10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

xAnnual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 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 No. 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, California	92571
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (951) 943-4014

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act.

Yes¨ No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

(Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes¨ No x

The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2005 was approximately $43,000,000. As of March 1, 2006, 17,062,219 shares of registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the registrant's 2006 Annual Stockholders' Meeting are incorporated by reference into Part III herein.

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PART I

FORWARD LOOKING STATEMENTS

This annual 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. 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-Q. 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.

ITEM 1.BUSINESS

OVERVIEW

Modtech Holdings, Inc. (“Modtech”, “we”, “our”, or the “Company”) was founded in 1982 with its initial business consisting of purchasing unfinished and outdated classroom shells and performing installation work. We subsequently changed our business to the design, manufacturing, marketing and installation of classroom and other custom modular projects. We have grown internally and through acquisitions to become one of the premier modular building manufacturers in the country. In February 1999, we merged with SPI Holdings Inc., a Colorado corporation, which designed and manufactured commercial and light industrial modular buildings in Arizona, Texas and California. In March 1999, we acquired Coastal Modular Buildings, Inc. and in March 2001 we acquired Innovative Modular Structures. Both companies were based in central Florida. All of the acquired companies have been fully integrated into Modtech Holdings, Inc. We are a Delaware corporation and maintain our corporate offices in Perris, California, USA.

We are a leading provider of modular classrooms in California and Florida and are 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 are expanding our classroom and other product offerings in all locations in response to increasing demand for new modular facilities.

PUBLIC FUNDING

Virtually all of our classroom sales are dependent on public funding. Funding initiatives passed by the voters of California have contributed to our growth and success.

In 2002, the California legislature approved spending approximately $25 billion on new classroom and school construction. The funding was to come from bond issues to be approved by the voters. Between 2002 and 2004, California voters approved the bond issues. Additional California bond measures totaling $6.0 billion were approved in November, 2005.

Florida voters approved a constitutional amendment in 2002 to address overcrowded public schools. This amendment establishes statewide ceilings to be in place by 2010; 18 students per classroom in kindergarten through third grade, 22 per classroom in fourth through eighth and 25 per classroom in high school. A number of counties have passed sales-tax initiatives to fund these new classrooms.

Further details on certain historical public funding and legislative actions pertaining to the modular industry can be found in prior Form 10-K filings which are available at www.modtech.com free of charge.

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INDUSTRY OVERVIEW

In recent years, the growth in population in California, both from births and from immigration, has led to increasing school enrollments. As a result, classrooms in many California school districts currently are reported to be among the most crowded in the nation, with an average (2003-2004 school year) of 21 students per class compared to a national average class size of 16. Additionally, changes in population demographics have left many existing permanent school facilities in older residential areas with excess capacity due to declining enrollments, while many new residential areas are faced with a continuing shortage of available classrooms. Consequently, it has become necessary to add additional classrooms at many existing facilities, and to build a number of new schools.

Both the construction of new schools and the addition of classrooms at existing schools are tied to the sources and levels of funding available to California school districts. The availability of funding for new school and classroom additions, in turn, is determined in large measure by the amount of tax revenue raised by the State, the level of annual allocations for education from the State’s budget which is determined by educational policies that are subject to political concerns, and the willingness of the California electorate to approve state and local bond issues to raise money for school facilities.

When compared to the construction of a conventionally built classroom, modular classrooms offer a number of advantages, including, among others:

Lower Cost	—	The cost of our standard modular classroom may be as low as $35,000 installed, as compared to $100,000 to $120,000 for conventional site built construction of a comparable classroom;
Shorter Construction Time	—	A modular classroom can be built and ready for occupancy in a shorter period of time than that needed for state approval and construction of a site built conventional school facility;
Flexibility of Use	—	Modular relocatable classrooms enable a school district to use the units for short or long-term needs and to move them if necessary to meet shifts in student populations; and
Ease of Financing	—	As personal rather than real property, modular classrooms may be leased on a long or short-term basis from manufacturers and leasing companies. This allows school districts to finance modular classrooms out of both their operating and capital budgets.

Our commercial and light industrial building revenues in the nonresidential modular market have resulted from the wide-spread acceptance of modular structures as an alternative to traditional site construction and the increasing number of applications for modular buildings across a broad spectrum of industries. Because modular buildings are constructed in a factory using an assembly line process, construction is typically not subject to the delays caused by weather and site conditions. Our buildings can, therefore, generally be built faster than conventional buildings, at a lower cost and with more consistent quality. Our buildings can generally be relocated more easily to meet the changing needs of end users and be quickly joined to other modular buildings to meet increased space requirements. Permanent modular construction has many of the same time saving characteristics as do the relocatable buildings, but can experience the same site delays as conventional construction.

CALIFORNIA MODULAR RELOCATABLE CLASSROOMS

Our California modular relocatable classrooms are designed, engineered and constructed in accordance with structural and seismic specifications and safety regulations adopted by the California Division of the State Architect (DSA), standards which are more rigorous than the requirements for other portable buildings. The Division of the State Architect, which regulates all school construction on public land, has prescribed extensive regulations regarding the design and construction of school facilities, setting minimum qualifications for the preparation of plans and specifications, and reviews all plans for the construction or material modifications to any school building. Construction authorization is not given unless the school district’s architect certifies that a proposed project satisfies construction cost and allowable area standards. We interface with each school district’s architect or engineer to process project specifications through the Division of the State Architect. We believe that the regulated environment in which our California classrooms are manufactured serves as a significant barrier to market entry by prospective competitors. See “Business — Competition.”

Conventional site built school facilities constructed by school districts using funds from the California State Office of Public School Construction typically require two to three years for approval and funding. By contrast, factory-built school buildings like our standard classrooms may be pre-approved by the Department of State Architect (DSA) for use in school construction. Once plans and specifications for a given classroom have been pre-approved, school districts can thereafter include in their application to obtain State funds for new facilities a notification that they intend to use pre-approved, standardized factory-built classrooms. This procedure reduces the time required in the DSA approval process to as little as 90 days, thereby providing an additional incentive to use factory-built relocatable classrooms. In all cases, continuous inspection by a licensed third party is required during actual manufacture of the classrooms, with the school district obligated to hire and pay for such inspection costs.

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Our California classrooms are manufactured and installed in accordance with the applicable state building codes and Department of State Architect’s interpretive regulations, which supersedes all local building codes for purposes of school construction. The classrooms must comply with accessibility requirements for the handicapped, structural, and seismic and fire code requirements. We manufacture and install standard, largely pre-fabricated modular relocatable classrooms, as well as customized classrooms, which are modular in design, but assembled on-site using components manufactured internally together with components purchased from third party suppliers. Our classrooms vary in size from two modular units containing a total of 960 square feet to 20 units that can be joined together to produce a facility comprising 9,600 square feet. Larger configurations are also possible. Typical prices for our standard classrooms range from $33,000 to $37,000, while prices for a custom classroom generally exceed $50,000, depending upon the extent of customization required.

The two basic structural designs for standard and custom modular classrooms are a rigid frame structure and a shear wall structure. The rigid frame structure uses a steel floor and roof system, supported at each corner with square steel tubing. These buildings have curtain walls to enclose the interior from the outside, and have the advantage of unlimited width and length. Rigid frame structures may be used for multipurpose rooms and physical education buildings as well as standard classrooms. Shear wall classrooms have a maximum width of 48 feet (four 12-foot modules) and a maximum length of 60 feet. These classrooms use the exterior and interior walls to produce the required structural strength and can be built at lower costs than rigid frame structures. Our most popular factory-built classroom is a rigid frame design, with two modules connected side by side to complete a 24 by 40-foot classroom.

Custom built classrooms, libraries and gymnasiums contain design variations and dimensions such as ceiling height, roof pitch, overall size and interior configuration. These units typically are not assembled at the factory, but instead are shipped in pieces, including floors, walls and roofs, and assembled on-site. Contracts for custom-built units may include the design, engineering and layout for an entire school or an addition to a school, and involve site preparation, grading, concrete and asphalt work and landscaping. Customized classrooms are generally more expensive and take longer to complete than standard classrooms.

Additionally, we have developed and manufactured two-story modular classroom buildings. A two-story complex may include cantilevered balconies, soffits, parapets and mansards. They typically include a modular elevator system as well as stairways. Our two-story structures offer a variety of material and design options such as stucco, brick veneer, fiber cement panels or traditional wood siding.

The interior and exterior of all of our modular classrooms can be customized by employing different materials, design features and floor plans. Most classrooms are open, but the interior of the buildings can be divided into individual rooms by permanent or relocatable partitions. The floor covering is usually carpet, but may be sheet vinyl or ceramic tile depending upon the intended use of the classroom. Interior wall material is usually vinyl covered firtex over gypsum board, while other finishes such as porcelain enamel or painted hardboard may be used in such places as restrooms and laboratories. Electrical wiring, air conditioning, windows, doors, fire sprinklers and plumbing are installed during the manufacturing process. The exterior of the units is typically plywood siding, painted to the customer’s specifications, but other common exterior finishes may also be applied.

CUSTOMERS

In California, we market and sell our modular classrooms primarily to school districts. Sales of classrooms to individual California school districts accounted for approximately 45.5%, 48.4% and 52.4% of our net sales during the years ended December 31, 2005, 2004 and 2003, respectively. The mix of school districts to which we sell our products varies somewhat from year to year. We also sell our classrooms to the State of California and leasing companies, both of which lease the classrooms principally to school districts. Sales of classrooms to the State of California and leasing companies together accounted for approximately 0.9%, 2.6% and 12.3% of our total net sales for the years ended December 31, 2005, 2004 and 2003, respectively. In 2003, approximately 9.8% of net sales were to third party lessors who leased our products to California school districts. Our customers typically pay cash from general operating funds or the proceeds of local bond issues, or lease classrooms through banks, leasing companies and other private funding sources.

We also design and build modular buildings to customer specifications for a wide array of non-residential uses beyond California classrooms, including governmental, healthcare, educational, airport and correctional facilities; office and retail space; daycare centers; libraries; churches; construction trailers; golf clubhouses; police stations; convenience stores; fast food restaurants; classrooms and sales offices. The modular buildings serve as temporary, semi-permanent and permanent facilities and can function as free-standing buildings or additions to existing structures. These modular buildings range in size and complexity from a basic single-unit 100-square foot module to a 50,000-square foot building combining several structures and containing multiple stories. We sell these non-classroom products directly to the end customer in some instances, particularly for major projects. We also sell to and through dealers and distributors. In some instances these dealers provide 3^rd party financing to the end customer for direct sales.

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SALES AND MARKETING

We utilize an internal sales force which focuses primarily on classroom and other major project opportunities. We rely on dealers and distributors for additional sales in all the markets we serve. Those markets are education; government (military, homeland security and other agencies); institutional (health care, day care, correctional); retail (banks, kiosks, remote restrooms, fast food, motels, and others) and other commercial.

Most of our contracts are awarded on an open bid basis. The marketing process for many of our contracts begins prior to the time the bid process begins. After we select bids or contracts that we desire to pursue, our marketing and engineering personnel interface directly with various school boards, superintendents or architects during the process of formulating bid or contract specifications. We prepare our bids or proposals using various criteria, including current material prices, historical overhead costs and a targeted profit margin. Many of our contracts include services such as engineering and design, manufacturing, transportation and installation. Open bid contracts are normally awarded to the lowest responsible bidder.

MANUFACTURING AND ON-SITE INSTALLATION

Classroom Products

We use an assembly-line approach in the manufacture of our classrooms. The process begins with the fabrication of the steel floor joists. The floor joists are welded to a perimeter steel frame to form the floor sub-assembly, which is typically covered by plywood flooring. Concurrent with the floor assembly the roof structure is welded in a similar fashion with joists and a perimeter frame. The completed roof is then welded to the completed floor utilizing four tube steel corner posts creating a moment connection. The unit progresses down the production line with value added at each work station with the installation of walls, insulation, suspended grid ceilings, electrical systems, heating and air conditioning, windows, doors, plumbing and chalkboards follow, with painting and finishing crews completing the process. Once construction of a classroom commences, the building can be completed in as little as three days. The construction of custom units on-site, from pre-manufactured components, is similar to factory-built units in its progressively-staged assembly process but may involve more extensive structural connections and finish work depending upon the size and type of building, and, typically takes 30 to 60 days to complete.

We are vertically-integrated in the manufacture of our modular classrooms, in that we fabricate substantially all of our own metal components at our facilities, including structural floor and roof joists, exterior roof panels, gutters, foundation vents, ramps, stairs and railings. We believe that the ability to fabricate our own metal components helps to reduce the costs of our products and controls our quality and delivery schedules. We maintain a quality control system throughout the manufacturing process, under the supervision of both our own quality control personnel and independent third party inspectors engaged by our customers. In addition, we track the status of all classrooms from sale through installation and completion.

Completed classroom units, or components used in customized units, are loaded onto specially designed flatbed trailers for towing by trucks to the school site. Upon arrival at the site, the units are structurally connected, components are assembled, and the classroom is installed on its foundation. Connection with utilities is completed in the same manner as in conventional on-site construction. Installation of the modular classrooms may be on a separate foundation, or several units may be incorporated on a common foundation, so that upon installation they appear to be an integral part of an existing school facility or function as a larger building, such as a multi-purpose room or cafeteria.

Historically, we have overseen installation of our classrooms and other buildings on-site, using our own employees for project supervision as the general contractor. In the future, we will, in some instances, use the services of third parties to oversee installation work. In many projects, we supervise subcontracted electrical, plumbing, grading, paving, concrete work, and other site preparation work and services. We have general contractor licenses in the states where we engage in activities that require such licenses.

In addition to approvals by the California Division of the State Architect, licensed inspectors representing California school district customers are present at each of our California manufacturing facilities to continuously inspect the construction of classrooms for compliance to the approved plans. On-site inspections after installation are also made by independent third party inspectors for purposes of determining compliance with the approved plans and all applicable codes.

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Non-Classroom Products

We also use a continuous flow assembly line process for our non-classroom buildings. Multiple structures are assembled simultaneously at various stations along the assembly line. Depending upon the complexity of the design for a particular modular building, the average construction time from approval of the design to shipment ranges from 30 to 45 days. Once construction of a typical modular building commences, the building can be completed in as few as seven to ten days.

Warranty

Our standard contractual warranty for modular buildings is one year, although it may be varied by contract specifications. Purchased equipment installed by us, such as air conditioning units, carries the manufacturers’ standard warranty. Warranty costs have not been material in the past.

BACKLOG

We manufacture classrooms and other buildings to fill existing orders only, and not for inventory. As of February 28, 2006, the backlog of sales orders was approximately $80.7 million, down from approximately $172.0 million at February 28, 2005. We expect to convert all of the backlog at February 28, 2006 into sales during the current fiscal year. 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 decline in our reported backlog from $172.0 million at February 28, 2005 to $80.7 million at February 28, 2006 was due to a number of factors. Prior to December 31, 2005, our policy was to include portions of long-term sales orders which were scheduled for completion in periods longer than 12 months from the backlog reporting date. For all periods commencing with December 31, 2005, we only report sales orders that are scheduled for completion within the following 12 months. Backlog at February 28, 2005 also included contracts for certain larger, more on-site construction-oriented projects which had longer completion times. We decided in 2005 to de-emphasize new sales orders of this type, which resulted in fewer of these relatively larger contracts in backlog as of February 28, 2006. These two factors, combined with our more streamlined manufacturing operations, which have resulted in faster completion times for many contracts (see Item 7 “Overview”), accounted for the majority of the decrease in reported backlog.

The backlog by region as of February 28, 2006 was as follows: California—$74.7 million; Arizona—$4.0 million; Texas—$0.4 million; and Florida—$1.6 million. This compares to the following backlog by region as of February 28, 2005 as follows: California - $145.7 million; Arizona - $3.5 million; Texas - $1.4 million; Florida - $21.4 million.

COMPETITION

The modular relocatable 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. We believe that the nature of the bidding process, the level of performance bonding required, and the industry’s regulated environment serve as barriers to market entry, and that the expertise of our management and our employees gives us an advantage over competitors.

We believe that our expertise in site preparation and on-site installation gives us a competitive advantage over many manufacturers of higher-priced, customized modular units, while our vertically integrated, assembly-line approach to manufacturing enables us to be one of the low-cost producers of standardized, modular relocatable classrooms in California and Florida. Unlike many of our competitors, we manufacture most of our own metal components which allows us to maintain quality control over these components and to produce them at a lower average cost than that at which they could be obtained from outside sources. We also believe that the quality and appearance of our buildings, and our reputation for reliability in completion of our contracts, enable us to maintain a favorable position among our competition.

As the demand for modular classrooms and other non-residential buildings has shifted in recent years from standardized buildings to more complex, customized buildings, we have had to modify our production process and, as a result, have at times experienced competitive disadvantages.

We categorize our current competition based upon the geographic market served, as well as upon the relative degree of customization of products sold. The primary competitors in California in modular classrooms are believed to be American Modular Systems and Design Mobile Systems, both of which are located in Northern California. Each of these competitors is a privately-owned company.

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The nonresidential modular building industry is highly competitive and fragmented. For our highly customized modular buildings, the main competitive factor is the ability to meet end user requirements in a timely manner, while price is the main competitive factor for less customized structures. Because the cost of transporting completed modular buildings is substantial, most manufacturers limit their distribution to dealers located within a 400-mile radius of their manufacturing facility. As a result, the nonresidential modular building industry outside of California is highly fragmented and is composed primarily of small, regionally based private companies maintaining a single manufacturing facility. These small, regionally based private companies may have a competitive advantage relative to certain overhead costs associated with a comparatively larger, publicly traded company.

Our primary competitors for modular buildings other than non-California classroom are believed to be Modular Structures International, Walden Structures, Miller Building Systems, Southeast Modular Manufacturing, and Indicom Building Systems. Each year there are new entrants and departures in response to perceived market conditions. A recent example is a new start-up company, Silver Creek Industries, Inc. which began operations in 2005 and opened its Perris, California factory in January, 2006.

PERFORMANCE BONDS

A substantial portion of our sales require bid, performance and payment bonds to ensure that the contracts will be performed and completed in accordance with contract terms and conditions, and to assure that subcontractors and suppliers will be paid. In determining whether to issue a performance bond on our behalf, bonding companies consider a variety of factors concerning the specific project to be bonded, as well as our levels of working capital, shareholders’ equity and outstanding indebtedness. From time to time we have had difficulty in obtaining bonding for certain large projects. We believe this has been attributable to our levels of working capital, shareholders’ equity and indebtedness, and not concerns about our ability to perform the work required under the contract. Although we have been able to obtain the bonding we have needed during the last twelve months, we may again encounter difficulty in obtaining bonding for certain projects.

RAW MATERIAL AND COMPONENTS

The raw materials used in our business consist mainly of commodities such as steel, lumber and plywood, electrical components such as plugs, switches and lights, plumbing components such as pipe, fittings and fixtures, heating and air conditioning units and other general construction materials. We are not dependent upon a single source for our principal raw materials and such materials have historically been readily available. We believe we currently have ready access to adequate supplies of raw materials and components from numerous suppliers at competitive prices. The cost of raw materials represents a significant portion of our operating expenses. As a result of domestic and international events, the prices of raw materials we use in our operations fluctuate and have significantly increased in recent years. We are not always able to obtain the right in our contracts to pass through raw material price increases to our customers. Should we experience significant increases in the price of raw materials as we did in 2004, our profitability could be adversely affected.

PATENTS, TRADEMARKS, LICENSES AND OTHER INTELLECTUAL PROPERTY

We have two registered trademarks; “Modtech” and “the right space, at the right time, for the right price”. We do not have any patents. We hold general contractors licenses in those states where our activities require such licenses. These licenses are readily available and renewable annually. We also hold certain intellectual property in the form of proprietary designs which have been approved for modular classroom design by the State of California. These approved designs and plans are required in order to sell classrooms into the State of California classroom market and create a short term barrier to entry into the California classroom market. We estimate that it takes approximately six months to obtain approval for a new set of plans. Our rights in our trademark and proprietary designs are for an indefinite term.

ENVIRONMENTAL AND HEALTH AND SAFETY MATTERS

Like other manufacturing concerns, we are subject to numerous laws and regulations that govern environmental and occupational health and safety matters. We believe that our operations are substantially in compliance with all such applicable laws and regulations. Such compliance has not caused us to incur, nor do we expect to incur, any material expenditures or liabilities for environmental matters. As a result, our environmental obligations have not had a material effect on our capital expenditures, earnings or competitive position in the past, and we do not believe they will have a material effect in the future.

The Phoenix facility, which we lease, is located within a 25-square-mile area listed by the Arizona Department of Environmental Quality on the state priority list for contaminated sites. According to a 1999 environmental site assessment report pertaining to the Phoenix facility, neither we nor the prior operators or owners of the property have been identified as potentially responsible parties at this site. Additionally, the environment site assessment report identified no historical activity on the property we lease that was likely to have been a source of the contaminants at the site.

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EMPLOYEES

The number of persons employed by us at year end 2005, 2004, and 2003 were 1,071, 1,395, and 901, respectively. None of our employees are represented by a labor union, and we have experienced no work stoppages. We believe that our employee relations are good

INFORMATION AVAILABLE ON OUR WEBSITE AND ELSEWHERE

We make available free of charge on our internet website at www.modtech.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). Our SEC filings, as well as those of other companies that file electronically with the SEC, are available at the SEC’s Internet website at www.sec.gov. You may also read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549. Information on the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0330. In addition to SEC filings, we also post on our website press releases, information regarding our Whistle Blower program and information about other company initiatives such as our Six Pillars of Excellence Award Program and our Lean Enterprise Team Charter.

ITEM 1A.RISK FACTORS

Our business is subject to a number of business risks and uncertainties that could impact the accuracy of any future looking statements in this report and cause actual results to differ materially from those projected or anticipated. These risk and uncertainties include, but are not limited to, the following:

We have recently 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.

We experienced significant operating losses in 2005 and 2004 as well as negative operating cash flow for both years and may continue to experience future operating losses and negative operating cash flow. The operating losses in 2004 were due primarily to losses on a single project and unanticipated price increases for raw materials that were not able to be passed on to the customer. Although we had positive gross profit during the year ended December 31, 2005, we experienced a net loss of approximately $21.1 million for the twelve month period ended December 31, 2005 and a net decrease in cash and cash equivalents of approximately $8.5 million for the period. Cost overruns of $11.5 million on four projects and the high cost of servicing our debt, totaling $9.0 million for the twelve-month period ended December 31, 2005 were the primary causes of the losses. We may experience future losses that could adversely affect our liquidity and ability to obtain bonding.

In the past year, we have breached the financial covenants of our credit facility.

On March 31, 2006, we entered into a new credit facility with Bank of America, as further described below under “Liquidity” in Item 7. This credit facility with Bank of America requires us to maintain certain financial ratios. During 2005, we were unable to meet the financial ratios required by our prior lender and had to obtain waivers and amendments. We incurred substantial fees to obtain the amendments. While we believe we will be able to meet the financial ratios under our new Bank of America credit facility, it is possible that we will fail to do so and have to seek waivers and amendments.

Borrowings under our new credit facility with Bank of America are secured by liens on substantially all of our assets and the assets of our subsidiaries. Should we experience a default under the new credit facility, the lenders could foreclose upon all or substantially all of our assets and the assets of our subsidiaries. We cannot assure you that we will generate sufficient cash flow to repay our indebtedness, and we further cannot assure you that, if the need arises, we will be able to obtain additional financing or to refinance our indebtedness on terms acceptable to us, if at all. Any such failure to obtain financing could reduce our access to necessary capital to fund our operations which would harm our business, results of operations and financial condition.

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Our substantial leverage could adversely affect our financial condition.

We are highly leveraged and expect to continue to be highly leveraged. As of December 31, 2005, our aggregate outstanding indebtedness was $43.6 million. As of March 31, 2006, such indebtedness is $45 million. Our primary source of capital is our credit facility with Bank of America which provides for a revolving line of credit of $25 million maturing in March 2009. The amount we are able to borrow under the revolving credit line depends on our borrowing base which in turn depends on our inventory levels, accounts receivable and available cash. If these assets decline in value, our borrowing base could decrease, which could reduce our access to capital at a given time and harm our business, results of operations and financial condition. For example, it could:

• require us to dedicate a substantial portion of our cash flow to the repayment of our indebtedness, reducing the amount of cash flow available to fund manufacturing, distribution and other operating expenses;

• limit our flexibility in planning for or reacting to downturns in our business, our industry or the economy in general;

• limit our ability to obtain additional financing, if necessary, for operating expenses, or limit our ability to obtain such financing on terms acceptable to us; and

• limit our ability to pursue strategic acquisitions and other business opportunities that may be in our best interests.

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.

The cost of raw materials represents a significant portion of our operating expenses. As a result of domestic and international events, the prices of raw materials we use in our operations fluctuate and have significantly increased in recent years. Although we did not experience significant fluctuations in the cost of raw materials used in 2005, during 2004, the cost of steel nearly doubled for certain steel used in some of our components and overall our steel costs were up in excess of 30%. We are not always able to obtain the right in our contracts to pass through raw material price increases to our customers. Should we again experience significant increases in the price of raw materials as we did in 2004, our financial results could be adversely affected.

Our credit facility contains certain covenants that limit the way we can conduct business.

Our credit facility contains various covenants limiting our ability to incur or guarantee additional indebtedness, pay dividends and make other distributions, pre-pay any subordinated indebtedness, make investments and other restricted payments, make capital expenditures, make acquisitions and sell assets. These covenants may prevent us from raising additional financing, competing effectively or taking advantage of new business opportunities

The loss of any one of our customers or failure to collect a receivable from them could adversely affect our operations and financial position.

We receive a significant portion of our revenues from the sale of classrooms to California school districts, to leasing companies that lease to such school districts and to a small number of independent dealers. Historically, certain California school districts, certain leasing companies and certain independent dealers have individually accounted for 10% or more of our consolidated revenues in certain quarters or represented 10% or more of our net accounts receivables on any given date. During the year ended December 31, 2005, sales of classrooms, directly or indirectly, for use in California schools accounted for approximately 46% of our net sales. During the same year, two independent dealers accounted for 9.9% and 5.5%, respectively, of our net sales.

The loss of any significant customer, the failure to collect a significant receivable from a significant customer, any material reduction in orders by a significant customer or the cancellation of a significant customer order could significantly reduce our revenues and consequently harm our financial condition and our ability to fund our operations and service our debt.

Sales of our classroom products are dependent upon the legislative and educational policies and the financial condition of the states in which we do business.

The demand for our modular relocatable classrooms is affected by various state statutes which, among other things, prescribe:

• The way in which all school classrooms to be constructed on public lands must be designed and engineered;

• The methods by which customers for our classroom product, primarily individual school districts, obtain funding for the construction of new facilities; and

• The manner in which available funding is spent.

9

As a result, our business depends upon the legislative and educational policies and financial condition of the states in which we do business. For example, in California, funding for new school construction and rehabilitation of existing schools by school districts currently is provided primarily at the state level, through annual allocations of funds derived from general revenue sources and statewide bond issues. In addition, school districts obtain funding for the purchase or lease of school facilities through the imposition of developers’ fees and local bond issuances. The availability of this funding is subject to financial and political considerations which vary from district to district and is not tied to demand. In California there is a requirement that, in order for school districts to increase the amount of funds to be received from developers in excess of the statutory level, school districts must show that 20% of all classroom space, not just space to be added, consists of relocatable classrooms. Although our classroom units qualify as relocatable structures, there are alternative structures that are less relocatable in nature than our classrooms that may also satisfy this legislative requirement. Changes in the legislative and educational policies or shortages of financial resources at either state or local levels in the states in which we do business could make our products less attractive to our principal customers or reduce the financial ability of our principal customers to purchase our products, any of which could reduce our revenue and harm our business, results of operations and financial condition.

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.

Barriers to entry into the modular classroom and commercial and light industrial modular building markets consist primarily of access to capital, the availability of a qualified labor pool, the nature of the bidding process, the level of performance bonding required, and the industry’s regulated environment. In the California market, for example, the state approves the designs and plans for classrooms sold to California schools and the time required to complete the approval process also creates a barrier to entry. However, manufacturers of other modular buildings, including housing and classrooms, who possess a skilled work force and manufacturing facilities, could easily adapt their manufacturing facilities to produce modular structures, and might choose to do so, during an economic downturn in their industry. We expect continued competition from existing competitors as well as competition from new entrants into the modular building market. In 2005, two of our former executive officers opened separate and unrelated modular building manufacturing business, one in Texas and the other across the street from our plant in Perris, California.

Our ability to compete successfully depends on several factors, including:

• maintaining high product quality;

• ability to deliver products on a timely basis;

• pricing policies of our competitors;

• success in designing and manufacturing new products;

• performance of competitors’ products;

• marketing, manufacturing and distribution capability; and

• financial strength.

To the extent our products achieve market success, competitors typically seek to offer competitive products or lower prices, which, if successful, could reduce our market share, harm our ability to compete successfully and reduce our revenue and margins which could harm our business, results of operations and financial condition.

Fluctuations, seasonality and economic downturns in any of our end-markets may have adverse consequences for our business.

Our quarterly revenue typically has been highest in the second and third quarters of the year when school districts generally place a large number of orders for modular classrooms to be delivered in time for the upcoming school year. Additionally, first and fourth quarter revenues are typically lower due to a greater number of holidays, days of inclement weather, and customer budget and fiscal constraints during such periods.

In the past, the level of funding available from the states in which we do business to the school districts which are the end customers of our classrooms have caused such districts to experience budget shortfalls and to reduce their demand for our products despite growing student populations. If restrictions or limitations on funding available to school districts from the states in which we do business increases, it could result in a lower number of orders for our products which could reduce our revenues and consequently harm our financial condition and our ability to fund our operations and service our debt.

If we are unable to successfully contain costs and effectively transition operations in connection with our recent plant closures, our revenues and profitability could decline.

We closed our plant in Lathrop, California on April 30, 2005. The effect of this closure will increase our transportation costs for jobs in Northern California. This increase in costs could reduce our ability to obtain future work in Northern California or our profit margins could be negatively impacted. If we are unable to effectively integrate our former operations at Lathrop into our remaining plants, it could harm our overall operations. We also closed a small facility in Perris, California on December 31, 2005. If we are unable to effectively integrate our former operations at this facility into our remaining plants, it could harm our overall operations.

10

If liabilities related to inspection and certification tests exceed our estimates, our profitability could be harmed.

Most of our contracts require us to build classrooms which meet certain established state mandated function and manufacturing specifications. Under such contracts, we assume the liability for correcting, without additional compensation, any deficiencies which cause the classrooms to fail inspection and certification tests. We rely upon our experience and expertise to evaluate the potential for such liability and to price our bids accordingly and we follow strict quality control standards and subject our units under construction to extensive testing under the supervision of inspectors hired by our customers. In the past, we have incurred liability for corrections significantly in excess of our estimates, and this has adversely affected our profitability. We could incur such liability again in the future.

We are subject to government regulations and other standards that impose operational and reporting requirements.

We are subject to a variety of Untied States federal, state and local government laws, rules and regulations, including those related to the use, storage, handling, discharge or disposal of certain toxic, volatile or otherwise hazardous chemicals used in the manufacturing process. We believe we are currently in material compliance with such laws, rules and regulations and price our bids in accordance with our experience and expertise to include the costs of such compliance. If there are changes in such laws, rules or regulations or we are found not to be in compliance with such laws, rules or regulations, we could be required to incur substantial additional expenses to acquire equipment necessary to make our manufacturing process compliant and could incur fines or penalties associated with any non-compliance, which we are unable to quantify at this time but which could be material. Any such event could cause our product costs to significantly increase, thus reducing our margins and harming our ability to compete effectively which would harm our business, results of operations and financial condition.

The Sarbanes-Oxley Act of 2002 required us to change or supplement some of our corporate governance and securities disclosure and compliance practices. The Securities and Exchange Commission and NASDAQ have revised, and continue to revise, their regulations and listing standards. These developments have increased, and may continue to increase, our legal compliance and financial reporting costs. For example, direct costs relating to Sarbanes-Oxley compliance during 2005 are estimated to exceed $500,000 and in 2004 were approximately $750,000. These developments may also make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. This, in turn, could make it more difficult for us to attract and retain qualified member of our board of directors, or qualified executive officers.

Failure to comply with present or future laws, rules and regulations of any kind that govern our business could result in suspension of all or a portion of production, cessation of all or a portion of our operations, or the imposition of significant administrative, civil, or criminal penalties, any of which could harm our business.

We may underutilize our manufacturing facilities or we may have inadequate facilities to meet the demand for our products.

We may underutilize our manufacturing facilities from time to time as a result of reduced demand for our products. If demand for our products does not increase consistent with our plans and expectations, we will continue to incur fixed expenses and if our facilities are underutilized our revenues and margins will decrease which could harm our ability to fund operations and service our debt. Conversely, there may be situations in the future in which our manufacturing facilities will be inadequate to meet the demand for our products. Our inability to generate sufficient manufacturing capacities to meet demand, either through our own facilities or through outsourcing to third parties, could result in our inability to fulfill orders or require us to turn down orders which could have an adverse effect on our business, results of operations and financial condition.

Our assembly line process requires a significant number of manufacturing employees, many of whom are employed at relatively low wages. In periods of low unemployment, we have experienced difficulty in finding suitable replacements for our workforce when turnover occurs. Additionally, the remote location of our manufacturing facility in Glen Rose, Texas, may make it difficult to hire qualified employees at that facility. Our inability to hire and retain sufficient numbers of manufacturing employees at any of our operating facilities could result in our inability to fulfill orders or require us to turn down orders which could have an adverse effect on our business, results of operations and financial condition.

11

We have acquired and may continue to acquire other companies and may be unable to successfully integrate these companies into our operations.

In the past, we have expanded our operations through strategic acquisitions, and we may continue to expand and diversify our operations with additional acquisitions. We may not realize the anticipated benefit from any of the transactions we pursue. Regardless of whether we consummate any such transaction, the negotiation of a potential transaction as well as the integration of the acquired business could require us to incur significant costs and cause diversion of management’s time and resources. Any such transaction could also result in impairment of goodwill and other intangibles, write-offs and other related expenses. If we are unsuccessful in integrating these companies into our operations or if integration is more difficult than anticipated our business, results of operations and financial condition could be harmed. Some of the risks that may affect our ability to integrate acquired companies include those associated with:

• Unexpected losses of key employees or customers of the acquired company;

• Conforming the acquired company’s standards, processes, procedures and controls with our operations;

• Coordinating new product and process development;

• Hiring additional management and other critical personnel; and

• Increasing the scope, geographic diversity and complexity of our operations.

Earthquakes or other natural disasters may cause us significant losses.

Our corporate headquarters, certain of our manufacturing facilities and certain other critical business operations are located near major earthquake fault lines. We do not maintain earthquake insurance and could be harmed in the event of a major earthquake. We maintain some business interruption insurance to help reduce the effect of such business interruptions, but we are not fully insured against such risks.

ITEM 1B.UNRESOLVED STAFF COMMENTS. None.

ITEM 2.PROPERTIES

Our principal executive and administrative facilities are located in approximately 17,000 square feet of modular buildings at our primary manufacturing facility located in Perris, California approximately 60 miles east of Los Angeles. This manufacturing facility occupies approximately 25 acres, with approximately 226,000 square feet of covered production space under roof, pursuant to a lease expiring in 2019.

We have three other manufacturing facilities: one in Phoenix, Arizona; another in Glen Rose, Texas, which is approximately 75 miles southwest of Dallas; and the third in Plant City, Florida, which is approximately 30 miles northeast of Tampa. Our Phoenix, Arizona facility consists of approximately 50,000 square feet of covered production space under roof, on a 10-acre site, pursuant to a lease expiring in 2007. Our Glen Rose, Texas facility consists of approximately 80,000 square feet of manufacturing area on a 20-acre site. The Texas lease expires in 2008. Our Plant City, Florida facility consists of 106,000 square feet on a 17-acre site.

We believe that our facilities are well maintained and in good operating condition, and meet the requirements for our immediately foreseeable business needs.

During 2005, we closed and subsequently subleased a 400,000 square foot manufacturing facility, on a 30-acre site in Lathrop, California. The sublease runs through the term of the master lease until 2019. During the year, we also closed a manufacturing facility in Perris, California by returning the facility to our landlord and amending our lease with the landlord to include only the vacant property that we retained for storage use. The lease expires in 2015.

The plants were closed because they represented excess capacity and, in the case of the Perris facility, we would have been required by the city to make extensive improvements to the property. The landlord we returned the facility to in Perris joined with one of our former executive officers in opening a modular manufacturing business at the facility.

ITEM 3.LEGAL PROCEEDINGS

On February 23, 2006, we filed a lawsuit against the Liberty Union High School District in the California Superior Court for Contra Costa County seeking damages for breach of contract of at least $5 million. We assert that the school district entered into a contract with us to manufacture off site our standard two-story modular buildings for a new high school and then breached that contract in numerous ways, including that we construct the buildings partially off site and partially on site, refusing to accept our shop drawings as submitted when they complied with all applicable contract requirements, providing us with defective contract plans, specifications and designs, including electrical and plumbing that required repeated changes to shop plans and then either refusing to pay for the necessary change orders or refusing to issue them, refusing to allow us to perform our work in the order intended and allowed by the contract, failing to manage the California state mandated inspection program resulting in stand-by cost delays, and refusing to allow us to erect our modular buildings as delivered without first performing extensive and unnecessary testing that required us to repair and partially rebuild the buildings in the field.

12

On September 26, 2005, we filed a breach of contract lawsuit against the Campbell Union Elementary School District in the California Superior Court for Santa Clara County. We assert that the district improperly terminated our contract and are seeking a determination that we are excused from completing the project for our bonding company or, in the alternative, we are entitled to additional compensation and damages. Pursuant to our contract with the district entered into in October 2003, we submitted our plans for a two-story building that were pre-approved by the Department of State Architect ("DSA"). The district submitted the plans to the DSA's Oakland regional office which unexpectedly refused to approve the plans. The district refused to grant us an extension of time to resolve this issue with the DSA Oakland regional office even though our contract provided for such an extension for unforeseen events and it was the school district's responsibility to have the plans approved by DSA. The district declared us in default in December 2004, and on May 3, 2005, the district made a demand on our bonding company, Liberty Mutual (“Liberty”), to complete the contract. On May 16, 2005 DSA directed its Oakland office to accept our plans as originally submitted. Liberty took over the project in June 2005 and we entered into an agreement with Liberty to complete the work on the project at the original contract price, reserving our rights and claims against the school district.

On January 25, 2006, a class action lawsuit was filed against us and Bayside Solutions, Inc by TRICO Pipes, Aram Hodess, Micah Long and the Plumbers and Steamfitters Local Union No. 159 in the California Superior Court for Alameda County on behalf of those persons we employed on California public work projects from January 25, 2002 to the filing of the complaint. The complaint alleges that we failed to pay these individuals general prevailing wage rates, overtime rates, and required rates for holiday work. It also alleges that we failed to employ registered apprentices, thereby denying such apprentices the opportunity to earn wages. Bayside Solutions, Inc. is a temporary labor service used by us and TRICO Pipes is a joint labor management committee in the plumbing and pipe fitting industry in Contra Costa County.

The complaint seeks restitution for all underpayments of wages, attorneys fees and costs. We have denied liability, but cannot predict with any certainty the outcome of the proceeding. We are unable to ascertain at this time the potential monetary liability or financial impact to us should there be an unfavorable settlement or adverse decision, but we believe that either event could have a material effect on our operations or financial position.

Except for the three proceedings described above, we are not involved in any legal proceedings other than ordinary routine litigation incidental to our business, including product liability, employment disputes, administrative proceedings and commercial litigation. Such proceedings often do not specify the amount of damages sought, and their outcomes are not predictable. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these routine pending proceedings. While they could affect operating results of any one quarter when resolved in future periods, it is management’s opinion that, after final disposition, any monetary liability or financial impact to us from these routine proceedings beyond that provided for at year-end would not be material to our financial position or results of operations.

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The matters voted on at the Annual Meeting of Stockholders held December 13, 2005, and the results of the vote were as follows:

1.   To elect a board of 7 directors to hold office until the next Annual Meeting and until their successors are elected and qualified.

Nominee	For		Withheld
David M. Buckley		13,924,925		48,281
Robert W. Campbell		13,924,925		48,281
Daniel J. Donahoe III		13,952,701		20,505
Stanley N. Gaines		13,952,625		20,581
Charles R. Gwirtsman		13,866,887		106,319
Charles C. McGettigan		13,846,205		127,001
Myron A. Wick III		12,574,049		1,399,157

2.   To ratify the appointment of Peterson & Company as the independent auditors of the Company for the fiscal year ending December 31, 2005.

For	Against		Abstain		Broker non-vote
13,970,994		790		1,421		0

13

PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the NASDAQ National Market System under the symbol “MODT”. The range of high and low sales prices for the common stock as reported by the National Association of Securities Dealers, Inc. for the periods indicated below, are as follows:

Quarter Ended	High		Low
3/31/04		9.41		7.13
6/30/04		8.09		6.54
9/30/04		8.11		7.10
12/31/04		8.89		7.21
3/31/05		8.87		7.29
6/30/05		8.50		6.20
9/30/05		10.83		5.90
12/31/05		10.20		8.27

On March 1, 2006, the closing sales price on the NASDAQ National Market for a share of our Common Stock was $7.51. The approximate number of holders of record of our Common Stock on March 1, 2006, was 66.

DIVIDEND POLICY

We have not paid a dividend on common stock at any time since 1990. The Board of Directors currently intends to follow a policy of retaining all earnings, if any, to finance our continued growth and development and does not anticipate paying cash dividends on our common stock in the foreseeable future. Our current credit facility prohibits the payment of dividends. Any future determination as to the payment of cash dividends will be dependent upon our financial condition and results of operations, the provisions of our then current credit facilities, and other factors deemed relevant by the Board of Directors.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table sets forth the number of shares to be issued upon exercise of outstanding options, the weighted-average exercise price of such options, and the number of shares remaining available for issuance as of the end of our most recently completed fiscal year.

	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders		1,373,300	$	9.79		540,402
Equity compensation plans not approved by security holders		N/A		N/A		N/A

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ITEM 6.SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The selected financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto included elsewhere in this report. Our statement of operations data for the year ended December 31, 2005 and our balance sheet data as of December 31, 2005 have been derived from our audited consolidated financial statements included elsewhere in this report which have been audited by Peterson and Co., LLP. Our statement of operations data for the years ended December 31, 2004 and 2003 and our balance sheet data as of December 31, 2004 have been derived from our audited consolidated financial statements included elsewhere in this report which have been audited by KPMG LLP, whose report is included elsewhere in this report. Our statement of operations data for the years ended December 31, 2002 and 2001 and our balance sheet data as of December 31, 2003, 2002, and 2001 have been derived from our audited consolidated financial statements, which are not presented in this report.

	Year Ended December 31,
	2005			2004			2003			2002			2001
Statement of Operations Data:(1) in thousands, except per share amounts
Net sales	$	230,324		$	185,194		$	159,870		$	167,973		$	201,116
Cost of goods sold		221,376			188,114			147,938			144,782			165,068
Gross profit (loss)		8,948			(2,920	)		11,932			23,191			36,048
Selling, general and administrative expenses		15,920			14,495			8,129			7,731			8,586
(Gain) loss on sale of property and equipment		(6	)		(745	)		1			2			—
Goodwill and covenant amortization		25			29			79			368			3,751
(Loss) income from operations		(6,991	)		(16,699	)		3,723			15,090			23,711
Interest expense, net		(8,670	)		(2,836	)		(1,359	)		(1,628	)		(3,067	)
Loss on warrant and embedded derivatives		(5,804	)		—			—			—			—
Other income		361			881			31			42			91
(Loss) income before income taxes and cumulative effect of a change in an accounting principle		(21,104	)		(18,654	)		2,395			13,504			20,735
Income taxes benefit (provision)		—			108			(938	)		(5,773	)		(9,606	)
(Loss) income before cumulative effect of a change in an accounting principle		(21,104	)		(18,546	)		1,457			7,731			11,129
Cumulative effect of a change in an accounting principle		—			—			—			(37,289	)		—
Net (loss) income		(21,104	)		(18,546	)		1,457			(29,558	)		11,129
Net (loss) income available for common shareholders(2)	$	(21,104	)	$	(18,767	)	$	1,450		$	(29,714	)	$	10,973
Basic (loss) earnings per common share before cumulative effect of a change in an accounting principle	$	(1.35	)	$	(1.35	)	$	0.11		$	0.56		$	0.82
Cumulative effect of a change in an accounting principle per common share—basic		—			—			—			(2.76	)		—
Basic (loss) earnings per common share	$	(1.35	)	$	(1.35	)	$	0.11		$	(2.20	)	$	0.82
Basic weighted-average shares outstanding		15,682			13,949			13,708			13,499			13,431
Diluted (loss) earnings per common share before cumulative effect of a change in an accounting principle	$	(1.35	)	$	(1.35	)	$	0.10		$	0.52		$	0.76
Cumulative effect of a change in an accounting principle per common share—diluted		—			—			—			(2.57	)		—
Diluted (loss) earnings per common share	$	(1.35	)	$	(1.35	)	$	0.10		$	(2.05	)	$	0.76
Diluted weighted-average shares outstanding		15,682			13,949			14,122			14,492			14,442

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	As of December 31,
	2005		2004		2003		2002		2001
Balance Sheet Data:(1)
Working capital	$	3,194	$	12,207	$	22,127	$	28,648	$	25,912
Total assets		181,833		179,792		146,209		154,454		186,550
Total liabilities		97,272		87,217		39,188		49,277		52,099
Long-term debt, excluding current portion		14,628		19,756		6,000		12,000		19,000
Shareholders’ equity		84,561		92,575		107,021		105,177		134,451

	Year Ended December 31,
	2005			2004			2003			2002			2001
Selected Operating Data:
Gross (loss) margin		3.9	%		(1.6	)%		7.5	%		13.8	%		17.9	%
Operating (loss) margin		(3.0	)%		(9.0	)%		2.3	%		9.0	%		11.8	%
Backlog at period end(3)	$	81,000		$	172,000		$	115,000		$	85,000		$	80,000

(1)   As summarized in Note 20 to our consolidated 2005 financial statements, certain immaterial corrections were made to prior periods.

(2)   After deduction of preferred stock dividends of $221,000 for the year ended December 31, 2004, $7,000 for the year ended December 31, 2003 and $156,000 for each of the years ended December 31, 2002 and 2001.

(3)   We manufacture classrooms and other buildings to fill existing orders only, and not for inventory.

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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

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 are expanding our classroom offerings in all locations in response to increasing demand for new classroom products.

Key factors which impact 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 2005, a generally robust national economy and increased demand from military bases. Demand has increased significantly over the past two years with an increase of 15.8% from 2003 to 2004 and an increase of 24.4% from 2004 to 2005.

Despite these increases in demand, we incurred significant operating losses and negative operating cash flow during 2004 and 2005. Beginning in 2005, we focused on several initiatives to improve our performance, including strict inventory management and implementation of efficiency improvements in a concentrated effort to streamline our manufacturing operations and improve margins. We also sought higher-margin, less-complex, permanent modular construction projects in order to reduce the risk of margin erosion associated with our field operations. We were modestly successful in our turn around efforts in 2005 as our gross profit was $8.9 million compared to a gross loss of $2.9 million in 2004.

A total of approximately $2.4 million in change orders on the Heritage High School project in Northern California are included in both revenue and cost of sales for 2005. These change orders represent incremental work that was outside the original contract. The contract calls for this work to be completed and the change orders submitted for approval and payment after the completion of the work. We complied with this requirement. Although the change orders remain unapproved, we believe it is probable that these costs will be recovered.

We believe that in 2006 our recovery will extend beyond the turn around in gross margin as we continue the gains made in manufacturing and implement further improvements in our control of field operation costs. We believe we have accounted for all the potential cost overruns in our backlog and that we will have positive operating income in 2006. In 2005, we paid $1.1 million in penalties and in fees for amendments to our credit facility that became necessary because of our failure to meet certain financial covenants. In addition, $0.9 million in accrued fees were added to the principal amount of our subordinated convertible note as a result of delays in registering the shares of common stock issued and to be issued upon conversion of the note. The shares have been registered. We do not believe we will incur these types of fees in 2006.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentages of net sales represented by certain items in our statements of operations.

PERCENTAGE OF NET SALES

	Years Ended December 31,
	2005			2004			2003
Net sales		100.0	%		100.0	%		100.0	%
Cost of sales		96.1			101.6			92.5
Gross (loss) profit		3.9			(1.6	)		7.5
Selling, general and administrative expenses		6.9			7.8			5.1
Gain on sale of property and equipment		—			(0.4	)		—
Covenant amortization		—			—			0.1
(Loss) income from operations		(3.0	)		(9.0	)		2.3
Interest expense, net		(3.8	)		(1.5	)		(0.8	)
Loss on warrant and embedded derivatives		(2.5	)		—			—
Other income		0.1			0.4			—
(Loss) income before income taxes		(9.2	)		(10.1	)		1.5
Income taxes benefit (provision)		—			0.1			(0.6	)
Net (loss) income		(9.2	)%		(10.0	)%		0.9	%

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YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004

Net Sales

Net sales for the year ended December 31, 2005, increased by $45.1 million, or approximately 24.4%, when compared to the prior year. When compared to the prior year, Florida sales of $53.7 million were up 120.6%; Texas sales of $19.1 million were up 54.5%; Arizona sales of $29.9 million were down 1.5% and California sales of $127.7 million were up 8.1%.

The large increase in sales in Florida was the result of continued growth in that state's school market and projects resulting from hurricane damage from storms in both 2004 and 2005. The growth in revenues from Texas was due to dealer sales in the last three months of the year generated by reconstruction activity following Hurricanes Katrina and Rita. The increase in California sales was principally from classroom sales, including both relocatable and permanent modular construction, which increased 12.8% to $107.0 million when compared to the prior year. This increase in net sales was due to the high backlog from 2004 being worked down in 2005 and returned to historical levels.

Gross Profit

Gross profit for the year ended December 31, 2005 was $8.9 million, an increase of $11.9 million over the gross loss of $2.9 million recorded the previous year. Gross profit as a percentage of net sales increased to 3.9% in 2005 up from a gross loss of 1.6% in 2004. Although gross profit in 2005 improved significantly over 2004, it was below expectations because of three factors.

First, estimated cost overruns of $4.5 million were charged to the Campbell Union Elementary School District - Monroe Middle School project in San Jose, California during 2005. Second, there were actual cost overruns totaling approximately $7 million on three projects in Florida during the year. Finally, approximately $1.2 million in costs were incurred in closing two plants in California.

A number of issues plagued the Campbell project, including a delay in approval of our plans by the California Department of State Architect. Disputes over the type of construction and project scope, combined with estimated cost increases due to the long delay between the awarding of the contract in late 2003 and the commencement of construction in the last week of December 2005 caused the projected cost overruns. In accordance with AICPA’s Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts these estimated future cost overruns were recorded in 2005 even though most of the costs will be incurred in 2006. The project is scheduled to be completed in May 2006. In an effort to minimize cost overruns on the Campbell project in 2006, we have teamed with a major California construction management company to assist us in managing this project and as a pilot program to evaluate this potential change in project management structure for future large projects.

