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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



(Mark One)



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



| | FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
| | ---------------------------------------------



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



| | FOR THE TRANSITION PERIOD FROM N/A TO N/A
| | -----------------------------------------



Commission File Number 000 - 25161



MODTECH HOLDINGS, INC.

(Exact name
of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 33  0825386                        
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer 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 ̈



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).    Yes  x    No ̈



As of May 13, 2005, there were 14,834,535 of the
Registrants Common Stock outstanding.



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MODTECH HOLDINGS, INC.



FORM 10-Q



FOR THE QUARTER ENDED MARCH 31, 2005



PART I. FINANCIAL INFORMATION



The condensed consolidated financial statements included herein have been prepared by Modtech Holdings, Inc. and subsidiaries (Modtech,
we, our, or 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, we believe 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 months ended March 31, 2005 and 2004 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 our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange
Commission.





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MODTECH HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(Unaudited)



|                                                                                                                                            |  |                |             |                  |   |            
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | ---------------- | - | -----------
|                                                                                                                                            |  | March 31, 2005 |             | December 31,2004
|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.



2



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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.



3



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MODTECH HOLDINGS, INC.



Condensed Consolidated Statements of Cash Flows



(Unaudited)



|                                                                                          |  |                             |             |   |      |   |            |  
|----------------------------------------------------------------------------------------- |  | --------------------------- | ----------- | - | ---- | - | ---------- | -
|                                                                                          |  | Three Months EndedMarch 31, |            
|                                                                                          |  | 2005                        |             |   | 2004 |  
|Cash flows from operating activities:                                                     |  |                             |             |   |      |   |            |  
|Net loss                                                                                  |  | $                           | (4,132,000  | ) |      | $ | (1,701,000 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                             |             |   |      |   |            |  
|Depreciation and amortization                                                             |  |                             | 600,000     |   |      |   | 614,000    |  
|Gain on sale of equipment                                                                 |  |                             | (5,000      | ) |      |   |           |  
|Non-cash loss on derivative liability                                                     |  |                             | 1,052,000   |   |      |   |           |  
|Accretion on convertible debt discount                                                    |  |                             | 262,000     |   |      |   |           |  
|Decrease (increase) in assets:                                                            |  |                             |             |   |      |   |            |  
|Contracts receivable                                                                      |  |                             | 1,296,000   |   |      |   | (1,237,000 | )
|Inventories                                                                               |  |                             | 2,542,000   |   |      |   | (3,766,000 | )
|Due from affiliates                                                                       |  |                             |            |   |      |   | 1,281,000  |  
|Other current and non-current assets                                                      |  |                             | 500,000     |   |      |   | 26,000     |  
|Increase (decrease) in liabilities:                                                       |  |                             |             |   |      |   |            |  
|Accounts payable and accrued liabilities                                                  |  |                             | (396,000    | ) |      |   | 3,148,000  |  
|Billings in excess of costs                                                               |  |                             | 1,471,000   |   |      |   | (245,000   | )
|                                                                                          |  |                             |             |   |      |   |            |  
|Net cash provided by (used in) operating activities                                       |  |                             | 3,190,000   |   |      |   | (1,880,000 | )
|                                                                                          |  |                             |             |   |      |   |            |  
|Cash flows from investing activities:                                                     |  |                             |             |   |      |   |            |  
|Purchase of property and equipment                                                        |  |                             | (224,000    | ) |      |   | (567,000   | )
|Proceeds from sale of equipment                                                           |  |                             | 8,000       |   |      |   |           |  
|                                                                                          |  |                             |             |   |      |   |            |  
|Net cash used in investing activities                                                     |  |                             | (216,000    | ) |      |   | (567,000   | )
|                                                                                          |  |                             |             |   |      |   |            |  
|Cash flows from financing activities:                                                     |  |                             |             |   |      |   |            |  
|Net principal (payments) borrowings under revolving credit line                           |  |                             | (14,152,000 | ) |      |   | 3,500,000  |  
|Principal payments on long-term debt                                                      |  |                             | (5,000,000  | ) |      |   | (750,000   | )
|Proceeds from issuance of long-term debt                                                  |  |                             | 27,898,000  |   |      |   |           |  
|Increase in restricted cash                                                               |  |                             | (6,898,000  | ) |      |   |           |  
|Payment of debt issuance costs                                                            |  |                             | (2,305,000  | ) |      |   | (118,000   | )
|Net proceeds from issuance of common stock                                                |  |                             | 2,344,000   |   |      |   | 181,000    |  
|                                                                                          |  |                             |             |   |      |   |            |  
|Net cash provided by financing activities                                                 |  |                             | 1,887,000   |   |      |   | 2,813,000  |  
|                                                                                          |  |                             |             |   |      |   |            |  
|Net increase in cash and cash equivalents                                                 |  |                             | 4,861,000   |   |      |   | 366,000    |  
|Cash and cash equivalents at beginning of period                                          |  |                             | 11,799,000  |   |      |   | 1,122,000  |  
|                                                                                          |  |                             |             |   |      |   |            |  
|Cash and cash equivalents at end of period                                                |  | $                           | 16,660,000  |   |      | $ | 1,488,000  |  
|                                                                                          |  |                             |             |   |      |   |            |  



See accompanying notes to condensed
consolidated financial statements



4



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MODTECH HOLDINGS, INC.



