1075066--4/3/2007--MODTECH_HOLDINGS

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We have incurred significant operating losses as well as negative operating cash flow and may continue to do so which could adversely affect our liquidity and our ability to obtain bonding necessary for our construction projects. In the past two years, we have breached the financial covenants of our credit facility. Our substantial leverage could adversely affect our financial condition. Our future results may fluctuate, fail to match past performance or fail to meet expectations. The prices of raw materials have significantly increased in recent years and if we are unable to pass these costs onto our customers, our financial results could be significantly harmed. Our current promissory notes contain certain covenants and financial conditions that limit the way we conduct business. We have experienced significant turnover of senior management and our current executive management team has been together for a limited time, which could slow the growth of our business and cause our operating results to decline. We receive a significant portion of our revenues from the sale of classrooms to California school districts, the leasing companies that lease classrooms to such school districts and from a small number of independent dealers. The loss of any one of these customers or failure to collect a receivable from them could adversely affect our operations and financial position. Sales of our classroom product are dependent upon the legislative and educational policies and the financial condition of the states in which we do business. Despite the existence of some barriers to entry into our markets, our markets are competitive and our market share may be reduced if competitors enter the market or we are unable to respond to our competitors effectively. Fluctuations, seasonality and economic downturns in any of our end-markets may have adverse consequences for our business. If liabilities related to inspection and certification tests exceed our estimates, our profitability could be harmed. We are subject to government regulations and other standards that impose operational and reporting requirements. We have identified material weaknesses in our disclosure controls and procedures and our internal control over financial reporting, which, if not remedied effectively, could prevent us from reporting our financial results on a timely and accurate basis and result in a decrease in the trading price of our common stock and otherwise seriously harm our business. Costs related to our compliance with Section 404 of the Sarbanes-Oxley Act have been significant and may continue to negatively impact our cash flow and results of operations. We may underutilize our manufacturing facilities or we may have inadequate facilities to meet the demand for our products. Our share price could be subject to extreme price fluctuations, and stockholders could have difficulty trading shares. We have acquired and may continue to acquire other companies and may be unable to successfully integrate these companies into our operations. Earthquakes or other natural disasters may cause us significant losses. Anti-takeover provisions in our charter documents and under Delaware law may make an acquisition of us, which may be beneficial to our stockholders, more difficult.

Full 10-K form ▸

1075066--4/3/2007--MODTECH_HOLDINGS_INC