The disputes over the contract have led to litigation between Modtech and the Campbell school district, which is further described in ITEM 3 of this report.

Completion of the first two-story school project in Florida resulted in actual cost overruns of approximately $4.0 million. The two-story school project, which was bid in late 2003, involved a new, complex product and suffered from manufacturing and field issues related to the complexity of the product. The primary cause of the $3 million in cost overruns on the other two projects was the completion of work in the field that should have been completed in the factory. Since these two projects were shipped, additional controls have been put in place at all of our factories to prevent the premature shipment of unfinished buildings. Management believes these controls have been effective in preventing further cost overruns of this type.

Our facility in Lathrop, California was closed in April, 2005 and subsequently subleased in September, 2005. Closure of this facility resulted in approximately $0.2 million of costs associated with turnover of the facility to the new tenant and the transfer of certain equipment to our primary Perris, California factory. At the end of December 2005, we also closed a small factory in Perris, California, keeping only a storage yard under lease. The cost to transfer certain equipment to our primary Perris, California factory was minimal, but the acceleration of deprecation on leasehold equipment and certain equipment totaled approximately $1.0 million. The closure of these two facilities will reduce future net lease costs by approximately $0.6 million per year.

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Selling, General and Administrative Expense

In 2005, selling, general and administrative (SG&A) expenses increased $1.3 million over the prior year to $15.9 million with SG&A costs representing 6.9% of net sales compared to 7.8% of net sales in the prior year. Sarbanes Oxley compliance costs increased due to higher internal costs and costs associated with independent testing. Other incremental SG&A costs were associated with higher volume.

Goodwill

There was no impairment of goodwill recorded for the year ended December 31, 2005 because our fair value (as determined by the December 31, 2005 closing stock price) exceeded book value. In the future, goodwill may be impaired by events or circumstances that lower the fair value below book value. These events or circumstances include, but are not limited to, things such as continued operating losses; unanticipated competition; a significant adverse change in legal factors or in the business climate; or other factors leading to a decline in estimated future cash flows.

Operating Income (Loss)

Operating losses decreased to $7.0 million, or 3% of net sales, for the year ended December 31, 2005 from $16.7 million in losses, or 9% of net sales, for the year ended December 31, 2004.

Interest Expense

Net interest expense increased from $2.9 million in 2004 to $8.7 million in 2005. The increase is attributable to higher interest rates and significantly greater borrowings under our credit facility due to our operating losses during 2005. Also included in 2005 is the amortization of debt issuance costs of $1.0 million and accretion of convertible debt discount in the amount of $1.1 million. In addition, $2 million in penalties and waiver fees were incurred as a result of loan covenant violations and delays in registering the shares of common stock issued in connection with our convertible note. The new credit facility with Bank of America discussed below under "Liquidity" in Item 7 will result in lower interest expense in 2006 due to the reduced debt and the lower interest rates of the facility.

Income Tax Benefit

No benefit for income tax was recorded in 2005. This compares to the benefit for income tax of $0.1 million recorded for the year ended December 31, 2004. Although we expect to return to profitability in 2006, no tax benefit was recognized because under applicable accounting standards our cumulative losses for the three years ended December 31, 2005 are deemed to have created significant negative evidence that it is more likely than not that we will not be able to realize our net deferred tax assets. Therefore, a valuation allowance has been recorded against our net deferred tax assets, which totals $12.3 million at December 31, 2005, and $7.3 million at December 31, 2004. Our 2005 effective tax rate was 23.7% before the deferred tax asset valuation adjustment compared to prior year at 39.6% and is expected to remain approximately within this range for 2006. The lower effective tax rate in 2005 is due primarily to the $5.8 million in non-cash losses for the embedded and warrant derivatives, which are not deductible for tax purposes.

Net Income (Loss)

Net loss increased to $21.1 million for the year ended December 31, 2005 from $18.5 million for the year ended December 31, 2004, an increase of $2.6 million or 13.8%. The $11.5 million in cost overruns on projects described above, $8 million in debt service costs and $5.8 million in non-cash losses for the embedded and warrant derivative liabilities were the primary causes of the net loss in 2005. The non-cash losses resulted primarily from the increase in our stock price during the period which caused a corresponding increase in the embedded and warrant derivative liabilities.

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YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003

Net sales for the year ended December 31, 2004, increased by $25.3 million, or approximately 15.8%, when compared to the prior year. When compared to the prior year, Florida sales of $24.3 million were up 51.8%; Texas sales of $12.4 million were up 38.0%; Arizona sales of $30.3 million were up 69.6% and California sales of $118.2 million were up 1.0%. The significantly increased sales in Florida were a result of the much anticipated school market opening up because of available state and local funding. The increased sales in Arizona were largely attributable to U.S. military troop housing solutions as bases were reorganized. General improvement in dealer sales also contributed to the sales increase across the company.

California classroom sales, including both relocatable and permanent modular construction declined 8.3% to $94.6 million when compared to the prior year. This decline in net sales is due to timing of specific projects as the overall backlog of California classroom projects grew significantly during the year.

Gross Profit (Loss)

Gross loss for the year ended December 31, 2004 was $2.9 million, a decrease of $14.9 million, or approximately 124.5%, from the $11.9 million gross profit of the prior year. Gross loss as a percentage of net sales was 1.6% in 2004, compared to a gross profit of 7.5% in 2003. The loss was due to several factors.

Cost overruns of $9.7 million were charged to the Heritage High School project in Brentwood, California. Four million dollars of these costs overruns resulted from events that occurred in 2004 and this portion of the cost overrun was identified by us prior to December 31, 2004. The remaining $5.7 million in additional cost overruns was identified in April and May 2005 prior to the issuance of our 2004 consolidated financial statements. These overruns are included in the 2004 results because they relate to certain contract conditions that existed as of December 31, 2004 and the subsequent information obtained during April and May 2005 allowed for the refinement of the loss estimate on this contract prior to the issuance of our consolidated financial statements. This refinement was made pursuant to paragraph 82 of the AICPA’s Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, which states that cost estimate refinements obtained subsequent to the balance sheet date should be included as an adjustment to the unissued financial statements. The Heritage project was substantially completed in the first week of June 2005.

Of the total $9.7 million in cost overruns on the Heritage project, approximately $3.0 million was due to additional material, labor, project supervision and related costs. The additional costs were caused by what we consider differences between the architect’s plans and the specifications on which we bid the project.

Approximately $4.8 million of the Heritage project cost overruns arose out of a dispute between us and the architect concerning the structural integrity of our welds as called for in the original scope of the project. At the school district’s insistence, the welds were tested in 2004 at a direct cost of approximately $1 million. The district delayed in approving the results of the test and a second test had to be conducted in 2005. The test results were approved by the school district and the structural integrity of the welds confirmed in late March 2005. The delay in approving the welds resulted in an accelerated timeline to complete the Heritage project which, in turn, led to approximately $3.8 million in additional costs. The additional costs were primarily labor costs, including the subcontracting of additional laborers and overtime charges.

Finally, approximately $1.9 million of the Heritage cost overruns were the result of correcting construction quality problems discovered during 2005 as a result of the inspection of the weld tests.

We have filed a lawsuit against the Liberty Union High School District for breach of contract to recover our losses on the Heritage project. See "Item 3 - Legal Proceedings."

Inventory write-downs accounted for approximately $1.7 million of the gross margin erosion. Certain costs were associated with inventory that had been set aside for a specific project that was cancelled during the quarter ended September 30, 2004. It was also determined that the inventory would not be usable in a replacement project. This inventory included steel and restricted use elevators that were not transferable to other projects. Other steel inventory was written down when it was determined after the quarterly inventory that the specific lengths and specifications were not usable.

Another significant factor in the loss incurred during 2004 was the increased prices for commodities such as steel, lumber and plywood. Some steel components used in our products nearly doubled in price during 2004 and overall our steel costs were up in excess of 30%.

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Selling, General and Administrative Expenses

In 2004, selling, general and administrative (SG&A) expenses increased $6.4 million over the prior year with SG&A costs representing 7.8% of net sales compared to 5.1% of net sales in the prior year. This increase is attributable to costs of $2.1 million associated with the senior management change that occurred in the quarter ended September 30, 2004, increased professional fees associated with compliance with the Sarbanes Oxley Act of 2002, professional and settlement fees associated with certain benefits plans and to increases attributable to higher sales activities across the company.

Gain on Sale of Property and Equipment

We recognized a gain of $745,000 on the sale of property in Florida in 2004.

Goodwill

There was no impairment of goodwill recorded for the year ended December 31, 2004 because our fair value (as determined by the December 31, 2004 closing stock price) exceeded book value.

Operating Income (Loss)

Operating losses of $16.7 million, or 9.0 % of net sales, were incurred for the year ended December 31, 2004 compared to operating income of $3.7 million, or 2.3%% of net sales, for the year ended December 31, 2003.

Interest Expense

In 2004, net interest expense increased from $1.4 million in 2003 to $2.9 million in 2004. The increase is attributable to higher interest rates and a significantly greater borrowings under our credit facility due to our operating losses during 2004. Also included in 2004 is the amortization of debt issuance costs of $643,000 as a result of the partial extinguishment of a prior credit facility at year-end.

Other Income

We recognized $795,000 of other income related to the settlement of a lawsuit we filed.

Tax Benefit

The benefit for income tax of $0.1 million for the year ended December 31, 2004 compares to a provision of $0.9 million for the year ended December 31, 2003. Minimal tax benefit was recognized because, under applicable accounting standards, our cumulative losses for the three years ended December 31, 2004 created significant negative evidence that it is more likely than not that we will not be able to realize our net deferred tax assets. We therefore recorded a valuation allowance against our net deferred tax assets of $7.3 million. Our 2004 effective tax rate was 39.6% before the deferred tax asset valuation adjustment compared to prior year at 39.2%.

Net Income (Loss)

A net loss of $18.5 million was incurred for the year ended December 31, 2004 compared to net income of $1.5 million for the year ended December 31, 2003.

LIQUIDITY AND CAPITAL RESOURCES

In recent years we have funded our operations and capital expenditures mostly with cash generated internally by operations, borrowings under various credit facilities, cash received from exercised options and private placements of equity. On February 25, 2005, we entered into a credit facility with Fortress Credit Corp. (the “Credit Facility”), as administrative and collateral agent, and certain senior lenders as identified in the facility. The credit facility provides $17 million in revolving credit loans (the “Revolving Credit Loan”) and a $21 million term loan (the “Term Loan”). The credit facility is secured by substantially all of our assets. In December 2004, we issued a $25 million Senior Subordinated Secured Convertible Note (the “Note”). Pursuant to the terms of the Convertible Note, $10 million is cash collateralized. On August 5, 2005, we issued 2,046,000 shares of common stock and warrants for an additional 1,023,000 shares of common stock in a private placement for an aggregate price of $11,629,110. In connection with the August 5, 2005 private placement, the Note was amended and restated and its principal balance was increased by $900,000 as a result of accrued late penalties arising out of our failure to timely register the shares of common stock into which the Note is convertible.

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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, with the first payment made on July 1, 2005. Both loans mature and are due and payable on February 25, 2008. As of December 31, 2005 the applicable annual interest rates for the Revolving Credit Loan, Term Loan and letter of credit subfacility were 12.0%, 12.8%, 5.5%, respectively.

The Note bears interest at 7% per annum. Interest on the Note is payable quarterly in cash. The principal amount of the Note is due on December 31, 2009. The Note holder has the option to cause us to redeem up to $8.33 million face amount of the Note on June 30, 2006, $9.23 million on June 30, 2007, and $8.33 million on June 30, 2008. The face amount of $8.33 million, or $6.9 million net discounted value, is therefore classified as current as of December 31, 2005, as this portion may become due and payable within one year at the option of the Note holder.

Both the Note and the Credit Facility contain certain financial convenants, primarily including meeting certain minimum EBITDA (Earnings Before Interest, Taxes and Depreciation) requirements.

During the year ended December 31, 2005 we used cash of approximately $8.2 million for operations. During the year ended December 31, 2004 we used cash of approximately $9.1 million for operations and for the year ended December 31, 2003 our operations provided cash in the amount of approximately $14.1 million. At December 31, 2005, we had $3.3 million in unrestricted cash and cash equivalents, and an additional $16.5 million in restricted cash and working capital of $3.2 million.

We had working capital of $3.2 million, $12.2 million and $22.1 million at December 31, 2005, 2004 and 2003, respectively. In 2005, current assets increased by $6.2 million over the prior year, with a decrease of $2.1 million in cash and restricted cash and a decrease of $4.9 million in income tax receivable offset by an increase of $2.5 million in contracts receivable being the primary factors in the change. Accounts receivable increased primarily due to the higher revenues occurring during the fourth quarter of 2005 compared to 2004, led by the increases in our Texas operations.

Current liabilities increased by $15.2 million for 2005 when compared to the prior year. This increase is primarily due to an increase of $13.0 million in accounts payable and accrued liabilities, including accruals for future loss on certain jobs of $3.8 million, and a $2.7 million increase in current debt compared to the prior year. The increase in current debt resulted from the reclassification of $8.9 million of term debt to current liabilities. This reclassification occurred because operating losses recorded for the quarter ended December 31, 2005 caused us to be in default under the financial covenants of the debt.

Capital expenditures amounted to $1.9 million, $1.4 million and $4.7 million during the years ended December 31, 2005, 2004 and 2003, respectively. In all three years, the majority of expenditures were a result of expanding production capacity at our various facilities. We expect to expend approximately $4.0 million in capital projects in 2006.

We suffered a significant operating loss as well as negative operating cash flow in the latest fiscal year and continue to be subject to certain risks common to companies in our industry as further described in Item 1A. "Risk Factors" above. Our financial performance for the quarter ended December 31, 2005 resulted in the breach of certain financial covenants in our Credit Facility and in our Note from a different lender, which included not meeting the minimum EBITDA covenant requirement. We have obtained a waiver of the breach from our subordinated lender. We have not sought a waiver from the provider of our credit facility as this facility was replaced on March 31, 2006, as discussed below.

On March 31, 2006, we entered into a Loan and Security Agreement (the “B of A Credit Facility”) with Bank of America, N.A and we amended our Note again. The B of A Credit Facility was funded and closed on April 4, 2006. We are in compliance with the financial covenants in both the amended Note and the B of A Credit Facility.

In connection with the B of A Credit Facility, we terminated our credit facility with Fortress Credit Corp. On April 4, 2006, we paid off all amounts borrowed and due under the Fortress credit facility, which aggregated approximately $19.4 million, including approximately $260,000 in accrued interest. There were no early termination penalties incurred by us in connection with the termination of the Fortress credit facility.

The B of A Credit Facility provides for revolving credit loans of up to a maximum principal amount of $25,000,000 (the “Revolver Loans”) and a letter of credit subline in the maximum amount of $12,000,000. The Revolver Loans will bear interest per annum, payable monthly, at a variable rate equal to Bank of America's announced prime rate, plus up to 0.75%. Under certain circumstances, we may elect a LIBOR rate plus 2.00% to 3.00%, in which case, interest will be payable in one, two, three or six month periods selected by us. The variable rates, plus an unused credit line fee of between 0.250% to 0.375% per annum, will depend on our quarterly EBITDA measured on a trailing 12 month basis.

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The principal amount of the Revolver Loans is due and payable in full on March 31, 2009. The Revolver Loans may be prepaid from time to time without penalty or premium, but if the B of A Credit Facility is terminated during the first two years, there is a termination fee equal to $500,000 in the first year and $250,000 in the second year. The B of A Credit Facility is secured by substantially all of our assets.

CONTRACTUAL OBLIGATIONS

The following table represents a list of our contractual obligations and commitments as of December 31, 2005:

	Payments Due by Year (amounts in thousands)
	Total		2006		2007		2008		2009		2010		Thereafter
Debt	$	43,615	$	26,048	$	9,233	$	8,334				—		—
Operating leases		10,689	$	1,476	$	1,392	$	908		879		879	$	5,155
Total contractual cash obligations	$	54,304	$	27,524	$	10,625	$	9,242	$	879	$	879	$	5,155

We do not have any capital lease obligations or purchase obligations, nor do we have any other form of long-term liabilities reflected on our consolidated balance sheet under GAAP that are not set forth in the preceding table.

USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES

In the preparation of our consolidated financial statements, we are required to make estimates and assumptions that affect the amount of assets, liabilities, revenue and expense reported in the statements. We base our estimates and assumptions on historical experience and other factors believed to be reasonable under the circumstances and continually evaluate our estimates and assumptions, Nevertheless, estimates are inherently uncertain and actual results could significantly differ from our estimates. We believe that the following discussion addresses our most significant accounting policies.

Allowances for Contract Adjustments

We maintain allowances for contract adjustments that result from the inability of our 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. 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.

Any estimation process, including that used in preparing contract accounting models, involves inherent risk. We attempt to 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.

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Valuation of the Embedded and Warrant Derivatives

The valuation of our embedded derivatives associated with our $25.9 million convertible subordinated promissory note, and our warrant derivatives, associated principally with the 1,023,000 warrant shares issued in connection with our $11.6 million private equity placement on August 5, 2005, are determined primarily by the Black-Scholes option pricing model. 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 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 non-cash gain or loss charged to the current period. A warrant derivative liability is determined in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”). Based on EITF 00-19, warrants which are determined to be classified as derivative liabilities are marked-to-market each reporting period, with a corresponding non-cash gain or loss charged to the current period. The practical effect of this has been that when our stock price increases so does our derivative liability, resulting in a non-cash loss charge that reduces our earnings and earnings per share. When our stock price declines, we record a non-cash gain, increasing our earnings and earnings per share.

To determine the fair value of our embedded derivatives, management evaluates assumptions regarding the probability of certain future events. Other factors used to determine fair value include our period end stock price, historical stock volatility, risk free interest rate and derivative term. The fair value recorded for the derivative liability varies from period to period. This variability may result in the actual derivative liability for a period either above or below the estimates recorded on our consolidated financial statements, resulting in significant fluctuations in other income (expense) because of the corresponding non-cash gain or loss recorded.

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 years 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” (“SFAS 123R”), which is a revision to Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 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. SFAS 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. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. We are required to adopt SFAS 123R in the first calendar quarter of 2006, beginning January 1, 2006. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition methods include modified prospective and modified retrospective adoption options. Under the modified retrospective option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the modified retrospective method would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. We have not yet determined the method of adoption or the effect of adopting SFAS 123R; however, we believe the adoption of SFAS 123R may have a material effect on our financial results during the period of adoption. We have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections—a replacement of APB No. 20 and SFAS No. 3” (“SFAS 154”). SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS 154. SFAS 154 is required to be adopted in fiscal years beginning after December 15, 2005. We do not believe that adoption of this standard will have an impact on our consolidated financial statements.

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SEASONALITY

Historically, our quarterly revenues have been highest in the second and third quarters of each calendar year because a large number of orders for modular classrooms placed by school districts require that classrooms be constructed, delivered and installed in time for the upcoming new school year which generally commences in September. We have typically been able to add employees as needed to respond to the increases in manufacturing output required by this seasonal demand.

Our first and fourth quarter revenues are typically lower due to greater number of holidays and days of inclement weather during such periods. In addition, our operating margins may vary on a quarterly basis depending upon the mix of revenues between standardized classrooms and higher margin customized classrooms and the timing of the completion of large, higher margin customized contracts.

We anticipate that the impact of seasonal demand for classrooms will diminish due to the growing impact of multi-year contracts and increased sales outside the traditional classroom market. However, these factors will not fully offset the impact of inclement weather and concentrations of holidays. So although the impact of seasonal demand is expected to be diminished, revenue and margins in the first and fourth quarters will likely be lower than in the second and third quarters.

The following tables present our unaudited quarterly information for each quarter of fiscal years 2005, 2004 and 2003 and reflects the seasonality of our business. In the opinion of management, all necessary adjustments, which consist only of normal and recurring accruals, have been included to fairly present the unaudited quarterly results. This data should be read together with the consolidated financial statements and the notes thereto included elsewhere in this report.

	Fourth Quarter			Third Quarter			Second Quarter		First Quarter
2005:
Net sales	$	55,914,000		$	65,576,000		$	58,297,000	$	50,538,000
Gross (loss) profit		(4,226,000	)		4,771,000			6,081,000		2,322,000
Net (loss) income		(8,971,000	)		(10,656,000	)		2,656,000		(4,132,000	)
(Loss) earnings per common share:
Basic	$	(0.53	)	$	(0.66	)	$	0.18	$	(0.28	)
Diluted		(0.53	)		(0.66	)		0.18		(0.28	)
2004:
Net sales	$	45,207,000		$	55,950,000		$	54,628,000	$	29,409,000
Gross (loss) profit		(3,213,000	)		(3,023,000	)		3,546,000		(230,000	)
Net (loss) income		(11,965,000	)		(5,639,000	)		759,000		(1,701,000	)
(Loss) earnings per common share:
Basic	$	(0.86	)	$	(0.41	)	$	0.05	$	(0.12	)
Diluted		(0.86	)		(0.41	)		0.05		(0.12	)
2003:
Net sales	$	23,143,000		$	50,729,000		$	45,713,000	$	40,285,000
Gross (loss) profit		(3,064,000	)		6,010,000			5,212,000		3,774,000
Net (loss) income		(3,242,000	)		2,191,000			1,580,000		928,000
(Loss) earnings per common share:
Basic	$	(0.24	)	$	0.16		$	0.12	$	0.07
Diluted		(0.24	)		0.15			0.11		0.07

INFLATION

We are subject to the effects of changing prices. During the years ended December 31, 2005 and December 31, 2003, there was no significant inflationary impact, but during 2004 we realized dramatic and unprecedented increases in the price of certain commodities used in the production of our products, in particular steel, dimensional lumber and plywood products. Many of our contracts at the time did not allow us to pass these costs on to our customers.

Because of the pending reconstruction of the Gulf Coast region following Hurricanes Katrina and Rita in 2005, there is the potential for significant increases in the future cost of lumber and plywood products. While the cost outlook for these and other commodities used in our production is not certain, management believes it can manage these inflationary pressures with sales price adjustments that are allowed by our newer contracts and by actively pursuing internal cost reduction efforts, including improved supply chain and inventory management

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ITEM 7A.    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 or group of instruments. We are exposed to the risk of increased interest rates on our current credit facility and the risk of loss on credit extended to our customers. We have issued equity instruments, including warrants and a convertible note which contain certain derivatives which fluctuate, primarily as a result of changes in our stock price

INTEREST RATE RISK

We are exposed to the risk of fluctuation in interest rates on our credit facilities. During 2005, we did not use interest rate swaps or other types of derivative financial instruments to hedge our interest rate risk. Indebtedness under the senior credit facility we obtained in 2005 bears interest at LIBOR plus additional interest of between 7.5% and 8.5%. The additional interest charge is based upon certain financial ratios. We estimate that the average amount of debt outstanding under the credit facility for 2006 will be $25 million. Therefore, a one-percentage point increase in interest rates would result in an increase in interest expense of $250,000 for the year. The interest rate on our convertible subordinated promissory note, is fixed.

CREDIT RISK

Our credit terms generally are “net 30” for dealer accounts and defined by contracts which vary for direct sales. We actively monitor the risk of loss through a variety of control procedures involving senior management. Historically, credit losses have been less than 1.0% of sales and within our expectations.

DERIVATIVE LIABILITY RISK

We are exposed to the risk of fair value derivative liability fluctuations in the equity instruments we have issued, which include a $25.9 million convertible note and outstanding warrants. The fair value of these derivative liabilities is primarily determined by fluctuations in our stock price. As our stock price increases or decreases, the fair value of these derivative liabilities increase or decrease, resulting in a corresponding current period loss or gain to be recognized. Based on the balance on our convertible note, number of outstanding warrants, market interest rates and historical volatility of our stock price as of December 31, 2005, a $1 increase or decrease in our stock price results in a non-cash derivative loss or gain of approximately $4.5 million. During 2005, we experienced a $5.8 million non-cash loss on warrant and embedded derivatives.

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company, along with the notes thereto and the Reports of Independent Registered Public Accounting Firm report thereon, required to be filed in response to this Item 8 are attached hereto as exhibits under Item 15.

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such terms are defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, and because of the material weaknesses discussed below, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures were not effective in ensuring that the information required to be filed or submitted under the Exchange Act is recorded, processed, summarized and reported as specified in the Securities and Exchange Commission’s rules and forms, and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

26

However, we believe that the accompanying consolidated financial statements fairly present the financial condition and results of operations for the fiscal years presented in this Annual Report of Form 10-K.

(b) Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or 15(d)-15(f) promulgated under the Securities Exchange Act 1934. Those rules define internal control over financial reporting as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

·   pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

·   provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors;

·   provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency (as defined in PCAOB Auditing Standard No. 2), or combination of control deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. The assessment identified the following material weaknesses in our internal control over financial reporting:

1.   During the quarter ending December 31, 2005, there were multiple changes in personnel and an overall understaffing of the finance function. Insufficient staff, at times, did not allow for timely completion of certain tasks, including analysis and review required for full compliance with internal controls. As a result, we identified the following issues as of December 31, 2005:

·   A control failure occurred involving processing of accrual of open invoices and valuation of work-in-process inventory, resulting in misstatements to accrued liabilities, cost of sales and revenue.

·   Our controls associated with accounting for our long-term contracts were not operating effectively. As a consequence, an error was identified relating to the accounting for a contract amount and one concerning the classification of a contract, resulting in misstatements to revenue and cost of sales.

The identified misstatements were corrected prior to the issuance of our 2005 consolidated financial statements and we believe that the accompanying consolidated financial statements fairly present the financial condition and results of operations for the fiscal year presented in this Annual Report of Form 10-K.

2.   Several general control deficiencies in information technology, in the aggregate, were considered a material weakness. Similar information technology control deficiencies were reported as a material weakness in our Form 10-K for the year ended December 31, 2004, and, therefore, remains unremediated. The specific control deficiencies noted as of December 31, 2005, were as follows:

·   We did not have a sufficiently comprehensive review of segregation of duties regarding access rights when employees changed positions.

·   System limitations allow unrestricted access rights to certain applications.

·   Removal of access rights for terminated employees was not always done on a timely basis. Although no security breaches occurred, the potential for such breaches exists.

·   Inadequate monitoring of server backups allowed one location to not be properly backed up over one weekend.

27

In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Because of the material weaknesses described above, management concludes that, as of December 31, 2005, our internal control over financial reporting was not effective.

(c) Changes in Internal Control over Financial Reporting

In order to remediate a material weakness reported in our Form 10-Q for the quarter ended September 30, 2005, and complete the remediation of a remaining material weakness reported in our Form 10-K for the year ended December 31, 2004, we made the following change during the quarter ended December 31, 2005 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

·   We completed the access, recalculation and change management controls relative to certain EXCEL spreadsheets.

In order to address the material weaknesses described above in Item 9A(b), including the remaining information technology material weakness reported in our Form 10-K for the year ended December 31, 2004, management will take the following actions in 2006:

·   Hire three additional finance staff, including two internal auditors. This search was initiated in January.

·   Require each General Manager and Regional Controller to certify monthly, in writing, that all policies and procedures have been followed and maintained and all controls over critical processes have been adequately performed.

·   Include internal control requirements as part of the orientation for new supervisors.

·   Provide additional tools to facilitate the performance of internal controls.

·   Include internal control compliance in evaluating certain employee’s performance.

·   Implement a new general ledger accounting system during 2006.

Our management believes that the above remediation measures as outlined, will address the material weaknesses described above. The Audit Committee and management will continue to monitor the effectiveness of our internal controls and procedures on an ongoing basis and will take further action as appropriate.

PART III.

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated herein by reference from the definitive proxy statement for our next annual stockholders' to be filed with the Commission pursuant to Regulation 14A under the Exchange Act within 120 days after the end of our most recently completed fiscal year.

ITEM 11.    EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference from the definitive proxy statement for our next annual stockholders' to be filed with the Commission pursuant to Regulation 14A under the Exchange Act within 120 days after the end of our most recently completed fiscal year.

28

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated herein by reference from the definitive proxy statement for our next annual stockholders' to be filed with the Commission pursuant to Regulation 14A under the Exchange Act within 120 days after the end of our most recently completed fiscal year.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference from the definitive proxy statement for our next annual stockholders' to be filed with the Commission pursuant to Regulation 14A under the Exchange Act within 120 days after the end of our most recently completed fiscal year.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference from the definitive proxy statement for our next annual stockholders' to be filed with the Commission pursuant to Regulation 14A under the Exchange Act within 120 days after the end of our most recently completed fiscal year.

PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) Exhibits and Financial Statement Schedules

1 & 2. Index to Financial Statements

The following financial statements and financial statement schedule of the Company, along with the notes thereto and the Reports of Independent Registered Public Accounting Firm, are filed herewith, as required by Part II, Item 8 hereof.

Financial Statements
Report of Independent Registered Public Accounting Firm - Peterson & Co., LLP	F-2
Report of Independent Registered Public Accounting Firm - KPMG LLP	F-3
Consolidated Balance Sheets — December 31, 2005 and 2004	F-4
Consolidated Statements of Operations — Years Ended December 31, 2005, 2004 and 2003	F-6
Consolidated Statements of Shareholders’ Equity — Years Ended December 31, 2005, 2004 and 2003	F-7
Consolidated Statements of Cash Flows — Years Ended December 31, 2005, 2004 and 2003	F-8
Notes to Consolidated Financial Statements	F-9
Schedule II — Valuation and Qualifying Accounts	F-28

All other financial statement schedules have been omitted because the required information is shown in the consolidated financial statements or notes thereto, the amounts involved are not significant, or the schedules are not applicable.

3. Exhibits

Exhibit Number	Name of Exhibit
3.1(1)	Certificate of Incorporation of the Company.
3.2(2)	Bylaws of the Company.
10.1(3)	Company’s 1994 Stock Option Plan.

29

 

Exhibit Number	Name of Exhibit
10.2(3)	Company’s 1996 Stock Option Plan.
10.3(3)	Company’s 1999 Stock Option Plan.
10.4(3)	Company’s 2002 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 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, dated December 31, 2004
10.14(6)	Senior Subordinated Secured Convertible Note, dated December 31, 2004
10.15(6)	Warrant to Purchase Common Stock issued December 31, 2004, dated December 31, 2004
10.16(6)	Registration Rights Agreement, dated December 31, 2004
10.17(6)	Pledge and Security Agreement, dated December 31, 2004
10.18(6)	Intercreditor Agreement, dated December 31, 2004
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.
10.21(8)	Amendment Number 1 to Industrial Real Estate Lease between Modtech Holdings, Inc. and BMG2 Enterprises, dated July 29, 2005
10.22(8)	Sublease between Modtech Holdings, Inc. and Boise Building Solutions Distribution, L.L.C., dated July 29, 2005
10.23(9)	Securities Purchase Agreement with Modtech Holdings, Inc. dated August 5, 2005
10.24(9)	First Amendment and Waiver of Financing Agreement between Fortress and Modtech Holdings, Inc., dated August 5, 2005
10.25(9)	First Amendment and Restated Registration Rights Agreement, dated August 5, 2005
10.26(9)	Amended and Restated Senior Subordinated Secured Convertible Note, dated August 5, 2005
10.27(9)	Consent, Waiver, Amendment and Exchange Agreement, dated August 5, 2005 (“Waiver”)
10.28(9)	Form of Voting Agreement executed pursuant to Waiver
10.29(9)	Form of Lock Up Letter executed pursuant to the Securities Purchase Agreement, dated August 5, 2005
10.30(9)	Form of Warrant issued pursuant to the Securities Purchase Agreement, dated August 5, 2005
10.31(9)	Warrant for 8,276 shares of common stock, dated August 5, 2005
10.32(10)	Second Amendment of Financing Agreement between Fortress and Modtech Holdings, Inc., dated September 19, 2005

 

30

Exhibit Number	Name of Exhibit
10.32(11)	Third Amendment of Financing Agreement between Fortress and Modtech Holdings, Inc., dated December 22, 2005
10.33	Intercreditor Agreement dated March 31, 2006
10.34	Loan and Security Agreement dated March 31, 2006
10.35	Amendment Agreement dated March 31, 2006
23.1	Consent of Independent Registered Public Accounting Firm — Peterson & Co., LLP
23.2	Consent of Independent Registered Public Accounting Firm - KPMG LLP
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, Inc.’s Registration Statement on Form S-1 filed 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).
(8)	Incorporated by reference to Modtech Holdings, Inc.’s Form 10-Q/A filed with the Commission on October 17, 2005 (Commission File No. 000-25161).
(9)	Incorporated by reference to Modtech Holdings, Inc.’s Form 8-K filed with the Commission on August 9, 2005 (Commission File No. 000-25161).
(10)	Incorporated by reference to Modtech Holdings, Inc.’s Form 8-K filed with the Commission on September 23, 2005 (Commission File No. 000-25161).
(11)	Incorporated by reference to Modtech Holdings, Inc.’s Form 8-K filed with the Commission on December 29, 2005 (Commission File No. 000-25161)

31

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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., a Delaware corporation
Date: April 4, 2006	By:	/s/ DAVID M. BUCKLEY
		David M. Buckley President & Chief Executive Officer (Principal Executive Officer)

32

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name	Capacities	Date
/s/    DAVID M. BUCKLEY David M. Buckley	Director, President & Chief Officer Executive (Principal Executive Officer)	April 4, 2006
/s/    ROBERT W. CAMPBELL Robert W. Campbell	Director	April 4, 2006
/s/    DANIEL J. DONAHOE Daniel J. Donahoe	Director	April 4, 2006
/s/    STANLEY GAINES Stanley Gaines	Director	April 4, 2006
/s/    CHARLES R. GWIRTSMAN	Director	April 4, 2006
Charles R. Gwirtsman
/s/    CHARLES C. MCGETTIGAN Charles C. McGettigan	Director, Chairman of the Board	April 4, 2006
/s/    MYRON A. WICK III Myron A. Wick III	Director	April 4, 2006
/s/    DENNIS L. SHOGREN Dennis L. Shogren	Chief Financial Officer (Principal Accounting Officer)	April 4, 2006

33

Index to Consolidated Financial Statements

Financial Statements
Report of Independent Registered Public Accounting Firm - Peterson & Co., LLP	F-2
Report of Independent Registered Public Accounting Firm - KPMG LLP	F-3
Consolidated Balance Sheets — December 31, 2005 and 2004	F-4
Consolidated Statements of Operations — Years Ended December 31, 2005, 2004 and 2003	F-6
Consolidated Statements of Shareholders’ Equity — Years Ended December 31, 2005, 2004 and 2003	F-7
Consolidated Statements of Cash Flows — Years Ended December 31, 2005, 2004 and 2003	F-8
Notes to Consolidated Financial Statements	F-9
Schedule II — Valuation and Qualifying Accounts	F-28

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Modtech Holdings, Inc.

Perris, California

We have audited the accompanying consolidated balance sheet of Modtech Holdings, Inc. and subsidiaries (the Company) as of December 31, 2005, and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we have also audited the accompanying financial statement schedule II for the year ended December 31, 2005. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Modtech Holdings, Inc. and subsidiaries as of December 31, 2005 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule for the year ended December 31, 2005, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Peterson & Co., LLP

San Diego, California

April 4, 2006

F-2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Modtech Holdings, Inc.:

We have audited the accompanying consolidated balance sheet of Modtech Holdings, Inc. and subsidiaries (the Company) as of December 31, 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2004. In connection with our audits of the consolidated financial statements, we have also audited the accompanying financial statement schedule II for each of the years in the two-year period ended December 31, 2004. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Modtech Holdings, Inc. and subsidiaries as of December 31, 2004, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for each of the years in the two-year period ended December 31, 2004, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/    KPMG LLP

Costa Mesa, California

June 16, 2005

F-3

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2005 and 2004

	2005		2004
ASSETS
Current assets:
Cash and cash equivalents	$	3,263,000	$	11,799,000
Restricted cash - current portion		11,452,000		—
Contracts receivable, less allowance for contract adjustments of $616,000 in 2005 and $1,526,000 in 2004		40,687,000		38,177,000
Costs and estimated earnings in excess of billings on contracts		16,050,000		9,273,000
Inventories		12,047,000		13,603,000
Prepaid assets		960,000		1,352,000
Income tax receivable		6,000		4,878,000
Other current assets		1,373,000		586,000
Total current assets		85,838,000		79,668,000
Property and equipment, net		14,518,000		15,511,000
Restricted cash		5,000,000		10,000,000
Goodwill		71,903,000		71,903,000
Covenants not to compete, net		4,000		29,000
Debt issuance costs, net		3,993,000		2,068,000
Other assets		577,000		613,000
	$	181,833,000	$	179,792,000

See accompanying notes to consolidated financial statements.

F-4

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (continued)

December 31, 2005 and 2004

	2005			2004
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	25,687,000		$	20,284,000
Accrued compensation		2,634,000			3,214,000
Accrued insurance expense		3,688,000			4,402,000
Provision for estimated losses on contracts		3,790,000			4,298,000
Embedded derivative liability		7,849,000			4,682,000
Warrant derivative liability		6,192,000			951,000
Accrued warranty		930,000			768,000
Other accrued liabilities		3,415,000			2,535,000
Billings in excess of costs and estimated earnings on contracts		3,809,000			4,427,000
Current revolving credit line		4,819,000			16,900,000
Current maturities of long-term debt, net		19,831,000			5,000,000
Total current liabilities		82,644,000			67,461,000
Long-term debt, net, excluding current portion		14,628,000			19,756,000
Total liabilities		97,272,000			87,217,000
Commitments and contingencies (Notes 17 and 19)
Shareholders’ equity:
Series A preferred stock, $.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding in 2005 and 2004		—			—
Common stock, $.01 par value. Authorized 25,000,000 shares; issued and outstanding 17,062,219 and 14,479,082 in 2005 and 2004, respectively		170,000			145,000
Additional paid-in capital		96,640,000			83,575,000
(Accumulated deficit) retained earnings		(12,249,000	)		8,855,000
Total shareholders’ equity		84,561,000			92,575,000
	$	181,833,000		$	179,792,000

See accompanying notes to consolidated financial statements.

F-5

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Years ended December 31, 2005, 2004 and 2003

	2005			2004			2003
Net sales	$	230,324,000		$	185,194,000		$	159,870,000
Cost of goods sold		221,376,000			188,114,000			147,938,000
Gross profit (loss)		8,948,000			(2,920,000	)		11,932,000
Selling, general, and administrative expenses		15,920,000			14,495,000			8,129,000
(Gain) loss on sale of property and equipment		(6,000	)		(745,000	)		1,000
Covenant amortization		25,000			29,000			79,000
(Loss) income from operations		(6,991,000	)		(16,699,000	)		3,723,000
Other (expense) income:
Interest expense		(9,028,000	)		(2,867,000	)		(1,444,000	)
Interest income		358,000			31,000			85,000
Loss on warrant and embedded derivatives		(5,804,000	)		—			—
Other, net		361,000			881,000			31,000
		(14,113,000	)		(1,955,000	)		(1,328,000	)
(Loss) income before income taxes		(21,104,000	)		(18,654,000	)		2,395,000
Income tax benefit (provision)		—			108,000			(938,000	)
Net (loss) income		(21,104,000	)		(18,546,000	)		1,457,000
Series A preferred stock dividend		—			221,000			7,000
Net (loss) income applicable to common shareholders	$	(21,104,000	)	$	(18,767,000	)	$	1,450,000
Basic (loss) earnings per common share	$	(1.35	)	$	(1.35	)	$	0.11
Basic weighted-average shares outstanding		15,682,357			13,949,372			13,707,610
Diluted (loss) earnings per common share	$	(1.35	)	$	(1.35	)	$	0.10
Diluted weighted-average shares outstanding		15,682,357			13,949,372			14,122,334

See accompanying notes to consolidated financial statements.

F-6

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

Years ended December 31, 2005, 2004 and 2003

	Series A Preferred Stock						Common Stock				Additional paid-in capital			Retained earnings (Accumulated deficit)			Shareholders’ equity
	Shares			Amount			Shares		Amount
Balance, December 31, 2002		138,924		$	1,000			13,524,491	$	135,000	$	78,876,000		$	26,165,000		$	105,177,000
Exercise of options, including tax benefit of $185,000		—			—			82,984		1,000		386,000			—			387,000
Series A conversion to common stock		(138,924	)		(1,000	)		138,924		1,000		—			—			—
Net income		—			—			—		—		—			1,457,000			1,457,000
Balance, December 31, 2003		—			—			13,746,399		137,000		79,262,000			27,622,000			107,021,000
Exercise of options, including tax benefit of $873,000		—			—			732,683		8,000		4,259,000			—			4,267,000
Compensation expense related to accelerated option vestiture		—			—			—		—		54,000			—			54,000
Dividends paid on Series A preferred stock		—			—			—		—		—			(221,000	)		(221,000	)
Net loss		—			—			—		—		—			(18,546,000	)		(18,546,000	)
Balance, December 31, 2004		—			—			14,479,082		145,000		83,575,000			8,855,000			92,575,000
Private placement of common stock		—			—			2,046,000		20,000		11,609,000			—			11,629,000
Equity issuance costs					—			—		—		(578,000	)		—			(578,000	)
Warrant derivatives issued with private placement		—			—			—		—		(2,448,000	)		—			(2,448,000	)
Exercise of options, including tax benefit of $290,000		—			—			537,137		5,000		4,482,000			—			4,487,000
Net loss		—			—			—		—		—			(21,104,000	)		(21,104,000	)
Balance, December 31, 2005		—		$	—			17,062,219	$	170,000	$	96,640,000		$	(12,249,000	)	$	84,561,000

See accompanying notes to consolidated financial statements.

F-7

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2005, 2004 and 2003

	2005			2004			2003
Cash flows from operating activities:
Net (loss) income	$	(21,104,000	)	$	(18,546,000	)	$	1,457,000
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Loss on abandonment of leasehold improvements		979,000			—			—
Depreciation and amortization		2,862,000			2,885,000			2,101,000
Provision for contract adjustments		731,000			500,000			282,000
Deferred income taxes		—			2,987,000			(64,000	)
Compensation expense related to accelerated option vestiture		—			54,000			—
(Gain) loss on sale of property and equipment		(6,000	)		(745,000	)		1,000
Non-cash interest expense		1,150,000			—			—
Non-cash loss on embedded derivatives		3,027,000			—			—
Non-cash loss on warrant derivatives		2,777,000			—			—
Accretion of convertible debt discount		1,064,000			—			—
(Increase) decrease in assets:
Contracts receivable		(3,241,000	)		(11,252,000	)		4,702,000
Costs and estimated earnings in excess of billings on contracts		(6,777,000	)		262,000			8,388,000
Inventories		1,556,000			(6,762,000	)		1,515,000
Due from affiliates		—			1,867,000			(499,000	)
Income tax receivable		5,162,000			(2,979,000	)		(1,252,000	)
Prepaid and other assets		(359,000	)		2,529,000			(1,482,000	)
Increase (decrease) in liabilities:
Accounts payable		5,403,000			13,964,000			(3,538,000	)
Accrued compensation		(580,000	)		349,000			(779,000	)
Accrued insurance expense		(714,000	)		1,184,000			1,030,000
Provision for estimated losses on contracts		(508,000	)		4,176,000			86,000
Accrued warranty		162,000			—			—
Other accrued liabilities		880,000			(143,000	)		536,000
Billings in excess of costs and estimated earnings on contracts		(618,000	)		610,000			1,573,000
Net cash (used in) provided by operating activities		(8,154,000	)		(9,060,000	)		14,057,000
Cash flows from investing activities:
Proceeds from sale of equipment		118,000			2,405,000			28,000
Purchase of property and equipment		(1,897,000	)		(1,427,000	)		(4,665,000	)
Net cash (used in) provided by investing activities		(1,779,000	)		978,000			(4,637,000	)
Cash flows from financing activities:
Net principal (payments) borrowings under revolving credit line		(19,379,000	)		9,500,000			(1,600,000	)
Principal payments on long-term debt		(13,105,000	)		(7,000,000	)		(7,000,000	)
Proceeds from issuance of long-term debt		27,898,000			25,000,000			—
Increase in restricted cash		(6,452,000	)		(10,000,000	)		—
Payment of debt issuance costs		(2,813,000	)		(1,914,000	)		(113,000	)
Net proceeds from issuance of common stock		15,248,000			3,394,000			202,000
Dividends paid related to Series A preferred stock		—			(221,000	)		—
Net cash provided by (used in) financing activities		1,397,000			18,759,000			(8,511,000	)
Net (decrease) increase in cash and cash equivalents		(8,536,000	)		10,677,000			909,000
Cash and cash equivalents at beginning of year		11,799,000			1,122,000			213,000
Cash and cash equivalents at end of year	$	3,263,000		$	11,799,000		$	1,122,000

See accompanying notes to consolidated financial statements.

F-8

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

(1)Description of Business and Summary of Significant Accounting Policies

Description of Business

Modtech Holdings, Inc. and its subsidiaries (“Modtech”, “we”, “our”, or the “Company”) design, manufacture, market and install modular and relocatable classrooms and commercial and light industrial modular buildings.

Our classrooms are sold primarily to California school districts. We also sell classrooms to the State of California and to leasing companies, who lease the classrooms principally to California school districts. Our modular classrooms include standardized units prefabricated at our manufacturing facilities, as well as customized units that are modular in design but constructed on site using components we manufacture. We also sell both standard and custom classrooms outside California, principally in Florida.

We also design and manufacture modular, portable buildings to customer specifications for a wide array of uses, including governmental, healthcare, educational, airport and correctional facilities; office and retail space; daycare centers; libraries; churches; construction trailers; golf clubhouses; police stations; convenience stores; fast food restaurants; and sales offices. The buildings are sold direct through an internal sales group, through leasing companies and through a dealer network to a wide range of end users.

Principles of Consolidation

The consolidated financial statements include the financial statements of Modtech Holdings, Inc. and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.

Use of Estimates

Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, restricted cash, contracts receivable, costs and estimated earnings in excess of billings on contracts, prepaid and other assets, accounts payable, accrued liabilities, and billings in excess of estimated earnings on contracts are measured at cost which approximates their fair value due to the short maturity period of the instruments. The carrying amount of the revolving credit line and long-term debt approximate their fair value because the interest rate on these instruments fluctuates with market interest rates. Our Subordinated Convertible Note has a net carrying value of approximately $21.6 million at December 31, 2005, which approximates fair value. The embedded derivatives and the outstanding warrants have a fair value of $7.8 million and $6.2 million, respectively, at December 31, 2005 (See Note 7). The estimated fair value of these amounts has been determined using available market information and appropriate valuation methodologies.

Revenue Recognition

Construction Contracts

Construction 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.

F-9

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

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.

Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling, general, and administrative costs are charged to expense as incurred. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is recognized in the consolidated financial statements.

Claims for additional contract costs are recognized upon a signed change order from the customer or in accordance with paragraphs 62 and 65 of the AICPA’S Statement of Position (SOP) 81-1. Accounting for Performance of Construction - Type and Certain Production - Type Contracts.

The current asset, “Costs and estimated earnings in excess of billings on contracts,” represents revenues recognized in excess of amounts billed. The current liability, “Billings in excess of costs and estimated earnings on contracts,” represents billings in excess of revenues recognized.

Allowances for Contract Adjustments

We maintain allowances for contract adjustments that result from the inability of our 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.

Other Products

Sales of other products are recognized when products are shipped and the customer takes ownership and assumes risk of loss, collection of the related accounts receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.

Cash and cash equivalents

We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. All cash and cash equivalents are held in United States (U.S.) financial institutions. Restricted cash consists of collateral to secure our Subordinated Convertible Note, and will be reduced as certain financial milestones are met (See Note 7).

Restricted cash as of December 31, 2005 consists of $10.0 million in cash collateral required under our $25.9 million Subordinated Convertible Note and $6.5 million in cash collateral required by a letter of credit subfacility under our credit facility (See Note 7). Five million dollars of the $10.0 million cash collateral is classified as long-term as defined in the Subordinated Convertible Note. The cash collateral required by the letter of credit subfacility is classified as short-term matching the underlying note classification (See Note 7). The remaining restricted cash amounts are classified as long-term assets as of December 31, 2005 according to the terms of their respective contracts.

Inventories

Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are calculated using the straight-line and accelerated methods over the following estimated useful lives:

F-10

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

Buildings	15 to 39 years
Land and building improvements	5 to 39 years
Leasehold improvements	5 to 30 years (or the shorter of the lease term)
Machinery and equipment	5 to 20 years
Office equipment	3 to 7 years
Trucks and automobiles	3 to 5 years

Goodwill

Goodwill represents the excess of costs over fair value of assets of businesses acquired. We adopted the provisions of Financial Accounting Standards Board (“FASB”) Statement No. 142, “Goodwill and Other Intangible Assets”, as of January 1, 2002. Pursuant to Statement 142, goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB Statement No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.”

Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, we determine the fair value of a reporting unit and compare it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with FASB Statement No. 141, “Business Combinations.” The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. There was no goodwill impairment recorded for the years ended December 31, 2005, 2004, and 2003.

Impairment of Long-Lived Assets

Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Debt Issuance Costs

Debt issuance costs have been deferred and are being amortized over the term of the credit facility using the effective interest method (See Note 7).

Warrant Derivative Liability

The Company accounts for warrants issued in connection with financing arrangements in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and

F-11

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

Potentially Settled in, a Company’s Own Stock) (“EITF 00-19”).  Pursuant to EITF 00-19, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as a derivative liability.  The fair value of warrants classified as derivative liabilities is adjusted for changes in fair value at each reporting period, and the corresponding non-cash gain or loss is recorded in current period earnings (See Note 13).

Stock Option Plans

We apply 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 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”, and FASB Statement No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” — 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, we have elected to continue to apply the intrinsic-value-based method of accounting described above, and have adopted only the disclosure requirements of Statement 123, as amended. The following table illustrates the effect on net income (loss) if the fair-value-based method had been applied to all outstanding and unvested awards in each period.

	2005			2004			2003
Net (loss) income
As reported	$	(21,104,000	)	$	(18,546,000	)	$	1,457,000
Deduct stock-based compensation expense determined under fair-value based method, net of tax		(425,000	)		(896,000	)		(340,000	)
Pro forma	$	(21,529,000	)	$	(19,442,000	)	$	1,117,000
Basic (loss) earnings per share
As reported	$	(1.35	)	$	(1.35	)	$	0.11
Pro forma	$	(1.37	)	$	(1.39	)	$	0.08
Diluted (loss) earnings per share
As reported	$	(1.35	)	$	(1.35	)	$	0.10
Pro forma	$	(1.37	)	$	(1.39	)	$	0.08

(Loss) Earnings per Share

We account for (loss) earnings per share in accordance with Statement No. 128, “Earnings per Share.” This Statement requires the presentation of both basic and diluted net (loss) income per share for financial statement purposes. Basic net (loss) income per share is computed by dividing (loss) income available to common shareholders by the weighted average number of common shares outstanding. Diluted net (loss) income per share includes the effect of the potential common shares outstanding.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Due to our cumulative losses for the three years ended December 31, 2005, we provided for a full valuation allowance on our net deferred tax assets, reducing these to zero. This valuation allowance and the amount of the deferred tax assets considered realizable could change if projected future taxable income is realized.