Notes to Condensed Consolidated Financial Statements



March 31, 2005



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 months ended March 31, 2005 and 2004 are not necessarily indicative of the results to be expected for the full
fiscal years.



2) Inventories



Inventories consist of the following:



|                |  |               |            |                  |   |           
|--------------- |  | ------------- | ---------- | ---------------- | - | ----------
|                |  | March 31,2005 |            | December 31,2004
|Raw materials   |  | $             | 9,008,000  |                  | $ | 10,317,000
|Work in process |  |               | 1,319,000  |                  |   | 2,188,000 
|Finished goods  |  |               | 734,000    |                  |   | 1,098,000 
|                |  |               |            |                  |   |           
|                |  | $             | 11,061,000 |                  | $ | 13,603,000
|                |  |               |            |                  |   |           



3)
Loss Per Share



Due to the net losses for the three-month
period ended March 31, 2005 and 2004, potentially dilutive securities have been excluded in the calculation of diluted loss per share because their inclusion would be anit-dilutive. Accordingly, basic and diluted loss per share for the periods
presented are the same. Additionally, there were no dividends paid during these reporting periods.



Potentially dilutive securities excluded in the calculation of diluted loss per common share include options to purchase 1,609,556 and 1,751,000 shares of
common stock outstanding during the quarters ended March 31, 2005 and 2004, respectively, and 2,873,564 shares issuable upon conversion of, and a total of 385,059 shares underlying warrants issued in connection with, the convertible note agreement
entered into in December 2004.



4) Debt and
Financing Agreements



On February 25, 2005 we entered into a
Financing Agreement (the New Credit Facility), with Fortress Credit Corp., as administrative and collateral agent and senior lenders as identified in the New Credit Facility. The New Credit Facility provides for revolving credit loans in
an aggregate principal amount not to exceed $17 million at any time (the Revolving Credit Loan) and a term loan in the aggregate principal amount $21 million (the Term Loan). The Revolving Credit Loan also provides for a
letter of credit subfacility in the maximum amount of $10 million, of which $6.9 million was outstanding as of March 31, 2005. This letter of credit subfacility is secured by a cash collateral account, which is recorded as restricted cash on our
condensed consolidated balance sheet as of March 31, 2005. This portion of the Revolving Credit Loan and corresponding restricted cash have been recorded as long-term liabilities and assets, respectively, as they relate to a reserve requirement for
our self-insured workers compensation program for future potential liability extending beyond one year. The New Credit Facility is secured by substantially all of the assets of Modtech.



The Revolving Credit Loan bears interest per annum, payable monthly, at a variable rate of 3.75% to 4.75% plus the greater
of 5% or JPMorgan Chase Banks prime rate. The Term Loan bears interest per annum, payable monthly, at the 30-day LIBOR rate plus a variable rate of 7.5% to 8.5%. The variable rates depend on Modtechs senior secured leverage ratio.
Principal payments in the amount of $1 million are due quarterly beginning on July 1, 2005. Both loans mature and are due



5



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and payable on February 25, 2008. As of March 31, 2005 the applicable annual interest rates for the Revolving Credit Loan and Term Loan were 10.5% and
11.25%, respectively.



Amounts owed under the New Credit
Facility may be accelerated under various circumstances more fully described in the New Credit Facility, including, but not limited to, the failure to make principal or interest payments when due, breaches of certain covenants, representations and
warranties set forth in the New Credit Facility, the occurrence of certain insolvency or receivership events affecting the Company and certain events having a material adverse effect on the business, assets, operations or condition of the Company
taken as a whole.



The New Credit Facility contains customary
affirmative and negative covenants for credit facilities of this type, including, without limitation, restrictions on the Companys ability to, among other things, incur debt, create liens, make investments, pay dividends, sell assets,
undertake transactions with affiliates, and enter into unrelated lines of business.



In connection with entering into the New Credit Facility we terminated our existing credit agreement with Wells Fargo, N.A., as administrative agent and the lenders that were parties to such agreement (the Prior
Credit Facility). We paid off all amounts borrowed and due under the Prior Credit Facility, which aggregated approximately $22.3 million. There were no early termination penalties incurred by the Company in connection with the termination of
the Prior Credit Facility.



There are certain embedded
derivatives associated with the convertible note we issued on December 31, 2004 between us and Amphora Limited, an institutional investor. An embedded derivative is a derivative instrument that is embedded within another contract, which under the
convertible note (the host contract) includes the right to convert the convertible note by the holder, certain default redemption right premiums and a change of control premium (payable in cash if a fundamental change occurs). In accordance with
FASB Statement No. 133, as amended, Accounting for Derivative Instruments and Hedging Activities, these embedded derivatives are marked-to-market each reporting period, with a corresponding gain or loss charged to the current period. We
conducted a valuation of these embedded derivatives as of March 31, 2005 using various valuation methods, which included Black-Scholes option pricing models. This valuation resulted in a non-cash expense of $1,052,000 in Other Expense
with a corresponding increase in the embedded derivative liability which is included in accounts payable and accrued liabilities at March 31, 2005.



Our financial performance for the quarter ended March 31, 2005 resulted in the violation of certain financial covenants within our New Credit Facility. We
obtained waivers for all such covenant violations at March 31, 2005 and are attempting to obtain amendments to the New Credit Facility to avoid future covenant violations. There can be no assurance that we will be successful in obtaining those
amendments.



