalents $16,660,000
$11,799,000 Contracts receivable, net, including costs in excess of
billings of $10,833,000 and $9,273,000 in 2005 and 2004,
respectively 46,154,000 47,450,000 Inventories 11,061,000
13,603,000 Income tax receivable 4,231,000 4,231,000 Other current
assets 1,603,000 1,938,000 Total current assets 79,709,000
79,021,000 Property and equipment, net 15,311,000 15,511,000 Other
assets Restricted cash 16,898,000 10,000,000 Goodwill 71,903,000
71,903,000 Covenants not to compete, net 23,000 29,000 Debt
issuance costs, net 4,200,000 2,068,000 Other assets 603,000
613,000 Total assets $188,647,000 $179,145,000 Liabilities and
Shareholders' Equity Current liabilities: Accounts payable and
accrued liabilities $41,790,000 $41,134,000 Billings in excess of
costs 5,898,000 4,427,000 Current revolving credit line 2,748,000
16,900,000 Current maturities of long-term debt 4,000,000 5,000,000
Total current liabilities 54,436,000 67,461,000 Long-term debt,
excluding current portion 43,916,000 19,756,000 Total liabilities
98,352,000 87,217,000 Shareholders' equity: Common stock, $.01 par
value. Authorized 25,000,000 shares; issued and outstanding
14,792,764 and 14,479,082 in 2005 and 2004, respectively 148,000
145,000 Additional paid-in capital 86,071,000 83,575,000 Retained
earnings 4,076,000 8,208,000 Total shareholders' equity 90,295,000
91,928,000 $188,647,000 $179,145,000 See accompanying notes to
condensed consolidated financial statements. MODTECH HOLDINGS, INC.
Condensed Consolidated Statements of Operations (Unaudited) Three
Months Ended March 31, 2005 2004 Net sales $50,538,000 $29,409,000
Cost of goods sold 48,216,000 29,639,000 Gross profit (loss)
2,322,000 (230,000) Selling, general and administrative expenses
3,887,000 2,299,000 Loss from operations (1,565,000) (2,529,000)
Other (expense) income: Interest expense, net (1,568,000) (418,000)
Other, net (999,000) 15,000 (2,567,000) (403,000) Loss before
income taxes (4,132,000) (2,932,000) Income tax benefit ---
1,231,000 Net loss $(4,132,000) $(1,701,000) Basic and diluted loss
per common share $(0.28) $(0.12) Basic and diluted weighted-average
common shares outstanding 14,665,185 13,754,354 See accompanying
notes to condensed consolidated financial statements. *T
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