F-12

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

Segment Information

We apply the provisions of Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Statement No. 131 establishes standards for reporting financial and descriptive information about an enterprise’s operating segments in its annual consolidated financial statements and selected segment information in interim financial reports. In 2005, 2004 and 2003, we had one operating segment and in accordance with Statement No. 131, only enterprise-wide disclosures have been provided.

Reclassification

Certain amounts in the 2004 and 2003 consolidated financial statements have been reclassified to conform to the 2005 presentation.

Comprehensive (Loss) Income

We have no components of other comprehensive (loss) income. Accordingly, comprehensive (loss) income is the same as net (loss) income for each period presented.

New Accounting Standards

In November 2004, the 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 are effective for inventory costs incurred during fiscal years 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. We believe the adoption of Statement 123R may have a material effect on our financial results, however, the full effect of adopting Statement 123R has not been determined.

(2)Contracts Receivable

Contracts receivable consisted of customer billings for:

	2005			2004
Completed contracts	$	19,112,000		$	17,292,000
Contracts in progress		14,938,000			14,737,000
Retentions		7,253,000			7,674,000
		41,303,000			39,703,000
Less allowance for contract adjustments		(616,000	)		(1,526,000	)
	$	40,687,000		$	38,177,000

Retentions are expected to be collected within 12 months.

F-13

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

During 2005, we recorded and billed $0.8 million in revenue related to scope-approved but unpriced change orders for the Heritage project in accordance with the guidelines in SOP 81-1 paragraph 62. We believe it is probable that the documented costs will be recovered through a change in the contract price and, therefore, revenue was recognized to the extent of the costs incurred.

During 2005, we also recorded and billed an additional $1.6 million in revenue related to unapproved change orders in accordance with the guidelines in SOP 81-1 paragraph 65. We met the four conditions outlined in SOP 81-1 paragraph 65 in order to satisfy the two requirements necessary for revenue recognition: 1) it is probable the claims will result in additional contract revenue and 2) the costs can be reliably estimated.

(3)Costs and Estimated Earnings in Excess of Billings on Contracts

Customer billing is determined by the “schedule of values” in accordance with contract terms as agreed to by all parties. Timing differences between costs incurred and billings based on the contract terms generate the costs and estimated earnings in excess of billings.

Net costs and estimated earnings in excess of billings on contracts consisted of:

	2005			2004
Net costs and estimated earnings on uncompleted contracts	$	196,306,000		$	179,639,000
Billings to date		(184,595,000	)		(174,953,000	)
		11,711,000			4,686,000
Net under (over) billed receivables from completed contracts		530,000			160,000
	$	12,241,000		$	4,846,000

These amounts are shown in the accompanying consolidated balance sheets under the following captions:

	2005			2004
Costs and estimated earnings in excess of billings on uncompleted contracts	$	15,520,000		$	9,088,000
Costs and estimated earnings in excess of billings on completed contracts		530,000			185,000
Costs and estimated earnings in excess of billings on contracts		16,050,000			9,273,000
Billings in excess of costs and estimated earnings on uncompleted contracts		(3,809,000	)		(4,402,000	)
Billings in excess of costs and estimated earnings on completed contracts		—			(25,000	)
Billings in excess of costs and estimated earnings on contracts		(3,809,000	)		(4,427,000	)
	$	12,241,000		$	4,846,000

(4)Inventories

Inventories consist of:

	2005		2004
Raw materials	$	9,211,000	$	10,317,000
Work-in-process		2,630,000		2,188,000
Finished goods		206,000		1,098,000
	$	12,047,000	$	13,603,000

F-14

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

(5)Property and Equipment, Net

Property and equipment, net consists of:

	2005			2004
Leasehold improvements	$	12,799,000		$	13,851,000
Machinery and equipment		5,190,000			8,207,000
Office equipment		2,767,000			1,810,000
Land		372,000			372,000
Construction-in-progress		716,000			1,394,000
Trucks and automobiles		864,000			785,000
Buildings		2,393,000			2,420,000
Land and building improvements		677,000			598,000
		25,778,000			29,437,000
Less accumulated depreciation and amortization		(11,260,000	)		(13,926,000	)
	$	14,518,000		$	15,511,000

Total depreciation expense for the years ended December 31, 2005, 2004 and 2003 was $1,799,000, $1,653,000 and $1,719,000, respectively.

(6)Goodwill

Statement No. 142, requires us to test for impairment of goodwill at least annually. The result of this analysis during 2005 and 2004 did not require us to recognize an impairment loss.

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

Balance as of December 31, 2002	$	72,384,000
Goodwill acquired during the period		—
Impairment loss		—
Deferred tax adjustments		(481,000	)
Balance as of December 31, 2003		71,903,000
Goodwill acquired during the period		—
Impairment loss		—
Balance as of December 31, 2004		71,903,000
Goodwill acquired during the period		—
Impairment loss		—
Balance as of December 31, 2005	$	71,903,000

(7)Long-Term Debt and Revolving Credit Line

As of December 31, 2005, we had outstanding a $38 million credit facility with Fortress Credit Corporation (the “Credit Facility”) and a $25.9 million subordinated convertible promissory note with another lender (the “Note”). The Credit Facility was entered into during the quarter ended March 31, 2005, and the Note was issued on December 31, 2004 and was amended and restated on August 5, 2005.

F-15

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

Credit Facility

The Credit Facility provides for revolving credit loans in an aggregate principal amount not to exceed $17.0 million at any time (the “Revolving Credit Loan”) and a term loan in the aggregate principal amount of $21.0 million (the “Term Loan”). The Revolving Credit Loan also provides for a letter of credit subfacility in the maximum amount of $10.0 million. This letter of credit subfacility is also secured by a cash collateral account, which is recorded as restricted cash on our consolidated balance sheet as of December 31, 2005. The Credit Facility is secured by substantially all of our assets.

On August 5, 2005, in connection with the closing of the Equity Issuance (See Note 13), we entered into a first amendment to the Credit Facility which amended certain financial covenants and waived any prior non-compliance with such covenants. On September 19, 2005, we entered into a second amendment to the Credit Facility which increased the rate at which we can borrow funds from once to twice within any period of five consecutive business days and revised the definition of the borrowing base to include all cash and cash equivalents up to a maximum of $5.0 million. Previously, the Credit Facility excluded the first $5.0 million of cash and cash equivalents from the borrowing base. Pursuant to this second amendment, we are required to pay down our Revolving Credit Loan whenever our cash and cash equivalents exceed $5.0 million and we are prohibited from accumulating cash and cash equivalents in excess of $5.0 million until the Revolving Credit Loan has been paid off in full.

During 2005, we made principal payments on our Term Loan totaling $8.1 million. These principal payments reduced the long-term portion of the Term Loan and correspondingly reduced our overall maximum credit under this facility from $38.0 million to $29.9 million.

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, with the first payment made on July 1, 2005. Both loans mature and are due and payable on February 25, 2008. As of December 31, 2005 the applicable annual interest rates for the Revolving Credit Loan, Term Loan and letter of credit subfacility were 12.0%, 12.8%, 5.5%, respectively.

The Term Loan balance totals $12.9 million, and the revolving Credit Loan balance totals $4.8 million as of December 31, 2005 and the entire balance has been classified as current as we were in default of certain financial covenants. We did not seek waivers for this default due to the replacement of the Credit Facility with a new credit facility on April 4, 2006 (See Note 22).

Convertible Note and Embedded Derivatives

On August 5, 2005, in connection with the 2005 Equity Issuance (See Note 13), we also amended and restated our $25.0 million Note to increase the principal amount to $25.9 million to cover amounts owed under an existing Registration Rights Agreement for failure to timely file a registration statement covering the shares issuable upon conversion of the Note and exercise of a warrant held by the Note holder. In connection with the amendment to the Note, we also issued a new warrant to the Note holder exercisable for 8,276 shares of common stock (“New Warrant”). This New Warrant is in addition to the 229,886 shares issuable upon exercise of the existing warrant.

The conversion price of the amended Note and the exercise price of both the warrants have been reduced from $8.70 per share to $8.57 and $8.56 per share, respectively, due to an adjustment pursuant to customary anti-dilution provisions resulting from the 2005 Equity Issuance. This adjustment in the exercise price correspondingly increased the number of shares convertible on the Note to 3,022,171 shares of common stock and the total number of shares exercisable for both warrants to 242,057 shares of common stock. The conversion price of the Note and the exercise price of either warrant cannot be reduced below $8.57 and $8.56 per share, respectively, without stockholder approval. We obtained stockholder approval of the 2005 Equity Issuance on January 3, 2006 which reduced the conversion price

F-16

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

of the Note and the exercise price of both warrants to $7.82 per share. The Note holder may convert the Note or exercise either warrant at any time or from time-to-time.

The $0.9 million increase in the amended and restated Note was recorded net of a discount, including $16,000 representing the estimated fair value of the New Warrant issued and $140,000 for the value of the underlying embedded derivatives (as further described below). The New Warrant may be exercised at any time after issuance and will expire on December 31, 2009. The valuation of the New Warrant issued was determined using a Black-Scholes option pricing model using the following assumptions: expected dividend yield of 0.0%, expected stock price volatility of 45.0%, risk free interest rate of 3.79% and a remaining contractual life of 4.4 years. The valuation of the embedded derivatives were derived by using various other valuation methods, which included Black-Scholes option pricing models. The total value of $156,000 including the embedded derivatives and the New Warrant has been deducted as an additional discount to the face value of the amended $25.9 million Note and recorded as a component of accrued liabilities as of December 31, 2005. This discount will be accreted to interest expense over the remaining term of the Note.

The Note bears interest at 7% per annum. Interest on the Note is payable quarterly in cash. The principal amount of the Note is due on December 31, 2009. The Note holder has the option to cause us to redeem up to $8.33 million face amount of the Note on June 30, 2006, $9.23 million on June 30, 2007, and $8.33 million on June 30, 2008. The face amount of $8.33 million, or $6.9 million net discounted value, is therefore classified as current as of December 31, 2005, as this portion may become due and payable within one year at the option of the Note holder.

The Note is secured by a first priority, perfected security interest in certain cash collateral placed in a restricted, segregated collateral account. The amount of cash collateral required to be maintained in this account is $10.0 million and is recorded as restricted cash on our consolidated balance sheet as of December 31, 2005. The cash collateral is not accessible for use by us until such time as it is released. The cash held in the cash collateral account will be reduced as certain financial milestones are met and can be used, in part, to fund optional redemptions that may be exercised by the

Note holder on June 30 of 2006, 2007 and 2008, or upon an “event of default” as defined under the Note. The Note is also secured by a second priority security interest in our assets, subordinated only to certain of our senior indebtedness, including our Credit Facility.

During the twelve months ended December 31, 2005, $1.7 million in additional interest expense was recorded due to delayed registration of the common shares that are convertible under the Note by the Note holder. Also included in interest expense for the year ended December 31, 2005 is $1,064,000 due to non-cash accretion of the discount on the Note.

There are certain embedded derivatives associated with the Note. 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 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 Financial Accounting Standards Board (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 non-cash gain or loss charged to the current period. We conducted a valuation of these embedded derivatives as of December 31, 2005 using various valuation methods, which included Black-Scholes option pricing models. Due to the increase in our stock price from $7.87 at December 31, 2004 to $9.34 at December 31, 2005 and the decrease in the exercise price of the Note from $8.70 to $8.57 (as described above), the valuation conducted as of December 31, 2005 resulted in a non-cash loss of $5,804,000, with a corresponding increase in the embedded derivative liability, which is included as a component of accrued liabilities at December 31, 2005. As of December 31, 2005, the fair value of the embedded derivative liability is $7,849,000.

The discounted balance on the Note totals $21.5 million as of December 31, 2005, with $6.9 million classified as current (as described above) and the remaining $14.6 million classified as long-term.

F-17

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

Long-term debt consists of:

	2005			2004
Term Loan	$	12,896,000		$	5,000,000
Convertible Note		25,900,000			25,000,000
Long-term debt		38,796,000			30,000,000
Less unamortized discount on Convertible Note		(4,337,000	)		(5,244,000	)
Long-term debt, net		34,459,000			24,756,000
Less current portion of Term Loan		(12,896,000	)		(5,000,000	)
Less current portion of Convertible Note		(6,935,000	)		—
Total long-term debt, net, excluding current portion	$	14,628,000		$	19,756,000

The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 2005 are as follows:

Year Ending December 31:
2006	$	21,229,000
2007		9,234,000
2008		8,333,000
2009		—
2010		—
Thereafter	$	38,796,000

(8)Income Taxes

The components of the 2005, 2004 and 2003 provision for Federal and state income tax benefit (expense) computed in accordance with Statement No. 109 are summarized below:

	2005		2004			2003
Current:
Federal	$	—	$	3,246,000		$	(808,000	)
State		—		6,000			(194,000	)
Deferred:
Federal		—		(2,463,000	)		(21,000	)
State		—		(681,000	)		85,000
	$	—	$	108,000		$	(938,000	)

The tax benefits associated with the exercise of employee stock option plans of $290,000, $873,000 and $185,000 in 2005, 2004 and 2003, respectively, were recorded directly to additional paid-in capital.

Income tax benefit (expense) attributable to (loss) income from operations differed from the amounts computed by applying the U.S. Federal income tax rate to pretax (loss) income from operations as a result of the following:

	2005			2004			2003
Taxes, U.S. statutory rates		34.0	%		34.0	%		(34.0	)%
State taxes, less Federal benefit		3.6			4.7			(4.9	)
Effect on non-deductible expense - derivatives		(9.4	)		—			—
Effect of non-deductible expenses - convertible Note interest		(4.6	)		(0.8	)		(1.3	)
Other		0.1			1.7			1.0
Change in valuation allowance		(23.7	)		(39.0	)		—
Total taxes on loss (income)		0.0	%		0.6	%		(39.2	)%

F-18

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities as of December 31, 2005 and 2004 are as follows:

	2005			2004
Deferred tax assets:
Allowances and accruals not recognized for income tax purposes	$	4,023,000		$	5,206,000
Federal net operating loss carryforward		6,461,000			579,000
State net operating loss carryforward		2,303,000			986,000
Federal AMT credit carryforward		243,000			243,000
Covenants not to compete		739,000			797,000
Other		288,000			223,000
Total gross deferred tax assets		14,057,000			8,034,000
Less valuation allowance		(12,288,000	)		(7,279,000	)
Net deferred tax assets		1,769,000			755,000
Deferred tax liabilities:
Prepaid expenses		(166,000	)		(167,000	)
Property and equipment		(541,000	)		(433,000	)
Billings in excess of costs and estimated earnings on contracts		—			(155,000	)
State taxes		(1,059,000	)		—
Other		(3,000	)		—
Total gross deferred tax liabilities		(1,769,000	)		(755,000	)
Total net deferred tax assets	$	—		$	—

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in deferred tax assets is a State net operating loss carryforward of $30.7 million, which will begin expiring in 2014, and a Federal net operating loss carryforward of $19.0 million, of which $2.7 million will expire in 2024 and $16.3 million will expire in 2025. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon our cumulative losses for the three years ended December 31, 2005 we have provided a valuation allowance in the amount of $12.3 million reducing the net realizable benefits of these deductible differences to zero at December 31, 2005. The net change in the valuation allowance for 2005 was $5.0 million and for 2004 was an increase of $7.3 million. The amount of the deferred tax asset considered realizable could change if projected future taxable income is realized.

F-19

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

(9)Transactions with Related Parties

Sales

One of the companies to which we sold modular classrooms was affiliated with the Company through ownership by one of our former officers. This officer discontinued employment with us effective August 7, 2004. Therefore, the 2004 related party sales as shown below is for the 7-month period ended July 31, 2004.

The table below summarizes the related party classroom sales:

	2005		2004			2003
Sales	$	—	$	1,567,000		$	3,203,000
Cost of goods sold	$	—	$	1,408,000		$	2,670,000
Gross profit percentage		—		10.15	%		16.64	%

The related party purchased modular relocatable classrooms from us on standard terms and at standard wholesale prices.

Operating Leases

Certain manufacturing facilities were leased from former related-party partnerships under non-cancelable operating leases through 2019. A former officer is a partner in the partnerships. This partner discontinued employment with us effective August 7, 2004. These related party leases require monthly payments which aggregate approximately $40,000. In connection with the lease at the Lathrop facility, the Company made an $83,000 security deposit during 1990.

Future minimum lease payments under these leases are discussed in Note 17. Payments to a related party included in cost of goods sold is rent expense of $0, $280,000 and $479,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

(10)401(k) Plans

We have tax deferred savings plans under Section 401(k) of the Internal Revenue Code. Eligible employees can contribute up to 12% of gross annual earnings. Our contributions are made on a 50% matching basis of eligible contributions. Our contributions were approximately $360,000, $273,000 and $283,000 in 2005, 2004, and 2003, respectively.

(11)Stock Options and Warrants

In May of 1994, the Board of Directors voted and approved a stock option plan (the May 1994 Plan). The May 1994 Plan provided for the grant of both incentive and non-qualified options to purchase up to 500,000 shares of the Company’s common stock. The incentive stock options were granted only to employees, including officers of the Company, while non-qualified stock options were granted to employees, non-employee officers and directors, consultants, vendors, customers and others expected to provide significant services to the Company. The exercise price of the stock options was not less than the fair market value of the underlying stock at the date of the grant (110% if granted to an employee who owns 10% or more of the Company’s common stock). All of these options were granted prior to 1999.

In 1996, our Board of Directors authorized the grant of options to purchase up to 500,000 shares of our common stock. The non-statutory options were granted to employees, non-employee officers and directors, consultants, vendors, customers and others expected to provide significant service to the Company. The exercise price of the stock options was not less than the fair market value of the underlying stock at the date of the grant (110% if granted to an employee who owns 10% or more of our common stock). All of these options were granted prior to 1999.

F-20

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

In 1999, our shareholders approved a stock option plan (the 1999 Plan). The 1999 Plan provides for the grant of non-statutory options to purchase up to 1,450,000 shares of our common stock. The non-statutory options may be granted to employees, officers, directors, consultants, independent contractors and others expected to provide significant service to the Company. The exercise price of the stock options cannot be less than the fair market value of the underlying stock at the date of the grant (110% if granted to an employee who owns 10% or more of our common stock). In 2002, 185,038 shares were granted, and no shares were granted under this plan in 2003, 2004 or 2005. As of December 31, 2005, 46,146 shares are available for future grants.

In 2002, our shareholders approved a stock option plan (the 2002 Plan). The 2002 Plan provides for the grant of non-statutory options to purchase up to 1,000,000 shares of our common stock. The non-statutory options may be granted to employees, officers, directors, consultants, independent contractors and others expected to provide significant service to the Company. The exercise price of the stock options cannot be less than the fair market value of the underlying stock at the date of the grant (110% if granted to an employee who owns 10% or more of our common stock).

In 2005, our shareholders approved an amendment to the 2002 nonstatutory stock option plan increasing the number of shares issuable from 1 million to 2 million. Grants of 121,000, 486,561 and 486,762 shares were made during the years ended December 31, 2005, 2004 and 2003, respectively.

Stock options outstanding under our stock option plans are summarized as follows:

	Shares			Weighted Average Exercise Price
December 31, 2002		2,336,381		$	7.38
Granted		486,762			9.66
Exercised		(82,984	)		2.43
Terminated		(347,101	)		6.41
December 31, 2003		2,393,058			8.15
Granted		468,561			7.79
Exercised		(732,683	)		4.63
Terminated		(153,367	)		8.99
December 31, 2004		1,975,569			9.31
Granted		121,000			8.18
Exercised		(537,137	)		7.81
Terminated		(186,132	)		9.35
December 31, 2005		1,373,300		$	9.79

All stock options have a maximum term of ten years and become fully exercisable in accordance with a predetermined vesting schedule which varies.

The per share weighted-average fair value of stock options granted during 2005, 2004 and 2003 was $3.11, $3.20, and $4.66, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2005			2004			2003
Expected dividend yield		0	%		0	%		0	%
Average risk-free interest rate		4.0	%		3.0	%		2.3	%
Volatility factor		41.17	%		49.28	%		61.0	%
Expected life		4 years			4 years			4 years

F-21

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

The following information applies to options outstanding at December 31, 2005:

	Options Outstanding						Options Exercisable
Range of exercise prices	Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$4.50 - $7.00		111,549		3.3		$  5.83		111,549		$  5.83
$7.00 - $10.00		1,087,092		6.7		8.80		693,673		9.16
$12.62 - $20.57		174,659		2.0		18.54		174,659		18.54
		1,373,300		5.9		$  9.79		979,881		$10.45

The following information applies to warrants outstanding at December 31, 2005:

Instrument/Security	Original Shares Pre-Adjustment		Original Exercise Price		Revised Exercise Price*		Additional Antidilution Shares		Adjusted Shares Post-Adjustment		Date of Issuance		Date of Expiration
1st Warrant to Note holder*		229,886		8.70		8.56		3,760		233,646		12/31/04		12/31/09
2nd Warrant to Note holder *		8,276		8.70		8.56		135		8,411		8/05/05		12/31/09
Financial Advisor 1st Warrant*		155,173		8.70		8.56		2,538		157,711		12/31/04		12/31/09
Financial Advisor 2nd Warrant		37,500		8.00		8.00		—		37,500		8/5/05		8/5/10
New Equity Warrants		1,023,000		8.00		8.00		—		1,023,000		8/5/05		8/5/10
Totals		1,453,835						6,433		1,460,268

*Pursuant to the terms of the amended convertible note and warrants referenced in this table, neither the conversion price of the amended note nor the exercise price of the warrants could be reduced below $8.56, without stockholder approval. On January 3, 2006, the Company obtained such stockholder approval, and therefore, further reduced the conversion price of the noted warrants listed in the table above to $7.82 per share.

(12)Series A Preferred Stock

In conjunction with a prior merger, 138,924 shares of Series A Preferred Stock were issued in February 1999. The Series A Preferred Stock had no voting rights, including, without limitation, the right to vote on the election of directors, mergers, reorganization or a sale of all or substantially all of our assets. Dividends accrued on each share of Series A Preferred Stock at the rate of $0.40 per annum as declared. Dividends were not paid on our common stock until all accrued dividends on the Series A Preferred Stock were paid or declared and set aside for payment.

Subject to proportional adjustments due to stock splits, reverse stock splits and similar transactions, each share of Series A Preferred Stock was convertible into one share of our common stock at any time following two years after their date of issuance. Each outstanding share of Series A Preferred Stock automatically converted into one share of our common stock in February 2003, the fourth anniversary of the Series A Preferred Stock issuance.

The Board approved a special dividend related to the Series A Preferred Stock totaling $221,000, which was paid in 2004.

(13) Private Placement Issuance of Common Stock and Warrant Derivatives

On August 5, 2005, we completed a private placement of equity securities (“2005 Equity Issuance”) pursuant to which we raised $11.6 million through the sale of 2,046,000 shares of our common stock and five-year warrants to purchase an additional 1,023,000 shares of common stock (“2005 Equity Warrants”).

F-22

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

The securities were sold to a group of accredited investors, including certain of our officers and directors, in reliance on an exemption from the registration requirements of the Securities Act of 1933. Investors, other than Company officers and directors, paid $5.67 per share, including a warrant for one-half share, which was the average of the closing bid prices of our common stock for the five-day trading period from May 26, 2005, through June 2, 2005. Our officers and directors paid $6.285 per share, (including a warrant for one-half share) which was the closing bid price for our common stock on August 4, 2005, plus $0.085. The 2005 Equity Warrants are exercisable at a price of $8.00 per share, may be exercised at any time after February 5, 2006, will expire on August 5, 2010 and are subject to anti-dilution provisions that could result in the reduction of the per share exercise price and an increase in the number of shares under certain conditions, provided however that the exercise price cannot be reduced below $6.20 per share without prior shareholder approval.

The 2005 Equity Warrants issued in connection with the 2005 New Equity Issuance required analysis in accordance with EITF 00-19. EITF 00-19 specifies the conditions which must be met in order to classify warrants issued in a company’s own stock as either equity or as a derivative liability. Evaluation of these conditions under EITF 00-19 resulted in the determination that the 2005 Equity Warrants are classified as a derivative liability. The warrant derivative liability was valued using a Black-Scholes option pricing model, resulting in a total valuation of $2.4 million as of August 5, 2005 (the date of issuance) and recorded as a reduction to additional paid-in capital from the total 2005 Equity Issuance proceeds received. The valuation of the 2005 Equity Warrants was determined using a Black-Scholes option pricing model using the following assumptions: expected dividend yield of 0.0%, expected stock price volatility of 45.9%, risk free interest rate of 4.24% and a remaining contractual life of 5.0 years.

In accordance with EITF 00-19, warrants which are determined to be classified as derivative liabilities are marked-to-market each reporting period, with a corresponding non-cash gain or loss charged to the current period. We valued all warrant derivative liabilities as of December 31, 2005 using a Black-Scholes option pricing model using the following assumptions: expected dividend yield of 0.0%, expected stock price volatility ranging from 40.6% to 44.0%, risk free interest rate ranging from 4.12% to 4.29% and a remaining contractual life ranging from 4.00 years to 4.57 years. Due primarily to the increase in our stock price from $6.20 at August 5, 2005 to $9.34 at December 31, 2005, the valuation conducted as of December 31, 2005 resulted in a non-cash loss of $2.8 million for the period from August 5, 2005 to December 31, 2005, with a corresponding increase in the warrant derivative liability, which is included as a component of accrued liabilities at December 31, 2005. As of December 31, 2005, the total fair value of the warrant derivative liability is $6,192,000.

Also in connection with the 2005 Equity Issuance, a warrant was issued to a financial advisor to purchase 37,500 shares of our common stock, after an antidilution adjustment, as compensation for advisor services. The exercise price of this warrant is $8.00 per share. The warrant may be exercised at any time after issuance and will expire on August 5, 2010. The warrant was valued using a Black-Scholes option pricing model, resulting in a total valuation of $48,000 and was recorded as a reduction to additional paid-in capital from the proceeds received and recorded as a component of the warrant derivative liability. The valuation of this advisor warrant issued was determined using a Black-Scholes option pricing model using the following assumptions: expected dividend yield of 0.0%, expected stock price volatility of 45.0%, risk free interest rate of 3.79% and a remaining contractual life of 4.4 years.

Approximately $1.1 million and $7.4 million of the proceeds from the 2005 Equity Issuance were used to pay down the Term Loan and the Revolving Credit Loan, respectively. Additional paid-in capital was reduced by $578,000 for direct equity issuance costs. The balance was used for working capital.

Concurrently with the closing of the 2005 Equity Issuance, our Senior Lender amended certain financial covenants in the our Credit Facility, we received waivers of any prior non-compliance with such covenants and our $25.0 million Note was amended and restated to increase the principal amount to $25.9 million (See Note 7).

F-23

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

In connection with the 2005 Equity Issuance, we agreed to file a registration statement under the Securities Act of 1933 covering the resale of the shares purchased, shares issuable upon conversion of the Note, and shares issuable upon exercise of all warrants. We further agreed to make the registration statement effective within ninety days of the transaction closing date to avoid additional penalties as detailed in the First Amendment and Restated Registration Rights Agreement. The registration statement was declared effective November 22, 2005.

(14) (Loss) Earnings per Share

The following table represents the calculation of basic and diluted (loss) earnings per common share:

	2005			2004			2003
Basic
Net (loss) income	$	(21,104,000	)	$	(18,546,000	)	$	1,457,000
Dividends on preferred stock (See Note 12)		—			221,000			7,000
Net (loss) income available to common stockholders	$	(21,104,000	)	$	(18,767,000	)	$	1,450,000
Basic weighted-average shares outstanding		15,682,357			13,949,372			13,707,610
Basic (loss) earnings per common share	$	(1.35	)	$	(1.35	)	$	0.11
Diluted
Net (loss) income	$	(21,104,000	)	$	(18,546,000	)	$	1,457,000
Basic weighted-average shares outstanding		15,682,357			13,949,372			13,707,610
Add:
Conversion of preferred stock		—			—			17,508
Exercise of stock options		—			—			397,216
Diluted weighted-average shares outstanding		15,682,357			13,949,372			14,122,334
Diluted (loss) earnings per common share	$	(1.35	)	$	(1.35	)	$	0.10

Excluded from diluted earnings per common share as of December 31, 2005 and 2004 were 3,022,170 and 2,873,564 shares, respectively, issuable upon conversion of the Note and a total of 436,802 and 385,059 shares, respectively, for warrants issued in connection with the Note (See Note 7). Options and other warrants to purchase 2,396,300, 1,975,569 and 1,113,822 shares of common stock were outstanding during 2005, 2004 and 2003, respectively, but were not included in the computation of diluted (loss) earnings per common share because the effect would be anti-dilutive.

(15)Major Customers

Sales to two major customers represented the following percentage of net sales:

	2005		2004		2003
Customer A		9.9%		6.0%		4.0%
Customer B		5.5%		5.0%		6.0%

F-24

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

(16)Supplemental Disclosures of Cash Flow Information

	2005		2004		2003
Cash paid during the year for:
Interest	$	5,089,000	$	1,674,000	$	1,136,000
Income taxes		—	$	120,000	$	700,000
\\\

During 2005 the Company recorded a derivative liability of $2,448,000 and a reduction of additional paid-in capital in connection with warrants issued as part of a private placement (See Note 13).

(17)Commitments and Contingencies

Land Leases

We have entered into various non-cancelable agreements to lease land at our manufacturing facilities through 2019. Minimum lease payments under these non-cancelable operating leases for the next five years and thereafter are as follows:

Year ending December 31:
2006	$	1,476,000
2007		1,392,000
2008		908,000
2009		879,000
2010		879,000
Thereafter		5,155,000
	$	10,689,000

Rent expense for the years ended December 31, 2005, 2004 and 2003 was $1,834,000, $1,618,000, and $2,147,000 respectively. Rental income from a sublease entered into during 2005 was $95,000. The monthly rental income for this sublease is $31,500 through August 2007, and increases to $34,500 per month through August 2009, $36,200 per month through August 2011, $38,000 per month through August 2013, and $40,000 per month through August 2015.

 (18)Warranty

The standard contractual warranty for our modular buildings is one year, although it may vary by contract specifications. Purchased equipment installed by us, such as air conditioning units, carries the manufacturers’ standard warranty. To date, warranty costs incurred have been immaterial.

(19)Pending Claims and Litigation

Other than the proceeding listed below, we are not involved in any legal proceedings against Modtech except those of a nature considered normal to our business, including product liability, employment disputes, administrative proceedings and commercial litigation. Such proceedings often do not specify the amount of damages sought, are subject to many uncertainties and outcomes that are not predictable with assurance. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these pending proceedings. While these matters could affect operating results of any one quarter when resolved in future periods, it is management’s opinion that after final disposition, any monetary liability or financial impact to us beyond that provided for at year-end would not be material to our financial position or results of operations.

On January 25, 2006, a class action lawsuit was filed against us and Bayside Solutions, Inc by TRICO Pipes, Aram Hodess, Micah Long and the Plumbers and Steamfitters Local Union No. 159 in the California Superior Court for Alameda County on behalf of those persons we employed on California public work projects from January 25, 2002 to

F-25

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

the filing of the complaint. The complaint alleges that we failed to pay these individuals general prevailing wage rates, overtime rates, and required rates for holiday work. It also alleges that we failed to employ registered apprentices, thereby denying such apprentices the opportunity to earn wages. Bayside Solutions, Inc. is a temporary labor service used by us and TRICO Pipes is a joint labor management committee in the plumbing and pipe fitting industry in Contra Costa County.

The complaint seeks restitution for all underpayments of wages, attorneys’ fees and costs. We have denied liability, but cannot predict with any certainty the outcome of the proceeding. We are unable to ascertain at this time the potential monetary liability or financial impact to us should there be an unfavorable settlement or adverse decision, but we believe that either event could have a material effect on our operations or financial position.

(20)Correction of Immaterial Error in Prior Periods

Upon the completion and filing of our federal income tax return for the year ended December 31, 2004, our overall income tax receivable was determined to be understated by approximately $647,000. This error originated from not properly recording deferred taxes for certain items, primarily for covenants not to compete, and recording the changes in those deferred taxes prior to 2002. Accordingly, we have revised beginning retained earnings in the accompanying financial statements to reflect the correction of this error. The impact of this correction was an increase in our income tax receivable and retained earnings as of December 31, 2002 of $647,000. The correction of $647,000 had the following effect on the accompanying balance sheets:

	2004 As Reported		2004 As Corrected		2003 As Reported		2003 As Corrected
Income tax receivable		4,231,000		4,878,000		1,252,000		1,898,000
Retained earnings		8,208,000		8,855,000		26,975,000		27,622,000
Shareholders’ equity		91,928,000		92,575,000		106,374,000		107,021,000

(21)Selected Quarterly Financial Information (Unaudited)

	Fourth  Quarter			Third Quarter			Second  Quarter		First Quarter
2005:
Net sales	$	55,913,000		$	65,576,000		$	58,297,000	$	50,538,000
Gross (loss) profit		(4,226,000	)		4,771,000			6,081,000		2,322,000
Net (loss) income		(8,972,000	)		(10,656,000	)		2,656,000		(4,132,000	)
(Loss) earnings per common share:
Basic	$	(0.53	)	$	(0.66	)	$	0.18	$	(0.28	)
Diluted		(0.53	)		(0.66	)		0.18		(0.28	)
2004:
Net sales	$	45,207,000		$	55,950,000		$	54,628,000	$	29,409,000
Gross (loss) profit		(3,213,000	)		(3,023,000	)		3,546,000		(230,000	)
Net (loss) income		(11,965,000	)		(5,639,000	)		759,000		(1,701,000	)
(Loss) earnings per common share:
Basic	$	(0.86	)	$	(0.41	)	$	0.05	$	(0.12	)
Diluted		(0.86	)		(0.41	)		0.05		(0.12	)

F-26

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

(22)Subsequent Events

Special Shareholder Approvals

On January 3, 2006, our shareholders approved the private placement of 2,046,000 shares of common stock and warrants to purchase an additional 1,023,000 shares of common stock. This approval of the 2005 Equity Issuance also reduced the conversion price of the Note and exercise price of the related Note warrants to $7.82 per share.

On January 3, 2006, our shareholders approved the issuance of the shares of common stock to be issued upon conversion of the $25.9 million note and exercise of the related warrants.

On January 3, 2006, our shareholders approved an amendment to our articles of incorporation to increase the number of authorized shares of common stock from 25 million shares to 55 million shares.

On January 3, 2006, our shareholders approved an amendment to the company’s 2002 nonstatutory stock option plan to increase the number of authorized shares under the plan from 1 million to 2 million.

New Credit Facility

On March 31, 2006, we entered into a Loan and Security Agreement (the “B of A Credit Facility”) with Bank of America, N.A and we amended our Convertible Note again. The B of A Credit Facility was funded and closed on April 4, 2006. We are in compliance with the financial covenants in both the amended Convertible Note and the B of A Credit Facility.

In connection with the B of A Credit Facility, we terminated our credit facility with Fortress Credit Corp. We paid off all amounts borrowed and due under the Fortress credit facility, which aggregated approximately $19.4 million, including approximately $260,000 in accrued interest. There were no early termination penalties incurred by us in connection with the termination of the Fortress credit facility. Due to the replacement of the Fortress credit facility, approximately $2 million of unamortized debt issue costs will be written off and charged to interest expense for the quarter ended March 31, 2006.

The B of A Credit Facility provides for revolving credit loans of up to a maximum principal amount of $25,000,000 (the “Revolver Loans”) and a letter of credit subline in the maximum amount of $12,000,000. The Revolver Loans will bear interest per annum, payable monthly, at a variable rate equal to Bank of America's announced prime rate, plus up to 0.75%. Under certain circumstances, we may elect a LIBOR rate plus 2.00% to 3.00%, in which case, interest will be payable in one, two, three or six month periods selected by us. The variable rates, plus an unused credit line fee of between 0.250% and 0.375% per annum, will depend on our quarterly EBITDA (“Earnings Before Interest Taxes Depreciation and Amortization”) measured on a trailing 12 month basis.

The principal amount of the Revolver Loans is due and payable in full on March 31, 2009. The Revolver Loans may be prepaid from time to time without penalty or premium, but if the B of A Credit Facility is terminated during the first two years, there is a termination fee equal to $500,000 in the first year and $250,000 in the second year. The B of A Credit Facility is secured by substantially all of our assets.

In connection with the B of A Credit Facility, we entered into an Amendment Agreement with the holder of our convertible note, dated March 31, 2006, which amended our Amended and Restated Senior Secured Convertible Note dated August 5, 2005 (the "Note"). The Amendment Agreement brought the financial covenants in the Note in line with those in the B of A Credit Facility and modified the redemption provisions of the Note by extending each redemption date by 45 days, reducing one of the EBITDA measurement periods from 12 months to 6 months, and adjusting the notice time periods for redemption. We also entered into a new Intercreditor Agreement with Bank of America and the holder of our Note that replaced the Intercreditor Agreement between Fortress Credit Corp and the holder of our Note. The replacement Intercreditor Agreement is on substantially the same terms as the original Intercreditor Agreement, but was modified to reflect the changes in the redemption provisions of the Note.

F-27

MODTECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

Schedule II—Valuation and Qualifying Accounts

Description	Balance at beginning of year		Acquired through acquisition		Amounts charged to expense		Deductions			Balance at end of year
Allowance for contract adjustments:
Year ended December 31, 2003	$	1,425,000	$	—	$	282,000	$	(645,000	)	$	1,062,000
Year ended December 31, 2004	$	1,062,000	$	—	$	500,000	$	(36,000	)	$	1,526,000
Year ended December 31, 2005	$	1,526,000	$	—	$	731,000	$	(1,641,000	)	$	616,000

F-28

Exhibits

Exhibit Number	Name of Exhibit
3.1(1)	Certificate of Incorporation of the Company.
3.2(2)	Bylaws of the Company.
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 2002 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 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, dated December 31, 2004
10.14(6)	Senior Subordinated Secured Convertible Note, dated December 31, 2004
10.15(6)	Warrant to Purchase Common Stock issued December 31, 2004, dated December 31, 2004
10.16(6)	Registration Rights Agreement, dated December 31, 2004
10.17(6)	Pledge and Security Agreement, dated December 31, 2004
10.18(6)	Intercreditor Agreement, dated December 31, 2004
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.
10.21(8)	Amendment Number 1 to Industrial Real Estate Lease between Modtech Holdings, Inc. and BMG2 Enterprises, dated July 29, 2005
10.22(8)	Sublease between Modtech Holdings, Inc. and Boise Building Solutions Distribution, L.L.C., dated July 29, 2005
10.23(9)	Securities Purchase Agreement with Modtech Holdings, Inc. dated August 5, 2005
10.24(9)	First Amendment and Waiver of Financing Agreement between Fortress and Modtech Holdings, Inc., dated August 5, 2005
10.25(9)	First Amendment and Restated Registration Rights Agreement, dated August 5, 2005
10.26(9)	Amended and Restated Senior Subordinated Secured Convertible Note, dated August 5, 2005
10.27(9)	Consent, Waiver, Amendment and Exchange Agreement, dated August 5, 2005 (“Waiver”)
10.28(9)	Form of Voting Agreement executed pursuant to Waiver
10.29(9)	Form of Lock Up Letter executed pursuant to the Securities Purchase Agreement, dated August 5, 2005

Exhibit Number	Name of Exhibit
10.30(9)	Form of Warrant issued pursuant to the Securities Purchase Agreement, dated August 5, 2005
10.31(9)	Warrant for 8,276 shares of common stock, dated August 5, 2005
10.32(10)	Second Amendment of Financing Agreement between Fortress and Modtech Holdings, Inc., dated September 19, 2005
10.32(11)	Third Amendment of Financing Agreement between Fortress and Modtech Holdings, Inc., dated December 22, 2005
10.33	Intercreditor Agreement dated March 31, 2006
10.34	Loan and Security Agreement dated March 31, 2006
10.35	Amendment Agreement dated March 31, 2006
23.1	Consent of Independent Registered Public Accounting Firm — Peterson & Co., LLP
23.2	Consent of Independent Registered Public Accounting Firm - KPMG LLP
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, Inc.’s Registration Statement on Form S-1 filed 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).
(8)	Incorporated by reference to Modtech Holdings, Inc.’s Form 10-Q/A filed with the Commission on October 17, 2005 (Commission File No. 000-25161).
(9)	Incorporated by reference to Modtech Holdings, Inc.’s Form 8-K filed with the Commission on August 9, 2005 (Commission File No. 000-25161).
(10)	Incorporated by reference to Modtech Holdings, Inc.’s Form 8-K filed with the Commission on September 23, 2005 (Commission File No. 000-25161).
(11)	Incorporated by reference to Modtech Holdings, Inc.’s Form 8-K filed with the Commission on December 29, 2005 (Commission File No. 000-25161)

EX-10.33

Exhibit 10.33

INTERCREDITOR AGREEMENT

This INTERCREDITOR AGREEMENT (“Agreement”), is dated as of March __, 2006, and entered into by and among MODTECH HOLDINGS, INC. (the “Company”), BANK OF AMERICA, N.A. (“Bank of America”), in its capacity as collateral agent and representative for the First Lien Obligations (as defined below) (in such capacity, together with any replacement or successor collateral agent and representative the “First Lien Collateral Agent”), and AMPHORA LIMITED, an exempt company organized under the laws of the Cayman Islands (“Amphora”), in its capacity as collateral agent and representative for the Second Lien Obligations (as defined below), (in such capacity, together with any replacement or successor collateral agent and representative the “Second Lien Collateral Agent”). Capitalized terms used in this Agreement have the meanings assigned to them in Section 1 below.

RECITALS

The Company, the lenders and agents party thereto, and Bank of America, as Agent, have entered into that Loan and Security Agreement dated as of even date herewith, providing for a revolving credit facility (as Refinanced from time to time, the “First Lien Credit Agreement”);

The Company and the lenders party thereto entered into that Securities Purchase Agreement dated as of December 31, 2004, providing for the issuance of convertible senior subordinated notes (as Refinanced from time to time in accordance with the terms of this Agreement, the “Second Lien Credit Agreement”);

Pursuant to (i)  the First Lien Credit Agreement, certain current Subsidiaries of the Company have agreed to guaranty the First Lien Obligations and the Company has agreed to cause certain future Subsidiaries of the Company to guaranty the First Lien Obligations (as Refinanced from time to time the “First Lien Subsidiary Guaranty”); and (ii) the Second Lien Credit Agreement, certain current Subsidiaries of the Company have guarantied the Second Lien Obligations and the Company has agreed to cause certain future Subsidiaries of the Company to guaranty the Second Lien Obligations (as Refinanced from time to time in accordance with the terms of this Agreement, the “Second Lien Subsidiary Guaranty”);

The obligations of the Company under the First Lien Credit Agreement and any Bank Products with the First Lien Lenders (or any of their Affiliates) and the obligations of the Subsidiaries under the First Lien Subsidiary Guaranty will be secured on a first priority basis by liens on all the assets of the Company and certain Subsidiaries (such current and future Subsidiaries of the Company providing a guaranty thereof, the “Guarantor Subsidiaries”), respectively, pursuant to the terms of the First Lien Collateral Documents;

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The obligations of the Company under the Second Lien Credit Agreement and the obligations of the Subsidiaries under the Second Lien Subsidiary Guaranty will be secured on a second priority basis by liens on substantially all the assets of the Company and the Guarantor Subsidiaries, respectively, pursuant to the terms of the Second Lien Collateral Documents;

The First Lien Loan Documents and the Second Lien Loan Documents provide, among other things, that the parties thereto shall set forth in this Agreement their respective rights and remedies with respect to the Collateral; and

In order to induce the First Lien Collateral Agent and the First Lien Claimholders to extend and maintain credit and other financial accommodations and lend monies to or for the benefit of the Company, or any other Grantor, the Second Lien Collateral Agent on behalf of the Second Lien Claimholders has agreed to the intercreditor and other provisions set forth in this Agreement.

AGREEMENT

In consideration of the foregoing, the mutual covenants and obligations herein set forth and for other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

SECTION 1.Definitions.

1.1Defined Terms. As used in the Agreement, the following terms shall have the following meanings:

“Affiliate” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the Person specified. For purposes of this definition, a Person shall be deemed to “control” or be “controlled by” a Person if such Person possesses, directly or indirectly, power to direct or cause the direction of the management or policies of such Person whether through ownership of equity interests, by contract or otherwise.

“Agreement” means this Intercreditor Agreement.

“Asset Sale” has the meaning assigned to that term in the First Lien Credit Agreement.

“Bank Products” means any of the following products, services or facilities extended to the Company or any of its Subsidiaries by Bank of America or any of its Affiliates: (a) Cash Management Services (as defined in the First Lien Credit Agreement); (b) products under Hedge Agreements; (c) commercial credit card and merchant card services; and (d) other banking products or services as may be requested by the Company or any of its Subsidiaries.

“Bank Product Obligation” of any Person means any obligation of such Person pursuant to any Bank Products, including, but not limited to Hedging Obligations.

“Bankruptcy Code” means Title 11 of the United States Code entitled “Bankruptcy,” as now and hereafter in effect, or any successor statute.

“Bankruptcy Law” means the Bankruptcy Code and any similar federal, state or foreign law for the relief of debtors.

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“Business Day” means a day other than a Saturday, Sunday or other day on which commercial banks in New York City or Los Angeles, California are authorized or required by law to close.

“Collateral” means all of the assets and property of any Grantor, whether real, personal or mixed, constituting either First Lien Collateral or Second Lien Collateral; provided, however, that in no event shall Collateral include the irrevocable standby letter of credit no. SLCLSTL01562, dated, December 31, 2004, issued by U.S. Bank National Association for the Company’s account for benefit of Amphora Limited, in the maximum amount of $10,000,000 to secure certain of the Second Lien Obligations (as renewed or extended from time to time, the “Second Lien Letter of Credit”), or drawings thereunder or proceeds thereof, but shall include any collateral pledged to the issuer thereof to support such letter of credit.

“Collateral Documents” means this Agreement, the First Lien Collateral Documents and the Second Lien Collateral Documents.

“Company” has the meaning assigned to that term in the Preamble to this Agreement.

“Comparable Second Lien Collateral Document” means, in relation to any Collateral subject to any Lien created under any First Lien Collateral Document, that Second Lien Loan Document which creates a Lien on the same Collateral, granted by the same Grantor.

“Currency Agreement” means any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement or arrangement, each of which is for the purpose of hedging the foreign currency risk associated with the Company’s and its Subsidiaries’ operations and not for speculative purposes.

“DIP Financing” has the meaning assigned to that term in Section 6.1.

“Discharge of First Lien Obligations” means, except to the extent otherwise expressly provided in Section 5.5 and subject to Section 6.5:

(a)payment in full in cash of the principal of and interest (including interest accruing on or after the commencement of any Insolvency or Liquidation Proceeding, whether or not such interest would be allowed in such Insolvency or Liquidation Proceeding), and premium, if any, on all Indebtedness outstanding under the First Lien Loan Documents constituting First Lien Obligations;

(b)payment in full in cash under any Bank Product Obligations entered into with a First Lien Claimholder (or any of their Affiliates) constituting First Lien Obligations;

(c)payment in full in cash of all other First Lien Obligations that are due and payable or otherwise accrued and owing at or prior to the time such principal and interest are paid;

3

(d)termination or expiration of all commitments, if any, to extend credit that would constitute First Lien Obligations; and

(e)termination (without any prior demand for payment thereunder having been made or, if made, with such demand having been fully reimbursed in cash) or cash collateralization (in an amount and manner, and on terms, satisfactory to the First Lien Collateral Agent) of all letters of credit issued constituting First Lien Obligations under the First Lien Loan Documents.

“Disposition” has the meaning assigned to that term in Section 5.1(b).

“First Lien Claimholders” means, at any relevant time, the holders of First Lien Obligations at that time, including without limitation the First Lien Lenders (or any Lender Counterparty) and the agents under the First Lien Loan Documents.

“First Lien Collateral Agent” has the meaning assigned to that term in the Recitals to this Agreement.

“First Lien Collateral” means all of the assets and property of any Grantor, whether real, personal or mixed, in which a Lien is purported to be granted as security for any First Lien Obligations.

“First Lien Collateral Documents” means the First Lien Credit Agreement (but only the security agreement provisions of such loan and security agreement), the First Lien Mortgages, and any other agreement, document or instrument which is intended to grant to the First Lien Collateral Agent or any of the First Lien Claimholders a Lien securing any First Lien Obligations or under which rights or remedies with respect to such Liens are governed, as each may be Refinanced from time to time in accordance with the terms hereof and thereof.

“First Lien Credit Agreement” has the meaning assigned to that term in the Recitals to this Agreement.

“First Lien Lenders” means the “Lenders” under and as defined in the First Lien Loan Documents, and any successor to, or replacements of, such Lenders.

“First Lien Loan Documents” means the First Lien Credit Agreement and the Loan Documents (as defined in the First Lien Credit Agreement) and each of the other agreements, documents and instruments providing for or evidencing or relating to any other First Lien Obligation, and any other agreement, writing, document or instrument executed or delivered at any time in connection with any First Lien Obligations, including any intercreditor or joinder agreement among holders of First Lien Obligations, to the extent such are effective at the relevant time, as each may be Refinanced from time to time in accordance with the terms hereof and thereof.

“First Lien Mortgages” means a collective reference to each mortgage, deed of trust and other document or instrument under which any Lien on real property owned or leased by any Grantor is purported to be granted to secure any First Lien Obligations or under which rights or remedies with respect to any such Liens are governed.

4

“First Lien Obligations” means, subject to the next sentence, all Obligations, whether outstanding or contingent, evidenced by or arising under: (i) the First Lien Credit Agreement, (ii) any of the other First Lien Loan Documents, and/or (iii) agreements relating to Bank Products entered into with any First Lien Lender (or any Lender Counterparty). “First Lien Obligations” shall include: (a) all interest accrued or accruing (or which would, absent commencement of an Insolvency or Liquidation Proceeding (and the effect of provisions such as Section 502(b)(2) of the Bankruptcy Code), accrue) after commencement of an Insolvency or Liquidation Proceeding in accordance with the rate specified in the relevant First Lien Loan Document whether or not the claim for such interest is allowed as a claim in such Insolvency or Liquidation Proceeding; and (b) any and all fees and expenses (including attorneys’ and/or financial consultants’ fees and expenses) incurred by the First Lien Collateral Agent or the other First Lien Claimholders after the commencement of an Insolvency or Liquidation Proceeding, whether or not the claim for fees and expenses is allowed under Section 506(b) of the Bankruptcy Code or any other provision of the Bankruptcy Code or Bankruptcy Law as a claim in such Insolvency or Liquidation Proceeding.