In order to raise additional capital, we executed
a non-binding term sheet on June 14, 2005 for a private placement of equity securities in the aggregate amount of $11.7 million. Pursuant to the term sheet, the potential investors will purchase shares of the Companys common stock at $5.67 per
share, based on 85% of the average closing price for May 26, 2005 thru June 2, 2005. The stock will include five-year warrants to purchase additional shares equal to one-half the number of shares initially sold. The warrants will have an exercise
price of $8.00 per share. There can be no assurance that we will be successful in closing the private placement.



5) Goodwill and Intangible Assets



The changes in the carrying amount of goodwill are as follows:



|                                    |  |   |           
|----------------------------------- |  | - | ----------
|Balance as of January 1, 2005       |  | $ | 71,903,000
|Goodwill acquired during the period |  |   |          
|Impairment loss                     |  |   |          
|                                    |  |   |           
|Balance as of March 31, 2005        |  | $ | 71,903,000
|                                    |  |   |           



6



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6) Stock Options Plans



The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, to
account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. FASB Statement No. 123, Accounting for
Stock-Based Compensation  as amended, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the
Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of Statement 123, as amended. The following table illustrates the effect on net loss if the
fair-value-based method had been applied to all outstanding and unvested awards in each period.



|                                                                                             |  |                              |            |   |      |   |            |  
|-------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                             |  | Three Months Ended March 31, |           
|                                                                                             |  | 2005                         |            |   | 2004 |  
|Net loss                                                                                     |  |                              |            |   |      |   |            |  
|As reported                                                                                  |  | $                            | (4,132,000 | ) |      | $ | (1,701,000 | )
|Deduct stock-based compensation expense determined under fair-value based method, net of tax |  |                              | (99,000    | ) |      |   | (197,000   | )
|                                                                                             |  |                              |            |   |      |   |            |  
|Pro forma                                                                                    |  |                              | (4,231,000 | ) |      |   | (1,898,000 | )
|                                                                                             |  |                              |            |   |      |   |            |  
|Basic and diluted loss per share                                                             |  |                              |            |   |      |   |            |  
|As reported                                                                                  |  | $                            | (0.28      | ) |      | $ | (0.12      | )
|Pro forma                                                                                    |  |                              | (0.29      | ) |      |   | (0.14      | )
|                                                                                             |  |                              |            |   |      |   |            |  



The per share
weighted-average fair value of stock options granted during the three months ended March 31, 2005 and 2004 was $3.47, and $4.07 respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average
assumptions:



|                                |  |                             |   |  |         |  
|------------------------------- |  | --------------------------- | - |  | ------- | -
|                                |  | Three Months EndedMarch 31, |  
|                                |  | 2005                        |   |  | 2004    |  
|Expected dividend yield         |  | 0                           | % |  | 0       | %
|Average risk-free interest rate |  | 3.5                         | % |  | 2.9     | %
|Volatility factor               |  | 45.44                       | % |  | 60.04   | %
|Expected life                   |  | 4 years                     |   |  | 4 years |  
|                                |  |                             |   |  |         |  



7



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Cautionary Statement



You should read the following discussion and analysis with our Unaudited Condensed Consolidated Financial Statements and related Notes
thereto contained elsewhere in this report. We urge you to carefully review and consider the various disclosures made in this report and in our other reports filed with the Securities and Exchange Commission.



Forward Looking Statements



This quarterly report contains statements which, to the extent that they are not recitations
of historical fact, constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The words believe, estimate, anticipate, project,
intend, expect, plan, outlook, forecast, may, will, should, continue, predict and similar expressions are intended to identify
forward-looking statements. Such forward-looking statements are intended to be subject to the safe harbor protection within the meaning of that term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this annual report, including the Notes to the Consolidated Financial Statements and in
the Managements Discussion and Analysis of Financial Condition and Results of Operation, describe factors, among others, that could contribute to or cause such differences. In addition, the accuracy of such forward looking
statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including but not limited to: the ability to adequately pass through to customers
unanticipated future increases in raw material costs; an unanticipated change in the types of classrooms required by school districts; and declines in available funding for modular classroom construction and other risks and uncertainties that are
described elsewhere in this report and in our other filings with the Securities and Exchange Commission, including our reports on Form 10-K. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable
assumptions, there is no assurance that our expectations will be attained. We will not update these forward-looking statements, even though our situation may change in the future. We qualify all of our forward-looking statements by these cautionary
statements.



USE OF ESTIMATES AND 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 our financial condition and results of operations and requires managements most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that
are inherently uncertain. Management continually evaluates its estimates and assumptions including those related our most critical accounting policies. Management bases its estimates and assumptions on historical experience and other factors that
are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Changes in economic conditions could have an impact on these estimates and our actual results.
Management believes that the following may involve a higher degree of judgment or complexity:



Allowances for Contract Adjustments



We maintain allowances for contract adjustments that result from the inability of its customers to make their required payments. Management bases its allowances on
analysis of the aging of accounts receivable, by account, at the date of the financial statements, assessments of historical collection trends, and an evaluation of the impact of current economic conditions. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.