Notwithstanding the foregoing, if the sum of: (1) Indebtedness constituting principal outstanding under the First Lien Credit Agreement and the other First Lien Loan Documents plus (2) the aggregate face amount of any letters of credit issued under the First Lien Credit Agreement, is in excess of $57,000,000 in the aggregate (the “Cap Amount”), then any such principal and reimbursement obligations with respect to such letters of credit in excess of the Cap Amount (collectively, the “Excluded First Lien Obligations”) shall not be included in First Lien Obligations solely for purposes of this Agreement.

“First Lien Subsidiary Guaranty” has the meaning assigned to that term in the Recitals to this Agreement.

“Governmental Authority” means any federal, state, municipal, national or other government, governmental department, commission, board, bureau, court, agency or instrumentality or political subdivision thereof or any entity or officer exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to any government or any court, in each case whether associated with a state of the United States, the United States, or a foreign entity or government.

“Grantors” means the Company, each of the Guarantor Subsidiaries and each other Person that may from time to time hereafter execute and deliver a First Lien Collateral Document or a Second Lien Collateral Document as a “Grantor” (or the equivalent thereof).

“Guarantor Subsidiaries” has the meaning set forth in the Recitals to this Agreement.

“Hedge Agreements” means an Interest Rate Agreement or a Currency Agreement entered into with a Lender Counterparty and a Grantor.

5

“Hedging Obligation” of any Person means any obligation of such Person pursuant to any Hedge Agreements.

“Indebtedness” means and includes all Obligations that constitute “Debt” within the meaning of the First Lien Credit Agreement or “Indebtedness” within the meaning of the Second Lien Credit Agreement, as applicable.

“Insolvency or Liquidation Proceeding” means:

(a)any voluntary or involuntary case or proceeding under the Bankruptcy Code with respect to any Grantor;

(b)any other voluntary or involuntary insolvency, reorganization or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding with respect to any Grantor or with respect to a material portion of their respective assets;

(c)any liquidation, dissolution, reorganization or winding up of any Grantor whether voluntary or involuntary and whether or not involving insolvency or bankruptcy other than any liquidation, dissolution, reorganized or winding up permitted by the terms of the First Lien Credit Agreement; or

(d)any general assignment for the benefit of creditors or any other marshaling of assets and liabilities of any Grantor.

“Interest Rate Agreement” means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedging agreement or other similar agreement or arrangement each of which is for the purposes of hedging the interest rate exposure associated with the Company’s and its Subsidiaries’ operations and not for speculative purposes.

“Lender Counterparty” means each First Lien Lender or any Affiliate of a First Lien Lender counterparty to a Hedge Agreement or other agreement relating to Bank Products (including any Person who is a First Lien Lender (and any Affiliate thereof) as of the date hereof but subsequently, whether before or after entering into a Hedge Agreement or such other agreement relating to Bank Products, ceases to be a First Lien Lender) including, without limitation, each such Affiliate that enders into a joinder agreement with the First Lien Collateral Agent.

“Lien” means any lien, mortgage, pledge, assignment, security interest, charge or encumbrance of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, and any lease in the nature thereof) and any option, trust, UCC financing statement or other preferential arrangement having the practical effect of any of the foregoing.

“Lien Enforcement Action” means: (a) the taking of any action to enforce or realize upon any Lien, (b) the exercise of any right or remedy provided to a secured creditor on account of a Lien under any of the Collateral Documents or under applicable law, including the election to retain any collateral in satisfaction of a Lien, (c) the taking of any action or the exercise of any right or remedy in respect of the collection on, set off against, marshaling of, or foreclosure on the Collateral (including, without limitation, the notification of account debtors), (d) the sale, lease, license, or other disposition of all or any portion of the Collateral by private or public sale or any other means permissible under applicable law, (e) the exercise of any other right of a secured creditor under Article 9 of the UCC, (f) the adjustment of any insurance claim, and (g) the commencement of any legal proceedings against the Company or any other Grantor or with respect to any Collateral for any relief described in clauses (a) though (f) above.

6

“New Agent” has the meaning assigned to that term in Section 5.5.

“Obligations” means all obligations of every nature of each Grantor from time to time owed to any agent or trustee, the First Lien Claimholders, the Second Lien Claimholders or any of them or their respective Affiliates under the First Lien Loan Documents, the Second Lien Loan Documents or agreements relating to Bank Products, including, without limitation, (a) any principal of or interest or premium on any indebtedness, including any reimbursement obligation in respect of any letter of credit, or any other liability, including interest accruing after the filing of a petition initiating any proceeding under the Bankruptcy Code, (b) any fees, indemnification obligations, charges, costs, expense reimbursement obligations or other liabilities payable under the documentation governing any indebtedness, (c) any obligation to post cash collateral in respect of letters of credit or any other obligations, (d) in the case of the First Lien Obligations, any Bank Product Obligations (including payments for early termination), and (e) all performance obligations under the documentation governing any indebtedness, in each case, whether direct or indirect, absolute or contingent, joint or several, in each case, whether or not the claim for such amounts is allowed under Section 506(b) of the Bankruptcy Code or any other provision of the Bankruptcy Code or Bankruptcy Law as a claim in an Insolvency or Liquidation Proceeding.

“Person” means any natural person, corporation, limited liability company, limited liability partnerships, trust, joint venture, association, company, bank, general or limited partnership, Governmental Authority or other entity or organization, whether or not legal entities.

“Pledged Collateral” has the meaning set forth in Section 5.4(a).

“Recovery” has the meaning set forth in Section 6.5.

“Refinance” means, in respect of any Indebtedness or any First Lien Loan Documents or Second Lien Loan Documents with respect to any Indebtedness, to refinance, extend, renew, defease, amend, modify, supplement, restructure, replace, refund or repay, or to issue other indebtedness in exchange or replacement for, such Indebtedness or any First Lien Loan Documents or Second Lien Loan Documents in whole or in part, whether pursuant to one or more agreements, with the same and/or different lenders and/or agents. “Refinanced” and “Refinancing” shall have correlative meanings.

7

“Second Lien Claimholders” means, at any relevant time, the holders of Second Lien Obligations at that time, including without limitation the Second Lien Lenders and the agents under the Second Lien Loan Documents.

“Second Lien Collateral” means all of the assets and property of any Grantor, whether real, personal or mixed, with respect to which a Lien is purported to be granted as security for any Second Lien Obligations.

“Second Lien Collateral Agent” has the meaning assigned to that term in the Preamble of this Agreement.

“Second Lien Collateral Documents” means the Pledge and Security Agreement (as defined in the Second Lien Credit Agreement, as in effect on the date hereof), the Second Lien Mortgages, and any other agreement, document or instrument which is intended to grant to the Second Lien Collateral Agent or any of the Second Lien Claimholders a Lien securing any Second Lien Obligations or under which rights or remedies with respect to such Liens are governed as each may be Refinanced from time to time in accordance with the terms hereof and thereof.

“Second Lien Credit Agreement” has the meaning assigned to that term in the Recitals to this Agreement.

“Second Lien Lenders” means the “Lenders” under and as defined in the Second Lien Credit Agreement, and any successors to, or replacements of, such Lenders.

“Second Lien Letter of Credit” has the meaning set forth in the definition of “Collateral” herein.

“Second Lien Loan Documents” means the Second Lien Credit Agreement, the Second Lien Notes and the Transaction Documents (as defined in the Second Lien Credit Agreement) and each of the other agreements, documents and instruments providing for or evidencing or relating to any other Second Lien Obligation, and any other agreement, writing, document or instrument executed or delivered at any time in connection with any Second Lien Obligations, including any intercreditor or joinder agreement among holders of Second Lien Obligations to the extent such are effective at the relevant time, as each may be amended, restated, supplemented, modified, renewed, extended or Refinanced from time to time in accordance with the provisions hereof and thereof.

“Second Lien Mortgages” means a collective reference to each mortgage, deed of trust and any other document or instrument under which any Lien on real property owned or leased by any Grantor is purported to be granted to secure any Second Lien Obligations or under which rights or remedies with respect to any such Liens are governed.

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“Second Lien Notes” means the Amended and Restated Senior Subordinated Secured Convertible Notes, dated as of August 5, 2005, issued by the Company in favor of the Second Lien Lenders, in the original aggregate principal amount of $25,900,000, as amended by the Amendment Agreement, dated as of even date herewith, between the Company and the Second Lien Lenders, and as otherwise Refinanced from time to time in accordance with the terms hereof and thereof.

“Second Lien Obligations” means all Obligations, whether outstanding or contingent, evidenced by or arising under: (i) the Second Lien Credit Agreement and/or (ii) any of the other Second Lien Loan Documents. “Second Lien Obligations” shall include: (a) all interest accrued or accruing (or which would, absent commencement of an Insolvency or Liquidation Proceeding (and the effect of provisions such as Section 502(b)(2) of the Bankruptcy Code), accrue) after commencement of an Insolvency or Liquidation Proceeding in accordance with the rate specified in the relevant Second Lien Loan Document whether or not the claim for such interest is allowed as a claim in such Insolvency or Liquidation Proceeding; and (b) any and all fees and expenses (including attorneys’ and/or financial consultants’ fees and expenses) incurred by the Second Lien Collateral Agent or the other Second Lien Claimholders after the commencement of an Insolvency or Liquidation Proceeding, whether or not the claim for fees and expenses is allowed under Section 506(b) of the Bankruptcy Code or any other provision of the Bankruptcy Code or Bankruptcy Law as a claim in such Insolvency or Liquidation Proceeding.

“Second Lien Subsidiary Guaranty” has the meaning assigned to that term in the Recitals to this Agreement.

“Standstill Period” has the meaning set forth in Section 3.1(a)(5).

“Subsidiary” means, with respect to any Person, any corporation, partnership, limited liability company, association, joint venture or other business entity of which more than 50% of the total voting power of shares of stock or other ownership interests entitled (without regard to the occurrence of any contingency) to vote in the election of the Person or Persons (whether directors, managers, trustees or other Persons performing similar functions) having the power to direct or cause the direction of the management and policies thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof.

“UCC” means the Uniform Commercial Code (or any similar or equivalent legislation) as in effect in any applicable jurisdiction.

1.2Terms Generally. The definitions of terms in this Agreement shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.” The word “will” shall be construed to have the same meaning and effect as the word “shall.” Unless the context requires otherwise:

(a)any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, restated, supplemented, modified, renewed or extended subject to the limitations set forth herein;

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(b)any reference herein to any Person shall be construed to include such Person’s permitted successors and assigns;

(c)the words “herein,” “hereof” and “hereunder,” and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof;

(d)all references herein to Sections shall be construed to refer to Sections of this Agreement; and

(e)the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.

SECTION 2.Lien Priorities.

2.1Relative Priorities. Notwithstanding the date, time, method, manner or order of grant, attachment or perfection of any Liens securing the Second Lien Obligations granted on the Collateral or of any Liens securing the First Lien Obligations granted on the Collateral and notwithstanding any provision of the UCC, or any statutory, decisional or other applicable law that would provide for a contrary ordering of priorities, or the Second Lien Loan Documents or any defect or deficiencies in, or failure to perfect, the Liens securing the First Lien Obligations or any other circumstance whatsoever, each of the Grantors, the First Lien Collateral Agent, and the Second Lien Collateral Agent, on behalf of itself and the Second Lien Claimholders, hereby acknowledges and agrees that:

(a)any Lien purported to be granted on the Collateral securing any First Lien Obligations now or hereafter held by or on behalf of the First Lien Collateral Agent or any First Lien Claimholders or any agent or trustee therefor, regardless of how or when acquired, whether by grant, possession, statute, operation of law, subrogation or otherwise, shall be “first” priority and senior in all respects and prior to any Lien on the Collateral securing any Second Lien Obligations; and

(b)any Lien purported to be granted on the Collateral securing any Second Lien Obligations now or hereafter held by or on behalf of the Second Lien Collateral Agent, any Second Lien Claimholders or any agent or trustee therefor regardless of how acquired, whether by grant, possession, statute, operation of law, subrogation or otherwise, shall be “second” priority and junior and subordinate and subject in all respects to all Liens on the Collateral securing any First Lien Obligations. All Liens on the Collateral securing any First Lien Obligations shall be and remain senior in all respects and prior to all Liens on the Collateral securing any Second Lien Obligations for all purposes, whether or not such Liens securing any First Lien Obligations are subordinated to any Lien securing any other obligation of the Company, any other Grantor or any other Person.

2.2Prohibition on Contesting Liens. Each of the Second Lien Collateral Agent, for itself and on behalf of each Second Lien Claimholder, and the First Lien Collateral Agent, for itself and on behalf of each First Lien Claimholder, agrees that it will not (and hereby waives any right to) contest or support any other Person in contesting, in any proceeding (including any Insolvency or Liquidation Proceeding), (i) the priority, validity or enforceability of a Lien held by or on behalf of any of the First Lien Claimholders in the First Lien Collateral or by or on behalf of any of the Second Lien Claimholders in the Second Lien Collateral, as the case may be; provided that nothing in this Agreement shall be construed to prevent or impair the rights of the First Lien Collateral Agent or any First Lien Claimholder to enforce this Agreement, including the provisions of this Agreement relating to the priority of the Liens securing the First Lien Obligations as provided in Sections 2.1 and 3.1, (ii) the validity or enforceability of any Collateral Documents (including this Agreement) or any Obligation or other obligation thereunder, or (iii) except as expressly set forth herein, the relative rights and duties of the First Lien Claimholders and the Second Lien Claimholders granted and/or established pursuant to this Agreement or any other Collateral Document.

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2.3No New Liens. So long as the Discharge of First Lien Obligations has not occurred, whether or not any Insolvency or Liquidation Proceeding has been commenced by or against the Company or any other Grantor, the parties hereto agree that the Company shall not, and shall not permit any other Grantor to grant or permit (and the Second Lien Claimholders agree that they shall not receive) any additional Liens, or take any action to perfect a Lien, on any asset or property to secure any Second Lien Obligation unless a first priority Lien is granted to the First Lien Collateral Agent on such asset or property to secure the First Lien Obligations. To the extent that the foregoing provisions are not complied with for any reason, without limiting any other rights and remedies available to the First Lien Collateral Agent and/or the First Lien Claimholders, the Second Lien Collateral Agent, on behalf of Second Lien Claimholders, agrees that any amounts received by or distributed to any of them pursuant to or as a result of Liens granted in contravention of this Section 2.3 shall be subject to Section 4.2.

SECTION 3.Enforcement.

3.1Exercise of Remedies.

(a)Except as otherwise permitted by Section 3.1(c), until the Discharge of First Lien Obligations has occurred, whether or not any Insolvency or Liquidation Proceeding has been commenced by or against the Company or any other Grantor, the Second Lien Collateral Agent and the Second Lien Claimholders:

(1)will not exercise or seek to exercise any rights or remedies with respect to any Collateral (including, without limitation, the exercise of any right of setoff or any right under any lockbox agreement, account control agreement, landlord waiver or bailee’s letter or similar agreement or arrangement to which the Second Lien Collateral Agent or any Second Lien Claimholder is a party) or institute any action or proceeding with respect to such rights or remedies (including any action of foreclosure) or take any other Lien Enforcement Action;

(2)will not contest, protest or object to any foreclosure proceeding or action brought by the First Lien Collateral Agent or any First Lien Claimholder or any other exercise by the First Lien Collateral Agent or any First Lien Claimholder of any rights and remedies relating to the Collateral under the First Lien Loan Documents or otherwise;

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(3)will not object to the forbearance by the First Lien Collateral Agent or the First Lien Claimholders from bringing or pursuing any foreclosure proceeding or action or any other exercise of any rights or remedies relating to the Collateral, in each case so long as the Liens granted to secure the Second Lien Obligations of the Second Lien Claimholders attach to the proceeds thereof subject to the relative priorities described in Section 2;

(4)will not initiate or join in or petition for or vote in favor of any resolution for or instigate or support, any Insolvency or Liquidation Proceeding; and

(5)will not:

(i)accelerate any payment of all or any of the Second Lien Obligations;

(ii)collect the Second Lien Obligations or any part thereof other than in common equity of the Company;

(iii)enforce any right of repayment of any Second Lien Obligations other than in common equity of the Company; or

(iv)initiate (or join in) or file or prosecute any proceeding or judicial action with respect to the Second Lien Obligations;

provided that, upon 5 Business Days prior written notice to the First Lien Collateral Agent after the Standstill Period, to the extent permitted by the terms of the Second Lien Loan Documents, the Second Lien Collateral Agent may accelerate the Second Lien Obligations and may, subject to the terms of clause (4) above and the other provisions of this Agreement, file and prosecute a lawsuit to collect the Second Lien Obligations.

As used in this Section 3.1(a)(5), the term “Standstill Period” means the period beginning on the occurrence of an Event of Default under and as defined in the Second Lien Loan Documents and ending on the date that is 540 days following the latest date after both (1) any Second Lien Collateral Agent shall have given notice (making specific reference to this Section 3.1(a)(5) and describing such Event of Default that is subject to such notice) to the First Lien Collateral Agent that any such Event of Default under the Second Lien Loan Documents shall have occurred and be continuing and of such Second Lien Collateral Agent’s intent to exercise rights and remedies and (2) the commencement of material work under all of the contracts that any of the Grantors then have entered into as of the time of the delivery of the notice in the preceding clause (1), except for any contracts, which individually or in the aggregate, as of such date would not entitle the Company to aggregate payments in excess of $1,000,000.

(b)Until the Discharge of First Lien Obligations has occurred, whether or not any Insolvency or Liquidation Proceeding has been commenced by or against the Company or any other Grantor, the First Lien Collateral Agent and the First Lien Claimholders shall have the exclusive right to manage, perform and enforce the terms of the First Lien Loan Documents in respect of the Collateral, to exercise and enforce rights, exercise remedies (including set-off and the right to credit bid their debt) and make determinations in its sole discretion regarding the release, disposition, or restrictions with respect to the Collateral, including, without limitation, the exclusive right to take or retake control or possession of the Collateral and to hold, prepare for sale, process, lease, sell, dispose of or liquidate the Collateral, all without any consultation with or the consent of the Second Lien Collateral Agent or any Second Lien Claimholder. In exercising rights and remedies with respect to the Collateral, the First Lien Collateral Agent and the First Lien Claimholders may enforce the provisions of the First Lien Loan Documents and exercise remedies thereunder, all in such order and in such manner as they may determine in the exercise of their sole discretion. Such exercise and enforcement shall include the rights of an agent appointed by them to sell or otherwise dispose of Collateral upon foreclosure, to incur expenses in connection with such sale or disposition, and to exercise all the rights and remedies of a secured creditor under the UCC and of a secured creditor under Bankruptcy Laws of any applicable jurisdiction.

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(c)Notwithstanding anything in this Agreement to the contrary (except as specifically provided below), the Second Lien Collateral Agent and any Second Lien Claimholder may, at any time and from time to time:

(1)file a claim or statement of interest with respect to the Second Lien Obligations; provided that an Insolvency or Liquidation Proceeding has been commenced by or against the Company or any other Grantor by or on behalf of someone other than a Second Lien Claimholder;

(2)take any action (not adverse to the priority status of the Liens on the Collateral securing the First Lien Obligations, or the rights of any First Lien Collateral Agent or the First Lien Claimholders to exercise remedies in respect thereof) in order to create, perfect or maintain its Lien on the Collateral, subject to the terms of this Agreement;

(3)ask the Company for and/or, subject to Section 4.3 hereof, scheduled payments with respect to Second Lien Obligations required to be made in accordance with the terms of the Second Lien Loan Documents then due and owing, but without acceleration of the maturity of such obligations;

(4)exercise any and all of their rights and remedies in respect of any conversion or redemption of, or any other payment of, any Second Lien Obligations solely into common equity of the Company; and

(5)sell, assign or otherwise transfer any and all of the Second Lien Obligations and their rights relating thereto, subject to and in compliance with the provisions of this Agreement, so long as any such subsequent holder agrees in writing to be bound by the terms of this Agreement.

The Second Lien Collateral Agent, on behalf of itself and the Second Lien Claimholders, agrees that it will not take or receive any Collateral or any proceeds of Collateral in connection with the exercise of any right or remedy (including set-off) with respect to any Collateral, unless and until the Discharge of First Lien Obligations has occurred. Without limiting the generality of the foregoing, unless and until the Discharge of First Lien Obligations has occurred, except as expressly provided in Section 3.1(c), the sole right of the Second Lien Collateral Agent and the Second Lien Claimholders with respect to the Collateral is to hold a Lien on the Collateral pursuant to the Second Lien Collateral Documents for the period and to the extent granted therein and to receive a share of the proceeds thereof, if any, after the Discharge of First Lien Obligations has occurred.

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(d)(1)The Second Lien Collateral Agent, for itself and on behalf of the Second Lien Claimholders, agrees that the Second Lien Collateral Agent and the Second Lien Claimholders will not take any action that would hinder, delay, limit or prohibit any exercise of remedies under the First Lien Loan Documents or is otherwise prohibited hereunder, including any sale, lease, exchange, transfer or other disposition of the Collateral, whether by foreclosure or otherwise or that would limit, invalidate, avoid or set aside any Lien or Collateral Document or subordinate the priority of the First Lien Obligations to the Second Lien Obligations or afford the Liens securing the Second Lien Obligations equal ranking to the Liens securing the First Lien Obligations;

(2)the Second Lien Collateral Agent, for itself and on behalf of the Second Lien Claimholders, hereby waives any and all rights it or the Second Lien Claimholders may have as a junior lien creditor or otherwise (whether arising under the UCC or any other law) to object to the manner in which the First Lien Collateral Agent or the First Lien Claimholders seek to enforce or collect the First Lien Obligations or the Liens securing the First Lien Obligations granted in any of the First Lien Collateral, regardless of whether any action or failure to act by or on behalf of the First Lien Collateral Agent or First Lien Claimholders is adverse to the interest of the Second Lien Claimholders; and

(3)the Second Lien Collateral Agent hereby acknowledges and agrees that no covenant, agreement or restriction contained in the Second Lien Collateral Documents or any other Second Lien Loan Document shall be deemed to restrict in any way the rights and remedies of the First Lien Collateral Agent or the First Lien Claimholders with respect to the Collateral as set forth in this Agreement and the First Lien Loan Documents.

(e)Except as specifically set forth in Sections 3.1(a) and (d) and subject to Section 3.1(f), the Second Lien Collateral Agent and the Second Lien Claimholders may exercise rights and remedies as unsecured creditors against the Company or any other Grantor that has guaranteed or granted Liens to secure the Second Lien Obligations in accordance with the terms of this Agreement, the Second Lien Loan Documents and applicable law; provided that in the event that any Second Lien Claimholder becomes a judgment Lien creditor in respect of Collateral as a result of its enforcement of its rights as an unsecured creditor with respect to the Second Lien Obligations, such judgment Lien shall be subject to the terms of this Agreement for all purposes (including in relation to the First Lien Obligations and being subordinate thereto) as the other Liens securing the Second Lien Obligations subject to this Agreement.

(f)Except as specifically set forth in Sections 3.1(a) and (d) and Section 4.3, nothing in this Agreement shall prohibit the receipt by the Second Lien Collateral Agent or any Second Lien Claimholders of the required payments of interest, principal and other amounts owed in respect of the Second Lien Obligations so long as both such payment does not constitute proceeds of Collateral and such receipt is not the direct or indirect result of the exercise by the Second Lien Collateral Agent or any Second Lien Claimholders of rights or remedies as a secured creditor (including set-off) or enforcement in contravention of this Agreement of any Lien held by any of them. Nothing in this Agreement impairs or otherwise adversely affects any rights or remedies the First Lien Collateral Agent or the First Lien Claimholders may have with respect to the First Lien Collateral.

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SECTION 4.Payments.

4.1Application of Proceeds.

(a)So long as the Discharge of First Lien Obligations has not occurred, whether or not any Insolvency or Liquidation Proceeding has been commenced by or against the Company or any other Grantor, all Collateral or proceeds thereof received or collected in connection with the sale or other disposition of, or collection on, all such Collateral (whether made or effected by a Grantor, a First Lien Claimholder, a Second Lien Claimholder or any other Person) (i) pursuant to the enforcement of any Collateral Document or the exercise of any remedial provision thereunder or under or pursuant to any applicable law, and all proceeds of Collateral that are recovered pursuant to an avoidance action or (ii) that otherwise are to be paid over to or for the account of the First Lien Collateral Agent or any other First Lien Claimholder or the Second Lien Collateral Agent or any other Second Lien Claimholder in accordance with or pursuant to any of the First Lien Loan Documents or any of the Second Lien Loan Documents, together with all other proceeds received by the First Lien Collateral Agent or the Second Lien Collateral Agent hereunder (including all funds received in respect of post-petition interest or fees and expenses) as a result of any such enforcement or the exercise of any such remedial provision or as a result of any distribution of or in respect of any Collateral (whether or not expressly characterized as such, including amounts representing proceeds turned over to any such Grantor or the estate of any such Grantor by First Lien Collateral Agent or any other First Lien Claimholder or the Second Lien Collateral Agent or any other Second Lien Claimholder as a result of any avoidance action) upon or in any Insolvency or Liquidation Proceeding with respect to any Grantor, or the application of any Collateral (or proceeds thereof) to the payment of any of the First Lien Obligations or Second Lien Obligations or any distribution of Collateral (or proceeds thereof) upon the liquidation or dissolution of any Grantor, or the winding up of the assets or business of any Grantor, shall be applied first, to payment of the First Lien Obligations and the provision of cash collateral in respect of issued and outstanding Letters of Credit in accordance with the First Lien Loan Documents and in respect of Bank Products in accordance with the First Lien Loan Documents, and second, to payment of the Second Lien Obligations then due and payable, and third, to payment of Excluded First Lien Obligations and, with respect to Excluded First Lien Obligations consisting of issued and outstanding Letters of Credit and Bank Products, the provision of cash collateral in respect of such Letters of Credit and such Bank Product in accordance with the First Lien Loan Documents.

(b)It is understood and agreed that the Grantors remain jointly and severally liable to the relevant creditors for any deficiency between (x) the amount of the proceeds of the Collateral received by such creditors hereunder and (y) the aggregate amount of the Obligations owing to such creditors.

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4.2Payments Over. So long as the Discharge of First Lien Obligations has not occurred but subject to Section 6.5 in any event, whether or not any Insolvency or Liquidation Proceeding has been commenced by or against the Company or any other Grantor, any Collateral or proceeds thereof (or any distribution in respect of Collateral) (whether or not characterized as such) (including assets or proceeds subject to Liens referred to in the final sentence of Section 2.3) received by the Second Lien Collateral Agent or any Second Lien Claimholders, whether received from any Grantor or any other Person, in connection with the exercise of any right or remedy (including set-off) relating to the Collateral or otherwise that is inconsistent or in contravention of this Agreement shall be segregated and held in trust and forthwith paid over to the First Lien Collateral Agent for the benefit of the First Lien Claimholders in the same form as received, with any necessary endorsements. The First Lien Collateral Agent is hereby authorized to make any such endorsements as agent for the Second Lien Collateral Agent or any such Second Lien Claimholders. This authorization is coupled with an interest and is irrevocable until the Discharge of First Lien Obligations.

4.3No Payment. None of the Second Lien Claimholders (including the Second Lien Collateral Agent) shall accept or receive, call or demand, and none of the Grantors shall make, (x) any payment in respect of the Second Lien Obligations (other than in common equity of the Company) at a time when a “Default” or “Event of Default” exists, or would result from any such payment, under (and as defined in) the First Lien Loan Documents, (y) any voluntary prepayment of any portion of the principal amount (or interest thereon) or other amounts in respect of the Second Lien Obligations (other than in common equity of the Company) or (z) any other payment, mandatory prepayment or redemption (other than in common equity of the Company) of any portion of the principal amount (or interest thereon) or other amounts in respect of the Second Lien Obligations other than in compliance with the terms of First Lien Loan Documents and the Second Lien Loan Documents; provided, however, that (1) the Second Lien Lenders may, at any time, exercise any and all rights under the Second Lien Loan Documents to convert or redeem any of the Second Lien Obligations into common equity of the Company; and (2) so long as both (A) no “Default” or “Event of Default” exists, or would result from any such payment, under (and as defined in) the First Lien Loan Documents, and (B) there will exist at least $3,000,000 of “Availability” as determined on a commercially reasonable basis, in good faith, under (and as defined in) the First Lien Loan Documents, after taking any such payment or redemption into account, the Second Lien Lenders may receive payment of principal in cash at the final scheduled maturity date of the Second Lien Notes, and the Second Lien Lenders may exercise and receive payment of principal in cash from permitted mandatory redemptions of the Second Lien Notes as follows:

(a)subject to the following terms, the Second Lien Lenders shall have the right to cause the Company to redeem up to the following principal amount(s) of the Second Lien Notes on each of the following redemption dates by delivering written notice of the exercise of such right to the Company 30 Trading Days (as defined in the Second Lien Notes) prior to the redemption dates: (i) up to $8.33 million, on August 31, 2006 (“First Redemption Date”); (ii) up to $9.23 million, on August 31, 2007 (“Second Redemption Date”); and (iii) up to $8.33 million, on September 2, 2008 (“Third Redemption Date” and, together with the First Redemption Date and the Second Redemption Date, collectively, the “Redemption Dates”);

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(b)if the Second Lien Lenders elect to redeem any of the Second Lien Notes on the applicable Redemption Dates, the Second Lien Lenders will be required to first use at least $5 million of cash collateral supporting the Second Lien Letter of Credit as repayment proceeds for the First Redemption Date and Second Redemption Date, respectively, to consummate the redemption; provided that such Second Lien Letter of Credit is automatically reduced by the amount of any cash collateral which is released;

(c)in the event the Company is required to redeem any portion of the Second Lien Notes on one of the applicable Redemption Dates, which redemption, under the terms of the Second Lien Loan Documents, (i) triggers the release of cash collateral for the Second Lien Letter of Credit and (ii) thereby reduces the Second Lien Letter of Credit by a corresponding amount of such released cash collateral, the Second Lien Lenders shall be permitted a right of redemption for an amount up to the additional $3.33 million then called for redemption on the applicable Redemption Date, so long as (A) no greater than (1) $3.33 million of redemption proceeds, on the First Redemption Date, and (2) $4.23 million of redemption proceeds, on the Second Redemption Date, are derived from borrowings under the First Lien Loan Documents, (B) the Company has met the conditions referenced in Section 4.3(d) below, (C) with respect to the applicable Redemption Date, the Second Lien Lenders have used at least $5 million of cash collateral securing the Second Lien Letter of Credit towards redemption of the Second Lien Notes on such specific Redemption Date (with the corresponding reduction to the Second Lien Letter of Credit), and (D) no default or event of default then exists, or would result from such payment, under the First Lien Loan Documents;

(d)the redemption conditions referenced above shall be: (i) with respect to the First Redemption Date, the Company meeting one hundred percent (100%) of its budgeted EBITDA (as defined in the First Lien Credit Agreement) as disclosed to the First Lien Collateral Agent on the date hereof for the trailing six-month period ending on June 30, 2006, as evidenced by the delivery of financial statements in compliance with the requirements of the First Lien Credit Agreement together with a certificate signed by the chief financial officer of the Company certifying as to such evidence, and (ii) with respect to the Second Redemption Date, the Company meeting the requirements set out in clause (i) above and meeting at least ninety percent (90%) of its budgeted EBITDA as disclosed to the First Lien Collateral Agent on the date hereof for the trailing twelve-month period ending on June 30, 2007, as evidenced by the delivery of financial statements in compliance with the requirements of the First Lien Credit Agreement together with a certificate signed by the chief financial officer of the Company certifying as to such evidence.

SECTION 5.Other Agreements.

5.1Releases.

(a)If, in connection with the exercise of the First Lien Collateral Agent’s remedies in respect of the Collateral provided for in Section 3.1, the First Lien Collateral Agent, for itself or on behalf of any of the First Lien Claimholders, releases any of its Liens on any part of the Collateral or releases any Grantor from its obligations under its guaranty of the First Lien Obligations, then the Liens, if any, of the Second Lien Collateral Agent, for itself or for the benefit of the Second Lien Claimholders, on such Collateral, and the obligations of such Grantor under its guaranty of the Second Lien Obligations, shall be automatically, unconditionally and simultaneously released. The Second Lien Collateral Agent, for itself or on behalf of any such Second Lien Claimholders, promptly shall execute and deliver to the First Lien Collateral Agent or such Grantor such termination statements, releases and other documents as the First Lien Collateral Agent or such Grantor may request to effectively confirm such release.

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(b)If in connection with any sale, lease, exchange, transfer or other disposition of any Collateral (collectively, a “Disposition”) permitted under the terms of the First Lien Loan Documents or consented to by the First Lien Claimholders (other than the exercise of the First Lien Collateral Agent’s remedies in respect of the Collateral provided for in Section 3.1), the First Lien Collateral Agent, for itself or on behalf of any of the First Lien Claimholders, releases any of its Liens on any part of the Collateral, or releases any Grantor from its obligations under its guaranty of the First Lien Obligations, then the Liens, if any, of the Second Lien Collateral Agent, for itself or for the benefit of the Second Lien Claimholders, on such Collateral, and the obligations of such Grantor under its guaranty of the Second Lien Obligations, shall be automatically, unconditionally and simultaneously released. The Second Lien Collateral Agent, for itself or on behalf of any such Second Lien Claimholders, promptly shall execute and deliver to the First Lien Collateral Agent or such Grantor such termination statements, releases and other documents as the First Lien Collateral Agent or such Grantor may request to effectively confirm such release.

(c)Until the Discharge of First Lien Obligations occurs, the Second Lien Collateral Agent, for itself and on behalf of the Second Lien Claimholders, hereby irrevocably constitutes and appoints the First Lien Collateral Agent and any officer or agent of the First Lien Collateral Agent, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Second Lien Collateral Agent or such holder or in the First Lien Collateral Agent’s own name, from time to time in the First Lien Collateral Agent’s discretion, for the purpose of carrying out the terms of this Section 5.1, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary to accomplish the purposes of this Section 5.1, including any endorsements or other instruments of transfer or release.

5.2Insurance. Unless and until the Discharge of First Lien Obligations has occurred, the First Lien Collateral Agent and the First Lien Claimholders shall have the sole and exclusive right, subject to the rights of the Grantors under the First Lien Loan Documents, to adjust settlement for any insurance policy covering the Collateral in the event of any loss thereunder and to approve any award granted in any condemnation or similar proceeding (or any deed in lieu of condemnation) affecting the Collateral. Unless and until the Discharge of First Lien Obligations has occurred, and subject to the rights of the Grantors under the First Lien Collateral Documents, all proceeds of any such policy and any such award (or any payments with respect to a deed in lieu of condemnation) if in respect to the Collateral shall be paid to the First Lien Collateral Agent for the benefit of the First Lien Claimholders pursuant to the terms of the First Lien Loan Documents (including, without limitation, for purposes of cash collateralization of commitments, letters of credit and Bank Products) and thereafter, to the extent no First Lien Obligations are outstanding, and subject to the rights of the Grantors under the Second Lien Collateral Documents, to the Second Lien Collateral Agent for the benefit of the Second Lien Claimholders to the extent required under the Second Lien Collateral Documents and then, to the extent no Second Lien Obligations are outstanding, to the owner of the subject property, such other Person as may be entitled thereto or as a court of competent jurisdiction may otherwise direct. Until the Discharge of First Lien Obligations has occurred, if the Second Lien Collateral Agent or any Second Lien Claimholders shall, at any time, receive any proceeds of any such insurance policy or any such award or payment in contravention of this Agreement, it shall pay such proceeds over to the First Lien Collateral Agent in accordance with the terms of Section 4.2 of this Agreement.

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5.3Amendments to First Lien Loan Documents and Second Lien Loan Documents.

(a)Subject to the terms of this Agreement, each of the Second Lien Claimholders and the Second Lien Collateral Agent agrees the First Lien Loan Documents and any and all collateral therefor and guarantees thereof, may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified in accordance with their terms and the First Lien Credit Agreement and other First Lien Loan Documents may be Refinanced, and the First Lien Claimholders and the First Lien Collateral Agent may grant waivers or extensions of time or performance to and make compromises, including releases of collateral or guarantees, and settlements with any of the Grantors and all other persons, in each case, without notice to, or the consent of the Second Lien Collateral Agent or any of the Second Lien Claimholders, but otherwise subject to the terms of this Agreement all without affecting the lien subordination or other provisions of this Agreement.

(b)Without the prior written consent of the First Lien Collateral Agent, no Second Lien Loan Document may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified or entered into to the extent such amendment, supplement, restatement, extension, renewal, replacement or modification, or the terms of any new Second Lien Loan Document, would:

(1)increase the principal or the interest rate or yield provisions or otherwise change or add fees or premiums applicable to the Second Lien Obligations (excluding increases resulting from the accrual of interest at the default rate as provided in the Second Lien Loan Documents on the date hereof);

(2)(x) add any representations, warranties, covenants (financial or otherwise), default or Event of Default thereunder (other than additional reporting or information requirements) or (y) change any representation, warranty, covenant, default or Event of Default thereunder (other than to eliminate any such representation, covenant, warranty, default or Event of Default or to increase any grace period related thereto or otherwise to make such representation, warranty, covenant, default or Event of Default or condition less restrictive or burdensome on the Grantors; it being understood that in no event shall any such change reduce the amount of permitted First Lien Obligations or priority liens thereon);

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(3)change (to earlier dates) any dates upon which payments of principal or interest are due thereon or change amounts due on any date or change the maturity date (other than to extend the maturity date or reduce amounts due on any date);

(4)change the prepayment provisions thereof (other than to reduce any required amount thereof or to extend time for payment thereof), or change any collateral therefor (other than to release such collateral);

(5)increase the obligations of the obligor thereunder or confer any additional rights on the lenders under the Second Lien Credit Agreement (or a representative on their behalf) which would be adverse to any Grantor or First Lien Lenders; or

(6)contravene the provisions of this Agreement.

(c)The Second Lien Credit Agreement may be Refinanced in whole but not in part (but not with cash proceeds from any equity issuance or capital contribution) to the extent the terms and conditions of such Refinancing debt are not less favorable to the Grantors and to the First Lien Lenders or the other First Lien Obligations than the Second Lien Loan Documents (as permitted to be amended, supplemented or otherwise modified pursuant to Section 5.3(b)), as determined in the reasonable opinion of the First Lien Collateral Agent, acting on behalf of the First Lien Lenders, the then outstanding aggregate principal amount of the Second Lien Obligations is not increased, the average life to maturity thereof is greater than or equal to that of the Second Lien Credit Agreement and all other terms and provisions of such refinancing debt are acceptable to the First Lien Collateral Agent and the holders of such Refinancing debt bind themselves in writing to the terms of this Agreement.

(d)No Second Lien Lender or Second Lien Collateral Agent shall sell, assign, dispose of or otherwise transfer all or any portion of its Second Lien Obligations or resign as agent unless the transferee thereof shall have executed and delivered an Acknowledgement and Consent, in a form acceptable to the First Lien Collateral Agent, providing for the agreement of such transferee to be bound by the provisions of this Agreement as a “Second Lien Lender” or “Second Lien Collateral Agent” hereunder. Notwithstanding any failure of any such transferee to execute and deliver such an Acknowledgement and Consent, this Agreement shall survive any sale, assignment, disposal or other transfer of all or any portion of the Second Lien Obligations to such transferee or replacement of the Second Lien Collateral Agent and the terms of this Agreement shall be binding upon the successors and assigns of the Second Lien Lenders and Second Lien Collateral Agent, as provided herein.

(e)Each of the Company and the Second Lien Collateral Agent agrees that each Second Lien Collateral Document shall include the following language (or language to similar effect approved by the First Lien Collateral Agent):

“Notwithstanding anything herein to the contrary, the lien and security interest granted to the Second Lien Collateral Agent pursuant to this Agreement and the exercise of any right or remedy by the Second Lien Collateral Agent hereunder are subject to the provisions of the Intercreditor Agreement, dated as of March __, 2006 (as amended, restated, supplemented or otherwise modified from time to time, the “Intercreditor Agreement”), among Modtech Holdings, Inc., Bank of America, N.A., as First Lien Collateral Agent and Amphora Limited, as Second Lien Collateral Agent and certain other persons party or that may become party thereto from time to time. In the event of any conflict between the terms of the Intercreditor Agreement and this Agreement, the terms of the Intercreditor Agreement shall govern and control.”

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In addition, the Company agrees that each Second Lien Mortgage covering any Collateral shall contain such other language as the First Lien Collateral Agent may reasonably request to reflect the subordination of such Second Lien Mortgage to the First Lien Collateral Document covering such Collateral.

(f)In the event any First Lien Collateral Agent or the First Lien Claimholders and the relevant Grantor enter into any amendment, waiver or consent in respect of any of the First Lien Collateral Documents for the purpose of adding to, or deleting from, or waiving or consenting to any departures from any provisions of, any First Lien Collateral Document or changing in any manner the rights of the First Lien Collateral Agent, such First Lien Claimholders, the Company or any other Grantor thereunder, then such amendment, waiver or consent shall apply automatically to any comparable provision of the Comparable Second Lien Collateral Document without the consent of the Second Lien Collateral Agent or the Second Lien Claimholders and without any action by the Second Lien Collateral Agent, the Company or any other Grantor, provided, that no such amendment, waiver or consent shall have the effect of: (1) removing assets subject to the Lien of the Second Lien Collateral Documents, except to the extent that a release of such Lien is permitted or required by Section 5.1 of this Agreement; or (2) imposing duties on the Second Lien Collateral Agent without its consent.

5.4Bailee for Perfection.

(a)The First Lien Collateral Agent agrees to hold (subject always to the rights of the First Lien Collateral Agent as a prior Lien holder) that part of the Collateral that is in its possession or control (or in the possession or control of its agents or bailees) to the extent that possession or control thereof is taken to perfect a Lien thereon under the UCC (such Collateral being the “Pledged Collateral”) as collateral agent for the First Lien Claimholders and as bailee for the Second Lien Collateral Agent (such bailment being intended, among other things, to satisfy the requirements of Section 8-301(a)(2) and 9-313(c) of the UCC) and any assignee solely for the purpose of perfecting the security interest granted under the First Lien Loan Documents and the Second Lien Loan Documents, respectively, subject to the terms and conditions of this Section 5.4.

(b)The First Lien Collateral Agent shall have no duties or obligation whatsoever to the First Lien Claimholders, the Second Lien Collateral Agent or any Second Lien Claimholder to ensure that the Pledged Collateral is genuine or owned by any of the Grantors or to preserve rights or benefits of any Person except as expressly set forth in this Section 5.4. The duties or responsibilities of the First Lien Collateral Agent under this Section 5.4 shall be limited solely to holding the Pledged Collateral as bailee in accordance with this Section 5.4.

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(c)The First Lien Collateral Agent acting pursuant to this Section 5.4 shall not have by reason of the First Lien Collateral Documents, the Second Lien Collateral Documents, this Agreement or any other document a fiduciary relationship in respect of the First Lien Claimholders, the Second Lien Collateral Agent or any Second Lien Claimholder.

(d)Upon the Discharge of First Lien Obligations under the First Lien Loan Documents to which the First Lien Collateral Agent is a party, the First Lien Collateral Agent shall deliver the remaining Pledged Collateral (if any) together with any necessary endorsements, first, to the Second Lien Collateral Agent to the extent Second Lien Obligations remain outstanding, and second, to the Company to the extent no First Lien Obligations or Second Lien Obligations remain outstanding (in each case, so as to allow such Person to obtain control of such Pledged Collateral). The First Lien Collateral Agent further agrees to take all other action reasonably requested by the Second Lien Collateral Agent in connection with the Second Lien Collateral Agent obtaining a first-priority interest in the Collateral or as a court of competent jurisdiction may otherwise direct.

5.5When Discharge of First Lien Obligations Deemed to Not Have Occurred. If, at any time after the Discharge of First Lien Obligations has occurred, the Company thereafter enters into any Refinancing of any First Lien Loan Document evidencing a First Lien Obligation which Refinancing is permitted by this Agreement, then such Discharge of First Lien Obligations shall automatically be deemed not to have occurred for all purposes of this Agreement (other than with respect to any actions taken as a result of the occurrence of such first Discharge of First Lien Obligations), and, from and after the date on which the New First Lien Debt Notice is delivered to the Second Lien Collateral Agent in accordance with the next sentence, the obligations under such Refinancing of the First Lien Loan Document shall automatically be treated as First Lien Obligations for all purposes of this Agreement, including for purposes of the Lien priorities and rights in respect of Collateral set forth herein, and the First Lien Collateral Agent under such First Lien Loan Documents shall be the First Lien Collateral Agent for all purposes of this Agreement. Upon receipt of a notice (the “New First Lien Debt Notice”) stating that the Company has entered into a new First Lien Loan Document (which notice shall include the identity of the new First Lien Collateral Agent, such agent, the “New Agent”), the Second Lien Collateral Agent shall promptly (a) enter into such documents and agreements (including amendments or supplements to this Agreement) as the Company or such New Agent shall reasonably request in order to provide to the New Agent the rights contemplated hereby, in each case consistent in all material respects with the terms of this Agreement and (b) deliver to the New Agent any Pledged Collateral held by it together with any necessary endorsements (or otherwise allow the New Agent to obtain control of such Pledged Collateral). The New Agent shall agree to be bound by the terms of this Agreement.

SECTION 6.Insolvency or Liquidation Proceedings.

6.1Finance and Sale Issues. Until the Discharge of First Lien Obligations has occurred, if the Company or any other Grantor shall be subject to any Insolvency or Liquidation Proceeding and the First Lien Collateral Agent shall desire to permit the use of “Cash Collateral” (as such term is defined in Section 363(a) of the Bankruptcy Code), on which the First Lien Collateral Agent or any other creditor has a Lien or to permit the Company or any other Grantor to obtain financing, whether from the First Lien Claimholders or any other entity under Section 363 or 364 of the Bankruptcy Code or any similar Bankruptcy Law (“DIP Financing”), then the Second Lien Collateral Agent, on behalf of itself and the Second Lien Claimholders, agrees that it will raise no objection to such Cash Collateral use or DIP Financing and will not request adequate protection or any other relief in connection therewith (except, as expressly agreed by the First Lien Collateral Agent) and, to the extent the Liens securing the First Lien Obligations are subordinated to or pari passu with such DIP Financing, the Second Lien Collateral Agent will subordinate its Liens in the Collateral to the Liens securing such DIP Financing (and all Obligations relating thereto). Without limiting the generality of any other provision of this Agreement, where the First Lien Collateral Agent has agreed to the use of cash collateral in such an instance, only such cash collateral that is actually distributed to (or permitted to be retained by) the First Lien Collateral Agent for final application against the First Lien Obligations or the Second Lien Obligations shall be subject to the application provisions of Section 4.1. Otherwise, in such an instance, any cash collateral permitted to be used by the Company or any Grantor shall not be subject to such application provisions. Without limiting the generality of any other provision of this Agreement, where the First Lien Collateral Agent shall desire to permit the Company or any other Grantor to obtain DIP Financing and such DIP Financing has been authorized by an unstayed order or judgment of the court with jurisdiction over such proceeding in form and substance acceptable to the First Lien Collateral Agent, Section 4.1 automatically shall be deemed to have been rewritten in a manner that reflects the priority of payment to which the First Lien Collateral Agent has agreed in approving such DIP Financing, including in the event that the First Lien Collateral Agent has agreed that the obligations owing under such DIP Financing may or shall be paid from Collateral proceeds as first priority in the “waterfall” set forth in Section 4.1 (with each class in the current order of application in such Section then being lowered one notch), and any reference herein to Section 4.1 shall be to Section 4.1 as so rewritten. Notwithstanding any other provision contained in this Agreement to the contrary, the provisions of the immediately preceding sentence shall apply only where the First Lien Collateral Agent affirmatively has consented in writing to such DIP Financing. Where the First Lien Collateral Agent has not so consented in writing to any such DIP Financing, including where any DIP Financing has been approved by such court over the First Lien Collateral Agent’s express objection, there shall be no deemed change to the provisions of Section 4.1, and such provisions (as well as the other provisions of this Agreement) shall continue to apply to the relative rights of the First Lien Claimholders, on the one hand, and the Second Lien Claimholders, on the other hand. The Second Lien Collateral Agent on behalf of the Second Lien Claimholders, agrees that it will raise no objection or oppose a motion to sell or otherwise dispose of any Collateral free and clear of its Liens or other claims under Section 363 of the Bankruptcy Code if the requisite First Lien Claimholders have consented to such sale or disposition of such assets.

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6.2Relief from the Automatic Stay. Until the Discharge of First Lien Obligations has occurred, the Second Lien Collateral Agent, on behalf of itself and the Second Lien Claimholders, agrees that none of them shall seek (or support any other Person seeking) relief from the automatic stay or any other stay in any Insolvency or Liquidation Proceeding in respect of the Collateral, without the prior written consent of the First Lien Collateral Agent.

6.3Adequate Protection.

(a)The Second Lien Collateral Agent, on behalf of itself and each of the Second Lien Claimholders, agrees that none of them shall object or contest (or support any other Person contesting):

(1)any request by the First Lien Collateral Agent or the First Lien Claimholders for adequate protection;

(2)any objection by the First Lien Collateral Agent or the First Lien Claimholders to any motion, relief, action or proceeding based on the First Lien Collateral Agent or the First Lien Claimholders claiming a lack of adequate protection; or

(3)the payment of interest, fees, expenses or other amounts to the First Lien Claimholders under Section 506(b) or 506(c) of the Bankruptcy Code or otherwise.

(b)Notwithstanding the foregoing provisions in this Section 6.3, in any Insolvency or Liquidation Proceeding in the event the Second Lien Collateral Agent, on behalf of itself and the Second Lien Claimholders, seeks or requests adequate protection in respect of Second Lien Obligations and such adequate protection is granted in the form of additional collateral (irrespective of the terms of this Agreement), then the Second Lien Collateral Agent, on behalf of itself or any of the Second Lien Claimholders, agrees that the First Lien Collateral Agent shall also be granted a senior Lien on such additional collateral as security for the First Lien Obligations and for any Cash Collateral use or DIP Financing provided by the First Lien Claimholders and that any Lien on such additional collateral securing the Second Lien Obligations shall be subordinated to the Liens on such collateral securing the First Lien Obligations and any such DIP Financing provided by the First Lien Claimholders (and all Obligations relating thereto) and to any other Liens granted to the First Lien Claimholders as adequate protection on the same basis as the other Liens securing the Second Lien Obligations are so subordinated to such First Lien Obligations under this Agreement.

6.4No Waiver; Voting. Nothing contained herein shall prohibit or in any way limit the First Lien Collateral Agent or any First Lien Claimholder from objecting in any Insolvency or Liquidation Proceeding or otherwise to any action taken by the Second Lien Collateral Agent or any of the Second Lien Claimholders, including the seeking by the Second Lien Collateral Agent or any Second Lien Claimholders of adequate protection or the asserting by the Second Lien Collateral Agent or any Second Lien Claimholders of any of its rights and remedies under the Second Lien Loan Documents or otherwise. In any Insolvency or Liquidation Proceeding, neither the Second Lien Collateral Agent nor any other Second Lien Claimholder shall (i) oppose, object to, or vote against any plan of reorganization or disclosure statement to the extent the terms of such plan or disclosure statement are consistent with the priorities and enforcement rights of the First Lien Claimholders under this Agreement or (ii) vote any claim in respect of Second Lien Obligations for any plan of reorganization of any Grantor unless (x) such plan provides for the payment in full in cash of all First Lien Obligations on the effective date of such plan of reorganization or (y) such plan provides for treatment of the First Lien Obligations in a manner that would result in such First Lien Obligations having relative lien (or, if the obligations, property or assets to be distributed in respect of the First Lien Obligations under such plan are unsecured, other) priority over the Second Lien Obligations to at least the same extent as if such obligations, property or assets were secured by Liens, whether or not such obligations, property or assets are, in fact, secured by any such Liens, and further requires (or does not purport to otherwise alter the provisions of this Agreement requiring) that all distributions on account of the Second Lien Obligations under such plan be delivered to the First Lien Collateral Agent and distributed as provided in Section 4.1.

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6.5Avoidance Issues. If any First Lien Claimholder is required in any Insolvency or Liquidation Proceeding or otherwise to turn over or otherwise pay to the estate of the Company or any other Grantor any amount paid in respect of First Lien Obligations (a “Recovery”), then such First Lien Claimholders shall be entitled to a reinstatement of First Lien Obligations with respect to all such recovered amounts and a reinstatement of liens securing the First Lien Obligations with the priorities set forth herein, all as if any Discharge of First Lien Obligations had not occurred. If this Agreement shall have been terminated prior to such Recovery, this Agreement shall be reinstated in full force and effect as if no Discharge of First Lien Obligations had occurred, and such prior termination shall not diminish, release, discharge, impair or otherwise affect the obligations of the parties hereto, including without limitation, any turnover provisions hereof, which may then require the payment to the First Lien Claimholders by the Second Lien Claimholders.

6.6Reorganization Securities. If, in any Insolvency or Liquidation Proceeding, debt obligations of the reorganized debtor secured by Liens upon any property of the reorganized debtor are distributed pursuant to a plan of reorganization or similar dispositive restructuring plan, both on account of First Lien Obligations and on account of Second Lien Obligations, then, to the extent the debt obligations distributed on account of the First Lien Obligations and on account of the Second Lien Obligations are secured by Liens upon the same property, the provisions of this Agreement will survive the distribution of such debt obligations pursuant to such plan and will apply with like effect to the Liens securing such debt obligations.

6.7Post-Petition Interest.

(a)Neither the Second Lien Collateral Agent nor any Second Lien Claimholder shall oppose or seek to challenge any claim by the First Lien Collateral Agent or any First Lien Claimholder for allowance in any Insolvency or Liquidation Proceeding of First Lien Obligations consisting of post-petition interest, fees or expenses. Regardless of whether any such claim is allowed, and without limiting the generality of the other provisions of this Agreement, this Agreement expressly is intended to include and does include the “rule of explicitness” in that this Agreement expressly entitles the First Lien Claimholders to receive payment from the Collateral of any post-petition interest, fees or expenses through distributions made pursuant to the provisions of this Agreement even though such interest, fees, expenses are not allowed or allowable against the bankruptcy estate of the Company or any other Grantor under Section 502(b)(2) or Section 506(b) of the Bankruptcy Code or under any other provision of the Bankruptcy Code or any other Bankruptcy Law.

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(b)Neither the First Lien Collateral Agent nor any other First Lien Claimholder shall oppose or seek to challenge any claim by the Second Lien Collateral Agent or any Second Lien Claimholder for allowance in any Insolvency or Liquidation Proceeding of Second Lien Obligations consisting of post-petition interest, fees or expenses to the extent of the value of the Lien of the Second Lien Collateral Agent on behalf of the Second Lien Claimholders on the Collateral (after taking into account the Lien on the First Lien Collateral in favor of the First Lien Collateral Agent for the benefit of the First Lien Claimholders).

6.8Waiver. The Second Lien Collateral Agent, for itself and on behalf of the Second Lien Claimholders, waives any claim it may hereafter have against any First Lien Claimholder arising out of the election of any First Lien Claimholder of the application of Section 1111(b)(2) of the Bankruptcy Code, and/or out of any cash collateral or financing arrangement or out of any grant of a security interest in connection with the Collateral in any Insolvency or Liquidation Proceeding.

6.9Limitations. So long as the Discharge of First Lien Obligations has not occurred, without the express written consent of the First Lien Collateral Agent, none of the Second Lien Claimholders shall, in any Insolvency or Liquidation Proceeding involving any Grantor, (i) make an election pursuant to Section 1111(b) of the Bankruptcy Code, (ii) oppose or object to the determination of the extent of any Liens held by any of the First Lien Claimholders or the value of any claims of First Lien Claimholders under Section 506(a) of the Bankruptcy Code or (iii) oppose or object to the payment of interest and expenses under Sections 506(b) and (c) of the Bankruptcy Code.

6.10Separate Grants of Security and Separate Classification. The Second Lien Collateral Agent, for itself and on behalf of the Second Lien Claimholders, and the First Lien Collateral Agent for itself and on behalf of the First Lien Claimholders, acknowledges and agrees that:

(a)the grants of Liens pursuant to the First Lien Collateral Documents and the Second Lien Collateral Documents constitute two separate and distinct grants of Liens; and

(b)because of, among other things, their differing rights in the Collateral, the Second Lien Obligations are fundamentally different from the First Lien Obligations and must be separately classified in any plan of reorganization proposed or adopted in an Insolvency or Liquidation Proceeding.

To further effectuate the intent of the parties as provided in the immediately preceding sentence, if it is held that the claims of the First Lien Claimholders and the Second Lien Claimholders in respect of the Collateral constitute only one secured claim (rather than separate classes of senior and junior secured claims), then each of the parties hereto hereby acknowledges and agrees that, subject to Sections 2.1 and 4.1, all distributions shall be made as if there were separate classes of senior and junior secured claims against the Grantors in respect of the Collateral (with the effect being that, to the extent that the aggregate value of the Collateral is sufficient (for this purpose ignoring all claims held by the Second Lien Claimholders), the First Lien Claimholders shall be entitled to receive, in addition to amounts distributed to them in respect of principal, pre-petition interest and other claims, all amounts owing in respect of post-petition interest, including any additional interest payable pursuant to the First Lien Credit Agreement, arising from or related to a default, which is disallowed as a claim in any Insolvency or Liquidation Proceeding) before any distribution is made in respect of the claims held by the Second Lien Claimholders, with the Second Lien Collateral Agent, for itself and on behalf of the Second Lien Claimholders, hereby acknowledging and agreeing to turn over to the First Lien Collateral Agent, for itself and on behalf of the First Lien Claimholders, amounts otherwise received or receivable by them to the extent necessary to effectuate the intent of this sentence, even if such turnover has the effect of reducing the claim or recovery of the Second Lien Claimholders).

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SECTION 7.Reliance; Waivers; Etc.

7.1Reliance. Other than any reliance on the terms of this Agreement, the First Lien Collateral Agent, on behalf of itself and the First Lien Claimholders under its First Lien Loan Documents, acknowledges that it and such First Lien Claimholders have, independently and without reliance on the Second Lien Collateral Agent or any Second Lien Claimholders, and based on documents and information deemed by them appropriate, made their own credit analysis and decision to enter into such First Lien Loan Documents and be bound by the terms of this Agreement and they will continue to make their own credit decision in taking or not taking any action under the First Lien Credit Agreement or this Agreement. The Second Lien Collateral Agent, on behalf of itself and the Second Lien Claimholders, acknowledges that it and the Second Lien Claimholders have, independently and without reliance on the First Lien Collateral Agent or any First Lien Claimholder, and based on documents and information deemed by them appropriate, made their own credit analysis and decision to enter into each of the Second Lien Loan Documents and be bound by the terms of this Agreement and they will continue to make their own credit decision in taking or not taking any action under the Second Lien Loan Documents or this Agreement.

7.2No Warranties or Liability. The First Lien Collateral Agent, on behalf of itself and the First Lien Claimholders under the First Lien Loan Documents, acknowledges and agrees that each of the Second Lien Collateral Agent and the Second Lien Claimholders have made no express or implied representation or warranty, including with respect to the execution, validity, legality, completeness, collectability or enforceability of any of the Second Lien Loan Documents, the ownership of any Collateral or the perfection or priority of any Liens thereon. Except as otherwise provided herein, the Second Lien Claimholders will be entitled to manage and supervise their respective loans and extensions of credit under the Second Lien Loan Documents in accordance with law and as they may otherwise, in their sole discretion, deem appropriate. The Second Lien Collateral Agent, on behalf of itself and the Second Lien Obligations, acknowledges and agrees that the First Lien Collateral Agent and the First Lien Claimholders have made no express or implied representation or warranty, including with respect to the execution, validity, legality, completeness, collectability or enforceability of any of the First Lien Loan Documents, the ownership of any Collateral or the perfection or priority of any Liens thereon. Except as otherwise provided herein, the First Lien Claimholders will be entitled to manage and supervise their respective loans and extensions of credit under their respective First Lien Loan Documents in accordance with law and as they may otherwise, in their sole discretion, deem appropriate. The Second Lien Collateral Agent and the Second Lien Claimholders shall have no duty to the First Lien Collateral Agent or any of the First Lien Claimholders, and the First Lien Collateral Agent and the First Lien Claimholders shall have no duty to the Second Lien Collateral Agent or any of the Second Lien Claimholders, to act or refrain from acting in a manner which allows, or results in, the occurrence or continuance of an event of default or default under any agreements with the Company or any other Grantor (including the First Lien Loan Documents and the Second Lien Loan Documents), regardless of any knowledge thereof which they may have or be charged with.

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7.3No Waiver of Lien Priorities.

(a)No right of the First Lien Claimholders, the First Lien Collateral Agent or any of them to enforce any provision of this Agreement or any First Lien Loan Document shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or any other Grantor or by any act or failure to act by any First Lien Claimholder or the First Lien Collateral Agent, or by any noncompliance by any Person with the terms, provisions and covenants of this Agreement, any of the First Lien Loan Documents or any of the Second Lien Loan Documents, regardless of any knowledge thereof which the First Lien Collateral Agent or the First Lien Claimholders, or any of them, may have or be otherwise charged with.

(b)Without in any way limiting the generality of the foregoing paragraph (but subject to the rights of the Company and the other Grantors under the First Lien Loan Documents), the First Lien Claimholders, the First Lien Collateral Agent and any of them may, at any time and from time to time in accordance with the First Lien Loan Documents and/or applicable law, without the consent of, or notice to, the Second Lien Collateral Agent or any Second Lien Claimholders, without incurring any liabilities to the Second Lien Collateral Agent or any Second Lien Claimholders and without impairing or releasing the Lien priorities and other benefits provided in this Agreement (even if any right of subrogation, reimbursement or contribution or other right or remedy of the Second Lien Collateral Agent or any Second Lien Claimholders is affected, impaired or extinguished thereby) do any one or more of the following:

(1)make loans and advances to any Grantor or issue, guarantee or obtain letters of credit for account of any Grantor or otherwise extend credit to any Grantor, in any amount and on any terms, whether pursuant to a commitment or as a discretionary advance and whether or not any default or event of default or failure of condition is then continuing;

(2)change the manner, place or terms of payment or change or extend the time of payment of, or amend, renew, exchange, increase or alter, the terms of any of the First Lien Obligations or any Lien on any First Lien Collateral or guaranty thereof or any liability of the Company or any other Grantor, or any liability incurred directly or indirectly in respect thereof (including any increase in or extension of the First Lien Obligations, without any restriction as to the tenor or terms of any such increase or extension) or otherwise amend, renew, exchange, extend, modify or supplement in any manner any Liens held by the First Lien Collateral Agent or any of the First Lien Claimholders, the First Lien Obligations or any of the First Lien Loan Documents;

(3)sell, exchange, release, surrender, realize upon, enforce or otherwise deal with in any manner and in any order any part of the First Lien Collateral or any liability of the Company or any other Grantor to the First Lien Claimholders or the First Lien Collateral Agent, or any liability incurred directly or indirectly in respect thereof;

(4)settle or compromise any First Lien Obligation or any other liability of the Company or any other Grantor or any security therefor or any liability incurred directly or indirectly in respect thereof and apply any sums by whomsoever paid and however realized to any liability (including the First Lien Obligations) in any manner or order;

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(5)exercise or delay in or refrain from exercising any right or remedy against the Company or any security or any other Grantor or any other Person, elect any remedy and otherwise deal freely with the Company, any other Grantor or any First Lien Collateral and any security and any guarantor or any liability of the Company or any other Grantor to the First Lien Claimholders or any liability incurred directly or indirectly in respect thereof; and

(6)release or discharge any First Lien Obligation or any guaranty thereof or any agreement or obligation of any Grantor or any other person or entity with respect thereto.

(c)Except as otherwise provided herein, the Second Lien Collateral Agent, on behalf of itself and the Second Lien Claimholders, also agrees that the First Lien Claimholders and the First Lien Collateral Agent shall have no liability to the Second Lien Collateral Agent or any Second Lien Claimholders, and the Second Lien Collateral Agent, on behalf of itself and the Second Lien Claimholders, hereby waives any claim against any First Lien Claimholder or the First Lien Collateral Agent, arising out of any and all actions which the First Lien Claimholders or the First Lien Collateral Agent may take or permit or omit to take with respect to:

(1)the First Lien Loan Documents;

(2)the collection of the First Lien Obligations; or

(3)the foreclosure upon, or sale, liquidation or other disposition of, any First Lien Collateral. The Second Lien Collateral Agent, on behalf of itself and the Second Lien Claimholders, agrees that the First Lien Claimholders and the First Lien Collateral Agent have no duty, express or implied, fiduciary or otherwise, to them in respect of the maintenance or preservation of the First Lien Collateral, the First Lien Obligations or otherwise. Neither the First Lien Collateral Agent nor any other First Lien Claimholder nor any of their respective directors, officers, employees or agents will be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so, or will be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Company or any other Grantor or upon the request of the Second Lien Collateral Agent, any other holder of Second Lien Obligations or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof.

(d)The Second Lien Collateral Agent, on behalf of itself and the Second Lien Claimholders, agrees not to assert and hereby waives, to the fullest extent permitted by law, any right to demand, request, plead or otherwise assert or otherwise claim the benefit of, any marshalling, appraisal, valuation or other similar right that may otherwise be available under applicable law with respect to the Collateral or any other similar rights a junior secured creditor may have under applicable law.

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(e)Each creditor by accepting the benefits of the Collateral Documents agrees that the First Lien Collateral Agent shall not have any duty or obligation to realize first upon any type of Collateral or to sell, dispose of or otherwise liquidate all or any portion of the Collateral in any manner, including as a result of the application of the principles of marshaling or otherwise, that would maximize the return to any class of creditors holding Obligations of any type (whether First Lien Obligations or Second Lien Obligations), notwithstanding that the order and timing of any such realization, sale, disposition or liquidation may affect the amount of proceeds actually received by such class of creditors from such realization, sale, disposition or liquidation.

7.4Obligations Unconditional. All rights, interests, agreements and obligations of the First Lien Collateral Agent and the First Lien Claimholders and the Second Lien Collateral Agent and the Second Lien Claimholders, respectively, hereunder shall remain in full force and effect irrespective of:

(a)any lack of validity or enforceability of any First Lien Loan Documents or any Second Lien Loan Documents;

(b)any change in the time, manner or place of payment of, or in any other terms of, all or any of the First Lien Obligations or Second Lien Obligations, or any amendment or waiver or other modification, including any increase in the amount thereof, whether by course of conduct or otherwise, of the terms of any First Lien Loan Document or any Second Lien Loan Document;

(c)any exchange of any security interest in any Collateral or any other collateral, or any amendment, waiver or other modification, whether in writing or by course of conduct or otherwise, of all or any of the First Lien Obligations or Second Lien Obligations or any guaranty thereof;

(d)the commencement of any Insolvency or Liquidation Proceeding in respect of the Company or any other Grantor; or

(e)any other circumstances which otherwise might constitute a defense available to, or a discharge of, the Company or any other Grantor in respect of the First Lien Collateral Agent, the First Lien Obligations, or any First Lien Claimholder, the Second Lien Collateral Agent, the Second Lien Obligations or any Second Lien Claimholder in respect of this Agreement.

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SECTION 8.Miscellaneous.

8.1Conflicts. In the event of any conflict between the provisions of this Agreement and the provisions of the First Lien Loan Documents or the Second Lien Loan Documents, the provisions of this Agreement shall govern and control.

8.2Effectiveness; Continuing Nature of this Agreement; Severability. This Agreement shall become effective when executed and delivered by the parties hereto. This is a continuing agreement of lien subordination and the First Lien Claimholders may continue, at any time and without notice to the Second Lien Collateral Agent or any Second Lien Claimholder to extend credit and other financial accommodations and lend monies to or for the benefit of the Company or any Grantor constituting First Lien Obligations in reliance hereof. The Second Lien Collateral Agent, on behalf of itself and the Second Lien Claimholders, hereby waives any right it may have under applicable law to revoke this Agreement or any of the provisions of this Agreement. The terms of this Agreement shall survive, and shall continue in full force and effect, in any Insolvency or Liquidation Proceeding. Without limiting the generality of the foregoing, this Agreement is intended to constitute and shall be deemed to constitute a “subordination agreement” within the meaning of Section 510(a) of the Bankruptcy Code and is intended to be and shall be interpreted to be enforceable to the maximum extent permitted pursuant to applicable nonbankruptcy law. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall not invalidate the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. All references to the Company or any other Grantor shall include the Company or such Grantor as debtor and debtor-in-possession and any receiver or trustee for the Company or any other Grantor (as the case may be) in any Insolvency or Liquidation Proceeding. This Agreement shall terminate and be of no further force and effect:

(a)with respect to the First Lien Collateral Agent, the First Lien Claimholders and the First Lien Obligations, upon the date of Discharge of First Lien Obligations and payment in full in cash of all Excluded First Lien Obligations, subject to the rights of the First Lien Claimholders under Sections 6.5 and 7; and

(b)with respect to the Second Lien Collateral Agent, the Second Lien Claimholders and the Second Lien Obligations, upon the later of (1) the date upon which the obligations under the Second Lien Credit Agreement terminate if there are no other Second Lien Obligations outstanding on such date and (2) if there are other Second Lien Obligations outstanding on such date, the date upon which such Second Lien Obligations terminate, subject to their obligations under Section 4.1.

8.3Amendments; Waivers. No amendment, modification or waiver of any of the provisions of this Agreement by the Second Lien Collateral Agent or the First Lien Collateral Agent shall be deemed to be made unless the same shall be in writing signed on behalf of each party hereto or its authorized agent and each waiver, if any, shall be a waiver only with respect to the specific instance involved and shall in no way impair the rights of the parties making such waiver or the obligations of the other parties to such party in any other respect or at any other time. Notwithstanding the foregoing, the Company shall not have any right to consent to or approve any amendment, modification or waiver of any provision of this Agreement except to the extent to cause additional obligations to the Company.

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8.4Information Concerning Financial Condition of the Company and its Subsidiaries. The First Lien Collateral Agent and the First Lien Claimholders, on the one hand, and the Second Lien Claimholders and the Second Lien Collateral Agent, on the other hand, shall each be responsible for keeping themselves informed of (a) the financial condition of the Company and its Subsidiaries and all endorsers and/or guarantors of the First Lien Obligations or the Second Lien Obligations and (b) all other circumstances bearing upon the risk of nonpayment of the First Lien Obligations or the Second Lien Obligations. The First Lien Collateral Agent and the First Lien Claimholders shall have no duty to advise the Second Lien Collateral Agent or any Second Lien Claimholder of information known to it or them regarding such condition or any such circumstances or otherwise. In the event the First Lien Collateral Agent or any of the First Lien Claimholders, in its or their sole discretion, undertakes at any time or from time to time to provide any such information to the Second Lien Collateral Agent or any Second Lien Claimholder, it or they shall be under no obligation:

(a)to make, and the First Lien Collateral Agent and the First Lien Claimholders shall not make, any express or implied representation or warranty, including with respect to the accuracy, completeness, truthfulness or validity of any such information so provided;

(b)to provide any additional information or to provide any such information on any subsequent occasion;

(c)to undertake any investigation; or

(d)to disclose any information which, pursuant to accepted or reasonable commercial finance practices, such party wishes to maintain confidential or is otherwise required to maintain confidential.

8.5Subrogation. With respect to the value of any payments or distributions in cash, property or other assets that any of the Second Lien Claimholders or the Second Lien Collateral Agent pays over to the First Lien Collateral Agent or the First Lien Claimholders under the terms of this Agreement, the Second Lien Claimholders and the Second Lien Collateral Agent shall be subrogated to the rights of the First Lien Collateral Agent and the First Lien Claimholders; provided that, the Second Lien Collateral Agent, on behalf of itself and the Second Lien Claimholders, hereby waives and agrees not to assert or enforce all rights of subrogation, reimbursement or contribution it may acquire as a result of any payment hereunder until the Discharge of First Lien Obligations has occurred. The Company acknowledges and agrees that the value of any payments or distributions in cash, property or other assets received by the Second Lien Collateral Agent or the Second Lien Claimholders that are paid over to the First Lien Collateral Agent or the First Lien Claimholders pursuant to this Agreement shall not reduce any of the Second Lien Obligations.

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8.6Application of Payments. All payments received by the First Lien Collateral Agent or the First Lien Claimholders may be applied, reversed and reapplied, in whole or in part, to such part of the First Lien Obligations as the First Lien Claimholders, in their sole discretion deem appropriate. The Second Lien Collateral Agent, on behalf of itself and the Second Lien Claimholders, assents to any extension or postponement of the time of payment of the First Lien Obligations or any part thereof and to any other indulgence with respect thereto, to any substitution, exchange or release of any security which may at any time secure any part of the First Lien Obligations and to the addition or release of any other Person primarily or secondarily liable therefor.

8.7SUBMISSION TO JURISDICTION; WAIVERS.

(a)ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY PARTY ARISING OUT OF OR RELATING HERETO MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN LOS ANGELES, CALIFORNIA. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH PARTY, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY:

(1)ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS;

(2)WAIVES ANY DEFENSE OF FORUM NON CONVENIENS;

(3)AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO THE APPLICABLE PARTY AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 8.8; AND

(4)AGREES THAT SERVICE AS PROVIDED IN CLAUSE (3) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER THE APPLICABLE PARTY IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT.

(b)EACH OF THE PARTIES HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING HEREUNDER. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER HEREOF, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT, AND THAT EACH WILL CONTINUE TO RELY ON THIS WAIVER IN ITS RELATED FUTURE DEALINGS. EACH PARTY HERETO FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 8.7(b) AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS HERETO. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

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(c)EACH OF THE PARTIES HERETO WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER FIRST LIEN LOAN DOCUMENT OR SECOND LIEN LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, VERBAL OR WRITTEN STATEMENT OR ACTION OF ANY PARTY HERETO.

(d)EXCEPT AS PROHIBITED BY LAW, EACH OF THE PARTIES HEREBY WAIVES ANY RIGHT WHICH IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING PARAGRAPH ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES.

8.8Notices. All notices to the Second Lien Claimholders and the First Lien Claimholders permitted or required under this Agreement shall also be sent to the Second Lien Collateral Agent and the First Lien Collateral Agent, respectively. Unless otherwise specifically provided herein, any notice hereunder shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service and signed for against receipt thereof, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed. For the purposes hereof, the addresses of the parties hereto shall be as set forth below each party’s name on the signature pages hereto, or, as to each party, at such other address as may be designated by such party in a written notice to all of the other parties.

8.9Further Assurances. The First Lien Collateral Agent, on behalf of itself and the First Lien Claimholders under the First Lien Loan Documents, and the Second Lien Collateral Agent, on behalf of itself and the Second Lien Claimholders under the Second Lien Loan Documents, and the Company, agree that each of them shall take such further action and shall execute and deliver such additional documents and instruments (in recordable form, if requested) as the First Lien Collateral Agent or the Second Lien Collateral Agent may reasonably request to effectuate the terms of and the Lien priorities contemplated by this Agreement.

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8.10APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

8.11Binding on Successors and Assigns. This Agreement shall be binding upon the Company, the Grantors, the First Lien Collateral Agent, the First Lien Claimholders, the Second Lien Collateral Agent, the Second Lien Claimholders and their respective successors and assigns.

8.12Specific Performance. Each of the First Lien Collateral Agent and the Second Lien Collateral Agent may demand specific performance of this Agreement. The First Lien Collateral Agent, on behalf of itself and the First Lien Claimholders under the First Lien Loan Documents, and the Second Lien Collateral Agent, on behalf of itself and the Second Lien Claimholders, hereby irrevocably waive any defense based on the adequacy of a remedy at law and any other defense which might be asserted to bar the remedy of specific performance in any action which may be brought by the First Lien Collateral Agent or the First Lien Claimholders or the Second Lien Collateral Agent or the Second Lien Claimholders, as the case may be.

8.13Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect.

8.14Counterparts. This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of an executed counterpart of a signature page of this Agreement or any document or instrument delivered in connection herewith by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement or such other document or instrument, as applicable.

8.15Authorization. By its signature, each Person executing this Agreement on behalf of a party hereto represents and warrants to the other parties hereto that it is duly authorized to execute this Agreement.

8.16No Third Party Beneficiaries. This Agreement and the rights and benefits hereof shall inure to the benefit of each of the parties hereto and its respective successors and assigns and shall inure to the benefit of each of the First Lien Claimholders and the Second Lien Claimholders. No other Person shall have or be entitled to assert rights or benefits hereunder.

8.17Provisions Solely to Define Relative Rights. The provisions of this Agreement are and are intended solely for the purpose of defining the relative rights of the First Lien Claimholders on the one hand and the Second Lien Claimholders on the other hand. None of the Company, any other Grantor or any other creditor thereof shall have any rights hereunder and neither the Company nor any Grantor may rely on the terms hereof. Nothing in this Agreement is intended to or shall impair the obligations of the Company or any other Grantor, which are absolute and unconditional, to pay the First Lien Obligations and the Second Lien Obligations as and when the same shall become due and payable in accordance with their terms.

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8.18Interpretation. This Agreement and the other documents relating to this Agreement are the result of negotiations among and have been reviewed by counsel to the First Lien Collateral Agent, the First Lien Claimholders, the Second Lien Collateral Agent and the Second Lien Claimholders, and certain of the other parties, and are the products of all parties. Accordingly, they shall not be construed against any party merely because of such party’s involvement in their preparation.

8.19Option to Purchase First Lien Obligations.

(a)Upon the delivery by the First Lien Collateral Agent to the Second Lien Collateral Agent of written notice in accordance with this Section 8.19(a) (a “Trigger Notice”) of the First Lien Collateral Agent and the First Lien Lenders (x) accelerating the First Lien Obligations or (y) their intent to commence any foreclosure or other action to sell or otherwise realize upon all or substantially all of the Collateral, the Second Lien Collateral Agent or any or all of the Second Lien Lenders, as a single group, shall have an option, exercised by delivery of written notice by the Second Lien Collateral Agent to the First Lien Collateral Agent (a “Purchase Notice”) given by a same-day facsimile or personal delivery, to purchase all (but not less than all) of the First Lien Obligations (at the “Purchase Price” referred to in Section 8.19(d) below) from the First Lien Collateral Agent and the First Lien Lenders. The Purchase Notice shall specify which Second Lien Lenders (the “Purchasing Second Lien Lenders”) will purchase the First Lien Obligations. The Purchase Notice shall be irrevocable. If the Second Lien Collateral Agent does not deliver such Purchase Notice within ten (10) Business Days of the delivery of the Trigger Notice, the purchase right of the Second Lien Collateral Agent and the other Second Lien Lenders hereunder with respect to such Trigger Notice shall expire and be of no force and effect.

(b)The First Lien Collateral Agent shall deliver to the Second Lien Collateral Agent the Trigger Notice referred to in Section 8.19(a) above (i) in the absence of an Exigent Circumstance (defined below), not more than five (5) Business Days prior to the taking of the earliest of the actions described in Section 8.19(a)(y), or (ii) if Exigent Circumstances exist, as soon as practicable and in any event not more than five (5) Business Days after the taking of action described in Section 8.19(a)(y) or (iii) in the case of acceleration of the First Lien Obligations, as soon as practicable and in any event not more than five (5) Business Days after such acceleration. The Second Lien Collateral Agent may send to the First Lien Collateral Agent the Purchase Notice referred to in Section 8.19(a) above within five (5) Business Days of receipt of such Trigger Notice, in which event, in the absence of Exigent Circumstances, the First Lien Collateral Agent and the other First Lien Lenders shall not commence any foreclosure or other action to sell or otherwise realize upon such Collateral, as the case may be, provided, that, the purchase and sale with respect to the First Lien Obligations provided for in this Section 8.19 shall have closed within ten (10) Business Days after receipt by the First Lien Collateral Agent of the Purchase Notice and the First Lien Collateral Agent shall have received payment in full in cash of the Purchase Price for the First Lien Obligations as provided for herein within such five (5) Business Day period. As used herein, “Exigent Circumstance” shall mean (i) an Insolvency or Liquidation Proceeding by or against any Grantor, (ii) an exercise by another lender of enforcement rights or remedies with respect to particular Collateral having an aggregate fair market value in excess of $1,000,000, or (iii) an event or circumstance that materially and imminently threatens the ability of the First Lien Collateral Agent to realize upon all or a material part of the Collateral, such as, without limitation, fraudulent removal or concealment thereof, destruction (other than to the extent covered by insurance) or material waste thereof.

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(c)On the date specified by the Second Lien Collateral Agent in the Purchase Notice (which shall not be more than ten (10) Business Days after the receipt by the First Lien Collateral Agent of the Purchase Notice), the First Lien Collateral Agent and the other First Lien Lenders shall sell to the Second Lien Collateral Agent and the other Second Lien Lenders, without recourse or warranty (except as specified in Section 8.19(e)) of any kind, and the Second Lien Collateral Agent and the other Second Lien Lenders shall purchase from the First Lien Collateral Agent and the other First Lien Lenders all (but not less than all) of the First Lien Obligations. From and after such sale and purchase of the First Lien Obligations, subject to the provisions of Section 8.19(d) hereof, the Second Lien Collateral Agent and the other Second Lien Lenders shall be parties to the First Lien Credit Agreement and the other First Lien Loan Documents, and shall have the rights and remedies and obligations and responsibilities of the First Lien Collateral Agent and other First Lien Lenders thereunder, and the First Lien Collateral Agent and the other First Lien Lenders shall have assigned their rights and remedies and shall have been released from their obligations and responsibilities under the First Lien Credit Agreement and the other First Lien Loan Documents and shall cease to be parties thereto. The First Lien Claimholders and the Second Lien Claimholders will execute an assignment and acceptance agreement, in a form acceptable to the First Lien Collateral Agent to assign the entire First Lien Obligations (as opposed to a percentage share thereof), to assign the agency to the Second Lien Collateral Agent, to otherwise reflect the terms of this Section 8.19, and to evidence the purchase and sale of the First Lien Obligations.

(d)Upon the date of such purchase and sale, the Purchasing Second Lien Lenders shall (i) pay to the First Lien Collateral Agent as the purchase price therefor (the “Purchase Price”) the full amount of all the First Lien Obligations then outstanding and unpaid, (ii) without duplication of (i), furnish cash collateral to the First Lien Collateral Agent to secure the First Lien Lenders with respect to (a) obligations under letters of credit in an amount equal to 105% of the aggregate undrawn face amount of any issued and outstanding letters of credit provided by the issuing bank (or any issued and outstanding letters of credit that the First Lien Collateral Agent has arranged to be provided by third parties pursuant to the financing arrangements of the First Lien Lenders with any Grantor) to the Company and, in any event, use reasonable efforts to replace all of such letters of credit with letters of credit issued by or for the account of the Purchasing Second Lien Lenders and (b) Bank Product Obligations in an amount equal to 100% of any Grantor’s obligations (as determined by the First Lien Collateral Agent), (iii) without duplication of (i), agree to reimburse the First Lien Collateral Agent and the other First Lien Lenders for any loss, cost, damage or expense (including attorneys’ fees and expenses) in connection with any commissions, fees, costs or expenses related to any issued and outstanding letters of credit and any checks or other payments provisionally credited to the First Lien Obligations, and/or as to which the First Lien Collateral Agent or any First Lien Claimholder has not yet received final payment, reasonably documented in writing,(iv) permit the First Lien Collateral Agent and the First Lien Lenders to retain Liens on the Collateral to secure any indemnification obligations of the Grantors that survive the termination of the First Lien Loan Documents, (v) without duplication of (i), agree to reimburse, within five (5) Business Days of written demand by the First Lien Collateral Agent therefore and reasonably documented in writing, the First Lien Collateral Agent and the other First Lien Lenders in respect of indemnification obligations of the Grantors under the First Lien Loan Documents as to matters or circumstances reasonably identified by the First Lien Collateral Agent in writing prior to such sale which would reasonably be expected to result in any loss, cost, damage or expense (including reasonable attorneys’ fees and legal expenses) to any First Lien Claimholder reasonably documented in writing, and (vi) agree to pay to the First Lien Collateral Agent and the other First Lien Lenders any of the other obligations in respect of the First Lien Obligations, within three (3) Business Days after receipt by the Second Lien Lenders of amounts sufficient to pay all or a portion of such other obligations. Such purchase price and cash collateral shall be remitted by wire transfer of immediately available federal funds to such bank account of the First Lien Collateral Agent as the First Lien Collateral Agent may designate in writing to the Second Lien Collateral Agent for such purpose. Interest shall be calculated to but excluding the Business Day on which such purchase and sale shall occur if the amounts so paid by the Purchasing Second Lien Lenders to the bank account designated by the First Lien Collateral Agent are received in such bank account prior to 1:00 p.m., New York time and interest shall be calculated to and including such Business Day if the amounts so paid by the Purchasing Second Lien Lenders to the bank account designated by the First Lien Collateral Agent are received in such bank account later than 1:00 p.m., New York time.

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(e)Such purchase shall be expressly made without representation or warranty of any kind by any of the First Lien Lenders as to the First Lien Obligations or otherwise and without recourse to any of the First Lien Lenders, except that each of the First Lien Lenders shall represent and warrant: (i) the amount of the First Lien Obligations being purchased from such First Lien Lender; (ii) that such First Lien Lender owns such First Lien Obligations free and clear of any Liens or encumbrances; and (iii) such First Lien Lenders has the right to assign such First Lien Obligations and the assignment is duly authorized.

 

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IN WITNESS WHEREOF, the parties hereto have executed this Intercreditor Agreement as of the date first written above.

	First Lien Collateral Agent
	BANK OF AMERICA, N.A.,
	as First Lien Collateral Agent,
By:
	55 South Lake
	Pasadena, California 91101

Second Lien Collateral Agent
AMPHORA LIMITED,
as Second Lien Collateral Agent
By:	Amaranth Advisors L.L.C., Its Trading Advisor
By:
	Name:
	Title:
	c/o Amaranth Advisors L.L.C.
	One American Lane
	Greenwich, CT 06831
	Attention: General Counsel
	Facsimile: (203) 422-3540
	Telephone: (203) 422-3340

	MODTECH HOLDINGS, INC
By:
	Name:
	Title:
	[NOTICE ADDRESS]

EX-10.34

MODTECH HOLDINGS, INC.,

as Borrower

LOAN AND SECURITY AGREEMENT

Dated as of March 31, 2006

$25,000,000

CERTAIN FINANCIAL INSTITUTIONS,

as Lenders

and

BANK OF AMERICA, N.A.,

as Agent

TABLE OF CONTENTS

		Page
SECTION 1.	DEFINITIONS; RULES OF CONSTRUCTION	1
1.1	Definitions	1
1.2	Accounting Terms	24
1.3	Certain Matters of Construction	24
SECTION 2.	CREDIT FACILITIES	25
2.1	Revolver Commitment	25
2.2	[Intentionally Omitted]	27
2.3	Letter of Credit Facility	27
SECTION 3.	INTEREST, FEES AND CHARGES	29
3.1	Interest	29
3.2	Fees	31
3.3	Computation of Interest, Fees, Yield Protection	32
3.4	Reimbursement Obligations	32
3.5	Illegality	32
3.6	Increased Costs	33
3.7	Capital Adequacy	34
3.8	Mitigation	34
3.9	Funding Losses	34
3.10	Maximum Interest	34
SECTION 4.	LOAN ADMINISTRATION	35
4.1	Manner of Borrowing and Funding Revolver Loans	35
4.2	Defaulting Lender	37
4.3	Number and Amount of LIBOR Loans; Determination of Rate	37
4.4	Borrower Agent	37
4.5	One Obligation	38
4.6	Effect of Termination	38
SECTION 5.	PAYMENTS	38
5.1	General Payment Provisions	38
5.2	Repayment of Revolver Loans	38
5.3	[Intentionally Omitted]	39
5.4	Payment of Other Obligations	39
5.5	Marshaling; Payments Set Aside	39
5.6	Post-Default Allocation of Payments	39
5.7	Application of Payments	40
5.8	Loan Account; Account Stated	40
5.9	Taxes	40
5.10	Withholding Tax Exemption	41
5.11	Nature and Extent of Each Borrower’s Liability	41

ii

TABLE OF CONTENTS

(continued)

		Page
SECTION 6.	CONDITIONS PRECEDENT	44
6.1	Conditions Precedent to Initial Loans	44
6.2	Conditions Precedent to All Credit Extensions	45
6.3	Limited Waiver of Conditions Precedent	46
6.4	Conditions Subsequent	46
SECTION 7.	COLLATERAL	46
7.1	Grant of Security Interest	46
7.2	Lien on Deposit Accounts; Cash Collateral	47
7.3	Real Estate Collateral	48
7.4	Other Collateral	48
7.5	No Assumption of Liability	49
7.6	Further Assurances	49
7.7	Foreign Subsidiary Stock	49
SECTION 8.	COLLATERAL ADMINISTRATION	49
8.1	Borrowing Base Certificates	49
8.2	Administration of Accounts	49
8.3	Administration of Inventory	50
8.4	Administration of Equipment	51
8.5	Administration of Deposit Accounts	51
8.6	General Provisions	52
8.7	Power of Attorney	53
SECTION 9.	REPRESENTATIONS AND WARRANTIES	54
9.1	General Representations and Warranties	54
9.2	Complete Disclosure	60
SECTION 10.	COVENANTS AND CONTINUING AGREEMENTS	60
10.1	Affirmative Covenants	60
10.2	Negative Covenants	63
10.3	Financial Covenants	68
SECTION 11.	EVENTS OF DEFAULT; REMEDIES ON DEFAULT	68
11.1	Events of Default	68
11.2	Remedies upon Default	70
11.3	License	71
11.4	Setoff	71
11.5	Remedies Cumulative; No Waiver	71
SECTION 12.	AGENT	72
12.1	Appointment, Authority and Duties of Agent	72
12.2	Agreements Regarding Collateral and Field Examination Reports	73

iii

TABLE OF CONTENTS

(continued)

		Page
12.3	Reliance By Agent	74
12.4	Action Upon Default	74
12.5	Ratable Sharing	74
12.6	Indemnification of Agent Indemnitees	75
12.7	Limitation on Responsibilities of Agent	75
12.8	Successor Agent and Co-Agents	76
12.9	Due Diligence and Non-Reliance	76
12.10	Replacement of Certain Lenders	77
12.11	Remittance of Payments and Collections	77
12.12	Agent in its Individual Capacity	78
12.13	Agent Titles	78
12.14	No Third Party Beneficiaries	78
SECTION 13.	BENEFIT OF AGREEMENT; ASSIGNMENTS AND PARTICIPATIONS	78
13.1	Successors and Assigns	78
13.2	Participations	79
13.3	Assignments	79
13.4	Tax Treatment	80
13.5	Representation of Lenders	80
SECTION 14.	MISCELLANEOUS	80
14.1	Consents, Amendments and Waivers	80
14.2	Indemnity	81
14.3	Notices and Communications	81
14.4	Performance of Borrowers’ Obligations	82
14.5	Credit Inquiries	82
14.6	Severability	82
14.7	Cumulative Effect; Conflict of Terms	83
14.8	Counterparts; Facsimile Signatures	83
14.9	Entire Agreement	83
14.10	Obligations of Lenders	83
14.11	Confidentiality	83
14.12	[Intentionally Omitted]	84
14.13	GOVERNING LAW	84
14.14	Consent to Forum; Arbitration	84
14.15	Waivers by Borrowers	85
14.16	Patriot Act Notice	86

iv

TABLE OF CONTENTS

(continued)

LIST OF EXHIBITS AND SCHEDULES

Exhibit A	Assignment and Acceptance
Exhibit B	Assignment Notice
Schedule 1.1	Commitments of Lenders
Schedule 8.5	Deposit Accounts
Schedule 8.6.1	Business Locations
Schedule 9.1.4	Names and Capital Structure
Schedule 9.1.5	Former Names and Companies
Schedule 9.1.8	Disclosed Losses
Schedule 9.1.10	Taxes Owed by Subsidiaries
Schedule 9.1.12	Patents, Trademarks, Copyrights and Licenses
Schedule 9.1.15	Environmental Matters
Schedule 9.1.16	Restrictive Agreements
Schedule 9.1.17	Litigation
Schedule 9.1.19	Pension Plans
Schedule 9.1.21	Labor Contracts
Schedule 10.2.2	Existing Liens
Schedule 10.2.17	Existing Affiliate Transactions

v

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT is dated as of March 31, 2006, among MODTECH HOLDINGS, INC., a Delaware corporation (“Borrower Agent”) and those Subsidiaries of Borrower Agent set forth on the signature pages hereto or which hereafter become parties hereto (individually, a “Borrower” and collectively, “Borrowers”), the financial institutions party to this Agreement from time to time as lenders (collectively, “Lenders”), and BANK OF AMERICA, N.A., a national banking association, as agent for the Lenders (“Agent”).

R E C I T A L S:

Borrowers have requested that Lenders make available a credit facility, to be used by Borrowers to finance their mutual and collective business enterprise. Lenders are willing to provide such credit facility on the terms and conditions set forth in this Agreement.

NOW, THEREFORE, for valuable consideration hereby acknowledged, the parties agree as follows:

SECTION 1. DEFINITIONS; RULES OF CONSTRUCTION

1.1Definitions. As used herein, the following terms have the meanings set forth below:

Account - as defined in the UCC, including all rights to payment for goods sold or leased, or for services rendered.

Account Debtor - a Person who is obligated under an Account, Chattel Paper or General Intangible.

Accounts Formula Amount - 85% of the Value of Eligible Accounts; provided, however, that such percentage shall be reduced by two-tenths of one percent for each one-tenth of one percent that the Dilution Percent exceeds 7.5%.

Adjusted LIBOR - for any Interest Period, with respect to LIBOR Loans, the per annum rate of interest (rounded upward, if necessary, to the nearest 1/8th of 1%) appearing on Telerate Page 3750, or if such page is unavailable, the Reuters Screen LIBO Page (or any successor page of either, as applicable), as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if the Reuters Screen LIBO Page is used and more than one rate is shown on such page, the applicable rate shall be the arithmetic mean thereof. If for any reason none of the foregoing rates is available, the Offshore Base Rate shall be the rate per annum determined by Agent as the rate of interest at which Dollar deposits in the approximate amount of the applicable LIBOR Loan would be offered to major banks in the offshore Dollar market at or about 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If the Board of Governors shall impose a Reserve Percentage with respect to LIBOR deposits, then Adjusted LIBOR shall equal the amount determined above, divided by 1 minus the Reserve Percentage.

1

Affiliate - with respect to any Person, another Person (a) who directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such first Person; (b) who beneficially owns 10% or more of the voting securities or any class of Equity Interests of such first Person; (c) at least 10% of whose voting securities or any class of Equity Interests is beneficially owned, directly or indirectly, by such first Person; or (d) who is an officer, director, partner or managing member of such first Person. “Control” means the possession, directly or indirectly, of the power to direct or cause direction of the management and policies of a Person, whether through ownership of Equity Interests, by contract or otherwise.

Agent Indemnitees - Agent and its officers, directors, employees, Affiliates, agents and attorneys.

Agent Professionals - attorneys, accountants, appraisers, auditors, business valuation experts, environmental engineers or consultants, turnaround consultants, and other professionals and experts retained by Agent.

Allocable Amount - as defined in Section 5.11.3.

Anti-Terrorism Laws - any laws relating to terrorism or money laundering, including the Patriot Act.

Applicable Law - all laws, rules, regulations and governmental guidelines applicable to the Person, conduct, transaction, agreement or matter in question, including all applicable statutory law, common law and equitable principles, and all provisions of constitutions, treaties, statutes, rules, regulations, orders and decrees of Governmental Authorities.

Applicable Margin - with respect to any Type of Loan, the margin set forth below, as determined by the EBITDA (measured on the first day of each Fiscal Quarter, on a trailing 12 month basis) for the immediately preceding Fiscal Quarter:

Level	EBITDA		Base Rate Revolver Loans			LIBOR Revolver Loans
I		< 10,000,000		0.75	%		3.00	%
II		>10,000,000 and < $12,000,000		0.50	%		2.75	%
III		>12,000,000 and < $15,000,000		0.25	%		2.50	%
IV		>15,000,000 and < $25,000,000		0.00	%		2.25	%
V		≥ 25,000,000		0.00	%		2.00	%

Until October 1, 2006, margins shall be determined as if Level III were applicable. Effective October 1, 2006, the margins shall be subject to increase or decrease based on the EBITDA (measured on a trailing 12 month basis) as set forth in the financial statements and corresponding Compliance Certificate for the immediately preceding Fiscal Quarter, which change shall be effective on the first Business Day of the calendar month that occurs more than 10 days following receipt. If, by the first Business Day of a month following any Fiscal Quarter, any financial statements and Compliance Certificate due in the preceding month have not been received, then the margins shall be determined as if Level I were applicable, from such day until the first Business Day of the Fiscal Quarter following actual receipt.

2

To the extent that at any time of determination the aggregate amount of outstanding Obligations exceeds an amount equal to the sum of the Eligible Accounts Component and Eligible Inventory Component at such time (as determined by Agent), then such excess shall bear interest at a rate per annum equal to the rate of interest otherwise applicable as set forth in this definition, plus 0.25%.

Approved Fund - any Person (other than a natural person) that is engaged in making, holding or investing in extensions of credit in its ordinary course of business and is administered or managed by a Lender, an entity that administers or manages a Lender, or an Affiliate of either.

Asset Disposition - a sale, lease, license, consignment, transfer or other disposition of Property of an Obligor, including a disposition of Property in connection with a sale-leaseback transaction or synthetic lease.

Assignment and Acceptance - an assignment agreement between a Lender and Eligible Assignee, in the form of Exhibit A.

Availability - determined as of any date, the amount that Borrowers are entitled to borrow as Revolver Loans, being the Borrowing Base minus the principal balance of all Revolver Loans.

Availability Reserve - the sum (without duplication) of (a) the Inventory Reserve; (b) the Rent and Charges Reserve; (c) the LC Reserve; (d) the Bank Product Reserve; (e) the aggregate amount of liabilities secured by Liens upon Collateral that are senior to Agent’s Liens (but imposition of any such reserve shall not waive an Event of Default arising therefrom); (f) the Payable Reserve; and (g) such additional reserves, in such amounts and with respect to such matters, as Agent in its discretion may elect to impose from time to time.

Bank of America - Bank of America, N.A., a national banking association, and its successors and assigns.

Bank of America Indemnitees - Bank of America and its officers, directors, employees, Affiliates, agents and attorneys.

Bank Product - any of the following products, services or facilities extended to any Borrower or Subsidiary by Bank of America or any of its Affiliates: (a) Cash Management Services; (b) products under Hedging Agreements; (c) commercial credit card and merchant card services; and (d) other banking products or services as may be requested by any Borrower or Subsidiary, other than Letters of Credit.

3

Bank Product Debt - Debt and other obligations of an Obligor relating to Bank Products.

Bank Product Reserve - the aggregate amount of reserves established by Agent from time to time in its discretion in respect of Bank Product Debt.

Bankruptcy Code - Title 11 of the United States Code.

Base Rate - the rate of interest announced by Bank of America from time to time as its prime rate. Such rate is a reference rate only and Bank of America may make loans or other extensions of credit at, above or below it. Any change in the prime rate announced by Bank of America shall take effect at the opening of business on the effective date specified in the public announcement of the change.

Base Rate Loan - any Loan that bears interest based on the Base Rate.

Base Rate Revolver Loan - a Revolver Loan that bears interest based on the Base Rate.

Board of Governors - the Board of Governors of the Federal Reserve System.

Bonded Accounts - Accounts of a Borrower, arising in the ordinary course of business of the Borrower with respect to a contract which requires the Borrower to have a bond posted on its behalf to secure the Borrower’s performance of such contract.

Borrowed Money - with respect to any Obligor, without duplication, its (a) Debt that (i) arises from the lending of money by any Person to such Obligor, (ii) is evidenced by notes, drafts, bonds, debentures, credit documents or similar instruments, (iii) accrues interest or is a type upon which interest charges are customarily paid (excluding trade payables owing in the Ordinary Course of Business), or (iv) was issued or assumed as full or partial payment for Property; (b) Capital Leases; (c) reimbursement obligations with respect to letters of credit; and (d) guaranties of any Debt of the foregoing types owing by another Person.

Borrower Agent - as defined in the Recitals to this Agreement.

Borrowing - a group of Loans of one Type that are made on the same day or are converted into Loans of one Type on the same day.

Borrowing Base - on any date of determination, an amount equal to the lesser of (a) the aggregate amount of Revolver Commitments, minus the LC Reserve; or (b) the sum of the Accounts Formula Amount, plus the Inventory Formula Amount, plus, the Fixed Asset Formula Amount, minus the Availability Reserve.

4

Borrowing Base Certificate - a certificate, in form and substance satisfactory to Agent, by which Borrowers certify calculation of the Borrowing Base.

Business Day - any day (a) excluding Saturday, Sunday and any other day on which banks are permitted to be closed under the laws of the States of North Carolina and California; and (b) when used with reference to a LIBOR Loan, also excluding any day on which banks do not conduct dealings in Dollar deposits on the London interbank market.

Capital Adequacy Regulation - any law, rule, regulation, guideline, request or directive of any central bank or other Governmental Authority, whether or not having the force of law, regarding capital adequacy of a bank or any Person controlling a bank.

Capital Expenditures - all liabilities incurred, expenditures made or payments due (whether or not made) by a Borrower or Subsidiary for the acquisition of any fixed assets, or any improvements, replacements, substitutions or additions thereto with a useful life of more than one year, including the principal portion of Capital Leases.

Capital Lease - any lease that is required to be capitalized for financial reporting purposes in accordance with GAAP.

Cash Collateral - cash, and any interest or other income earned thereon, that is delivered to Agent to Cash Collateralize any Obligations.

Cash Collateral Account - a demand deposit, money market or other account established by Agent at such financial institution as Agent may select in its discretion, which account shall be subject to Agent’s Liens for the benefit of Secured Parties.