Accrual for Workers Compensation Reserve



We are self-insured for workers compensation under a high deductible program. Management bases its accrual estimate on input from the insurance carrier which includes
information regarding open and closed cases, historical costs associated with those claims, certain developed costs and an estimate of Incurred But Not Reported (IBNR) claims. It is important to recognize that variation from the estimates of future
liability claims is not only possible but probable. The inherent variability may result in actual costs being either above or below the estimates recorded on our consolidated financial statements.



Revenue Recognition on Construction Contracts



Contracts are recognized using the percentage-of-completion method of accounting and,
therefore, take into account the costs, estimated earnings and revenue to date on contracts not yet completed. Revenue recognized is that percentage of the total contract price that cost expended to date bears to anticipated final total cost, based
on current estimates of costs to complete. The percentage-of-completion methodology generally results in the recognition of reasonably consistent profit margins over the life of a contract. Cumulative revenues recognized may be less or greater than
cumulative costs and profits billed at any point in time during a contracts term. The resulting difference is recognized as unbilled or deferred revenue.



8



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Any estimation process, including that used in preparing contract accounting models, involves inherent risk. We reduce
the inherent risk relating to revenue and cost estimates in percentage-of-completion models through corporate policy, approval and monitoring processes. Risks relating to project delivery, productivity and other factors are considered in the
estimation process. Our estimates of revenues and costs on construction contracts change periodically in the normal course of business due to factors such as productivity and modifications of contractual arrangements. Such changes are reflected in
the results of operations as a change in accounting estimate in the period the revisions are determined. Provisions for estimated losses are made in the period in which the loss first becomes apparent.



New Accounting Standards



In November 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 151,
Inventory Costs, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This statement requires those items be recognized as current-period charges. The provisions of this
statement shall be effective for inventory costs incurred during fiscal periods beginning after June 15, 2005. We do not expect adoption of this statement to have a material impact on our consolidated financial statements.



In December 2004, the FASB issued Statement No. 123R, Share-Based Payment, a revision to
Statement No. 123, Accounting for Stock-Based Compensation. This statement replaces Statement No. 123 and supersedes APB No. 25. This statement addresses the accounting for transactions in which an entity exchanges its equity instruments for goods
or services with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. Statement 123R will require us to measure the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. We are required to adopt Statement 123R effective January 1, 2006 and have two transition options under the new standard; however, the recognition of compensation expense is the same under
both options. We believe the adoption of Statement 123R may have a material effect on our financial results during the period of adoption; however, the full effect of adopting Statement 123R has not been determined.



Company Overview



Modtech manufactures and sells modular relocatable classrooms and commercial and light industrial modular buildings. We are a leading
provider of modular classrooms in the State of California and a significant provider of commercial and light industrial modular buildings in California, Nevada, Arizona, New Mexico, Utah, Colorado, Texas, Florida and other neighboring states. We
continue to expand our classroom offerings in all locations in response to the increasing demand for new classroom products.



In California, we market and sell our modular classrooms to school districts. Virtually all of our classroom sales are dependent upon public funding. Such funding is
based on annual allocations from the States budget which is determined by educational policies that are subject to political concerns.



The modular re-locatable classroom industry is highly competitive with the market divided among a number of privately-owned companies whose share of the market is smaller
than ours. This industry is experiencing a significant downturn. Two of our major competitors, Aurora Modular Industries and Turn Key Schools, both located in Perris, California, discontinued operations in 2004.



The nonresidential modular building industry is highly competitive and fragmented. It is
composed primarily of regionally based private companies, each with a single manufacturing facility. This industry has not experienced the recent downturn that the classroom industry has.



Results of Current Operations  Overview



Revenues were $50.5 million for the quarter ended March 31, 2005, an increase of 72% over the prior year and a record for the first quarter
of any year in our history. Key factors which impacted demand for our products include a growing population and the resulting increase in school age children in the regions we serve, natural disasters such as the hurricanes in Florida during 2004
and increased demand from military bases.



However, major cost overruns
totaling $6.6 million were identified for the Heritage High School project in Brentwood, California. Of this $6.6 million identified in the quarter ended March 31, 2005, $5.7 million was recognized in 2004 as a subsequent event. The remaining $0.9
million was recorded in the quarter ended March 31, 2005. These cost overruns are in addition to previously recorded cost overruns related to this project of $4.0 million reported for the quarter ended September 30, 2004.



Other costs impacting operating results for the first quarter of 2005 include increased labor
costs of approximately $0.6 million caused by overtime associated with lost work days in California due to the record rainfall in January and February, a $0.4 million reserve for repairing roof damage caused by the heavy rains in California, which
repair is scheduled for completion over the summer months, and approximately $0.5 million in incremental selling, general and administrative costs associated with Sarbanes-Oxley Act compliance and the related delays in completing the year-end audit.



As of April 30, 2005, the backlog of sales orders was approximately $179.5
million, up from approximately $157.9 million at



9



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April 30, 2004. Backlog that will be converted to sales during the current fiscal year is approximately $125.0 million. The rate of booking new contracts
varies month to month, and customer changes in delivery schedules occur. For these reasons, among others, our backlog as of any particular date may not be representative of actual sales for any succeeding period.



The backlog by region as of April 30, 2005 was as follows: California$139.4 million;
Arizona$14.2 million; Texas$4.5 million; and Florida$21.4 million.



Our financial performance for the quarter ended March 31, 2005 resulted in the violation of certain financial covenants within the New Credit Facility. We have obtained waivers for all such covenant violations at March 31, 2005 and are
still able to borrow under the facility. However, we are in discussions with our lenders regarding amendments to the New Credit Facility in order to avoid possible future violations. Based upon our discussions, any covenant amendments to the New
Credit Facility will be conditioned upon the closing of the financing described below.



To strengthen our financial condition we have been exploring additional financing opportunities and in this regard executed a nonbinding term sheet on June 14, 2005 for a private placement of equity securities in the aggregate amount of
$11.7 million. Pursuant to the term sheet, the investors will purchase shares of the Companys common stock at $5.67 per share, based on 85% of the average closing price for May 26, 2005 thru June 2, 2005. The stock will include five-year
warrants to purchase additional shares equal to one-half the number of shares initially sold. The warrants will have an exercise price of $8.00 per share. We expect to close this transaction in July 2005.



Although we believe that we will be successful in closing the private placement and in
obtaining covenant amendments, there can be no assurance that these events will occur or occur on favorable terms.



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 Three Months Ended March 31, |  
|                                             |  | 2005                                              |   |  | 2004  |  
|Net sales                                    |  | 100.0                                             | % |  | 100.0 | %
|Gross profit (loss)                          |  | 4.6                                               |   |  | (0.8  | )
|Selling, general and administrative expenses |  | 7.7                                               |   |  | 7.8   |  
|Loss from operations                         |  | (3.1                                              | ) |  | (8.6  | )
|Interest expense, net                        |  | (3.1                                              | ) |  | (1.4  | )
|Loss before income taxes                     |  | (8.2                                              | ) |  | (10.0 | )
|Income tax benefit                           |  |                                                  |   |  | 4.2   |  
|Net loss                                     |  | (8.2                                              | ) |  | (5.8  | )



Revenue



Net sales for the three months ended March 31, 2005,
increased by $21.1 million or 71.8% when compared to the corresponding period of the prior year. All regions saw an increase in revenue over the three-month period ended March 31, 2004. California revenue was $28 million, an increase of 18%; Arizona
revenue was $5.6 million, an increase of 72%; Texas revenue was $3.6 million, an increase of 94% and Florida revenue was $13.3 million a seven-fold increase in revenue. These increases in revenue occurred primarily because the project delays that
occurred in the California market in the quarter ended March 31, 2004 did not occur in the quarter ended March 31, 2005. In addition, Florida revenues for the first quarter of 2005 were boosted by a major education project that was begun as a result
of the hurricanes in 2004. Revenues in Texas and Arizona increased primarily as a result of the general increase in commercial and government business over the corresponding period in 2004.



Gross profit as a percentage of net sales for the three months ended March 31, 2005 increased
to 4.6% from a gross loss of (0.8%) for the same period in 2004. Suppressing gross profit were increased labor costs of approximately $0.5 million caused by overtime associated with lost work days in California due to the record rainfall in January
and February, a $0.4 million warranty reserve for a roof repair that was required because of the heavy rains in California and the $0.9 million in additional cost overruns on the Heritage High School project. The gross loss of (0.8%) for the
three-month period ended March 31, 2004 was largely due to the inability to absorb fixed manufacturing costs because of the lower revenue volumes experienced in the California market.



SG&A



Selling, general and administrative expenses increased for the three months ended March 31, 2005 by $1.6 million, an increase of 69% over the corresponding period of the
prior year. As a percentage of net sales, selling, general, and administrative expenses decreased slightly from 7.8% in the first three months of 2004 to 7.7% in the first three months of 2005. Selling expenses for the three months ended March 31,
2005 increased by $0.2 million over such expenses for the comparable period in 2004 due to an increased sales staff. As a percentage of net sales, selling expenses for the first three months of 2005 decreased from 2.0% to 1.6% when compared to the
same period in prior year. General and administrative expenses for the three months ended March 31, 2005 increased by $1.4 million when compared to the same period for the prior year. Professional services, including legal and accounting increased
for the first three months of 2005 by $0.6 million over such expenses for the comparable period in 2004. This was primarily due to increased compliance costs related to the Sarbanes-Oxley Act. Salaries and salary related expenses



10



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increased for the three-month period ended March 31, 2005 by $0.5 million compared to the first three months of 2004. The additional expense was due to
staffing increases primarily in finance and human resources. Net interest, increased for the three months ended March 31, 2005, by $1.2 million, or 275% when compared to the same period in 2004. The increase is attributable to significantly
increased debt and higher interest rates.



Other expense for the quarter ended
March 31, 2005 includes a non-cash loss of $1.1 million from the revaluation of embedded derivatives associated with the convertible debt agreement entered into in December 2004 (see note 4 in the Notes to Condensed Consolidated Financial Statements
under Part 1 of this form).



Based upon our continued losses for the three
months ended March 31, 2005, we have provided a valuation allowance in the amount of $1.2 million to completely offset the initial tax benefit calculation. This compares to a tax benefit provided for the three months ended March 31, 2004. Effective
tax rates of 29%, before effect of the valuation allowance, and 42% were used for the quarters ended March 31, 2005 and 2004, respectively. The difference in the tax benefit in the two periods is due to an overall decrease in the effective tax rate
from 42% to 39.6% year-over-year plus the impact of the $1.1 million loss on the embedded derivatives.