Cash Collateralize - the delivery of cash to Agent, as security for the payment of Obligations, in an amount equal to (a) with respect to LC Obligations, 105% of the aggregate LC Obligations, and (b) with respect to any inchoate or contingent Obligations (including Obligations arising under Bank Products), Agent’s good faith estimate of the amount due or to become due, including all fees and other amounts relating to such Obligations. “Cash Collateralization” has a correlative meaning.

Cash Equivalents - (a) marketable obligations issued or unconditionally guaranteed by, and backed by the full faith and credit of, the United States government, maturing within 12 months of the date of acquisition; (b) certificates of deposit, time deposits and bankers’ acceptances maturing within 12 months of the date of acquisition, and overnight bank deposits, in each case which are issued by a commercial bank organized under the laws of the United States or any state or district thereof, rated A-1 (or better) by S&P or P-1 (or better) by Moody’s at the time of acquisition, and (unless issued by a Lender) not subject to offset rights; (c) repurchase obligations with a term of not more than 30 days for underlying investments of the types described in clauses (a) and (b) entered into with any bank meeting the qualifications specified in clause (b); (d) commercial paper rated A-1 (or better) by S&P or P-1 (or better) by Moody’s, and maturing within nine months of the date of acquisition; and (e) shares of any money market fund that has substantially all of its assets invested continuously in the types of investments referred to above, has net assets of at least $500,000,000 and has the highest rating obtainable from either Moody’s or S&P.

5

Cash Management Services - any services provided from time to time by Bank of America or any of its Affiliates to any Borrower or Subsidiary in connection with operating, collections, payroll, trust, or other depository or disbursement accounts, including automatic clearinghouse, controlled disbursement, depository, electronic funds transfer, information reporting, lockbox, stop payment, overdraft and/or wire transfer services.

CERCLA - the Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C. Sec. 9601 etseq.).

Chattel Paper - as defined in the UCC.

Claims - all liabilities, obligations, losses, damages, penalties, judgments, proceedings, costs and expenses of any kind (including remedial response costs, reasonable attorneys’ fees and Extraordinary Expenses) at any time (including after Full Payment of the Obligations, resignation or replacement of Agent, or replacement of any Lender) incurred by or asserted against any Indemnitee in any way relating to (a) any Loan Documents or transactions relating thereto, (b) any action taken or omitted to be taken by any Indemnitee in connection with any Loan Documents, (c) the existence or perfection of any Liens, or realization upon any Collateral, (d) exercise of any rights or remedies under any Loan Documents or Applicable Law, or (e) failure by any Obligor to perform or observe any terms of any Loan Document, in each case including all costs and expenses relating to any investigation, litigation, arbitration or other proceeding (including an Insolvency Proceeding or appellate proceedings), whether or not the applicable Indemnitee is a party thereto.

Closing Date - as defined in Section 6.1.

Collateral - all Property described in Section 7.1, all Property described in any Security Documents as security for any Obligations, and all other Property that now or hereafter secures (or is intended to secure) any Obligations.

Commercial Tort Claim - as defined in the UCC.

Commitment - for any Lender, the amount of such Lender’s Revolver Commitment. “Commitments” means the aggregate amount of all Revolver Commitments.

Commitment Termination Date - the earliest to occur of (a) the Revolver Termination Date; (b) the date on which Borrowers terminate the Revolver Commitments pursuant to Section 2.1.4; or (c) the date on which the Revolver Commitments are terminated pursuant to Section 11.2.

Compliance Certificate - a certificate, in form and substance satisfactory to Agent, by which Borrowers certify compliance with Sections 10.2.3 and 10.3 and calculate the applicable Level for the Applicable Margin.

6

Contingent Obligation - any obligation of a Person arising from a guaranty, indemnity or other assurance of payment or performance of any Debt, lease, dividend or other obligation (“primary obligations”) of another obligor (“primary obligor”) in any manner, whether directly or indirectly, including any obligation of such Person under any (a) guaranty, endorsement, co-making or sale with recourse of an obligation of a primary obligor; (b) obligation to make take-or-pay or similar payments regardless of nonperformance by any other party to an agreement; and (c) arrangement (i) to purchase any primary obligation or security therefor, (ii) to supply funds for the purchase or payment of any primary obligation, (iii) to maintain or assure working capital, equity capital, net worth or solvency of the primary obligor, (iv) to purchase Property or services for the purpose of assuring the ability of the primary obligor to perform a primary obligation, or (v) otherwise to assure or hold harmless the holder of any primary obligation against loss in respect thereof. The amount of any Contingent Obligation shall be deemed to be the stated or determinable amount of the primary obligation (or, if less, the maximum amount for which such Person may be liable under the instrument evidencing the Contingent Obligation) or, if not stated or determinable, the maximum reasonably anticipated liability with respect thereto.

CWA - the Clean Water Act (33 U.S.C. Sec.Sec. 1251 etseq.).

Debt - as applied to any Person, without duplication, (a) all items that would be included as liabilities on a balance sheet in accordance with GAAP, including Capital Leases, but excluding trade payables incurred and being paid in the Ordinary Course of Business; (b) all Contingent Obligations; (c) all reimbursement obligations in connection with letters of credit issued for the account of such Person; and (d) in the case of a Borrower, the Obligations. The Debt of a Person shall include any recourse Debt of any partnership in which such Person is a general partner or joint venturer.

Default - an event or condition that, with the lapse of time or giving of notice, would constitute an Event of Default.

Default Rate - for any Obligation (including, to the extent permitted by law, interest not paid when due), 2% plus the interest rate otherwise applicable thereto.

Deposit Account - as defined in the UCC.

Deposit Account Control Agreements - the Deposit Account control agreements to be executed by each institution maintaining a Deposit Account for a Borrower, in favor of Agent, for the benefit of Secured Parties, as security for the Obligations.

Dilution Percent - the percent, determined for Borrowers’ most recent Fiscal Quarter, equal to (a) bad debt write-downs or write-offs, discounts, returns, promotions, credits, credit memos and other dilutive items with respect to Accounts, dividedby (b) gross sales.

Distribution - any declaration or payment of a distribution, interest or dividend on any Equity Interest (other than payment-in-kind); any distribution, advance or repayment of Debt to a holder of Equity Interests; or any purchase, redemption, or other acquisition or retirement for value of any Equity Interest.

7

Document - as defined in the UCC.

Dollars - lawful money of the United States.

Dominion Account - a special account established by Borrowers at Bank of America or another bank acceptable to Agent, over which Agent has exclusive control for withdrawal purposes.

EBITDA - determined on a consolidated basis for Borrowers and Subsidiaries, net income, calculated before interest expense, provision for income taxes, depreciation and amortization expense, gains or losses arising from the sale of capital assets, gains arising from the write-up of assets, non-cash gains or losses, and any extraordinary gains (in each case, to the extent included in determining net income).

Eligible Account - an Account owing to a Borrower that arises in the Ordinary Course of Business from the sale of goods,is payable in Dollars and is deemed by Agent, in its discretion, to be an Eligible Account. Without limiting the foregoing, no Account shall be an Eligible Account if (a) it is a Bonded Account, (b) it is unpaid for more than 60days after the original due date, or more than 90days after the original invoice date; (c)  50% or more of the Accounts owing by the Account Debtor are not Eligible Accounts under the foregoing clause (b); (d) when aggregated with other Accounts owing by the Account Debtor, it exceeds 15%of the aggregate Eligible Accounts (or such higher percentage as Agent may establish for the Account Debtor from time to time, including, but not limited to Williams Scottsman and Resun Leasing with respect to each of which such percentage shall be 30%); (e) it does not conform with a covenant or representation herein; (f) it is owing by a creditor or supplier, or is otherwise subject to a counterclaim, dispute, deduction, discount, recoupment, reserve, defense, chargeback, credit or allowance (but ineligibility shall be limited to the amount thereof) or a potential offset; (g) an Insolvency Proceeding has been commenced by or against the Account Debtor; or the Account Debtor has failed, has suspended or ceased doing business, is liquidating, dissolving or winding up its affairs, or is not Solvent; (h) the Account Debtor is organized or has its principal offices or assets outside the United States or Canada; (i) it is owing by a Government Authority, unless (1) otherwise approved by Agent (as of the Closing Date, for the purposes of this subsection (i) Agent has approved Accounts owing by any Governmental Authority which is a school district in the States of Florida or California), or (2) the Account Debtor is the United States or any department, agency or instrumentality thereof and the Account has been assigned to Agent in compliance with the Assignment of Claims Act; (j) it is not subject to a duly perfected, first priority Lien in favor of Agent, or is subject to any other Lien other than the Lien arising under the Existing Subordinated Debt Documents; (k) except as set forth in subsection (n) below, the goods giving rise to it have not been delivered to and accepted by the Account Debtor, the services giving rise to it have not been accepted by the Account Debtor, or it otherwise does not represent a final sale; (l) it is evidenced by Chattel Paper or an Instrument of any kind, or has been reduced to judgment; (m) its payment has been extended, the Account Debtor has made a partial payment, or it arises from a sale on a cash-on-delivery basis; (n) it arises from a sale to an Affiliate, or from a sale on a bill-and-hold (except for those sales on a bill-and-hold basis for which the applicable invoices indicate that title to sold goods shall pass from Borrower to its customer once production of the goods is completed and they become available to be accepted by or delivered to the customer), guaranteed sale, sale-or-return, sale-on-approval, consignment, or other repurchase or return basis; (o) it represents a progress billing or retainage; (p) it includes a billing for interest, fees or late charges, but ineligibility shall be limited to the extent thereof; or (q) it arises from a retail sale to a Person who is purchasing for personal, family or household purposes. In calculating delinquent portions of Accounts under clauses (a) and (b), credit balances more than 90 days old will be excluded.

8

Eligible Accounts Component - as of any date of determination, the amount of the Borrowing Base attributable to Eligible Accounts, after taking into account any Availability Reserves applicable thereto, as each of the foregoing is determined by Agent.

Eligible Assignee - a Person that is (a) a Lender, U.S.-based Affiliate of a Lender or Approved Fund; (b) any other financial institution approved by Agent and Borrower Agent (which approval by Borrower Agent shall not be unreasonably withheld or delayed, and shall be deemed given if no objection is made within two Business Days after notice of the proposed assignment), that is organized under the laws of the United States or any state or district thereof, has total assets in excess of $5 billion, extends asset-based lending facilities in its ordinary course of business and whose becoming an assignee would not constitute a prohibited transaction under Section 4975 of ERISA or any other Applicable Law; and (c) during any Event of Default, any Person acceptable to Agent in its discretion.

Eligible Equipment - Equipment owned by a Borrower that Agent, in its discretion, deems to be Eligible Equipment.

Eligible Inventory - Inventory owned by a Borrower that Agent, in its discretion, deems to be Eligible Inventory. Without limiting the foregoing, no Inventory shall be Eligible Inventory unless it (a) is raw materials, and not finished goods, work-in-process, packaging or shipping materials, labels, samples, display items, bags, or replacement parts; (b) is not held on consignment; (c) is in new and saleable condition and is not damaged, defective, shopworn or otherwise unfit for sale; (d) is not slow-moving, obsolete or unmerchantable, and does not constitute returned or repossessed goods; (e) meets all standards imposed by any Governmental Authority, and does not constitute hazardous materials under any Environmental Law; (f) conforms with the covenants and representations herein; (g) is subject to Agent’s duly perfected, first priority Lien, and no other Lien other than the Lien arising under the Existing Subordinated Debt Documents; (h) is within the continental United States or Canada, is not in transit except between locations of Borrowers, and is not consigned to any Person; (i) is not subject to any warehouse receipt or negotiable Document; (j) is not subject to any License or other arrangement that restricts such Borrower’s or Agent’s right to dispose of such Inventory, unless Agent has received an appropriate Lien Waiver; and (k) is not located on leased premises or in the possession of a warehouseman, processor, repairman, mechanic, shipper, freight forwarder or other Person, unless the lessor or such Person has delivered a Lien Waiver or an appropriate Rent and Charges Reserve has been established; and (l) is reflected in the details of a current perpetual inventory report once Borrowers have established a perpetual inventory reporting system satisfactory to Agent.

9

Eligible Inventory Component - as of any date of determination, the amount of the Borrowing Base attributable to Eligible Inventory, after taking into account any Availability Reserves applicable thereto, as each of the foregoing is determined by Agent.

Enforcement Action - any action to enforce any Obligations or Loan Documents or to realize upon any Collateral (whether by judicial action, self-help, notification of Account Debtors, exercise of setoff or recoupment, or otherwise).

Environmental Agreement - each agreement of Borrowers with respect to any Real Estate subject to a Mortgage, pursuant to which Borrowers agree to indemnify and hold harmless Agent and Lenders from liability under any Environmental Laws.

Environmental Laws - all Applicable Laws (including all programs, permits and guidance promulgated by regulatory agencies), relating to public health (but excluding occupational safety and health, to the extent regulated by OSHA) or the protection or pollution of the environment, including CERCLA, RCRA and CWA.

Environmental Notice - a notice (whether written or oral) from any Governmental Authority or other Person of any possible noncompliance with, investigation of a possible violation of, litigation relating to, or potential fine or liability under any Environmental Law, or with respect to any Environmental Release, environmental pollution or hazardous materials, including any complaint, summons, citation, order, claim, demand or request for correction, remediation or otherwise.

Environmental Release - a release as defined in CERCLA or under any other Environmental Law.

Equipment - as defined in the UCC, including all machinery, apparatus, equipment, fittings, furniture, fixtures, motor vehicles and other tangible personal Property (other than Inventory), and all parts, accessories and special tools therefor, and accessions thereto.

Equity Interest - the interest of any (a) shareholder in a corporation, (b) partner in a partnership (whether general, limited, limited liability or joint venture), (c) member in a limited liability company, or (d) other Person having any other form of equity security or ownership interest.

ERISA - the Employee Retirement Income Security Act of 1974.

Event of Default - as defined in Section 11.

Excluded Tax - Tax on the overall net income or gross receipts of a Lender imposed by the jurisdiction in which such Lender’s principal executive office is located.

Existing Subordinated Credit Agreement - that certain Securities Purchase Agreement dated as of December 31, 2004 providing for the issuance of convertible senior subordinated notes by Borrower Agent (as amended, supplemented, modified, extended, renewed, replaced or refinanced from time to time).

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Existing Subordinated Debt - the Debt incurred by Borrower Agent pursuant to the Existing Subordinated Debt Documents.

Existing Subordinated Debt Collateral Agent - Amphora Limited, an exempt company organized under the laws of the Cayman Islands.

Existing Subordinated Debt Documents - the Existing Subordinated Credit Agreement, the Subordinated Convertible Notes and the Transaction Documents (as defined in the Existing Subordinated Debt Credit Agreement) and each of the other agreements, documents and instruments providing for or evidencing or related to the Existing Subordinated Debt Obligations, and any other agreement, writing, document or instrument executed or delivered at any time in connection with the Existing Subordinated Debt Obligations, including any intercreditor or joinder agreement among the holders of the Existing Subordinated Debt Obligations, as each may be amended, restated, supplemented, modified, renewed, extended or refinanced from time to time.

Existing Subordinated Debt Lenders - the “Lenders” as defined in the Existing Subordinated Debt Credit Agreement, and any successors and assigns.

Existing Subordinated Debt Letter of Credit - the irrevocable standby letter of credit no.SLCLSTL01562, dated December 31, 2004, issued by U.S. Bank National Association for the Borrower Agent’s account for the benefit of Existing Subordinated Debt Collateral Agent, in the maximum amount of $10,000,000 to secure certain of the Existing Subordinated Debt Obligations.

Existing Subordinated Debt Notes - the Senior Subordinated Secured Convertible Notes, dated as of December 31, 2004, issued by the Borrower Agent in favor of the Existing Subordinated Debt Lenders, in the original aggregate principal amount of $25,000,000, as amended, restated, supplemented, modified, renewed, extended or refinanced from time to time in accordance with the terms of the Intercreditor Agreement.

Existing Subordinated Debt Obligations - all obligations of Borrower Agent, whether outstanding or contingent, evidenced by or arising under: (i) the Existing Subordinated Credit Agreement and/or (ii) any of the other Existing Subordinated Debt Documents.

Extraordinary Expenses - all costs, expenses or advances that Agent may incur during a Default or Event of Default, or during the pendency of an Insolvency Proceeding of an Obligor, including those relating to (a) any audit, inspection, repossession, storage, repair, appraisal, insurance, manufacture, preparation or advertising for sale, sale, collection, or other preservation of or realization upon any Collateral; (b) any action, arbitration or other proceeding (whether instituted by or against Agent, any Lender, any Obligor, any representative of creditors of an Obligor or any other Person) in any way relating to any Collateral (including the validity, perfection, priority or avoidability of Agent’s Liens with respect to any Collateral), Loan Documents or Obligations, including any lender liability or other Claims; (c) the exercise, protection or enforcement of any rights or remedies of Agent in, or the monitoring of, any Insolvency Proceeding; (d) settlement or satisfaction of any taxes, charges or Liens with respect to any Collateral; (e) any Enforcement Action; (f) negotiation and documentation of any modification, waiver, workout, restructuring or forbearance with respect to any Loan Documents or Obligations; or (g) Protective Advances. Such costs, expenses and advances include transfer fees, taxes, storage fees, insurance costs, permit fees, utility reservation and standby fees, legal fees, appraisal fees, brokers’ fees and commissions, auctioneers’ fees and commissions, accountants’ fees, environmental study fees, wages and salaries paid to employees of any Obligor or independent contractors in liquidating any Collateral, and travel expenses.

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Fiscal Quarter - each period of three months, commencing on the first day of a Fiscal Year.

Fiscal Year - the fiscal year of Borrowers and Subsidiaries for accounting and tax purposes, ending on December 31 of each year.

Fixed Asset Formula Amount - the lesser of (a) the Fixed Asset Sublimit, or (b) the sum of (i)  70% of the fair market value of the Mortgaged Property, as determined by an appraisal satisfactory to Agent, and (ii) 80% of the orderly liquidation value of Eligible Equipment, as determined by an appraisal satisfactory to Agent.

Fixed Asset Sublimit - an amount equal to $3,700,000, which amount shall be reduced quarterly in the amount of $108,340 with the first such reduction occurring on July 1, 2006 and subsequent reductions continuing on the first day of each quarter thereafter.

Fixed Charge Coverage Ratio - the ratio, determined on a consolidated basis for Borrowers and Subsidiaries, for any measurement period, of (a) EBITDA to (b) Fixed Charges.

Fixed Charges - the sum of interest expense (other than payment-in-kind), principal payments made on Borrowed Money, cash payments made with respect to a reduction of the Fixed Asset Sublimit (determined on a monthly basis), unfinanced Capital Expenditures and cash taxes paid.

FLSA - the Fair Labor Standards Act of 1938.

Foreign Lender - any Lender that is organized under the laws of a jurisdiction other than the laws of the United States, or any state or district thereof.

Foreign Plan - any employee benefit plan or arrangement maintained or contributed to by any Obligor or Subsidiary that is not subject to the laws of the United States, or any employee benefit plan or arrangement mandated by a government other than the United States for employees of any Obligor or Subsidiary.

Foreign Subsidiary - a Subsidiary that is a “controlled foreign corporation” under Section 957 of the Internal Revenue Code, such that a guaranty by such Subsidiary of the Obligations or a Lien on the assets of such Subsidiary to secure the Obligations would result in material tax liability to Borrowers.

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Full Payment - with respect to any Obligations, (a) the full and indefeasible cash payment thereof, including any interest, fees and other charges accruing during an Insolvency Proceeding (whether or not allowed in the proceeding); (b) if such Obligations are LC Obligations or inchoate or contingent in nature, Cash Collateralization thereof (or delivery of a standby letter of credit acceptable to Agent in its discretion, in the amount of required Cash Collateral); and (c) a release of any Claims of Obligors against Agent, Lenders and Issuing Bank arising on or before the payment date. No Loans shall be deemed to have been paid in full until all Commitments related to such Loans have expired or been terminated.

GAAP - generally accepted accounting principles in the United States in effect from time to time.

General Intangibles - as defined in the UCC, including choses in action, causes of action, company or other business records, inventions, blueprints, designs, patents, patent applications, trademarks, trademark applications, trade names, trade secrets, service marks, goodwill, brand names, copyrights, registrations, licenses, franchises, customer lists, permits, tax refund claims, computer programs, operational manuals, internet addresses and domain names, insurance refunds and premium rebates, all rights to indemnification, and all other intangible Property of any kind.

Goods - as defined in the UCC.

Governmental Approvals - all authorizations, consents, approvals, licenses and exemptions of, registrations and filings with, and required reports to, all Governmental Authorities.

Governmental Authority - any federal, state, municipal, foreign or other governmental department, agency, commission, board, bureau, court, tribunal, instrumentality, political subdivision, or other entity or officer exercising executive, legislative, judicial, regulatory or administrative functions for or pertaining to any government or court, in each case whether associated with the United States, a state, district or territory thereof, or a foreign entity or government.

Guarantor Payment - as defined in Section 5.11.3.

Guarantors - each Person who guarantees payment or performance of any Obligations. There are no Guarantors as of the Closing Date.

Guaranty - each guaranty agreement executed by a Guarantor in favor of Agent.

Hedging Agreement - an agreement relating to any swap, cap, floor, collar, option, forward, cross right or obligation, or combination thereof or similar transaction, with respect to interest rate, foreign exchange, currency, commodity, credit or equity risk.

Indemnitees - Agent Indemnitees, Lender Indemnitees, Issuing Bank Indemnitees and Bank of America Indemnitees.

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Insolvency Proceeding - any case or proceeding commenced by or against a Person under any state, federal or foreign law for, or any agreement of such Person to, (a) the entry of an order for relief under the Bankruptcy Code, or any other insolvency, debtor relief or debt adjustment law; (b) the appointment of a receiver, trustee, liquidator, administrator, conservator or other custodian for such Person or any part of its Property; or (c) an assignment or trust mortgage for the benefit of creditors.

Instrument - as defined in the UCC.

Insurance Assignment - each collateral assignment of insurance pursuant to which an Obligor assigns to Agent, for the benefit of Secured Parties, such Obligor’s rights under business interruption or other insurance policies as Agent deems appropriate, as security for the Obligations.

Intellectual Property - all intellectual and similar Property of a Person, including inventions, designs, patents, patent applications, copyrights, trademarks, service marks, trade names, trade secrets, confidential or proprietary information, customer lists, know-how, software and databases; all embodiments or fixations thereof and all related documentation, registrations and franchises; all books and records describing or used in connection with the foregoing; and all licenses or other rights to use any of the foregoing.

Intellectual Property Claim - any claim or assertion (whether in writing, by suit or otherwise) that a Borrower’s or Subsidiary’s ownership, use, marketing, sale or distribution of any Inventory, Equipment, Intellectual Property or other Property violates another Person’s Intellectual Property.

Intercreditor Agreement - the Intercreditor Agreement of even date herewith, in form and substance satisfactory to Agent, between the Existing Subordinated Debt Collateral Agent and Agent, relating to the Existing Subordinated Debt, as may be amended, modified, supplemented or restated from time to time.

Interest Period - as defined in Section 3.1.3.

Interest Rate Contract - any interest rate swap, collar or cap agreement, or other agreement or arrangement by any Borrower or Subsidiary with Bank of America that is designed to protect against fluctuations in interest rates.

Inventory - as defined in the UCC, including all goods intended for sale, lease, display or demonstration; all work in process; and all raw materials, and other materials and supplies of any kind that are or could be used in connection with the manufacture, printing, packing, shipping, advertising, sale, lease or furnishing of such goods, or otherwise used or consumed in a Borrower’s business (but excluding Equipment).

Inventory Formula Amount - the lesser of (a) $10,000,000; or (b) 60% of the Value of Eligible Inventory.

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Inventory Reserve - reserves established by Agent to reflect factors that may negatively impact the Value of Inventory, including change in salability, obsolescence, seasonality, theft, shrinkage, imbalance, change in composition or mix, markdowns and vendor chargebacks.

Investment - any acquisition of all or substantially all assets of a Person; any acquisition of record or beneficial ownership of any Equity Interests of a Person; or any advance or capital contribution to or other investment in a Person.

Investment Property - as defined in the UCC.

Issuing Bank - Bank of America or an Affiliate of Bank of America.

Issuing Bank Indemnitees - Issuing Bank and its officers, directors, employees, Affiliates, agents and attorneys.

LC Application - an application by Borrower Agent to Issuing Bank for issuance of a Letter of Credit, in form and substance satisfactory to Issuing Bank.

LC Conditions - the following conditions necessary for issuance of a Letter of Credit: (a) each of the conditions set forth in Section 6; (b) after giving effect to such issuance, total LC Obligations do not exceed the Letter of Credit Subline, no Overadvance exists and, if no Revolver Loans are outstanding, the LC Obligations do not exceed the Borrowing Base (without giving effect to the LC Reserve for purposes of this calculation); (c) the expiration date of such Letter of Credit is (i) no more than 365 days from issuance, in the case of standby Letters of Credit, (ii) no more than 120 days from issuance, in the case of documentary Letters of Credit, and (iii) at least 20 Business Days prior to the Revolver Termination Date; (d) the Letter of Credit and payments thereunder are denominated in Dollars; and (e) the form of the proposed Letter of Credit is satisfactory to Agent and Issuing Bank in their discretion.

LC Documents - all documents, instruments and agreements (including LC Requests and LC Applications) delivered by Borrowers or any other Person to Issuing Bank or Agent in connection with issuance, amendment or renewal of, or payment under, any Letter of Credit.

LC Obligations - the sum (without duplication) of (a) all amounts owing by Borrowers for any drawings under Letters of Credit; (b) the aggregate undrawn amount of all outstanding Letters of Credit; and (c) all fees and other amounts owing with respect to Letters of Credit.

LC Request - a request for issuance of a Letter of Credit, to be provided by Borrower Agent to Issuing Bank, in form satisfactory to Agent and Issuing Bank.

LC Reserve - the aggregate of all LC Obligations, other than (a) those that have been Cash Collateralized, and (b) if no Default or Event of Default exists, those constituting charges owing to the Issuing Bank.

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Lender Indemnitees - Lenders and their officers, directors, employees, Affiliates, agents and attorneys.

Lenders - as defined in the preamble to this Agreement, including Agent in its capacity as a provider of Swingline Loans and any other Person who hereafter becomes a “Lender” pursuant to an Assignment and Acceptance.

Letter of Credit - any standby or documentary letter of credit issued by Issuing Bank for the account of a Borrower, or any indemnity, guarantee, exposure transmittal memorandum or similar form of credit support issued by Agent or Issuing Bank for the benefit of a Borrower.

Letter-of-Credit Right - as defined in the UCC.

Letter of Credit Subline - $12,000,000.

LIBOR Loan - each set of LIBOR Revolver Loans having a common length and commencement of Interest Period.

LIBOR Revolver Loan - a Revolver Loan that bears interest based on Adjusted LIBOR.

License - any license or agreement under which an Obligor is authorized to use Intellectual Property in connection with any manufacture, marketing, distribution or disposition of Collateral, any use of Property or any other conduct of its business.

Licensor - any Person from whom an Obligor obtains the right to use any Intellectual Property.

Lien - any Person’s interest in Property securing an obligation owed to, or a claim by, such Person, whether such interest is based on common law, statute or contract, including liens, security interests, pledges, hypothecations, statutory trusts, reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting Property.

Lien Waiver - an agreement, in form and substance satisfactory to Agent, by which (a) for any material Collateral located on leased premises, the lessor waives or subordinates any Lien it may have on the Collateral, and agrees to permit Agent to enter upon the premises and remove the Collateral or to use the premises to store or dispose of the Collateral; (b) for any Collateral held by a warehouseman, processor, shipper or freight forwarder, such Person waives or subordinates any Lien it may have on the Collateral, agrees to hold any Documents in its possession relating to the Collateral as agent for Agent, and agrees to deliver the Collateral to Agent upon request; (c) for any Collateral held by a repairman, mechanic or bailee, such Person acknowledges Agent’s Lien, waives or subordinates any Lien it may have on the Collateral, and agrees to deliver the Collateral to Agent upon request; and (d) for any Collateral subject to a Licensor’s Intellectual Property rights, the Licensor grants to Agent the right, vis-à-vis such Licensor, to enforce Agent’s Liens with respect to the Collateral, including the right to dispose of it with the benefit of the Intellectual Property, whether or not a default exists under any applicable License.

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Loan - a Revolver Loan.

Loan Account - the loan account established by each Lender on its books pursuant to Section 5.8.

Loan Documents - this Agreement, Other Agreements and Security Documents.

Loan Year - each calendar year commencing on the Closing Date and on each anniversary of the Closing Date.

Margin Stock - as defined in Regulation U of the Board of Governors.

Material Adverse Effect - the effect of any event or circumstance that, taken alone or in conjunction with other events or circumstances, (a) has or could be reasonably expected to have a material adverse effect on the business, operations, Properties, prospects or condition (financial or otherwise) of any Obligor, on the value of any material Collateral, on the enforceability of any Loan Documents, or on the validity or priority of Agent’s Liens on any Collateral; (b) materially impairs the ability of any Obligor to perform any obligations under the Loan Documents, including repayment of any Obligations; or (c) otherwise impairs the ability of Agent or any Lender to enforce or collect any Obligations or to realize upon any Collateral.

Material Contract - any agreement or arrangement to which a Borrower or Subsidiary is party (other than the Loan Documents) (a) that is deemed to be a material contract under any securities law applicable to such Obligor, including the Securities Act of 1933, (b) for which breach, termination, nonperformance or failure to renew could reasonably be expected to have a Material Adverse Effect, (c) the Existing Subordinated Debt Documents, or (d) that relates to Debt in an aggregate amount of $750,000 or more.

Moody’s - Moody’s Investors Service, Inc., and its successors.

Mortgage - each mortgage, deed of trust or deed to secure debt pursuant to which a Borrower grants to Agent, for the benefit of Secured Parties, Liens upon the Real Estate owned by such Borrower, as security for the Obligations.

Mortgaged Property - the Real Estate located in Hillsborough County, Florida and subject to a Mortgage.

Multiemployer Plan - any employee benefit plan or arrangement described in Section 4001(a)(3) of ERISA that is maintained or contributed to by any Obligor or Subsidiary.

Net Proceeds - with respect to an Asset Disposition, proceeds (including, when received, any deferred or escrowed payments) received by a Borrower or Subsidiary in cash from such disposition, net of (a) reasonable and customary costs and expenses actually incurred in connection therewith, including legal fees and sales commissions; (b) amounts applied to repayment of Debt secured by a Permitted Lien senior to Agent’s Liens on Collateral sold; (c) transfer or similar taxes; and (d) reserves for indemnities, until such reserves are no longer needed.

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Notes - each Revolver Note, or other promissory note executed by a Borrower to evidence any Obligations.

Note Transaction - the transactions contemplated and consummated pursuant to the Existing Subordinated Debt Documents.

Notice of Borrowing - a Notice of Borrowing to be provided by Borrower Agent to request the funding of a Borrowing of Revolver Loans, in form satisfactory to Agent.

Notice of Conversion/Continuation - a Notice of Conversion/Continuation to be provided by Borrower Agent to request a conversion or continuation of any Loans as LIBOR Loans, in form satisfactory to Agent.

Obligations - all (a) principal of and premium, if any, on the Loans, (b) LC Obligations and other obligations of Obligors with respect to Letters of Credit, (c) interest, expenses, fees and other sums payable by Obligors under Loan Documents, (d) obligations of Obligors under any indemnity for Claims, (e) Extraordinary Expenses, (f) Bank Product Debt, and (g) other Debts, obligations and liabilities of any kind owing by Obligors pursuant to the Loan Documents, whether now existing or hereafter arising, whether evidenced by a note or other writing, whether allowed in any Insolvency Proceeding, whether arising from an extension of credit, issuance of a letter of credit, acceptance, loan, guaranty, indemnification or otherwise, and whether direct or indirect, absolute or contingent, due or to become due, primary or secondary, or joint or several.

Obligor - each Borrower, Guarantor, or other Person that is liable for payment of any Obligations or that has granted a Lien in favor of Agent on its assets to secure any Obligations.

Ordinary Course of Business - the ordinary course of business of any Borrower or Subsidiary, consistent with past practices and undertaken in good faith.

Organic Documents - with respect to any Person, its charter, certificate or articles of incorporation, bylaws, articles of organization, limited liability agreement, operating agreement, members agreement, shareholders agreement, partnership agreement, certificate of partnership, certificate of formation, voting trust agreement, or similar agreement or instrument governing the formation or operation of such Person.

OSHA - the Occupational Safety and Hazard Act of 1970.

Other Agreement - each Note; LC Document; Lien Waiver; Intercreditor Agreement; Real Estate Related Document Borrowing Base Certificate, Compliance Certificate, financial statement or report delivered hereunder; or other document, instrument or agreement (other than this Agreement or a Security Document) now or hereafter delivered by an Obligor or other Person to Agent or a Lender in connection with any transactions relating hereto.

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Overadvance - as defined in Section 2.1.5.

Overadvance Loan - a Base Rate Revolver Loan made when an Overadvance exists or is caused by the funding thereof.

Participant - as defined in Section 13.2.

Patriot Act - the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Pub. L. No. 107-56, 115 Stat. 272 (2001).

Payable Reserve - a reserve equal to aggregate amount of Borrowers’ accounts payable which at any time remain unpaid more than 90 days past the invoice date thereof (but not including retention hold-backs for subcontractors which coincide with the accounts receivable retention that customers of the Borrowers impose on the Borrowers).

Payment Intangible - as defined in the UCC.

Payment Item - each check, draft or other item of payment payable to a Borrower, including those constituting proceeds of any Collateral.

Permitted Asset Disposition - as long as no Default or Event of Default exists and all Net Proceeds are remitted to Agent, an Asset Disposition that is (a) a sale of Inventory in the Ordinary Course of Business; (b) a disposition of Equipment that, in the aggregate during any 12 month period, has a fair market or book value (whichever is more) of $250,000 or less; (c) a disposition of Inventory that is obsolete, unmerchantable or otherwise unsalable in the Ordinary Course of Business; (d) termination of a lease of real or personal Property that is not necessary for the Ordinary Course of Business, could not reasonably be expected to have a Material Adverse Effect and does not result from an Obligor’s default; or (e) approved in writing by Agent and Required Lenders.

Permitted Contingent Obligations - Contingent Obligations (a) arising from endorsements of Payment Items for collection or deposit in the Ordinary Course of Business; (b) arising from Hedging Agreements permitted hereunder; (c) existing on the Closing Date, and any extension or renewal thereof that does not increase the amount of such Contingent Obligation when extended or renewed; (d) incurred in the Ordinary Course of Business with respect to surety, appeal or performance bonds, or other similar obligations; (e) arising from customary indemnification obligations in favor of purchasers in connection with dispositions of Equipment permitted hereunder; (f) arising under the Loan Documents; or (g) in an aggregate amount of $250,000 or less at any time.

Permitted Lien - as defined in Section 10.2.2.

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Permitted Purchase Money Debt - Purchase Money Debt of Borrowers and Subsidiaries that is unsecured or secured only by a Purchase Money Lien, as long as the aggregate amount does not exceed $250,000 at any time and its incurrence does not violate Section 10.2.3.

Person - any individual, corporation, limited liability company, partnership, joint venture, joint stock company, land trust, business trust, unincorporated organization, Governmental Authority or other entity.

Plan - an employee pension benefit plan that is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and that is either (a) maintained by a Borrower or Subsidiary for employees or (b) maintained pursuant to a collective bargaining agreement, or other arrangement under which more than one employer makes contributions and to which a Borrower or Subsidiary is making or accruing an obligation to make contributions or has within the preceding five years made or accrued such contributions.

Pro Rata - with respect to any Lender, a percentage (expressed as a decimal, rounded to the ninth decimal place) determined (a) while Revolver Commitments are outstanding, by dividing the amount of such Lender’s Revolver Commitment by the aggregate amount of all Revolver Commitments; and (b) at any other time, by dividing the amount of such Lender’s Loans and LC Obligations by the aggregate amount of all outstanding Loans and LC Obligations.

Properly Contested - with respect to any obligation of an Obligor, (a) the obligation is subject to a bona fide dispute regarding amount or the Obligor’s liability to pay; (b) the obligation is being properly contested in good faith by appropriate proceedings promptly instituted and diligently pursued; (c) appropriate reserves have been established in accordance with GAAP; (d) non-payment could not have a Material Adverse Effect, nor result in forfeiture or sale of any assets of the Obligor; (e) no Lien is imposed on assets of the Obligor, unless bonded and stayed to the satisfaction of Agent; and (f) if the obligation results from entry of a judgment or other order, such judgment or order is stayed pending appeal or other judicial review.

Property - any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible.

Protective Advances - as defined in Section 2.1.6.

Purchase Money Debt - (a) Debt (other than the Obligations) for payment of any of the purchase price of fixed assets; (b) Debt (other than the Obligations) incurred within 10 days before or after acquisition of any fixed assets, for the purpose of financing any of the purchase price thereof; and (c) any renewals, extensions or refinancings (but not increases) thereof.

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Purchase Money Lien - a Lien that secures Purchase Money Debt, encumbering only the fixed assets acquired with such Debt and constituting a Capital Lease or a purchase money security interest under the UCC.

RCRA - the Resource Conservation and Recovery Act (42 U.S.C. Sec.Sec. 6991-6991i).

Real Estate - all right, title and interest (whether as owner, lessor or lessee) in any real Property or any buildings, structures, parking areas or other improvements thereon.

Refinancing Conditions - the following conditions for Refinancing Debt: (a) it is in an aggregate principal amount that does not exceed the principal amount of the Debt being extended, renewed or refinanced; (b) it has a final maturity no sooner than, a weighted average life no less than, and an interest rate no greater than, the Debt being extended, renewed or refinanced; (c) it is subordinated to the Obligations at least to the same extent as the Debt being extended, renewed or refinanced; (d) the representations, covenants and defaults applicable to it are no less favorable to Borrowers than those applicable to the Debt being extended, renewed or refinanced; (e) no additional Lien is granted to secure it; (f) no additional Person is obligated on such Debt; and (g) upon giving effect to it, no Default or Event of Default exists.

Refinancing Debt - Borrowed Money that is the result of an extension, renewal or refinancing of Debt permitted under Section 10.2.1(b), (d) or (f).

Reimbursement Date - as defined in Section 2.3.2.

Related Real Estate Documents - with respect to any Real Estate subject to a Mortgage, the following, in form and substance satisfactory to Agent and received by Agent for review at least 15 days prior to the effective date of the Mortgage: (a) a mortgagee title policy (or binder therefor) covering Agent’s interest under the Mortgage, in a form and amount and by an insurer acceptable to Agent, which must be fully paid on such effective date; (b) such assignments of leases, estoppel letters, attornment agreements, consents, waivers and releases as Agent may require with respect to other Persons having an interest in the Real Estate; (c) a current, as-built survey of the Real Estate, containing a metes-and-bounds property description and flood plain certification, and certified by a licensed surveyor acceptable to Agent; (d) flood insurance in an amount, with endorsements and by an insurer acceptable to Agent, if the Real Estate is within a flood plain; (e) a current appraisal of the Real Estate, prepared by an appraiser acceptable to Agent, and in form and substance satisfactory to Required Lenders; (f) an environmental assessment, prepared by environmental engineers acceptable to Agent, and accompanied by such reports, certificates, studies or data as Agent may reasonably require, which shall all be in form and substance satisfactory to Required Lenders; and (g) an Environmental Agreement and such other documents, instruments or agreements as Agent may reasonably require with respect to any environmental risks regarding the Real Estate.

Rent and Charges Reserve - the aggregate of (a) all past due rent and other amounts owing by an Obligor to any landlord, warehouseman, processor, repairman, mechanic, shipper, freight forwarder or other Person who possesses any Collateral or could assert a Lien on any Collateral; and (b) a reserve at least equal to three months rent and other charges that could be payable to any such Person, unless it has executed a Lien Waiver.

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Report - as defined in Section 12.2.3.

Reportable Event - any event set forth in Section 4043(b) of ERISA.

Required Lenders - Lenders (subject to Section 4.2) having (a) Revolver Commitments and in excess of 50% of the aggregate Revolver Commitments; and (b) if the Revolver Commitments have terminated, Loans in excess of 50% of all outstanding Loans.

Reserve Percentage - the reserve percentage (expressed as a decimal, rounded upward to the nearest 1/8th of 1%) applicable to member banks under regulations issued from time to time by the Board of Governors for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as “Eurocurrency liabilities”).

Restricted Investment - any Investment by a Borrower or Subsidiary, other than (a) Investments in Subsidiaries to the extent existing on the Closing Date; (b) Cash Equivalents that are subject to Agent’s Lien and control, pursuant to documentation in form and substance satisfactory to Agent; and (c) loans and advances permitted under Section 10.2.7.

Restrictive Agreement - an agreement (other than a Loan Document) that conditions or restricts the right of any Borrower, Subsidiary or other Obligor to incur or repay Borrowed Money, to grant Liens on any assets, to declare or make Distributions, to modify, extend or renew any agreement evidencing Borrowed Money, or to repay any intercompany Debt.

Revolver Commitment - for any Lender, its obligation to make Revolver Loans and to participate in LC Obligations up to the maximum principal amount shown on Schedule 1.1, or as specified hereafter in the most recent Assignment and Acceptance to which it is a party. “Revolver Commitments” means the aggregate amount of such commitments of all Lenders.

Revolver Loan - a loan made pursuant to Section 2.1, and any Swingline Loan, Overadvance Loan or Protective Advance.

Revolver Termination Date - March 31, 2009.

Royalties - all royalties, fees, expense reimbursement and other amounts payable by a Borrower under a License.

S&P - Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., and its successors.

Secured Parties - Agent, Issuing Bank, Lenders and providers of Bank Products.

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Security Documents - the Guaranties, Mortgages, Trademark Security Agreements, Deposit Account Control Agreements,and all other documents, instruments and agreements now or hereafter securing (or given with the intent to secure) any Obligations.

Senior Officer - the chairman of the board, president, chief executive officer or chief financial officer of a Borrower or, if the context requires, an Obligor.

Settlement Report - a report delivered by Agent to Lenders summarizing the Revolver Loans and participations in LC Obligations outstanding as of a given settlement date, allocated to Lenders on a Pro Rata basis in accordance with their Revolver Commitments.

Software - as defined in the UCC.

Solvent - as to any Person, such Person (a) owns Property whose fair salable value is greater than the amount required to pay all of its debts (including contingent, subordinated, unmatured and unliquidated liabilities); (b) owns Property whose present fair salable value (as defined below) is greater than the probable total liabilities (including contingent, subordinated, unmatured and unliquidated liabilities) of such Person as they become absolute and matured; (c) is able to pay all of its debts as they mature; (d) has capital that is not unreasonably small for its business and is sufficient to carry on its business and transactions and all business and transactions in which it is about to engage; (e) is not “insolvent” within the meaning of Section 101(32) of the Bankruptcy Code; and (f) has not incurred (by way of assumption or otherwise) any obligations or liabilities (contingent or otherwise) under any Loan Documents, or made any conveyance in connection therewith, with actual intent to hinder, delay or defraud either present or future creditors of such Person or any of its Affiliates. “Fair salable value” means the amount that could be obtained for assets within a reasonable time, either through collection or through sale under ordinary selling conditions by a capable and diligent seller to an interested buyer who is willing (but under no compulsion) to purchase.

Statutory Reserves - the percentage (expressed as a decimal) established by the Board of Governors as the then stated maximum rate for all reserves (including those imposed by Regulation D of the Board of Governors, all basic, emergency, supplemental or other marginal reserve requirements, and any transitional adjustments or other scheduled changes in reserve requirements) applicable to any member bank of the Federal Reserve System in respect of Eurocurrency Liabilities (or any successor category of liabilities under Regulation D).

Subordinated Convertible Notes - the Notes issued pursuant to the Existing Subordinated Debt Documents in the original aggregate principal amount of $25,000,000, as amended, restated, supplemented, modified, renewed, extended or refinanced from time to time in accordance with the terms hereof and thereof.

Subsidiary - any entity at least 50% of whose voting securities or Equity Interests is owned by a Borrower or any combination of Borrowers (including indirect ownership by a Borrower through other entities in which the Borrower directly or indirectly owns 50% of the voting securities or Equity Interests).

Supporting Obligation - as defined in the UCC.

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Swingline Loan - any Borrowing of Base Rate Revolver Loans funded with Agent’s funds, until such Borrowing is settled among Lenders pursuant to Section 4.1.3.

Taxes - any taxes, levies, imposts, duties, fees, assessments, deductions, withholdings or other charges of whatever nature, including income, receipts, excise, property, sales, use, transfer, license, payroll, withholding, social security, franchise, intangibles, stamp or recording taxes imposed by any Governmental Authority, and all interest, penalties and similar liabilities relating thereto.

Trademark Security Agreement - each trademark security agreement pursuant to which an Obligor grants to Agent, for the benefit of Secured Parties, a Lien on such Obligor’s interests in trademarks, as security for the Obligations.

Transferee - any actual or potential Eligible Assignee, Participant or other Person acquiring an interest in any Obligations.

Type - any type of a Loan (i.e., Base Rate Loan or LIBOR Loan) that has the same interest option and, in the case of LIBOR Loans, the same Interest Period.

UCC - the Uniform Commercial Code as in effect in the State of California or, when the laws of any other jurisdiction govern the perfection or enforcement of any Lien, the Uniform Commercial Code of such jurisdiction.

Upstream Payment - a Distribution by a Subsidiary of a Borrower to such Borrower.

Value - (a) for Inventory, its value determined on the basis of the lower of cost or market, calculated on a first-in, first-out basis; and (b) for an Account, its face amount, net of any returns, rebates, discounts (calculated on the shortest terms), credits, allowances or Taxes (including sales, excise or other taxes) that have been or could be claimed by the Account Debtor or any other Person.

1.2Accounting Terms. Under the Loan Documents (except as otherwise specified herein), all accounting terms shall be interpreted, all accounting determinations shall be made, and all financial statements shall be prepared, in accordance with GAAP applied on a basis consistent with the most recent audited financial statements of Borrowers delivered to Agent before the Closing Date and using the same inventory valuation method as used in such financial statements, except for any change required or permitted by GAAP if Borrowers’ certified public accountants concur in such change, the change is disclosed to Agent, and Section 10.3 is amended in a manner satisfactory to Required Lenders to take into account the effects of the change.

1.3Certain Matters of Construction. The terms “herein,” “hereof,” “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. In the computation of periods of time from a specified date to a later specified date, “from” means “from and including,” and “to” and “until” each mean “to but excluding.” The terms “including” and “include” shall mean “including, without limitation” and, for purposes of each Loan Document, the parties agree that the rule of ejusdem generis shall not be applicable to limit any provision. Section titles appear as a matter of convenience only and shall not affect the interpretation of any Loan Document. All references to (a) laws or statutes include all related rules, regulations, interpretations, amendments and successor provisions; (b) any document, instrument or agreement include any amendments, waivers and other modifications, extensions or renewals (to the extent permitted by the Loan Documents); (c) any section mean, unless the context otherwise requires, a section of this Agreement; (d) any exhibits or schedules mean, unless the context otherwise requires, exhibits and schedules attached hereto, which are hereby incorporated by reference; (e) any Person include successors and assigns; (f) time of day mean time of day at Agent’s notice address under Section 14.3.1; or (g) discretion of Agent, Issuing Bank or any Lender mean the sole and absolute discretion of such Person. All calculations of Value, fundings of Loans, issuances of Letters of Credit and payments of Obligations shall be in Dollars and, unless the context otherwise requires, all determinations (including calculations of Borrowing Base and financial covenants) made from time to time under the Loan Documents shall be made in light of the circumstances existing at such time. Borrowing Base calculations shall be consistent with historical methods of valuation and calculation, and otherwise satisfactory to Agent (and not necessarily calculated in accordance with GAAP). Borrowers shall have the burden of establishing any alleged negligence, misconduct or lack of good faith by Agent, Issuing Bank or any Lender under any Loan Documents. No provision of any Loan Documents shall be construed against any party by reason of such party having, or being deemed to have, drafted the provision. Whenever the phrase “to the best of Borrowers’ knowledge” or words of similar import are used in any Loan Documents, it means actual knowledge of a Senior Officer, or knowledge that a Senior Officer would have obtained if he or she had engaged in good faith and diligent performance of his or her duties, including reasonably specific inquiries of employees or agents and a good faith attempt to ascertain the matter to which such phrase relates.

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SECTION 2. CREDIT FACILITIES

2.1Revolver Commitment.

2.1.1 Revolver Loans. Each Lender agrees, severally on a Pro Rata basis up to its Revolver Commitment, on the terms set forth herein, to make Revolver Loans to Borrowers from time to time through the Commitment Termination Date. The Revolver Loans may be repaid and reborrowed as provided herein. In no event shall Lenders have any obligation to honor a request for a Revolver Loan if the unpaid balance of Revolver Loans outstanding at such time (including the requested Loan) would exceed the Borrowing Base.

2.1.2 Revolver Notes. The Revolver Loans made by each Lender and interest accruing thereon shall be evidenced by the records of Agent and such Lender. At the request of any Lender, Borrowers shall deliver a Revolver Note to such Lender.

2.1.3 Use of Proceeds. The proceeds of Revolver Loans shall be used by Borrowers solely (a) to satisfy existing Debt; (b) to pay fees and transaction expenses associated with the closing of this credit facility; (c) to pay Obligations in accordance with this Agreement; and (d) for working capital and other lawful corporate purposes of Borrowers.

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2.1.4 Termination of Revolver Commitments.

(a)The Revolver Commitments shall terminate on the Revolver Termination Date, unless sooner terminated in accordance with this Agreement. Upon at least 90 days prior written notice to Agent at any time after the first Loan Year, Borrowers may, at their option, terminate the Revolver Commitments and this credit facility. Any notice of termination given by Borrowers shall be irrevocable. On the termination date, Borrowers shall make Full Payment of all Obligations.

(b)[Intentionally Omitted].

(c)Concurrently with a termination of the Revolving Commitments, for whatever reason (including an Event of Default), Borrowers shall pay to Agent, for the Pro Rata benefit of Lenders and as liquidated damages for loss of bargain (and not as a penalty), an amount equal to (i) if the termination occurs during the first Loan Year, 2.0% of the Revolver Commitments; (ii) if it occurs during the second Loan Year, 1.0% of the Revolver Commitments; and (iii) if it occurs thereafter, 0.0% of the Revolver Commitments. No termination charge shall be payable if termination occurs on the Revolver Termination Date or in connection with a refinancing of this credit facility by Bank of America or any of its Affiliates.