Loss



Net loss for the three months ended March 31, 2005 was $4.1 million compared to net loss of $1.7 million for the same period the prior year. This change is the direct
result of the revenue and cost factors discussed above.



Inflation



We are subject to the effects of changing prices. During the quarter
ended March 31, 2005, there was no significant inflationary impact. While the cost outlook for commodities used in our products, in particular steel, dimensional lumber and plywood products is not certain, management believes it can manage these
inflationary pressures with sales price adjustments as allowed by our newer contracts and by actively pursuing internal cost reduction efforts, including improved supply chain and inventory management.



Liquidity and Capital Resources



We have funded our operations and capital expenditures mostly with cash generated internally
by operations, and borrowings under various credit facilities as well as cash received from exercised options. At March 31, 2005, we had $16.7 million in unrestricted cash and an additional $16.9 million in restricted cash. During the three months
ended March 31, 2005, our operating activities generated net cash of $3.2 million.



On February 25, 2005, we entered into a Financing Agreement (the New Credit Facility) with Fortress Credit Corp., as administrative and collateral agent, and certain senior lenders as identified in the New Credit Facility. The
New Credit Facility provides $17 million in revolving credit loans (the Revolving Credit Loan) and a $21 million term loan (the Term Loan). The Revolving Credit Loan also provides for a letter of credit subfacility in the
maximum amount of $10 million. The New Credit Facility is secured by substantially all of our assets.



The Revolving Credit Loan bears interest at a variable rate of 3.75% to 4.75% per annum plus the greater of 5% or JPMorgan Chase Banks prime rate. Interest is payable monthly. The Term Loan bears interest at the
30-day LIBOR rate plus a variable rate of 7.5% to 8.5% per annum payable monthly. The variable rates depend on our senior secured leverage ratio.



Amounts owed under the New Credit Facility may be accelerated under various circumstances more fully described in the New Credit Facility, including, but not limited to,
the failure to make principal or interest payments due under the New Credit Facility, breaches of certain covenants, representations and warranties set forth in the New Credit Facility, the occurrence of certain insolvency or receivership events
affecting us and certain events having a material adverse effect on our business, assets, operations or condition taken as a whole.



The New Credit Facility contains customary affirmative and negative covenants for credit facilities of this type, including, without limitation, restrictions on our
ability to, among other things, incur debt, create liens, make investments, pay dividends, sell assets, undertake transactions with affiliates, and enter into unrelated lines of business.



In connection with the New Credit Facility, on February 25, 2005, we terminated our existing credit agreement with Wells Fargo, N.A., as
administrative agent and the lenders that were parties to such agreement (the Prior Credit Facility). We paid off all amounts borrowed and due under the Prior Credit Facility, which aggregated approximately $22.3 million. We did not
incur any penalties in connection with the termination of the Prior Credit Facility.



Our financial performance for the quarter ended March 31, 2005 resulted in the violation of certain financial covenants within the New Credit Facility. We have obtained waivers for all such covenant violations at March 31, 2005 and are
still able to borrow under the facility. However, we are in discussions with our lenders regarding amendments to the New Credit Facility in order to avoid possible future violations. Based upon our discussions, any covenant amendments to the New
Credit Facility will be conditioned upon the closing of the financing described below.



To strengthen our financial condition we have been exploring additional financing opportunities and in this regard executed a nonbinding term sheet on June 14, 2005 for a private placement of equity securities in the aggregate amount of
$11.7 million. Pursuant to the term sheet, the investors will purchase shares of the Companys common stock at $5.67 per share, based on 85% of the average closing price for May 26, 2005 thru June 2, 2005. The stock will include five-year
warrants to purchase additional shares equal to one-half the number of shares initially sold. The warrants will have an exercise price of $8.00 per share. We expect to close this transaction in July 2005.



Although we believe that we will be successful in closing the private placement and in
obtaining covenant amendments, there can be no assurance that these events will occur or occur on favorable terms.



11



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Item 3. Quantitative And Qualitative Disclosures About Market Risk



Market risk refers to the risk that a change in the level of one or more market factors such
as interest rates, foreign currency exchange rates, or equity prices will result in losses for a certain financial instrument of group of instruments. We do not hold any instruments that are subject to such risks, but we are exposed to the risk of
increased interest rates on our credit facility and the risk of loss on credit extended to our customers.



INTEREST RATE RISK



We are exposed to the risk of fluctuation in interest rates on our $38 million senior credit facility. During the quarter ended March 31, 2005, 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 senior credit facility bears interest at
a variable rate of 3.75% to 4.75% per annum plus the greater of 5% or JPMorgan Chase Banks prime rate. Interest is payable monthly. The Term Loan bears interest at the 30-day LIBOR rate plus a variable rate of 7.5% to 8.5% per annum payable
monthly. The variable rates depend on our senior secured leverage ratio. We estimate that the average amount of debt outstanding under the senior credit facility for 2005 will be $26 million. Therefore, a one-percentage point increase in interest
rates would result in an increase in interest expense of $260,000 for the year.



CREDIT RISK



Our credit terms generally are net 30 for dealer accounts and defined by contracts which vary for direct sales. We actively monitor this risk through a
variety of control procedures involving senior management. Historically, credit losses have been less than 0.5% of sales and within our expectations.



12



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Item 4. Controls And Procedures



| | a. | Evaluation of Disclosure Controls and Procedures
| | -- | ------------------------------------------------



We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file under the
Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information
is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, with the participation of the Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such terms are defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2005 and concluded that our disclosure
controls and procedures were not effective as of March 31, 2005, because certain material weaknesses in our internal controls over financial reporting described in Managements Report On Internal Control Over Financial Reporting in Item 9A of
our Annual Report on Form 10-K for the year ended December 31, 2004 (the 2004 10-K Report), have not been remediated.



The material weaknesses disclosed in our 2004 Annual Report on Form 10-K are:



| |  |  | As of December 31, 2004, we lacked the necessary depth of personnel with sufficient technical accounting expertise to ensure preparation of interim and annual financial statements
without material misstatements. Evidence of a number of reconciliations, reviews, and approvals designed to ensure the reliability of the financial statements and related disclosures did not exist such that testing the operating effectiveness of the
related controls was not possible.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A procedure associated with accounting for our long-term revenue contracts was not sufficient to ensure that revenue was properly reflected in our consolidated financial statements.
Specifically, the estimated costs to complete individual contracts were not reviewed for propriety and approved by our senior project management and cost overruns known prior to the issuance of the consolidated financial statements were not recorded
in the correct accounting period.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A detailed review of the proper valuation of inventory was not operating effectively.
| | - |  | -------------------------------------------------------------------------------------



| |  |  | We did not have adequate access and segregation of duties controls within the accounts payable and payroll applications.
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | We did not have adequate access, recalculation/control totals and change management controls relative to certain end-user computing tools (EXCEL spreadsheets). It was determined
that there were no change management or access controls in place to prevent an unauthorized modification of the formulas within the spreadsheets and no recalculation/control totals to detect unauthorized changes or errors.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A number of information technology general control items were identified as deficiencies or significant deficiencies in the areas of Access to Programs and Data, Program Change,
Program Development, and Computer Operations. A material weakness was assessed due to the aggregate of the deficiencies.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As of December 31, 2004, our program for assessing and monitoring the effectiveness of internal control was not sufficient to provide us with a basis to assess and monitor the
quality of our internal control performance in a timely manner.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Changes in Internal Control over Financial Reporting
| | -- | ----------------------------------------------------



In order to remediate the material weaknesses described in the 2004 10-K Report, we made the following changes during the fiscal quarter ended March 31,
2005 in our internal control over financing reporting:



| |  |  | Additional professional accounting and financial staff with the technical expertise necessary to ensure adequate management oversight over interim and annual financial statements
were added. Staff additions included a Director of Accounting, Operations Controller (Arizona), Operations Controller (Florida and Texas), and Manager, Internal Audit.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Additional price testing procedures were implemented to ensure the proper valuation of inventory items.
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | A system to monitor the effectiveness of internal control over financial reporting was implemented. The effectiveness of the design and operation of internal controls is being
assessed on a timely basis, and corrective action to remediate weaknesses is ongoing.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Certain deficiencies in the operation of our Information Technology department which, in the aggregate, constituted a material weakness have been addressed as follows:
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1. | An Application Access Rights Form is maintained for each employee who has access to a computer and reviewed to determine if the level of access is appropriate to each
employees job description.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | A list of all terminated employees is maintained and updated on a daily basis in order to prevent access to company computers once an employee has been terminated.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



13



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| | 3. | An Application Outline Form is prepared for each modification or implementation of new software as a means of documenting when and how revisions were made to software applications.
Requests and authorization to install updates, patches and fixes are now formally documented.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | Nightly back-up successes and failures are logged, dated, and signed.
| | -- | ---------------------------------------------------------------------



| | 5. | A weekly report is submitted to the Chief Financial Officer by the IT Manager which summarizes operational statistics, virus coverage, software deployment, services provided, and
repairs and maintenance.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In light of the
material weaknesses that remain as of March 31, 2005, we performed additional analysis and other post-closing procedures to ensure the Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles.
Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.



Other than the remediation measures described above, there have been no
changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2005, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



| | c. | Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting
| | -- | -------------------------------------------------------------------------------------



Subsequent to the filing of our 2004 10-K Report, we have undertaken, and continue to undertake, actions to remedy the
material weaknesses in internal control over financial reporting described in the 2004 10-K Report. Our remediation efforts to date are described in Paragraph (b) above. Our plan to remediate those material weaknesses remaining as of March 31, 2005
is as follows:



| |  |  | Prior to June 30, 2005, the Senior Project Managers will approve project cost budgets and/or updates and provide the information to the Operations Controller to incorporate into the
estimated cost at completion component of the revenue recognition calculation.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Prior to June 30, 2005, a control will be implemented to require prior management approval to purchase an inventory item without a parts number as to ensure these items are properly
valued. Implementation of the new perpetual inventory system will be completed prior to September 30, 2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Adequate access and segregation of duty controls within the accounts payable and payroll applications will be implemented prior to June 30, 2005
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Prior to June 30, 2005, an independent consultant will be hired to reprogram those Excel spreadsheets that support significant journal entry activity. Change management and access
controls will be put in place to prevent unauthorized modification of the formulas within the spreadsheet, and recalculation/control totals will be added to detect unauthorized changes or errors.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Prior to June 30, 2005, access to the software for payroll and accounts payable will be modified to allow each individual only what is necessary to perform their duties. Segregation
of duties controls will be implemented in these two areas so that those individuals with the ability to initiate and record transactions are different from those who perform key reconciliations and financial reporting.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Remediation of certain deficiencies in Information Technology (which in aggregate were assessed as a material weakness) is ongoing. It is estimated that remediation will be complete
during the fourth quarter of 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings



None



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



None



Item 3. Defaults upon Senior Securities



Our financial performance for the quarter ended March 31, 2005 resulted in the violation of certain financial covenants under our New Credit Facility and
our $25 million convertible note issued to Amphorah. We obtained waivers for all such covenant violations. The aggregate amount outstanding under such obligations at March 31, 2005 was $30.6 million.