2.1.5 Overadvances. If the aggregate Revolver Loans exceed the Borrowing Base (“Overadvance”) or the aggregate Revolver Commitments at any time, the excess amount shall be payable by Borrowers on demand by Agent, but all such Revolver Loans shall nevertheless constitute Obligations secured by the Collateral and entitled to all benefits of the Loan Documents. Unless its authority has been revoked in writing by Required Lenders, Agent may require Lenders to honor requests for Overadvance Loans and to forbear from requiring Borrowers to cure an Overadvance, (a) when no other Event of Default is known to Agent, as long as (i) the Overadvance does not continue for more than 30 consecutive days (and no Overadvance may exist for at least five consecutive days thereafter before further Overadvance Loans are required), and (ii) the Overadvance is not known by Agent to exceed $500,000; and (b) regardless of whether an Event of Default exists, if Agent discovers an Overadvance not previously known by it to exist, as long as from the date of such discovery the Overadvance (i) is not increased by more than $50,000, and (ii) does not continue for more than 30 consecutive days. In no event shall Overadvance Loans be required that would cause the outstanding Revolver Loans and LC Obligations to exceed the aggregate Revolver Commitments. Any funding of an Overadvance Loan or sufferance of an Overadvance shall not constitute a waiver by Agent or Lenders of the Event of Default caused thereby. In no event shall any Borrower or other Obligor be deemed a beneficiary of this Section nor authorized to enforce any of its terms.

2.1.6 Protective Advances. Agent shall be authorized, in its discretion, at any time that a Default or Event of Default exists or any conditions in Section 6 are not satisfied, and without regard to the aggregate Commitments, to make Base Rate Revolver Loans (“Protective Advances”) (a) up to an aggregate amount of $100,000 outstanding at any time, if Agent deems such Loans necessary or desirable to preserve or protect any Collateral, or to enhance the collectibility or repayment of Obligations; or (b) to pay any other amounts chargeable to Obligors under any Loan Documents, including costs, fees and expenses. All Protective Advances shall be Obligations, secured by the Collateral, and shall be treated for all purposes as Extraordinary Expenses. Each Lender shall participate in each Protective Advance on a Pro Rata basis. Required Lenders may at any time revoke Agent’s authorization to make further Protective Advances by written notice to Agent. Absent such revocation, Agent’s determination that funding of a Protective Advance is appropriate shall be conclusive.

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2.2[Intentionally Omitted].

2.3Letter of Credit Facility.

2.3.1 Issuance of Letters of Credit. Issuing Bank agrees to issue Letters of Credit from time to time until 30 days prior to the Revolver Termination Date (or until the Commitment Termination Date, if earlier), on the terms set forth herein, including the following:

(a)Each Borrower acknowledges that Issuing Bank’s willingness to issue any Letter of Credit is conditioned upon Issuing Bank’s receipt of a LC Application with respect to the requested Letter of Credit, as well as such other instruments and agreements as Issuing Bank may customarily require for issuance of a letter of credit of similar type and amount. Issuing Bank shall have no obligation to issue any Letter of Credit unless (i) Issuing Bank receives a LC Request and LC Application at least three Business Days prior to the requested date of issuance; and (ii) each LC Condition is satisfied. If Issuing Bank receives written notice from a Lender at least one Business Day before issuance of a Letter of Credit that any LC Condition has not been satisfied, Issuing Bank shall have no obligation to issue the requested Letter of Credit (or any other) until such notice is withdrawn in writing by that Lender or until Required Lenders have waived such condition in accordance with this Agreement. Prior to receipt of any such notice, Issuing Bank shall not be deemed to have knowledge of any failure of LC Conditions.

(b)Letters of Credit may be requested by a Borrower only (i) to support obligations of such Borrower incurred in the Ordinary Course of Business; or (ii) for other purposes as Agent and Lenders may approve from time to time in writing. The renewal or extension of any Letter of Credit shall be treated as the issuance of a new Letter of Credit, except that delivery of a new LC Application shall be required at the discretion of Issuing Bank.

(c)Borrowers assume all risks of the acts, omissions or misuses of any Letter of Credit by the beneficiary. In connection with issuance of any Letter of Credit, none of Agent, Issuing Bank or any Lender shall be responsible for the existence, character, quality, quantity, condition, packing, value or delivery of any goods purported to be represented by any Documents; any differences or variation in the character, quality, quantity, condition, packing, value or delivery of any goods from that expressed in any Documents; the form, validity, sufficiency, accuracy, genuineness or legal effect of any Documents or of any endorsements thereon; the time, place, manner or order in which shipment of goods is made; partial or incomplete shipment of, or failure to ship, any goods referred to in a Letter of Credit or Documents; any deviation from instructions, delay, default or fraud by any shipper or other Person in connection with any goods, shipment or delivery; any breach of contract between a shipper or vendor and a Borrower; errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex, telecopy, e-mail, telephone or otherwise; errors in interpretation of technical terms; the misapplication by a beneficiary of any Letter of Credit or the proceeds thereof; or any consequences arising from causes beyond the control of Issuing Bank, Agent or any Lender, including any act or omission of a Governmental Authority. The rights and remedies of Issuing Bank under the Loan Documents shall be cumulative. Issuing Bank shall be fully subrogated to the rights and remedies of each beneficiary whose claims against Borrowers are discharged with proceeds of any Letter of Credit.

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(d)In connection with its administration of and enforcement of rights or remedies under any Letters of Credit or LC Documents, Issuing Bank shall be entitled to act, and shall be fully protected in acting, upon any certification, notice or other communication in whatever form believed by Issuing Bank, in good faith, to be genuine and correct and to have been signed, sent or made by a proper Person. Issuing Bank may consult with and employ legal counsel, accountants and other experts to advise it concerning its obligations, rights and remedies, and shall be entitled to act upon, and shall be fully protected in any action taken in good faith reliance upon, any advice given by such experts. Issuing Bank may employ agents and attorneys-in-fact in connection with any matter relating to Letters of Credit or LC Documents, and shall not be liable for the negligence or misconduct of any such agents or attorneys-in-fact selected with reasonable care.

2.3.2 Reimbursement; Participations.

(a)If Issuing Bank honors any request for payment under a Letter of Credit, Borrowers shall pay to Issuing Bank, on the same day (“Reimbursement Date”), the amount paid by Issuing Bank under such Letter of Credit, together with interest at the interest rate for Base Rate Revolver Loans from the Reimbursement Date until payment by Borrowers. The obligation of Borrowers to reimburse Issuing Bank for any payment made under a Letter of Credit shall be absolute, unconditional, irrevocable, and joint and several, and shall be paid without regard to any lack of validity or enforceability of any Letter of Credit or the existence of any claim, setoff, defense or other right that Borrowers may have at any time against the beneficiary. Whether or not Borrower Agent submits a Notice of Borrowing, Borrowers shall be deemed to have requested a Borrowing of Base Rate Revolver Loans in an amount necessary to pay all amounts due Issuing Bank on any Reimbursement Date and each Lender agrees to fund its Pro Rata share of such Borrowing whether or not the Commitments have terminated, an Overadvance exists or is created thereby, or the conditions in Section 6 are satisfied.

(b)Upon issuance of a Letter of Credit, each Lender shall be deemed to have irrevocably and unconditionally purchased from Issuing Bank, without recourse or warranty, an undivided Pro Rata interest and participation in all LC Obligations relating to the Letter of Credit. If Issuing Bank makes any payment under a Letter of Credit and Borrowers do not reimburse such payment on the Reimbursement Date, Agent shall promptly notify Lenders and each Lender shall promptly (within one Business Day) and unconditionally pay to Agent, for the benefit of Issuing Bank, the Lender’s Pro Rata share of such payment. Upon request by a Lender, Issuing Bank shall furnish copies of any Letters of Credit and LC Documents in its possession at such time.

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(c)The obligation of each Lender to make payments to Agent for the account of Issuing Bank in connection with Issuing Bank’s payment under a Letter of Credit shall be absolute, unconditional and irrevocable, not subject to any counterclaim, setoff, qualification or exception whatsoever, and shall be made in accordance with this Agreement under all circumstances, irrespective of any lack of validity or unenforceability of any Loan Documents; any draft, certificate or other document presented under a Letter of Credit having been determined to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or the existence of any setoff or defense that any Obligor may have with respect to any Obligations. Issuing Bank does not assume any responsibility for any failure or delay in performance or any breach by any Borrower or other Person of any obligations under any LC Documents. Issuing Bank does not make to Lenders any express or implied warranty, representation or guaranty with respect to the Collateral, LC Documents or any Obligor. Issuing Bank shall not be responsible to any Lender for any recitals, statements, information, representations or warranties contained in, or for the execution, validity, genuineness, effectiveness or enforceability of any LC Documents; the validity, genuineness, enforceability, collectibility, value or sufficiency of any Collateral or the perfection of any Lien therein; or the assets, liabilities, financial condition, results of operations, business, creditworthiness or legal status of any Obligor.

(d)No Issuing Bank Indemnitee shall be liable to any Lender or other Person for any action taken or omitted to be taken in connection with any LC Documents except as a result of its actual gross negligence or willful misconduct. Issuing Bank shall not have any liability to any Lender if Issuing Bank refrains from any action under any Letter of Credit or LC Documents until it receives written instructions from Required Lenders.

2.3.3 Cash Collateral. If any LC Obligations, whether or not then due or payable, shall for any reason be outstanding at any time (a) that an Event of Default exists, (b) that Availability is less than zero, (c) after the Commitment Termination Date, or (d) within 20 Business Days prior to the Revolver Termination Date, then Borrowers shall, at Issuing Bank’s or Agent’s request, pay to Issuing Bank the amount of all outstanding LC Obligations consisting of drawings under Letters of Credit and all fees related thereto, and Cash Collateralize the outstanding undrawn amount of any Letters of Credit. If Borrowers fail to Cash Collateralize outstanding Letters of Credit as required herein, Lenders may (and shall upon direction of Agent) advance, as Revolver Loans, the amount of the Cash Collateral required (whether or not the Commitments have terminated, an Overadvance exists, or the conditions in Section 6 are satisfied).

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SECTION 3. INTEREST, FEES AND CHARGES

3.1Interest.

3.1.1 Rates and Payment of Interest.

(a)The Obligations shall bear interest (i) if a Base Rate Loan, at the Base Rate in effect from time to time, plus the Applicable Margin; (ii) if a LIBOR Loan, at Adjusted LIBOR for the applicable Interest Period, plus the Applicable Margin; and (iii) if any other Obligation (including, to the extent permitted by law, interest not paid when due), at the Base Rate in effect from time to time, plus the Applicable Margin for Base Rate Revolver Loans. Interest shall accrue from the date the Loan is advanced or the Obligation is incurred or payable, until paid by Borrowers. If a Loan is repaid on the same day made, one day’s interest shall accrue.

(b)During an Insolvency Proceeding with respect to any Borrower, or during any other Event of Default if Agent or Required Lenders in their discretion so elect, Obligations shall bear interest at the Default Rate. Each Borrower acknowledges that the cost and expense to Agent and each Lender due to an Event of Default are difficult to ascertain and that the Default Rate is a fair and reasonable estimate to compensate Agent and Lenders for such added cost and expense.

(c)Interest accrued on the Loans shall be due and payable in arrears, (i) on the first day of each month and, for any LIBOR Loan, the last day of its Interest Period; (ii) on any date of prepayment, with respect to the principal amount of Loans being prepaid; and (iii) on the Commitment Termination Date. Interest accrued on any other Obligations shall be due and payable as provided in the Loan Documents and, if no payment date is specified, shall be due and payable on demand. Notwithstanding the foregoing, interest accrued at the Default Rate shall be due and payable on demand.

3.1.2 Application of Adjusted LIBOR to Outstanding Loans.

(a)Borrowers may on any Business Day, subject to delivery of a Notice of Conversion/Continuation, elect to convert any portion of the Base Rate Loans to, or to continue any LIBOR Loan at the end of its Interest Period as, a LIBOR Loan. During any Default or Event of Default, Agent may (and shall at the direction of Required Lenders) declare that no Loan may be made, converted or continued as a LIBOR Loan.

(b)Whenever Borrowers desire to convert or continue Loans as LIBOR Loans, Borrower Agent shall give Agent a Notice of Conversion/Continuation, no later than 11:00 a.m. at least two Business Days before the requested conversion or continuation date. Promptly after receiving any such notice, Agent shall notify each Lender thereof. Each Notice of Conversion/Continuation shall be irrevocable, and shall specify the aggregate principal amount of Loans to be converted or continued, the conversion or continuation date (which shall be a Business Day), and the duration of the Interest Period (which shall be deemed to be one month if not specified). If, upon the expiration of any Interest Period in respect of any LIBOR Loans, Borrowers shall have failed to deliver a Notice of Conversion/Continuation, they shall be deemed to have elected to convert such Loans into Base Rate Loans.

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3.1.3 Interest Periods. In connection with the making, conversion or continuation of any LIBOR Loans, Borrowers shall select an interest period (“Interest Period”) to apply, which interest period shall be one, two, three or six months; provided, however, that:

(a)the Interest Period shall commence on the date the Loan is made or continued as, or converted into, a LIBOR Loan, and shall expire on the numerically corresponding day in the calendar month at its end;

(b)if any Interest Period commences on a day for which there is no corresponding day in the calendar month at its end or if such corresponding day falls after the last Business Day of such month, then the Interest Period shall expire on the last Business Day of such month; and if any Interest Period would expire on a day that is not a Business Day, the period shall expire on the next Business Day; and

(c)no Interest Period shall extend beyond the Revolver Termination Date.

3.1.4 Interest Rate Not Ascertainable. If Agent shall determine that on any date for determining Adjusted LIBOR, due to any circumstance affecting the London interbank market, adequate and fair means do not exist for ascertaining such rate on the basis provided herein, then Agent shall immediately notify Borrowers of such determination. Until Agent notifies Borrowers that such circumstance no longer exists, the obligation of Lenders to make LIBOR Loans shall be suspended, and no further Loans may be converted into or continued as LIBOR Loans.

3.2Fees.

3.2.1 Unused Line Fee. Borrowers shall pay to Agent, for the Pro Rata benefit of Lenders, a fee equal to the per annum percentage set forth below, as determined by the EBITDA (measured on the first day of each Fiscal Quarter, on a trailing twelve month basis) for the immediately preceding Fiscal Quarter, times the amount by which the Revolver Commitments exceed the average daily balance of Revolver Loans and stated amount of Letters of Credit during any month. Such fee shall be payable in arrears, on the first day of each month and on the Commitment Termination Date.

Level	EBITDA		Unused Line Fee
I		< 10,000,000		0.375	%
II		>10,000,000 and < $12,000,000		0.250	%
III		>12,000,000 and < $15,000,000		0.250	%
IV		>15,000,000 and < $25,000,000		0.250	%
V		≥$25,000,000		0.250	%

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Until October 1, 2006, the unused line fee shall be determined as if Level III were applicable. Effective October 1, 2006, the unused line fee shall be subject to increase or decrease based on the EBITDA (measured on a trailing 12 month basis) as set forth in the financial statements and corresponding Compliance Certificate for the immediately preceding Fiscal Quarter, which change shall be effective on the first Business Day of the calendar month that occurs more than 10 days following receipt. If, by the first Business Day of a month following any Fiscal Quarter, any financial statements and Compliance Certificate due in the preceding month have not been received, then the unused line fee shall be determined as if Level I were applicable, from such day until the first Business Day of the Fiscal Quarter following actual receipt.

3.2.2 LC Facility Fees. Borrowers shall pay (a) to Agent, for the Pro Rata benefit of Lenders, a fee equal to the Applicable Margin in effect for LIBOR Revolver Loans times the average daily stated amount of Letters of Credit, which fee shall be payable monthly in arrears, on the first day of each month; (b) to Agent, for its own account, a fronting fee equal to 0.125% of the stated amount of each Letter of Credit, which fee shall be payable upon issuance of the Letter of Credit and on each anniversary date of such issuance, and shall be payable on any increase in stated amount made between any such dates; and (c) to Issuing Bank, for its own account, all customary charges associated with the issuance, amending, negotiating, payment, processing, transfer and administration of Letters of Credit, which charges shall be paid as and when incurred. During an Event of Default, the fee payable under clause (a) shall be increased by 2% per annum.

3.2.3 Closing Fee. Borrowers shall pay to Agent, for the Pro Rata benefit of the Lenders, a closing fee equal to the greater of (i) $187,500, or (ii) 0.75% of the total Commitments of all Lenders as of the Closing Date, which shall be paid on the Closing Date.

3.3Computation of Interest, Fees, Yield Protection. All interest, as well as fees and other charges calculated on a per annum basis, shall be computed for the actual days elapsed, based on a year of 360 days. Each determination by Agent of any interest, fees or interest rate hereunder shall be final, conclusive and binding for all purposes, absent manifest error. All fees shall be fully earned when due and shall not be subject to rebate or refund, nor subject to proration except as specifically provided herein. All fees payable under Section 3.2 are compensation for services and are not, and shall not be deemed to be, interest or any other charge for the use, forbearance or detention of money. A certificate as to amounts payable by Borrowers under Section 3.4, 3.6, 3.7, 3.9 or 5.9, submitted to Borrowers by Agent or the affected Lender, as applicable, shall be final, conclusive and binding for all purposes, absent manifest error.

3.4Reimbursement Obligations. Borrowers shall reimburse Agent for all Extraordinary Expenses. Borrowers shall also reimburse Agent for all reasonable legal, accounting, appraisal, consulting, and other fees, costs and expenses incurred by it in connection with (a) negotiation and preparation of any Loan Documents, including any amendment or other modification thereof; (b) administration of and actions relating to any Collateral, Loan Documents and transactions contemplated thereby, including any actions taken to perfect or maintain priority of Agent’s Liens on any Collateral, to maintain any insurance required hereunder or to verify Collateral; and (c) subject to the limits of Section 10.1.1(b), each inspection, audit or appraisal with respect to any Obligor or Collateral, whether prepared by Agent’s personnel or a third party. All legal, accounting and consulting fees shall be charged to Borrowers by Agent’s professionals at their full hourly rates, regardless of any reduced or alternative fee billing arrangements that Agent, any Lender or any of their Affiliates may have with such professionals with respect to this or any other transaction. All amounts reimbursable by Borrowers under this Section shall constitute Obligations secured by the Collateral and shall be payable on demand.

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3.5Illegality. Notwithstanding anything to the contrary herein, if (a) any change in any law or interpretation thereof by any Governmental Authority makes it unlawful for a Lender to make or maintain a LIBOR Loan or to maintain any Commitment with respect to LIBOR Loans or (b) a Lender determines that the making or continuance of a LIBOR Loan has become impracticable as a result of a circumstance that adversely affects the London interbank market or the position of such Lender in such market, then such Lender shall give notice thereof to Agent and Borrowers and may (i) declare that LIBOR Loans will not thereafter be made by such Lender, whereupon any request for a LIBOR Loan from such Lender shall be deemed to be a request for a Base Rate Loan unless such Lender’s declaration has been withdrawn (and it shall be withdrawn promptly upon cessation of the circumstances described in clause (a) or (b) above); and/or (ii) require that all outstanding LIBOR Loans made by such Lender be converted to Base Rate Loans immediately, in which event all outstanding LIBOR Loans of such Lender shall be immediately converted to Base Rate Loans.

3.6Increased Costs. If, by reason of (a) the introduction of or any change (including any change by way of imposition or increase of Statutory Reserves or other reserve requirements) in any law or interpretation thereof, or (b) the compliance with any guideline or request from any Governmental Authority or other Person exercising control over banks or financial institutions generally (whether or not having the force of law):

(i)a Lender shall be subject to any Tax with respect to any LIBOR Loan or Letter of Credit or its obligation to make LIBOR Loans, issue Letters of Credit or participate in LC Obligations, or a change shall result in the basis of taxation of any payment to a Lender with respect to its LIBOR Loans or its obligation to make LIBOR Loans, issue Letters of Credit or participate in LC Obligations (except for Excluded Taxes); or

(ii)any reserve (including any imposed by the Board of Governors), special deposits or similar requirement against assets of, deposits with or for the account of, or credit extended by, a Lender shall be imposed or deemed applicable, or any other condition affecting a Lender’s LIBOR Loans or obligation to make LIBOR Loans, issue Letters of Credit or participate in LC Obligations shall be imposed on such Lender or the London interbank market;

and as a result there shall be an increase in the cost to such Lender of agreeing to make or making, funding or maintaining LIBOR Loans, Letters of Credit or participations in LC Obligations (except to the extent already included in determination of Adjusted LIBOR), or there shall be a reduction in the amount receivable by such Lender, then the Lender shall promptly notify Borrowers and Agent of such event, and Borrowers shall, within five days following demand therefor, pay such Lender the amount of such increased costs or reduced amounts.

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If a Lender determines that, because of circumstances described above or any other circumstances arising hereafter affecting such Lender, the London interbank market or the Lender’s position in such market, Adjusted LIBOR or its Applicable Margin, as applicable, will not adequately and fairly reflect the cost to such Lender of funding LIBOR Loans, issuing Letters of Credit or participating in LC Obligations, then (A) the Lender shall promptly notify Borrowers and Agent of such event; (B) such Lender’s obligation to make LIBOR Loans, issue Letters of Credit or participate in LC Obligations shall be immediately suspended, until each condition giving rise to such suspension no longer exists; and (C) such Lender shall make a Base Rate Loan as part of any requested Borrowing of LIBOR Loans, which Base Rate Loan shall, for all purposes, be considered part of such Borrowing.

3.7Capital Adequacy. If a Lender determines that any introduction of or any change in a Capital Adequacy Regulation, any change in the interpretation or administration of a Capital Adequacy Regulation by a Governmental Authority charged with interpretation or administration thereof, or any compliance by such Lender or any Person controlling such Lender with a Capital Adequacy Regulation, increases the amount of capital required or expected to be maintained by such Lender or Person (taking into consideration its capital adequacy policies and desired return on capital) as a consequence of such Lender’s Commitments, Loans, participations in LC Obligations or other obligations under the Loan Documents, then Borrowers shall, within five days following demand therefor, pay such Lender an amount sufficient to compensate for such increase. A Lender’s demand for payment shall set forth the nature of the occurrence giving rise to such compensation and a calculation of the amount to be paid. In determining such amount, the Lender may use any reasonable averaging and attribution method.

3.8Mitigation. Each Lender agrees that, upon becoming aware that it is subject to Section 3.5, 3.6, 3.7 or 5.9, it will take reasonable measures to reduce Borrowers’ obligations under such Sections, including funding or maintaining its Commitments or Loans through another office, as long as use of such measures would not adversely affect the Lender’s Commitments, Loans, business or interests, and would not be inconsistent with any internal policy or applicable legal or regulatory restriction.

3.9Funding Losses. If for any reason (other than default by a Lender) (a) any Borrowing of, or conversion to or continuation of, a LIBOR Loan does not occur on the date specified therefor in a Notice of Borrowing or Notice of Conversion/Continuation (whether or not withdrawn), (b) any repayment or conversion of a LIBOR Loan occurs on a day other than the end of its Interest Period, or (c) Borrowers fail to repay a LIBOR Loan when required hereunder, then Borrowers shall pay to Agent its customary administrative charge and to each Lender all losses and expenses that it sustains as a consequence thereof, including any loss or expense arising from liquidation or redeployment of funds or from fees payable to terminate deposits of matching funds. Lenders shall not be required to purchase Dollar deposits in the London interbank market or any other offshore Dollar market to fund any LIBOR Loan, but the provisions hereof shall be deemed to apply as if each Lender had purchased such deposits to fund its LIBOR Loans.

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3.10Maximum Interest. In no event shall interest, charges or other amounts that are contracted for, charged or received by Agent and Lenders pursuant to any Loan Documents and that are deemed interest under Applicable Law (“interest”) exceed the highest rate permissible under Applicable Law (“maximum rate”). If, in any month, any interest rate, absent the foregoing limitation, would have exceeded the maximum rate, then the interest rate for that month shall be the maximum rate and, if in a future month, that interest rate would otherwise be less than the maximum rate, then the rate shall remain at the maximum rate until the amount of interest actually paid equals the amount of interest which would have accrued if it had not been limited by the maximum rate. If, upon Full Payment of the Obligations, the total amount of interest actually paid under the Loan Documents is less than the total amount of interest that would, but for this Section, have accrued under the Loan Documents, then Borrowers shall, to the extent permitted by Applicable Law, pay to Agent, for the account of Lenders, (a) the lesser of (i) the amount of interest that would have been charged if the maximum rate had been in effect at all times, or (ii) the amount of interest that would have accrued had the interest rate otherwise set forth in the Loan Documents been in effect, minus (b) the amount of interest actually paid under the Loan Documents. If a court of competent jurisdiction determines that Agent or any Lender has received interest in excess of the maximum amount allowed under Applicable Law, such excess shall be deemed received on account of, and shall automatically be applied to reduce, Obligations other than interest (regardless of any erroneous application thereof by Agent or any Lender), and upon Full Payment of the Obligations, any balance shall be refunded to Borrowers. In determining whether any excess interest has been charged or received by Agent or any Lender, all interest at any time charged or received from Borrowers in connection with the Loan Documents shall, to the extent permitted by Applicable Law, be amortized, prorated, allocated and spread in equal parts throughout the full term of the Obligations.

SECTION 4. LOAN ADMINISTRATION

4.1Manner of Borrowing and Funding Revolver Loans.

4.1.1 Notice of Borrowing.

(a)Whenever Borrowers desire funding of a Borrowing of Revolver Loans, Borrower Agent shall give Agent a Notice of Borrowing. Such notice must be received by Agent no later than 11:00 a.m. (i) on the Business Day of the requested funding date, in the case of Base Rate Loans, and (ii) at least two Business Days prior to the requested funding date, in the case of LIBOR Loans. Notices received after 11:00 a.m. shall be deemed received on the next Business Day. Each Notice of Borrowing shall be irrevocable and shall specify (A) the principal amount of the Borrowing, (B) the requested funding date (which must be a Business Day), (C) whether the Borrowing is to be made as Base Rate Loans or LIBOR Loans, and (D) in the case of LIBOR Loans, the duration of the applicable Interest Period (which shall be deemed to be one month if not specified).

(b)Unless payment is otherwise timely made by Borrowers, the becoming due of any Obligations (whether principal, interest, fees or other charges, including Extraordinary Expenses, LC Obligations, Cash Collateral and Bank Product Debt) shall be deemed to be a request for Base Rate Revolver Loans on the due date, in the amount of such Obligations. The proceeds of such Revolver Loans shall be disbursed as direct payment of the relevant Obligation.

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(c)If Borrowers establish a controlled disbursement account with Agent or any Affiliate of Agent, then the presentation for payment of any check or other item of payment drawn on such account at a time when there are insufficient funds to cover it shall be deemed to be a request for Base Rate Revolver Loans on the date of such presentation, in the amount of the check and items presented for payment. The proceeds of such Revolver Loans may be disbursed directly to the controlled disbursement account or other appropriate account.

4.1.2 Fundings by Lenders. Each Lender shall timely honor its Revolver Commitment by funding its Pro Rata share of each Borrowing of Revolver Loans that is properly requested hereunder. Except for Borrowings to be made as Swingline Loans, Agent shall endeavor to notify Lenders of each Notice of Borrowing (or deemed request for a Borrowing) by 12:00 noon on the proposed funding date for Base Rate Loans or by 3:00 p.m. at least two Business Days before any proposed funding of LIBOR Loans. Each Lender shall fund to Agent such Lender’s Pro Rata share of the Borrowing to the account specified by Agent in immediately available funds not later than 2:00 p.m. on the requested funding date, unless Agent’s notice is received after the times provided above, in which event Lender shall fund its Pro Rata share by 11:00 a.m. on the next Business Day. Subject to its receipt of such amounts from Lenders, Agent shall disburse the proceeds of the Revolver Loans as directed by Borrower Agent. Unless Agent shall have received (in sufficient time to act) written notice from a Lender that it does not intend to fund its Pro Rata share of a Borrowing, Agent may assume that such Lender has deposited or promptly will deposit its share with Agent, and Agent may disburse a corresponding amount to Borrowers. If a Lender’s share of any Borrowing is not in fact received by Agent, then Borrowers agree to repay to Agent on demand the amount of such share, together with interest thereon from the date disbursed until repaid, at the rate applicable to such Borrowing.

4.1.3 Swingline Loans; Settlement.

(a)Agent may, but shall not be obligated to, advance Swingline Loans to Borrowers out of Agent’s own funds, up to an aggregate outstanding amount of $5,000,000, unless the funding is specifically required to be made by all Lenders hereunder. Each Swingline Loan shall constitute a Revolver Loan for all purposes, except that payments thereon shall be made to Agent for its own account. The obligation of Borrowers to repay Swingline Loans shall be evidenced by the records of Agent and need not be evidenced by any promissory note.

(b)To facilitate administration of the Revolver Loans, Lenders and Agent agree (which agreement is solely among them, and not for the benefit of or enforceable by any Borrower) that settlement among them with respect to Swingline Loans and other Revolver Loans may take place periodically on a date determined from time to time by Agent, which shall occur at least once every five Business Days. On each settlement date, settlement shall be made with each Lender in accordance with the Settlement Report delivered by Agent to Lenders. Between settlement dates, Agent may in its discretion apply payments on Revolver Loans to Swingline Loans, regardless of any designation by Borrower or any provision herein to the contrary. Each Lender’s obligation to make settlements with Agent is absolute and unconditional, without offset, counterclaim or other defense, and whether or not the Commitments have terminated, an Overadvance exists, or the conditions in Section 6 are satisfied. If, due to an Insolvency Proceeding with respect to a Borrower or otherwise, any Swingline Loan may not be settled among Lenders hereunder, then each Lender shall be deemed to have purchased from Agent a Pro Rata participation in each unpaid Swingline Loan and shall transfer the amount of such participation to Agent, in immediately available funds, within one Business Day after Agent’s request therefor. In its discretion, Agent may on any settlement date permit Swingline Loans in an aggregate principal amount not to exceed $1,000,000 to remain outstanding, while requiring settlement of the other outstanding Swingline Loans among the Lenders.

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4.1.4 Notices. Each Borrower authorizes Agent and Lenders to extend, convert or continue Loans, effect selections of interest rates, and transfer funds to or on behalf of Borrowers based on telephonic or e-mailed instructions. Borrowers shall confirm each such request by prompt delivery to Agent of a Notice of Borrowing or Notice of Conversion/Continuation, if applicable, but if it differs in any material respect from the action taken by Agent or Lenders, the records of Agent and Lenders shall govern. Neither Agent nor any Lender shall have any liability for any loss suffered by a Borrower as a result of Agent or any Lender acting upon its understanding of telephonic or e-mailed instructions from a person believed in good faith by Agent or any Lender to be a person authorized to give such instructions on a Borrower’s behalf.

4.2Defaulting Lender. If a Lender fails to make any payment to Agent that is required hereunder, Agent may (but shall not be required to), in its discretion, retain payments that would otherwise be made to such defaulting Lender hereunder, apply the payments to such Lender’s defaulted obligations or readvance the funds to Borrowers in accordance with this Agreement. The failure of any Lender to fund a Loan or to make a payment in respect of a LC Obligationshall not relieve any other Lender of its obligations hereunder, and no Lender shall be responsible for default by another Lender. Lenders and Agent agree (which agreement is solely among them, and not for the benefit of or enforceable by any Borrower) that, solely for purposes of determining a defaulting Lender’s right to vote on matters relating to the Loan Documents and to share in payments, fees and Collateral proceeds thereunder, a defaulting Lender shall not be deemed to be a “Lender” until all its defaulted obligations have been cured.

4.3Number and Amount of LIBOR Loans; Determination of Rate. For ease of administration, all LIBOR Revolver Loans having the same length and beginning date of their Interest Periods shall be aggregated together, and such Loans shall be allocated among Lenders on a Pro Rata basis. No more than 4 aggregated LIBOR Loans may be outstanding at any time, and each aggregate LIBOR Loan when made, continued or converted shall be in a minimum amount of $1,000,000, or an increment of $500,000 in excess thereof. Upon determining Adjusted LIBOR for any Interest Period requested by Borrowers, Agent shall promptly notify Borrowers thereof by telephone or electronically and, if requested by Borrowers, shall confirm any telephonic notice in writing.

4.4Borrower Agent. Each Borrower hereby designates Borrower Agent as its representative and agent for all purposes under the Loan Documents, including requests for Loans and Letters of Credit, designation of interest rates, delivery or receipt of communications with Agent, Issuing Bank or any Lender, preparation and delivery of Borrowing Base and financial reports, receipt and payment of Obligations, requests for waivers, amendments or other accommodations, actions under the Loan Documents (including in respect of compliance with covenants), and all other dealings with Agent, Issuing Bank or any Lender. Borrower Agent hereby accepts such appointment. Agent and Lenders shall be entitled to rely upon, and shall be fully protected in relying upon, any notice or communication (including any notice of borrowing) delivered by Borrower Agent on behalf of any Borrower. Agent and Lenders may give any notice or communication with a Borrower hereunder to Borrower Agent on behalf of such Borrower. Agent shall have the right, in its discretion, to deal exclusively with Borrower Agent for any or all purposes under the Loan Documents. Each Borrower agrees that any notice, election, communication, representation, agreement or undertaking made on its behalf by Borrower Agent shall be binding upon and enforceable against it.

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4.5One Obligation. The Loans, LC Obligations and other Obligations shall constitute one general obligation of Borrowers and (unless otherwise expressly provided in any Loan Document) shall be secured by Agent’s Lien upon all Collateral; provided, however, that Agent and each Lender shall be deemed to be a creditor of, and the holder of a separate claim against, each Borrower to the extent of any Obligations jointly or severally owed by such Borrower.

4.6Effect of Termination. On the effective date of any termination of the Commitments, all Obligations shall be immediately due and payable, and any Lender may terminate its and its Affiliates’ Bank Products (including, with the consent of Agent, any Cash Management Services). All undertakings of Borrowers contained in the Loan Documents shall survive any termination, and Agent shall retain its Liens in the Collateral and all of its rights and remedies under the Loan Documents until Full Payment of the Obligations. Notwithstanding Full Payment of the Obligations, Agent shall not be required to terminate its Liens in any Collateral unless, with respect to any damages Agent may incur as a result of the dishonor or return of Payment Items applied to Obligations, Agent receives (a) a written agreement, executed by Borrowers and any Person whose advances are used in whole or in part to satisfy the Obligations, indemnifying Agent and Lenders from any such damages; or (b) such Cash Collateral as Agent, in its discretion, deems necessary to protect against any such damages. The provisions of Sections 2.3, 3.4, 3.6, 3.7, 3.9, 5.5, 5.9, 12, 14.2 and this Section, and the obligation of each Obligor and Lender with respect to each indemnity given by it in any Loan Document, shall survive Full Payment of the Obligations and any release relating to this credit facility.

SECTION 5. PAYMENTS

5.1General Payment Provisions. All payments of Obligations shall be made in Dollars, without offset, counterclaim or defense of any kind, free of (and without deduction for) any Taxes, and in immediately available funds, not later than 12:00 noon on the due date. Any payment after such time shall be deemed made on the next Business Day. Borrowers may, at the time of payment, specify to Agent the Obligations to which such payment is to be applied, but Agent shall in all events retain the right to apply such payment in such manner as Agent, subject to the provisions hereof, may determine to be appropriate. If any payment under the Loan Documents shall be stated to be due on a day other than a Business Day, the due date shall be extended to the next Business Day and such extension of time shall be included in any computation of interest and fees. Any payment of a LIBOR Loan prior to the end of its Interest Period shall be accompanied by all amounts due under Section 3.9. Any prepayment of Loans shall be applied first to Base Rate Loans and then to LIBOR Loans.

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5.2Repayment of Revolver Loans. Revolver Loans shall be due and payable in full on the Revolver Termination Date, unless payment is sooner required hereunder. Revolver Loans may be prepaid from time to time, without penalty or premium. If any Asset Disposition includes the disposition of Accounts or Inventory, then Net Proceeds equal to the greater of (a) the net book value of such Accounts and Inventory, or (b) the reduction in the Borrowing Base upon giving effect to such disposition, shall be applied to the Revolver Loans. Notwithstanding anything herein to the contrary, if an Overadvance exists, Borrowers shall, on the sooner of Agent’s demand or the first Business Day after any Borrower has knowledge thereof, repay the outstanding Revolver Loans in an amount sufficient to reduce the principal balance of Revolver Loans to the Borrowing Base.

5.3[Intentionally Omitted].

5.4Payment of Other Obligations. Obligations other than Loans, including LC Obligations and Extraordinary Expenses, shall be paid by Borrowers as provided in the Loan Documents or, if no payment date is specified, on demand.

5.5Marshaling; Payments Set Aside. None of Agent or Lenders shall be under any obligation to marshal any assets in favor of any Obligor or against any Obligations. If any Obligor makes a payment to Agent or Lenders, or if Agent or any Lender receives payment from the proceeds of Collateral, exercise of setoff or otherwise, and such payment is subsequently invalidated or required to be repaid to a trustee, receiver or any other Person, then the Obligations originally intended to be satisfied, and all Liens, rights and remedies therefor, shall be revived and continued in full force and effect as if such payment had not been received and any enforcement or setoff had not occurred.

5.6Post-Default Allocation of Payments.

5.6.1 Allocation. Notwithstanding anything herein to the contrary, during an Event of Default, monies to be applied to the Obligations, whether arising from payments by Obligors, realization on Collateral, setoff or otherwise, shall be allocated as follows:

(a)first, to all costs and expenses, including Extraordinary Expenses, owing to Agent;

(b)second, to all amounts owing to Agent on Swingline Loans or Protective Advances;

(c)third, to all amounts owing to Issuing Bank on LC Obligations;

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(d)fourth, to all Obligations constituting fees (excluding amounts relating to Bank Products);

(e)fifth, to all Obligations constituting interest (excluding amounts relating to Bank Products);

(f)sixth, to provide Cash Collateral for outstanding Letters of Credit;

(g)seventh, to all other Obligations, other than Bank Product Debt; and

(h)last, to Bank Product Debt.

Amounts shall be applied to each category of Obligations set forth above until Full Payment thereof and then to the next category. If amounts are insufficient to satisfy a category, they shall be applied on a pro rata basis among the Obligations in the category. The allocations set forth in this Section are solely to determine the rights and priorities of Agent and Lenders as among themselves, and may be changed by agreement among them without the consent of any Obligor. This Section is not for the benefit of or enforceable by any Borrower.

5.6.2 Erroneous Application. Agent shall not be liable for any application of amounts made by it in good faith and, if any such application is subsequently determined to have been made in error, the sole recourse of any Lender or other Person to which such amount should have been made shall be to recover the amount from the Person that actually received it (and, if such amount was received by any Lender, such Lender hereby agrees to return it).

5.7Application of Payments. The ledger balance in the main Dominion Account as of the end of a Business Day shall be applied to the Obligations at the beginning of the next Business Day. Each Borrower irrevocably waives the right to direct the application of any payments or Collateral proceeds, and agrees that Agent shall have the continuing, exclusive right to apply and reapply same against the Obligations, in such manner as Agent deems advisable, notwithstanding any entry by Agent in its records. If, as a result of Agent’s receipt of Payment Items or proceeds of Collateral, a credit balance exists, the balance shall not accrue interest in favor of Borrowers and shall be made available to Borrowers as long as no Default or Event of Default exists.

5.8Loan Account; Account Stated.

5.8.1 Loan Account. Agent shall maintain in accordance with its usual and customary practices an account or accounts (“Loan Account”) evidencing the Debt of Borrowers resulting from each Loan or issuance of a Letter of Credit from time to time. Any failure of Agent to record anything in the Loan Account, or any error in doing so, shall not limit or otherwise affect the obligation of Borrowers to pay any amount owing hereunder. Agent may maintain a single Loan Account in the name of Borrower Agent, and each Borrower confirms that such arrangement shall have no effect on the joint and several character of its liability for the Obligations.

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5.8.2 Entries Binding. Entries made in the Loan Account shall constitute presumptive evidence of the information contained therein. If any information contained in the Loan Account is provided to or inspected by any Person, then such information shall be conclusive and binding on such Person for all purposes absent manifest error, except to the extent such Person notifies Agent in writing within 30 days after receipt or inspection that specific information is subject to dispute.

5.9Taxes. If any Taxes (except Excluded Taxes) shall be payable by any party due to the execution, delivery, issuance or recording of any Loan Documents, or the creation or repayment of any Obligations, Borrowers shall pay (and shall promptly reimburse Agent and Lenders for their payment of) all such Taxes, including any interest and penalties thereon, and will indemnify and hold harmless Indemnitees against all liability in connection therewith. If Borrowers shall be required by Applicable Law to withhold or deduct any Taxes (except Excluded Taxes) with respect to any sum payable under any Loan Documents, (a) the sum payable to Agent or such Lender shall be increased as may be necessary so that, after making all required withholding or deductions, Agent or such Lender (as the case may be) receives an amount equal to the sum it would have received had no such withholding or deductions been made; (b) Borrowers shall make such withholding or deductions; and (c) Borrowers shall pay the full amount withheld or deducted to the relevant taxing or other authority in accordance with Applicable Law.

5.10Withholding Tax Exemption. At least five Business Days prior to the first date for payment of interest or fees hereunder to a Foreign Lender, the Foreign Lender shall deliver to Borrowers and Agent two duly completed copies of IRS Form W-8BEN or W-8ECI (or any subsequent replacement or substitute form therefor), certifying that such Lender can receive payment of Obligations without deduction or withholding of any United States federal income taxes. Each Foreign Lender shall deliver to Borrowers and Agent two additional copies of such form before the preceding form expires or becomes obsolete or after the occurrence of any event requiring a change in the form, as well as any amendments, extensions or renewals thereof as may be reasonably requested by Borrowers or Agent, in each case, certifying that the Foreign Lender can receive payment of Obligations without deduction or withholding of any such taxes, unless an event (including any change in treaty or law) has occurred that renders such forms inapplicable or prevents the Foreign Lender from certifying that it can receive payments without deduction or withholding of such taxes. During any period that a Foreign Lender does not or is unable to establish that it can receive payments without deduction or withholding of such taxes, other than by reason of an event (including any change in treaty or law) that occurs after it becomes a Lender, Agent may withhold taxes from payments to such Foreign Lender at the applicable statutory and treaty rates, and Borrowers shall not be required to pay any additional amounts under this Section as a result of such withholding.

5.11Nature and Extent of Each Borrower’s Liability.

5.11.1 Joint and Several Liability. Each Borrower agrees that it is jointly and severally liable for, and absolutely and unconditionally guarantees to Agent and Lenders the prompt payment and performance of, all Obligations and all agreements under the Loan Documents. Each Borrower agrees that its guaranty obligations hereunder constitute a continuing guaranty of payment and performance and not of collection, that such obligations shall not be discharged until Full Payment of the Obligations, and that such obligations are absolute and unconditional, irrespective of (a) the genuineness, validity, regularity, enforceability, subordination or any future modification of, or change in, any Obligations or Loan Document, or any other document, instrument or agreement to which any Obligor is or may become a party or liable; (b) the absence of any action to enforce this Agreement (including this Section) or any other Loan Document, or any waiver, consent or indulgence of any kind by Agent or any Lender with respect thereto; (c) the existence, value or condition of, or failure to perfect a Lien or to preserve rights against, any security or guaranty for the Obligations or any action, or the absence of any action, by Agent or any Lender in respect thereof (including the release of any security or guaranty); (d) the insolvency of any Obligor; (e) any election by Agent or any Lender in an Insolvency Proceeding for the application of Section 1111(b)(2) of the Bankruptcy Code; (f) any borrowing or grant of a Lien by any other Borrower, as debtor-in-possession under Section 364 of the Bankruptcy Code or otherwise; (g) the disallowance of any claims of Agent or any Lender against any Obligor for the repayment of any Obligations under Section 502 of the Bankruptcy Code or otherwise; or (h) any other action or circumstances that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, except Full Payment of all Obligations.

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5.11.2 Waivers.

(a)Each Borrower expressly waives all rights that it may have now or in the future under any statute, at common law, in equity or otherwise, to compel Agent or Lenders to marshal assets or to proceed against any Obligor, other Person or security for the payment or performance of any Obligations before, or as a condition to, proceeding against such Borrower. It is agreed among each Borrower, Agent and Lenders that the provisions of this Section are of the essence of the transaction contemplated by the Loan Documents and that, but for such provisions, Agent and Lenders would decline to make Loans and issue Letters of Credit. Notwithstanding anything to the contrary in any Loan Document, and except as set forth in Section 5.11.3, each Borrower expressly waives all rights at law or in equity to subrogation, reimbursement, exoneration, contribution, indemnification or set off, as well as all defenses available to a surety, guarantor or accommodation co-obligor. Each Borrower acknowledges that its guaranty pursuant to this Section is necessary to the conduct and promotion of its business, and can be expected to benefit such business.

(b)Agent and Lenders may, in their discretion, pursue such rights and remedies as they deem appropriate, including realization upon Collateral or any Real Estate by judicial foreclosure or non-judicial sale or enforcement, without affecting any rights and remedies under this Section 5.11. If, in the exercise of any rights or remedies, Agent or any Lender shall forfeit any of its rights or remedies, including its right to enter a deficiency judgment against any Borrower or any other Person, whether because of any applicable laws pertaining to “election of remedies” or otherwise, each Borrower consents to such action by Agent or such Lender and waives any claim based upon such action, even if the action may result in loss of any rights of subrogation that any Borrower might otherwise have had but for such action. Any election of remedies that results in denial or impairment of the right of Agent or any Lender to seek a deficiency judgment against any Borrower shall not impair any other Borrower’s obligation to pay the full amount of the Obligations. Each Borrower waives all rights and defenses arising out of an election of remedies, such as nonjudicial foreclosure with respect to any security for the Obligations, even though that election of remedies destroys such Borrower’s rights of subrogation against any other Person. If Agent bids at any foreclosure or trustee’s sale or at any private sale, Agent may bid all or a portion of the Obligations and the amount of such bid need not be paid by Agent but shall be credited against the Obligations. The amount of the successful bid at any such sale, whether Agent or any other Person is the successful bidder, shall be conclusively deemed to be the fair market value of the Collateral, and the difference between such bid amount and the remaining balance of the Obligations shall be conclusively deemed to be the amount of the Obligations guaranteed under this Section 5.11, notwithstanding that any present or future law or court decision may have the effect of reducing the amount of any deficiency claim to which Agent or any Lender might otherwise be entitled but for such bidding at any such sale.

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5.11.3 Extent of Liability; Contribution.

(a)Notwithstanding anything herein to the contrary, each Borrower’s liability under this Section 5.11 shall be limited to the greater of (i) all amounts for which such Borrower is primarily liable, as described below, and (ii) such Borrower’s Allocable Amount.

(b)If any Borrower makes a payment under this Section 5.11 of any Obligations (other than amounts for which such Borrower is primarily liable) (a “Guarantor Payment”) that, taking into account all other Guarantor Payments previously or concurrently made by any other Borrower, exceeds the amount that such Borrower would otherwise have paid if each Borrower had paid the aggregate Obligations satisfied by such Guarantor Payments in the same proportion that such Borrower’s Allocable Amount bore to the total Allocable Amounts of all Borrowers, then such Borrower shall be entitled to receive contribution and indemnification payments from, and to be reimbursed by, each other Borrower for the amount of such excess, pro rata based upon their respective Allocable Amounts in effect immediately prior to such Guarantor Payment. The “Allocable Amount” for any Borrower shall be the maximum amount that could then be recovered from such Borrower under this Section 5.11 without rendering such payment voidable or avoidable under Section 548 of the Bankruptcy Code or under any applicable state fraudulent transfer or conveyance act, or similar statute or common law.

(c)Nothing contained in this Section 5.11 shall limit the liability of any Borrower to pay Loans made directly or indirectly to that Borrower (including Loans advanced to any other Borrower and then re-loaned or otherwise transferred to, or for the benefit of, such Borrower), LC Obligations relating to Letters of Credit issued to support such Borrower’s business, and all accrued interest, fees, expenses and other related Obligations with respect thereto, for which such Borrower shall be primarily liable for all purposes hereunder. Agent and Lenders shall have the right, at any time in their discretion, to condition Loans and Letters of Credit upon a separate calculation of borrowing availability for each Borrower and to restrict the disbursement and use of such Loans and Letters of Credit to such Borrower.

5.11.4 Joint Enterprise. Each Borrower has requested that Agent and Lenders make this credit facility available to Borrowers on a combined basis, in order to finance Borrowers’ business most efficiently and economically. Borrowers’ business is a mutual and collective enterprise, and Borrowers believe that consolidation of their credit facility will enhance the borrowing power of each Borrower and ease the administration of their relationship with Lenders, all to the mutual advantage of Borrowers. Borrowers acknowledge and agree that Agent’s and Lenders’ willingness to extend credit to Borrowers and to administer the Collateral on a combined basis, as set forth herein, is done solely as an accommodation to Borrowers and at Borrowers’ request.

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5.11.5 Subordination. Each Borrower hereby subordinates any claims, including any right of payment, subrogation, contribution and indemnity, that it may have at any time against any other Obligor, howsoever arising, to the Full Payment of all Obligations.

SECTION 6. CONDITIONS PRECEDENT

6.1Conditions Precedent to Initial Loans. In addition to the conditions set forth in Section 6.2, Lenders shall not be required to fund any requested Loan, issue any Letter of Credit, or otherwise extend credit to Borrowers hereunder, until the date (“Closing Date”) that each of the following conditions has been satisfied:

(a)Each other Loan Document shall have been duly executed and delivered to Agent by each of the signatories thereto, and each Obligor shall be in compliance with all terms thereof.

(b)Agent shall have received acknowledgments of all filings or recordations necessary to perfect its Liens in the Collateral, as well as UCC and Lien searches and other evidence satisfactory to Agent that such Liens are the only Liens upon the Collateral, except Permitted Liens.

(c)Agent shall have received the Related Real Estate Documents for all Real Estate subject to a Mortgage.

(d)Agent shall have received certificates, in form and substance satisfactory to it, from a knowledgeable Senior Officer of each Borrower certifying that, after giving effect to the initial Loans and transactions hereunder, (i) such Borrower is Solvent; (ii) no Default or Event of Default exists; (iii) the representations and warranties set forth in Section 9 are true and correct; and (iv) such Borrower has complied with all agreements and conditions to be satisfied by it under the Loan Documents.

(e)Agent shall have received a certificate of a duly authorized officer of each Obligor, certifying (i) that attached copies of such Obligor’s Organic Documents are true and complete, and in full force and effect, without amendment except as shown, (ii) that an attached copy of resolutions authorizing execution and delivery of the Loan Documents is true and complete, and that such resolutions are in full force and effect, were duly adopted, have not been amended, modified or revoked, and constitute all resolutions adopted with respect to this credit facility, and (iii) to the title, name and signature of each Person authorized to sign the Loan Documents. Agent may conclusively rely on this certificate until it is otherwise notified by the applicable Obligor in writing.

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(f)Agent shall have received a written opinion of Haddan & Zepfel, LLP, as well as any local counsel to Borrowers or Agent (if requested by Agent), in form and substance satisfactory to Agent.

(g)Agent shall have received copies of the charter documents of each Obligor, certified as appropriate by the Secretary of State or another official of such Obligor’s jurisdiction of organization. Agent shall have received good standing certificates for each Obligor, issued by the Secretary of State or other appropriate official of such Obligor’s jurisdiction of organization and each jurisdiction where such Obligor’s conduct of business or ownership of Property necessitates qualification.