Item 4. Submission of Matters to a Vote of Security Holders



None



Item 5. Other Information



None



Item 6. Exhibits



|         |  |                                                                                                                                      
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------
|Number   |  | Name of Exhibit                                                                                                                      
|3.1(1)   |  | Certificate of Incorporation of Modtech Holdings, Inc.                                                                               
|         | 
|3.2(2)   |  | Bylaws of Modtech Holdings, Inc.                                                                                                     
|         | 
|10.1(3)  |  | Companys 1994 Stock Option Plan.                                                                                                    
|         | 
|10.2(3)  |  | Companys 1996 Stock Option Plan.                                                                                                    
|         | 
|10.3(3)  |  | Companys 1999 Stock Option Plan.                                                                                                    
|         | 
|10.4(3)  |  | Companys 2004 Stock Option Plan.                                                                                                    
|         | 
|10.5(2)  |  | Employment Agreement between the Company and Evan M. Gruber.                                                                         
|         | 
|10.6(2)  |  | Employment Agreement between the Company and Michael G. Rhodes.                                                                      
|         | 
|10.7(3)  |  | Separation Agreement between the Company and Evan M. Gruber.                                                                         
|         | 
|10.8(3)  |  | Separation Agreement between the Company and Michael G. Rhodes.                                                                      
|         | 
|10.9(3)  |  | Employment Agreement between the Company and David M. Buckley.                                                                       
|         | 
|10.10(4) |  | Lease between the Company and Pacific Continental Modular Enterprises, relating to the Barrett Street property in Perris, California.
|         | 
|10.11(4) |  | Lease between the Company and BMG, relating to the property in Lathrop, California.                                                  
|         | 
|10.12(5) |  | Credit Agreement between the Company and Wells Fargo Bank, N.A., as administrative agent, dated December 26, 2001                    
|         | 
|10.13(6) |  | Securities Purchase Agreement between the Company and Investor Limited, dated December 31, 2004                                      
|         | 
|10.14(6) |  | Senior Subordinated Secured Convertible Note issued to the Investor Limited, dated December 31, 2004                                 
|         | 
|10.15(6) |  | Warrant issued to the Investor Limited, dated December 31, 2004                                                                      
|         | 
|10.16(6) |  | Registration Rights Agreement between the Company and the Investor Limited, dated December 31, 2004                                  
|         | 
|10.17(6) |  | Pledge and Security Agreement between the Company and the Investor Limited, dated December 31, 2004                                  
|         | 
|10.18(6) |  | Intercreditor Agreement, among the Company, Wells Fargo Bank, N.A. and Amulet Limited, dated December 31, 2004                       



15



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|         |  |                                                                                                                                                                    
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         | 
|10.19(6) |  | Amendment and Forbearance Agreement among the Company, Wells Fargo Bank, N.A., Union Bank of California, N.A. and Comerica Bank California, dated December 29, 2004
|         | 
|10.20(7) |  | Financing Agreement between the Company and Fortress Credit Corp. as administrative agent, dated February 25, 2005                                                 
|         | 
|31.1     |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                 
|         | 
|31.2     |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                 
|         | 
|32.1     |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                  
|         | 
|32.2     |  | 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                  

---

|(1) | Incorporated by reference to Modtech Holdings, Inc.s Registration Statement on Form S-4 filed with the Commission on October 27, 1998 (Commission File No. 333-69033).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference to Modtech Holdings, Inc.s Form 10-K filed with the Commission on March 15, 2004 (Commission File No. 000-25161).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference to Modtech Holdings, Inc.s Form 10-Q filed with the Commission on November 12, 2004 (Commission File No. 000-25161).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference to Modtech Holdings, Inc.s Registration Statement on Form S-1filed with the Commission on June 6, 1990 (Commission File No. 033-35239).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to Modtech Holdings, Inc.s Form 10-K filed with the Commission on April 1, 2002 (Commission File No. 000-25161).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Incorporated by reference to Modtech Holdings, Inc.s Form 8-K filed with the Commission on January 3, 2005 (Commission File No. 000-25161).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Incorporated by reference to Modtech Holdings, Inc.s Form 8-K filed with the Commission on March 2, 2005 (Commission File No. 000-25161).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------



16



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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: June 16, 2005 |  |  |  | by:                    |  | /s/ DENNIS L. SHOGREN
|                    |  |  |  |                        |  |                       |  | Dennis L. Shogren Chief Financial Officer
and Chief Accounting Officer
|                    |  |  | 
|                    |  |  |  | by:                    |  | /s/ DAVID M. BUCKLEY 
|                    |  |  |  |                        |  |                       |  | David M. Buckley Chief Executive
Officer                              



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