(h)Agent shall have received copies of policies or certificates of insurance for the insurance policies carried by Borrowers, all in compliance with the Loan Documents.

(i)Agent shall have completed its business, financial and legal due diligence of Obligors, including a roll-forward of its previous field examination, with results satisfactory to Agent. No material adverse change in the financial condition of any Obligor or in the quality, quantity or value of any Collateral shall have occurred since September 30, 2005.

(j)Borrowers shall have paid all fees and expenses to be paid to Agent and Lenders on the Closing Date.

(k)Agent shall have received a Borrowing Base Certificate prepared as of a date not more than 2 days prior to the Closing Date.

(l)Upon giving effect to the initial funding of Loans and issuance of Letters of Credit, and the payment by Borrowers of all fees and expenses incurred in connection herewith and taking into account all Availability Reserves in existence as of the Closing Date, Availability shall be at least $3,000,000.

(m)Agent shall have received evidence that Borrowers’ invoices indicate that title to sold goods shall pass from Borrower to its customer once production of the goods are completed and they become available to be accepted by or delivered to the customer.

(n)Agent shall have received copies of Existing Subordinated Debt Documents and the other Material Contracts as in effect on the Closing Date.

(o)Agent shall have received a certification from the Borrower Agent that no default or event of default has occurred and is continuing under the Existing Subordinated Debt Documents.

(p)Agent shall have received duly executed agreements establishing each Dominion Account and related lockbox with the Borrowers’ current cash management bank, in form and substance satisfactory to Agent.

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6.2Conditions Precedent to All Credit Extensions. Agent, Issuing Bank and Lenders shall not be required to fund any Loans, arrange for issuance of any Letters of Credit or grant any other accommodation to or for the benefit of Borrowers, unless the following conditions are satisfied:

(a)No Default or Event of Default shall exist at the time of, or result from, such funding, issuance or grant;

(b)The representations and warranties of each Obligor in the Loan Documents shall be true and correct on the date of, and upon giving effect to, such funding, issuance or grant (except for representations and warranties that expressly relate to an earlier date);

(c)All conditions precedent in any other Loan Document shall be satisfied;

(d)No event shall have occurred or circumstance exist that has or could reasonably be expected to have a Material Adverse Effect; and

(e)With respect to issuance of a Letter of Credit, the LC Conditions shall be satisfied.

Each request (or deemed request) by Borrowers for funding of a Loan, issuance of a Letter of Credit or grant of an accommodation shall constitute a representation by Borrowers that the foregoing conditions are satisfied on the date of such request and on the date of such funding, issuance or grant. As an additional condition to any funding, issuance or grant, Agent shall have received such other information, documents, instruments and agreements as it deems appropriate in connection therewith.

6.3Limited Waiver of Conditions Precedent. If Agent, Issuing Bank or Lenders fund any Loans, arrange for issuance of any Letters of Credit or grant any other accommodation when any conditions precedent are not satisfied (regardless of whether the lack of satisfaction was known or unknown at the time), it shall not operate as a waiver of (a) the right of Agent, Issuing Bank and Lenders to insist upon satisfaction of all conditions precedent with respect to any subsequent funding, issuance or grant; nor (b) any Default or Event of Default due to such failure of conditions or otherwise.

6.4Conditions Subsequent.

6.4.1 Within 30 days after the Closing Date, Agent shall receive evidence that the Dominion Account and related lockbox have been established with Bank of America, in form and substance, and with financial institutions, satisfactory to Agent.

6.4.2 Within 60 days after the Closing Date, Agent shall have received vehicle titles for all vehicles owned by Borrowers together with all documents deemed necessary by Agent to perfect its security interest in such vehicles.

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SECTION 7. COLLATERAL

7.1Grant of Security Interest. To secure the prompt payment and performance of all Obligations, each Borrower hereby grants to Agent, for the benefit of Secured Parties, a continuing security interest in and Lien upon all Property of such Borrower, including all of the following Property, whether now owned or hereafter acquired, and wherever located:

(a)all Accounts;

(b)all Chattel Paper, including electronic chattel paper;

(c)all Commercial Tort Claims;

(d)all Deposit Accounts;

(e)all Documents;

(f)all General Intangibles, including Payment Intangibles, Software and Intellectual Property;

(g)all Goods, including Inventory, Equipment and fixtures;

(h)all Instruments;

(i)all Investment Property;

(j)all Letter-of-Credit Rights;

(k)all Supporting Obligations;

(l)all monies, whether or not in the possession or under the control of Agent, a Lender, or a bailee or Affiliate of Agent or a Lender, including any Cash Collateral;

(m)all accessions to, substitutions for, and all replacements, products, and cash and non-cash proceeds of the foregoing, including proceeds of and unearned premiums with respect to insurance policies, and claims against any Person for loss, damage or destruction of any Collateral; and

(n)all books and records (including customer lists, files, correspondence, tapes, computer programs, print-outs and computer records) pertaining to the foregoing.

7.2Lien on Deposit Accounts; Cash Collateral.

7.2.1 Deposit Accounts. To further secure the prompt payment and performance of all Obligations, each Borrower hereby grants to Agent, for the benefit of Secured Parties, a continuing security interest in and Lien upon all of such Borrower’s right, title and interest in and to each Deposit Account of such Borrower and any deposits or other sums at any time credited to any such Deposit Account, including any sums in any blocked or lockbox accounts or in any accounts into which such sums are swept. Each Borrower authorizes and directs each bank or other depository to deliver to Agent, on a daily basis, all balances in each Deposit Account maintained by such Borrower with such depository for application to the Obligations then outstanding. Each Borrower irrevocably appoints Agent as such Borrower’s attorney-in-fact to collect such balances to the extent any such delivery is not so made.

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7.2.2 Cash Collateral. Any Cash Collateral, including Cash Collateral provided pursuant to Section 2.3.3, may be invested, in Agent’s discretion, in Cash Equivalents, but Agent shall have no duty to do so, regardless of any agreement, understanding or course of dealing with any Borrower, and shall have no responsibility for any investment or loss. Each Borrower hereby grants to Agent, for the benefit of Secured Parties, a security interest in all Cash Collateral held from time to time and all proceeds thereof, as security for the Obligations, whether such Cash Collateral is held in the Cash Collateral Account or elsewhere. Agent may apply Cash Collateral to the payment of any Obligations, in such order as Agent may elect, as they become due and payable. The Cash Collateral Account and all Cash Collateral shall be under the sole dominion and control of Agent. No Borrower or other Person claiming through or on behalf of any Borrower shall have any right to any Cash Collateral, until Full Payment of all Obligations.

7.3Real Estate Collateral.

7.3.1Lien on Real Estate. The Obligations shall also be secured by Mortgages upon all Real Estate owned by Borrowers, including the Mortgaged Property. The Mortgages shall be duly recorded, at Borrowers’ expense, in each office where such recording is required to constitute a fully perfected Lien on the Real Estate covered thereby. If any Borrower acquires Real Estate hereafter, Borrowers shall, within 30 days, execute, deliver and record a Mortgage sufficient to create a first priority Lien in favor of Agent on such Real Estate, and shall deliver all Related Real Estate Documents.

7.3.2Collateral Assignment of Leases. To further secure the prompt payment and performance of all Obligations, each Borrower hereby transfers and assigns to Agent, for the benefit of Secured Parties, all of such Borrower’s right, title and interest in, to and under all now or hereafter existing leases of real Property to which such Borrower is a party, whether as lessor or lessee, and all extensions, renewals and modifications thereof.

7.4Other Collateral.

7.4.1 Commercial Tort Claims. Borrowers shall promptly notify Agent in writing if any Borrower has a Commercial Tort Claim (other than, as long as no Default or Event of Default exists, a Commercial Tort Claim for less than $100,000) and, upon Agent’s request, shall promptly execute such documents and take such actions as Agent deems appropriate to confer upon Agent (for the benefit of Secured Parties) a duly perfected, first priority Lien upon such claim.

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7.4.2 Certain After-Acquired Collateral. Borrowers shall promptly notify Agent in writing if, after the Closing Date, any Borrower obtains any interest in any Collateral consisting of Deposit Accounts, Chattel Paper, Documents, Instruments, Intellectual Property, Investment Property or Letter-of-Credit Rights and, upon Agent’s request, shall promptly execute such documents and take such actions as Agent deems appropriate to effect Agent’s duly perfected, first priority Lien upon such Collateral, including obtaining any appropriate possession, control agreement or Lien Waiver. If any Collateral is in the possession of a third party, at Agent’s request, Borrowers shall obtain an acknowledgment that such third party holds the Collateral for the benefit of Agent.

7.5No Assumption of Liability. The Lien on Collateral granted hereunder is given as security only and shall not subject Agent or any Lender to, or in any way modify, any obligation or liability of Borrowers relating to any Collateral.

7.6Further Assurances. Promptly upon request, Borrowers shall deliver such instruments, assignments, title certificates, or other documents or agreements, and shall take such actions, as Agent deems appropriate under Applicable Law to evidence or perfect its Lien on any Collateral, or otherwise to give effect to the intent of this Agreement. Each Borrower authorizes Agent to file any financing statement that indicates the Collateral as “all assets” or “all personal property” of such Borrower, or words to similar effect, and ratifies any action taken by Agent before the Closing Date to effect or perfect its Lien on any Collateral.

7.7Foreign Subsidiary Stock. Notwithstanding Section 7.1, the Collateral shall include only 65% of the voting stock of any Foreign Subsidiary.

SECTION 8. COLLATERAL ADMINISTRATION

8.1Borrowing Base Certificates. By Tuesday of each week, Borrowers shall deliver to Agent (and Agent shall promptly deliver same to Lenders) a Borrowing Base Certificate prepared as of the close of business of the previous week, and at such other times (either more frequently or less frequently) as Agent may request. All calculations of Availability in any Borrowing Base Certificate shall originally be made by Borrowers and certified by a Senior Officer, provided that Agent may from time to time review and adjust any such calculation (a) to reflect its reasonable estimate of declines in value of any Collateral, due to collections received in the Dominion Account or otherwise; (b) to adjust advance rates to reflect changes in dilution, quality, mix and other factors affecting Collateral; and (c) to the extent the calculation is not made in accordance with this Agreement or does not accurately reflect the Availability Reserve.

8.2Administration of Accounts.

8.2.1 Records and Schedules of Accounts. Each Borrower shall keep accurate and complete records of its Accounts, including all payments and collections thereon, and shall submit to Agent a monthly sales and collections report, by the 20^th day of the following month, in form satisfactory to Agent. Each Borrower shall also provide to Agent, on or before the 20^th day of each month, a detailed aged trial balance of all Accounts (separately listing Bonded Accounts) as of the end of the preceding month, specifying each Account’s Account Debtor name and address, amount, invoice date and due date, showing any discount, allowance, credit, authorized return or dispute, and including such proof of delivery, copies of invoices and invoice registers, copies of related documents, repayment histories, status reports and other information as Agent may reasonably request. If Accounts in an aggregate face amount of $500,000 or more cease to be Eligible Accounts, Borrowers shall notify Agent of such occurrence promptly (and in any event within one Business Day) after any Borrower has knowledge thereof.

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8.2.2 Taxes. If an Account of any Borrower includes a charge for any Taxes, Agent is authorized, in its discretion, to pay the amount thereof to the proper taxing authority for the account of such Borrower and to charge Borrowers therefor; provided, however, that neither Agent nor Lenders shall be liable for any Taxes that may be due from Borrowers or with respect to any Collateral.

8.2.3 Account Verification. Whether or not a Default or Event of Default exists, Agent shall have the right at any time, in the name of Agent, any designee of Agent or any Borrower to verify the validity, amount or any other matter relating to any Accounts of Borrowers by mail, telephone or otherwise. Borrowers shall cooperate fully with Agent in an effort to facilitate and promptly conclude any such verification process.

8.2.4 Maintenance of Dominion Account. Borrowers shall maintain Dominion Accounts pursuant to lockbox or other arrangements acceptable to Agent. Borrowers shall obtain an agreement (in form and substance satisfactory to Agent) from each lockbox servicer and Dominion Account bank, establishing Agent’s control over and Lien in the lockbox or Dominion Account, requiring immediate deposit of all remittances received in the lockbox to a Dominion Account and, if such Dominion Account is not maintained with Bank of America, requiring immediate transfer of all funds in the Dominion Account to a Dominion Account maintained with Bank of America, and waiving offset rights of such servicer or bank against any funds in the lockbox or Dominion Account, except offset rights for customary administrative charges. Neither Agent nor Lenders assume any responsibility to Borrowers for any lockbox arrangement or Dominion Account, including any claim of accord and satisfaction or release with respect to any Payment Items accepted by any bank.

8.2.5 Proceeds of Collateral. Borrowers shall request in writing and otherwise take all reasonable steps to ensure that all payments on Accounts or otherwise relating to Collateral are made directly to a Dominion Account (or a lockbox relating to a Dominion Account). If any Borrower or Subsidiary receives cash or Payment Items with respect to any Collateral, it shall hold same in trust for Agent and promptly (not later than the next Business Day) deposit same into a Dominion Account.

8.3Administration of Inventory.

8.3.1 Records and Reports of Inventory. Each Borrower shall keep accurate and complete records of its Inventory, including costs and daily withdrawals and additions, and shall submit to Agent inventory reports in form satisfactory to Agent, on a monthly basis by no later than the 20th day of the following month. Until a perpetual inventory reporting system satisfactory to Agent has been established by each Borrower, each Borrower shall conduct a physical inventory count at least once per calendar quarter (and on a more frequent basis if requested by Agent when an Event of Default exists) and periodic cycle counts consistent with historical practices, and shall provide to Agent a report based on each such inventory and count promptly upon completion thereof, together with such supporting information as Agent may request. Once a perpetual inventory reporting system has been established by each Borrower, such physical inventory shall be conducted at least once per year Agent may participate in and observe each inventory or physical count.

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8.3.2 Returns of Inventory. No Borrower shall return any Inventory to a supplier, vendor or other Person, whether for cash, credit or otherwise, unless (a) such return is in the Ordinary Course of Business; (b) no Default, Event of Default or Overadvance exists or would result therefrom; (c) Agent is promptly notified if the aggregate Value of all Inventory returned in any month exceeds $100,000; and (d) any payment received by a Borrower for a return is promptly remitted to Agent for application to the Obligations.

8.3.3 Acquisition, Sale and Maintenance. No Borrower shall acquire or accept any Inventory on consignment or approval, and shall take all steps to assure that all Inventory is produced in accordance with Applicable Law, including the FLSA. No Borrower shall sell any Inventory on consignment or approval or any other basis under which the customer may return or require a Borrower to repurchase such Inventory. Borrowers shall use, store and maintain all Inventory with reasonable care and caution, in accordance with applicable standards of any insurance and in conformity with all Applicable Law, and shall make current rent payments (within applicable grace periods provided for in leases) at all locations where any Collateral is located.

8.4Administration of Equipment.

8.4.1 Records and Schedules of Equipment. Each Borrower shall keep accurate and complete records of its Equipment, including kind, quality, quantity, cost, acquisitions and dispositions thereof, and shall submit to Agent, on such periodic basis as Agent may request, a current schedule thereof, in form satisfactory to Agent. Promptly upon request, Borrowers shall deliver to Agent evidence of their ownership or interests in any Equipment.

8.4.2 Dispositions of Equipment. No Borrower shall sell, lease or otherwise dispose of any Equipment, without the prior written consent of Agent, other than (a) a Permitted Asset Disposition; and (b) replacement of Equipment that is worn, damaged or obsolete with Equipment of like function and value, if the replacement Equipment is acquired substantially contemporaneously with such disposition and is free of Liens.

8.4.3 Condition of Equipment. The Equipment is in good operating condition and repair, and all necessary replacements and repairs have been made so that the value and operating efficiency of the Equipment is preserved at all times, reasonable wear and tear excepted. Each Borrower shall ensure that the Equipment is mechanically and structurally sound, and capable of performing the functions for which it was designed, in accordance with the manufacturer’s published and recommended specifications. No Borrower shall permit any Equipment to become affixed to real Property unless any landlord or mortgagee delivers a Lien Waiver or similar instrument.

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8.5Administration of Deposit Accounts. Schedule 8.5 sets forth all Deposit Accounts maintained by Borrowers, including all Dominion Accounts. Each Borrower shall take all actions necessary to establish Agent’s control of each such Deposit Account (other than an account exclusively used for payroll, payroll taxes or employee benefits, or an account containing not more that $10,000 at any time). Each Borrower shall be the sole account holder of each Deposit Account and shall not allow any other Person (other than Agent) to have control over a Deposit Account or any Property deposited therein. Each Borrower shall promptly notify Agent of any opening or closing of a Deposit Account and, with the consent of Agent, will amend Schedule 8.5 to reflect same.

8.6General Provisions.

8.6.1 Location of Collateral. All tangible items of Collateral, other than Inventory in transit, shall at all times be kept by Borrowers at the business locations set forth in Schedule 8.6.1, except that Borrowers may (a) make sales or other dispositions of Collateral in accordance with Section 10.2.6; and (b) move Collateral to another location in the United States, upon 30 Business Days prior written notice to Agent.

8.6.2 Insurance of Collateral; Condemnation Proceeds.

(a)Each Borrower shall maintain insurance with respect to the Collateral, covering casualty, hazard, public liability, theft, malicious mischief, and such other risks, in such amounts, with such endorsements, and with such insurers (rated A+ or better by A.M. Best Rating Guide) as are satisfactory to Agent. All proceeds under each policy shall be payable to Agent. From time to time upon request, Borrowers shall deliver to Agent the originals or certified copies of its insurance policies and updated flood plain searches. Unless Agent shall agree otherwise, each policy shall include satisfactory endorsements (i) showing Agent as sole loss payee or additional insured, as appropriate; (ii) requiring 30 days prior written notice to Agent in the event of cancellation of the policy for any reason whatsoever; and (iii) specifying that the interest of Agent shall not be impaired or invalidated by any act or neglect of any Borrower or the owner of the Property, nor by the occupation of the premises for purposes more hazardous than are permitted by the policy. If any Borrower fails to provide and pay for such insurance, Agent may, at its option, but shall not be required to, procure the insurance and charge Borrowers therefor. Each Borrower agrees to deliver to Agent, promptly as rendered, copies of all reports made to insurance companies. While no Event of Default exists, Borrowers may settle, adjust or compromise any insurance claim, as long as the proceeds are delivered to Agent. If an Event of Default exists, only Agent shall be authorized to settle, adjust and compromise such claims.

(b)Subject to subsection (b) below, Any proceeds of insurance (other than proceeds from workers’ compensation or D&O insurance) and any awards arising from condemnation of any Collateral shall be paid to Agent. Any such proceeds or awards shall first be applied to payment of the Revolver Loans, and then to any other Obligations outstanding, and if there are no outstanding Obligations, then to Borrower Agent.

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(c)If requested by Borrowers in writing within 15 days after Agent’s receipt of any insurance proceeds or condemnation awards relating to any loss or destruction of Equipment or Real Estate, Borrowers may use such proceeds or awards to repair or replace such Equipment or Real Estate (and until so used, the proceeds shall be held by Agent as Cash Collateral) as long as (i) no Default or Event of Default exists; (ii) such repair or replacement is promptly undertaken and concluded, in accordance with plans satisfactory to Agent; (iii) replacement buildings are constructed on the sites of the original casualties and are of comparable size, quality and utility to the destroyed buildings; (iv) the repaired or replaced Property is free of Liens, other than Permitted Liens that are not Purchase Money Liens; (v) Borrowers comply with disbursement procedures for such repair or replacement as Agent may reasonably require; and (vi) the aggregate amount of such proceeds or awards from any single casualty or condemnation does not exceed $1,000,000.

8.6.3 Protection of Collateral. All expenses of protecting, storing, warehousing, insuring, handling, maintaining and shipping any Collateral, all Taxes payable with respect to any Collateral (including any sale thereof), and all other payments required to be made by Agent to any Person to realize upon any Collateral, shall be borne and paid by Borrowers. Agent shall not be liable or responsible in any way for the safekeeping of any Collateral, for any loss or damage thereto (except for reasonable care in its custody while Collateral is in Agent’s actual possession), for any diminution in the value thereof, or for any act or default of any warehouseman, carrier, forwarding agency or other Person whatsoever, but the same shall be at Borrowers’ sole risk.

8.6.4 Defense of Title to Collateral. Each Borrower shall at all times defend its title to Collateral and Agent’s Liens therein against all Persons, claims and demands whatsoever, except Permitted Liens.

8.7Power of Attorney. Each Borrower hereby irrevocably constitutes and appoints Agent (and all Persons designated by Agent) as such Borrower’s true and lawful attorney (and agent-in-fact) for the purposes provided in this Section. Agent, or Agent’s designee, may, without notice and in either its or a Borrower’s name, but at the cost and expense of Borrowers:

(a)Endorse a Borrower’s name on any Payment Item or other proceeds of Collateral (including proceeds of insurance) that come into Agent’s possession or control; and

(b)During an Event of Default, (i) notify any Account Debtors of the assignment of their Accounts, demand and enforce payment of Accounts, by legal proceedings or otherwise, and generally exercise any rights and remedies with respect to Accounts; (ii) settle, adjust, modify, compromise, discharge or release any Accounts or other Collateral, or any legal proceedings brought to collect Accounts or Collateral; (iii) sell or assign any Accounts and other Collateral upon such terms, for such amounts and at such times as Agent deems advisable; (iv) take control, in any manner, of any proceeds of Collateral; (v) prepare, file and sign a Borrower’s name to a proof of claim or other document in a bankruptcy of an Account Debtor, or to any notice, assignment or satisfaction of Lien or similar document; (vi) receive, open and dispose of mail addressed to a Borrower, and notify postal authorities to change the address for delivery thereof to such address as Agent may designate; (vii) endorse any Chattel Paper, Document, Instrument, invoice, freight bill, bill of lading, or similar document or agreement relating to any Accounts, Inventory or other Collateral; (viii) use a Borrower’s stationery and sign its name to verifications of Accounts and notices to Account Debtors; (ix) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to any Collateral; (x) make and adjust claims under policies of insurance; (xi) take any action as may be necessary or appropriate to obtain payment under any letter of credit or banker’s acceptance for which a Borrower is a beneficiary; and (xii) take all other actions as Agent deems appropriate to fulfill any Borrower’s obligations under the Loan Documents.

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SECTION 9. REPRESENTATIONS AND WARRANTIES

9.1General Representations and Warranties. To induce Agent and Lenders to enter into this Agreement and to make available the Commitments, Loans and Letters of Credit, each Borrower represents and warrants that:

9.1.1 Organization and Qualification. Each Borrower is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. Each Borrower is duly qualified, authorized to do business and in good standing as a foreign corporation in each jurisdiction where failure to be so qualified could reasonably be expected to have a Material Adverse Effect.

9.1.2 Power and Authority. Each Obligor is duly authorized to execute, deliver and perform its Loan Documents. The execution, delivery and performance of the Loan Documents have been duly authorized by all necessary action, and do not (a) require any consent or approval of any holders of Equity Interests of any Obligor, other than those already obtained; (b) contravene the Organic Documents of any Obligor; (c) violate or cause a default under any Applicable Law or Material Contract; or (d) result in or require the imposition of any Lien (other than Permitted Liens) on any Property of any Obligor.

9.1.3 Enforceability. Each Loan Document is a legal, valid and binding obligation of each Obligor party thereto, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors’ rights generally.

9.1.4 Capital Structure. Schedule 9.1.4 shows, for each Borrower and Subsidiary, its name, its jurisdiction of organization, its authorized and issued Equity Interests, the holders of its Equity Interests, and all agreements binding on such holders with respect to their Equity Interests. Each Borrower has good title to its Equity Interests in its Subsidiaries, subject only to Agent’s Lien, and all such Equity Interests are duly issued, fully paid and non-assessable. Except as shown on Schedule 9.1.4, there are no outstanding options to purchase, warrants, subscription rights, agreements to issue or sell, convertible interests, phantom rights or powers of attorney relating to any Equity Interests of any Borrower or Subsidiary. Each of the Borrower Agent’s Subdisiaries in existence as of the date hereof are inactive and have no assets, operations or income.

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9.1.5 Corporate Names; Locations. During the five years preceding the Closing Date, except as shown on Schedule 9.1.5, no Borrower or Subsidiary has been known as or used any corporate, fictitious or trade names, has been the surviving corporation of a merger or combination, or has acquired any substantial part of the assets of any Person. The chief executive offices and other places of business of Borrowers and Subsidiaries are shown on Schedule 8.6.1. During the five years preceding the Closing Date, no Borrower or Subsidiary has had any other office or place of business.

9.1.6 Title to Properties; Priority of Liens. Each Borrower and Subsidiary has good and marketable title to (or valid leasehold interests in) all of its Real Estate, and good title to all of its personal Property, including all Property reflected in any financial statements delivered to Agent or Lenders, in each case free of Liens except Permitted Liens. Except as set forth in Schedule 9.1.6, each Borrower and Subsidiary has paid and discharged all lawful claims that, if unpaid, could become a Lien on its Properties, other than Permitted Liens. All Liens of Agent in the Collateral are duly perfected, first priority Liens, subject only to Permitted Liens that are expressly allowed to have priority over Agent’s Liens.

9.1.7 Accounts. Agent may rely, in determining which Accounts are Eligible Accounts, on all statements and representations made by Borrowers with respect thereto. Borrowers warrant, with respect to each Account at the time it is shown as an Eligible Account in a Borrowing Base Certificate, that:

(a)it is genuine and in all respects what it purports to be, and is not evidenced by a judgment;

(b)it arises out of a completed, bona fide sale and delivery of goods in the Ordinary Course of Business, and substantially in accordance with any purchase order, contract or other document relating thereto;

(c)it is for a sum certain, maturing as stated in the invoice covering such sale, a copy of which has been furnished or is available to Agent on request;

(d)it is not subject to any offset, Lien (other than Agent’s Lien), deduction, defense, dispute, counterclaim or other adverse condition except as arising in the Ordinary Course of Business and disclosed to Agent; and it is absolutely owing by the Account Debtor, without contingency in any respect;

(e)no purchase order, agreement, document or Applicable Law restricts assignment of the Account to Agent (regardless of whether, under the UCC, the restriction is ineffective);

(f)no extension, compromise, settlement, modification, credit, deduction or return has been authorized with respect to the Account, except discounts or allowances granted in the Ordinary Course of Business for prompt payment that are reflected on the face of the invoice related thereto and in the reports submitted to Agent hereunder; and

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(g)to the best of Borrowers’ knowledge, (i) there are no facts or circumstances that are reasonably likely to impair the enforceability or collectibility of such Account; (ii) the Account Debtor had the capacity to contract when the Account arose, continues to meet the applicable Borrower’s customary credit standards, is Solvent, is not contemplating or subject to an Insolvency Proceeding, and has not failed, or suspended or ceased doing business; and (iii) there are no proceedings or actions threatened or pending against any Account Debtor that could reasonably be expected to have a material adverse effect on the Account Debtor’s financial condition.

9.1.8 Financial Statements. The consolidated and consolidating balance sheets, and related statements of income, cash flow and shareholder’s equity, of Borrowers and Subsidiaries that have been and are hereafter delivered to Agent and Lenders, are prepared in accordance with GAAP, and fairly present the financial positions and results of operations of Borrowers and Subsidiaries at the dates and for the periods indicated subject, in the case of interim statements, to customary year-end adjustments. All projections delivered from time to time to Agent and Lenders have been prepared in good faith, based on reasonable assumptions in light of the circumstances at such time. Except for the losses as of December 31, 2005 disclosed by Borrower Agent in Schedule 9.1.8 since September 30, 2005, there has been no change in the condition, financial or otherwise, of any Borrower or Subsidiary that could reasonably be expected to have a Material Adverse Effect. No financial statement delivered to Agent or Lenders at any time contains any untrue statement of a material fact, nor fails to disclose any material fact necessary to make such statement not materially misleading. Each Borrower is Solvent. There has been no material adverse change in the Fixed Charge Coverage Ratio of Borrowers for the month of February 2006 as set forth in the projections delivered to Agent prior to the Closing Date.

9.1.9 Surety Obligations. No Borrower or Subsidiary is obligated as surety or indemnitor under any bond or other contract that assures payment or performance of any obligation of any Person, except as permitted hereunder.

9.1.10 Taxes. Except as disclosed in Schedule 9.1.10, each Borrower and Subsidiary has filed all federal, state and local tax returns and other reports that it is required by law to file, and has paid, or made provision for the payment of, all Taxes upon it, its income and its Properties that are due and payable, except to the extent being Properly Contested. The provision for Taxes on the books of each Borrower and Subsidiary is adequate for all years not closed by applicable statutes, and for its current Fiscal Year.

9.1.11 Brokers. There are no brokerage commissions, finder’s fees or investment banking fees payable in connection with any transactions contemplated by the Loan Documents.

9.1.12 Intellectual Property. Each Borrower and Subsidiary owns or has the lawful right to use all Intellectual Property necessary for the conduct of its business, without conflict with any rights of others. There is no pending or, to any Borrower’s knowledge, threatened Intellectual Property Claim with respect to any Borrower, any Subsidiary or any of their Property (including any Intellectual Property). Except as disclosed on Schedule 9.1.12, no Borrower or Subsidiary pays or owes any Royalty or other compensation to any Person with respect to any Intellectual Property. All Intellectual Property owned, used or licensed by, or otherwise subject to any interests of, any Borrower or Subsidiary is shown on Schedule 9.1.12.

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9.1.13 Governmental Approvals. Each Borrower and Subsidiary has, is in compliance with, and is in good standing with respect to, all Governmental Approvals necessary to conduct its business and to own, lease and operate its Properties, except where noncompliance could not reasonably be expected to have a Material Adverse Effect. All necessary import, export or other licenses, permits or certificates for the import or handling of any goods or other Collateral have been procured and are in effect, and Borrowers and Subsidiaries have complied with all foreign and domestic laws with respect to the shipment and importation of any goods or Collateral, except where noncompliance could not reasonably be expected to have a Material Adverse Effect.

9.1.14 Compliance with Laws. Each Borrower and Subsidiary has duly complied, and its Properties and business operations are in compliance, in all material respects with all Applicable Law, except where noncompliance could not reasonably be expected to have a Material Adverse Effect. There have been no citations, notices or orders of material noncompliance issued to any Borrower or Subsidiary under any Applicable Law. No Inventory has been produced in violation of the FLSA.

9.1.15 Compliance with Environmental Laws. Except as disclosed on Schedule 9.1.15, no Borrower’s or Subsidiary’s past or present operations, Real Estate or other Properties are subject to any federal, state or local investigation to determine whether any remedial action is needed to address any known environmental pollution, hazardous material or environmental clean-up. Except as disclosed on Schedule 9.1.15, no Borrower or Subsidiary has received any Environmental Notice. No Borrower or Subsidiary has any contingent liability with respect to any Environmental Release, environmental pollution or hazardous material on any Real Estate now or previously owned, leased or operated by it. The representations and warranties contained in the Environmental Agreement are true and correct on the Closing Date.

9.1.16 Burdensome Contracts. No Borrower or Subsidiary is a party or subject to any contract, agreement or charter restriction that could reasonably be expected to have a Material Adverse Effect. No Borrower or Subsidiary is party or subject to any Restrictive Agreement, except as shown on Schedule 9.1.16, none of which prohibit the execution or delivery of any Loan Documents by an Obligor nor the performance by an Obligor of any obligations thereunder.

9.1.17 Litigation. Except as shown on Schedule 9.1.17, there are no proceedings or investigations pending or, to any Borrower’s knowledge, threatened against any Borrower or Subsidiary, or any of their businesses, operations, Properties, prospects or conditions, that (a) relate to any Loan Documents or transactions contemplated thereby; or (b) could reasonably be expected to have a Material Adverse Effect if determined adversely to any Borrower or Subsidiary. No Borrower or Subsidiary is in default with respect to any order, injunction or judgment of any Governmental Authority.

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9.1.18 No Defaults. No event or circumstance has occurred or exists that constitutes a Default or Event of Default. No Borrower or Subsidiary is in default, and no event or circumstance has occurred or exists that with the passage of time or giving of notice would constitute a default, under any Material Contract or in the payment of any Borrowed Money. There is no basis upon which any party (other than a Borrower or Subsidiary) could terminate a Material Contract for cause prior to its scheduled termination date.

9.1.19 ERISA. Except as disclosed on Schedule 9.1.19, no Borrower or Subsidiary has any Multiemployer Plan or Foreign Plan. Each Borrower and Subsidiary is in full compliance with the requirements of all Applicable Law, including ERISA, relating to each Multiemployer Plan and Foreign Plan. No fact or situation exists that could reasonably be expected to result in a Material Adverse Effect in connection with any Multiemployer Plan or Foreign Plan. No Borrower or Subsidiary has any withdrawal liability in connection with a Multiemployer Plan or Foreign Plan. All employer and employee contributions to Foreign Plans, to the extent required by law or the terms of such plans, have been made or accrued in accordance with normal accounting principles. The fair market value of the assets of each funded Foreign Plan, the liability of each insurer for any Foreign Plan funded through insurance and/or the book reserve established for each Foreign Plan, together with any accrued contributions, are sufficient to provide the accrued benefit obligations of all participants in such plans according to the actuarial assumptions and valuations most recently used to account for such obligations in accordance with applicable generally accepted accounting principles. Each Foreign Plan required to be registered has been registered and is maintained in good standing with all applicable regulatory authorities.

9.1.20 Trade Relations. There exists no actual or threatened termination, limitation or modification of any business relationship between any Borrower or Subsidiary and any customer or supplier, or any group of customers or suppliers, who individually or in the aggregate are material to the business of such Borrower or Subsidiary. There exists no condition or circumstance that could reasonably be expected to impair the ability of any Borrower or Subsidiary to conduct its business at any time hereafter in substantially the same manner as conducted on the Closing Date.

9.1.21 Labor Relations. Except as described on Schedule 9.1.21, no Borrower or Subsidiary is party to or bound by any collective bargaining agreement, management agreement or consulting agreement. There are no material grievances, disputes or controversies with any union or other organization of any Borrower’s or Subsidiary’s employees, or, to any Borrower’s knowledge, any asserted or threatened strikes, work stoppages or demands for collective bargaining.

9.1.22 Payable Practices. No Borrower or Subsidiary has made any material change in its historical accounts payable practices from those in effect on the Closing Date.

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9.1.23 Not a Regulated Entity. No Obligor is (a) an “investment company” or a “person directly or indirectly controlled by or acting on behalf of an investment company” within the meaning of the Investment Company Act of 1940; (b) a “holding company,” a “subsidiary company” of a “holding company,” or an “affiliate” of either, within the meaning of the Public Utility Holding Company Act of 1935; or (c) subject to regulation under the Federal Power Act, the Interstate Commerce Act, any public utilities code or any other Applicable Law regarding its authority to incur Debt.

9.1.24 Margin Stock. No Borrower or Subsidiary is engaged, principally or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. No Loan proceeds or Letters of Credit will be used by Borrowers to purchase or carry, or to reduce or refinance any Debt incurred to purchase or carry, any Margin Stock or for any related purpose governed by Regulations T, U or X of the Board of Governors.

9.1.25 Plan Assets. No Borrower is an entity deemed to hold “plan assets” within the meaning of 29 C.F.R. Sec.2510.3-101 of any “employee benefit plan” (as defined in Section 3(3) of ERISA) that is subject to Title I of ERISA or any “plan” (within the meaning of Section 4975 of the Internal Revenue Code), and neither the execution of this Agreement nor the funding of any Loans gives rise to a prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code.

9.1.26 The Note Transaction. (i) The Borrower has delivered to the Agent a complete and correct copy of the Existing Subordinated Debt Documents, including all schedules and exhibits thereto, (ii) the Existing Subordinated Debt Documents set forth the entire agreement and understanding of the parties thereto relating to the subject matter thereof, and there are no other agreements, arrangements or understandings, written or oral, relating to the matters covered thereby, (iii) no Existing Subordinated Debt Document has been amended or otherwise modified prior to the date hereof, (iv) the execution, delivery and performance of each of the Existing Subordinated Debt Documents has been duly authorized by all necessary action on the part of the applicable Borrowers, (v) the Note Transaction has been effected in accordance with the terms of the Existing Subordinated Debt Documents and all applicable law, (vi) the Borrowers have not incurred or assumed any liabilities or obligations pursuant to or in connection with the Note Transaction other than the Existing Subordinated Debt Documents, (vii) the execution, delivery and performance of this Agreement and the other Loan Documents and the funding of the Loans or issuance of any Letter of Credit do not violate any term or provision of any of the Existing Subordinated Debt Documents, and (viii) each Existing Subordinated Debt Document is the legal, valid and binding obligation of the parties thereto, enforceable against such parties in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and by general principals of equity.

9.1.27 Existing Subordinated Debt. The Borrower Agent has the power and authority to incur the Debt provided for under the Existing Subordinated Debt Documents and has duly authorized, executed and delivered the Existing Subordinated Debt Documents. The Borrower Agent has issued, pursuant to due authorization, the Subordinated Convertible Notes under the Existing Subordinated Debt Documents. The Subordinated Convertible Notes constitute the legal, valid and binding obligation of the Borrower Agent enforceable against the Borrower Agent in accordance with their terms. The subordination provisions of the Intercreditor Agreement and the Subordinated Convertible Notes are and will be enforceable against the holders of the Subordinated Convertible Notes by the holders of any Senior Indebtedness (as defined in the Intercreditor Agreement). All Obligations, including, without limitation, those to pay principal of and interest (including post-petition interest) on the Loan, the LC Obligations and fees, indemnities and expenses in connection therewith, constitute Senior Indebtedness (as defined in the Intercreditor Agreement), and all such Obligations are entitled to the benefits of the subordination and lien priorities created by the Intercreditor Agreement. The Borrower Agent acknowledges that the Agent and the Lenders are entering into this Agreement, and extending their Commitments, in reliance upon the subordination provisions of the Intercreditor Agreement and this Section 9.1.27.

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9.2Complete Disclosure. No Loan Document contains any untrue statement of a material fact, nor fails to disclose any material fact necessary to make the statements contained therein not materially misleading. There is no fact or circumstance that any Obligor has failed to disclose to Agent in writing that could reasonably be expected to have a Material Adverse Effect.

SECTION 10. COVENANTS AND CONTINUING AGREEMENTS

10.1Affirmative Covenants. For so long as any Commitments or Obligations are outstanding, each Borrower shall, and shall cause each Subsidiary to:

10.1.1 Inspections; Appraisals.

(a)Permit Agent from time to time, subject (except when a Default or Event of Default exists) to reasonable notice and normal business hours, to visit and inspect the Properties of any Borrower or Subsidiary, inspect, audit and make extracts from any Borrower’s or Subsidiary’s books and records, and discuss with its officers, employees, agents, advisors and independent accountants such Borrower’s or Subsidiary’s business, financial condition, assets, prospects and results of operations. Lenders may participate in any such visit or inspection, at their own expense. Neither Agent nor any Lender shall have any duty to any Borrower to make any inspection, nor to share any results of any inspection, appraisal or report with any Borrower. To the extent any appraisal or other information is shared by Agent or a Lender with any Borrower, such Borrower acknowledges that it was prepared by Agent and Lenders for their purposes and Borrowers shall not be entitled to rely upon it.

(b)Reimburse Agent for all reasonable charges, costs and expenses of Agent in connection with (i) examinations of any Obligor’s books and records or any other financial or Collateral matters as Agent deems appropriate, up to four times per Loan Year; and (ii) appraisals of Inventory, Equipment and Real Estate, up to one time per Loan Year; provided, however, that if an examination or appraisal is initiated during a Default or Event of Default, all such charges, costs and expenses therefor shall be reimbursed by Borrowers without regard to such limits. Subject to the foregoing, Borrowers shall pay Agent’s then standard charges for each day that an employee of Agent or its Affiliates is engaged in any examination activities (such charge is currently $850 per day (or portion thereof) for each person retained or employed by the Agent with respect to each field examination or audit, but is subject to change without notice by Agent), and shall pay the standard charges of Agent’s internal appraisal group. This Section shall not be construed to limit Agent’s right to conduct examinations or to obtain appraisals at any time in its discretion, nor to use third parties for such purposes.

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10.1.2 Financial and Other Information. Keep adequate records and books of account with respect to its business activities, in which proper entries are made in accordance with GAAP reflecting all financial transactions; and furnish to Agent and Lenders:

(a)as soon as available, and in any event within 90 days after the close of each Fiscal Year, balance sheets as of the end of such Fiscal Year and the related statements of income, cash flow and shareholders’ equity for such Fiscal Year, on consolidated and consolidating bases for Borrowers and Subsidiaries, which consolidated statements shall be audited and certified (without qualification as to scope, “going concern” or similar items) by a firm of independent certified public accountants of recognized standing selected by Borrowers and acceptable to Agent (Borrower’s current accountants are deemed acceptable by Agent as of the Closing Date), and shall set forth in comparative form corresponding figures for the preceding Fiscal Year and other information acceptable to Agent;

(b)as soon as available, and in any event within 30 days after the end of each month (and by no later than February 28 of each year with respect to the financial statements for the month of January of such year), unaudited balance sheets as of the end of such month and the related statements of income and cash flow for such month and for the portion of the Fiscal Year then elapsed, on consolidated and consolidating bases for Borrowers and Subsidiaries, setting forth in comparative form corresponding figures for the preceding Fiscal Year and certified by the chief financial officer of Borrower Agent as prepared in accordance with GAAP and fairly presenting the financial position and results of operations for such month and period, subject to normal year-end adjustments and the absence of footnotes, all acceptable to Agent;

(c)as soon a available, and in any event within 45 days after the end of each quarter, a copy of 10-Q quarterly report of the Borrowing Agent as filed with the Securities and Exchange Commission;

(d)concurrently with delivery of financial statements under clauses (a) and (b) above, or more frequently if requested by Agent while a Default or Event of Default exists, a Compliance Certificate executed by the chief financial officer of Borrower Agent and acceptable to Agent;

(e)concurrently with delivery of financial statements under clause (a) above, copies of all management letters and other material reports submitted to Borrowers by their accountants in connection with such financial statements, all acceptable to Agent;

(f)not later than 30 days prior to the end of each Fiscal Year, projections of Borrowers’ consolidated balance sheets, results of operations, cash flow and Availability for the next two Fiscal Years, month by month for the first Fiscal Year, all acceptable to Agent;

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(g)at Agent’s request, a listing of each Borrower’s trade payables, specifying the trade creditor and balance due, and a detailed trade payable aging, all in form satisfactory to Agent;

(h)promptly after the sending or filing thereof, copies of any proxy statements, financial statements or reports that any Borrower has made generally available to its shareholders; copies of any regular, periodic and special reports or registration statements or prospectuses that any Borrower files with the Securities and Exchange Commission or any other Governmental Authority, or any securities exchange; and copies of any press releases or other statements made available by a Borrower to the public concerning material changes to or developments in the business of such Borrower;

(i)promptly after the sending or filing thereof, copies of any annual report to be filed in connection with each Plan or Foreign Plan;

(j)such other reports and information (financial or otherwise) as Agent may reasonably request from time to time in connection with any Collateral or any Borrower’s, Subsidiary’s or other Obligor’s financial condition or business;

(k)as soon as available, and in any event within 120 days after the close of each Fiscal Year, financial statements for each Guarantor, if any, in form and substance satisfactory to Agent; and

(l)together with the monthly financial statements delivered as set forth in Section 10.1.2(b), all material stop notices and release of stop notices, explanations of short paids, list of cost overruns by job, report of production of goods scheduled as compared to actual production, and all notices of any claims for liquidated damages.

Simultaneously with retaining accountants for their annual audit, Borrowers shall send a letter to the accountants, with a copy to Agent and Lenders, notifying the accountants that one of the primary purposes for retaining their services and obtaining audited financial statements is for use by Agent and Lenders. Agent is authorized to send such notice if Borrowers fail to do so for any reason.

10.1.3 Notices. Notify Agent and Lenders in writing, promptly after a Borrower’s obtaining knowledge thereof, of any of the following that affects an Obligor: (a) the threat or commencement of any proceeding or investigation, whether or not covered by insurance, if an adverse determination could have a Material Adverse Effect; (b) any pending or threatened labor dispute, strike or walkout, or the expiration of any material labor contract; (c) any default under or termination of a Material Contract; (d) the existence of any Default or Event of Default; (e) any judgment in an amount exceeding $1,000,000; (f) the assertion of any Intellectual Property Claim, if an adverse resolution could have a Material Adverse Effect; (g) any violation or asserted violation of any Applicable Law (including ERISA, OSHA, FLSA, or any Environmental Laws), if an adverse resolution could have a Material Adverse Effect; (h) any Environmental Release by an Obligor or on any Property owned, leased or occupied by an Obligor; or receipt of any Environmental Notice; (i) the discharge of or any withdrawal or resignation by Borrowers’ independent accountants; or (j) any opening of a new office or place of business, at least 30 days prior to such opening.

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10.1.4 Landlord and Storage Agreements. Upon request, provide Agent with copies of all existing agreements, and promptly after execution thereof provide Agent with copies of all future agreements, between an Obligor and any landlord, warehouseman, processor, shipper, bailee or other Person that owns any premises at which any Collateral may be kept or that otherwise may possess or handle any Collateral.

10.1.5 Compliance with Laws. Comply with all Applicable Laws, including ERISA, Environmental Laws, FLSA, OSHA, Anti-Terrorism Laws, and laws regarding collection and payment of Taxes, and maintain all Governmental Approvals necessary to the ownership of its Properties or conduct of its business, unless failure to comply (other than failure to comply with Anti-Terrorism Laws) or maintain could not reasonably be expected to have a Material Adverse Effect. Without limiting the generality of the foregoing, if any Environmental Release occurs at or on any Properties of any Borrower or Subsidiary, it shall act promptly and diligently to investigate and report to Agent and all appropriate Governmental Authorities the extent of, and to make appropriate remedial action to eliminate, such Environmental Release, whether or not directed to do so by any Governmental Authority.

10.1.6 Taxes. Pay and discharge all Taxes prior to the date on which they become delinquent or penalties attach, unless such Taxes are being Properly Contested.

10.1.7 Insurance. In addition to the insurance required hereunder with respect to Collateral, maintain insurance with insurers (rated A+ or better by Best Rating Guide) satisfactory to Agent, (a) with respect to the Properties and business of Borrowers and Subsidiaries of such type (including product liability, workers’ compensation, larceny, embezzlement, or other criminal misappropriation insurance), in such amounts, and with such coverages and deductibles as are customary for companies similarly situated, and (b) business interruption insurance in an amount not less than $10,000,000, with deductibles and subject to an Insurance Assignment satisfactory to Agent.

10.1.8 Licenses. Keep each License affecting any Collateral (including the manufacture, distribution or disposition of Inventory) or any other material Property of Borrowers and Subsidiaries in full force and effect; promptly notify Agent of any proposed modification to any such License, or entry into any new License, in each case at least 30 days prior to its effective date; pay all Royalties when due; and notify Agent of any default or breach asserted by any Person to have occurred under any License.

10.1.9 Future Subsidiaries. Promptly notify Agent upon any Person becoming a Subsidiary and, if such Person is not a Foreign Subsidiary, cause it to guaranty the Obligations in a manner satisfactory to Agent, and to execute and deliver such documents, instruments and agreements and to take such other actions as Agent shall require to evidence and perfect a Lien in favor of Agent (for the benefit of Secured Parties) on all assets of such Person, including delivery of such legal opinions, in form and substance satisfactory to Agent, as it shall deem appropriate.

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10.2Negative Covenants. For so long as any Commitments or Obligations are outstanding, each Borrower shall not, and shall cause each Subsidiary not to:

10.2.1 Permitted Debt. Create, incur, guarantee or suffer to exist any Debt, except:

(a)the Obligations;

(b)The Subordinated Convertible Notes in the aggregate outstanding principal amount of $25,900,000 as of the Closing Date, as shall be reduced by principal repayments thereon from time to time;

(c)Permitted Purchase Money Debt;

(d)Borrowed Money (other than the Obligations, the Existing Subordinated Debt and Permitted Purchase Money Debt), but only to the extent outstanding on the Closing Date and not satisfied with proceeds of the initial Loans;

(e)Bank Product Debt;

(f)Permitted Contingent Obligations;

(g)Refinancing Debt as long as each Refinancing Condition is satisfied; and

(h)Debt that is not included in any of the preceding clauses of this Section, is not secured by a Lien and does not exceed $500,000 in the aggregate at any time.

10.2.2 Permitted Liens. Create or suffer to exist any Lien upon any of its Property, except the following (collectively, “Permitted Liens”):

(a)Liens in favor of Agent;

(b)Purchase Money Liens securing Permitted Purchase Money Debt;

(c)Liens for Taxes not yet due or being Properly Contested;

(d)statutory Liens (other than Liens for Taxes or imposed under ERISA) arising in the Ordinary Course of Business, but only if (i) payment of the obligations secured thereby is not yet due or is being Properly Contested, and (ii) such Liens do not materially impair the value or use of the Property or materially impair operation of the business of any Borrower or Subsidiary;

(e)Liens incurred or deposits made in the Ordinary Course of Business to secure the performance of tenders, bids, leases, contracts (except those relating to Borrowed Money), statutory obligations and other similar obligations, or arising as a result of progress payments under government contracts, as long as such Liens are at all times junior to Agent’s Liens;

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(f)Liens arising by virtue of a judgment or judicial order against any Borrower or Subsidiary, or any Property of a Borrower or Subsidiary, as long as such Liens are (i) in existence for less than 20 consecutive days or being Properly Contested, and (ii) at all times junior to Agent’s Liens;

(g)easements, rights-of-way, restrictions, covenants or other agreements of record, and other similar charges or encumbrances on Real Estate, that do not secure any monetary obligation and do not interfere with the Ordinary Course of Business;

(h)normal and customary rights of setoff upon deposits in favor of depository institutions, and Liens of a collecting bank on Payment Items in the course of collection;

(i)Liens arising under the Existing Subordinated Debt Documents to the extent such Liens are permitted by and subject to the Intercreditor Agreement; and

(j)existing Liens shown on Schedule 10.2.2.

10.2.3 [Intentionally Omitted].

10.2.4 Distributions; Upstream Payments. Declare or make any Distributions, except Upstream Payments; or create or suffer to exist any encumbrance or restriction on the ability of a Subsidiary to make any Upstream Payment, except for restrictions under the Loan Documents, under Applicable Law or in effect on the Closing Date as shown on Schedule 9.1.16.

10.2.5 Restricted Investments. Make any Restricted Investment.

10.2.6 Disposition of Assets. Make any Asset Disposition, except a Permitted Asset Disposition, a disposition of Equipment under Section 8.4.2, or a transfer of Property by a Subsidiary or Obligor to a Borrower.

10.2.7 Loans. Make any loans or other advances of money to any Person, except (a) advances to an officer or employee for salary, travel expenses, commissions and similar items in the Ordinary Course of Business; (b) prepaid expenses and extensions of trade credit made in the Ordinary Course of Business; (c) deposits with financial institutions permitted hereunder; and (d) as long as no Default or Event of Default exists, intercompany loans by a Borrower to another Borrower.

10.2.8 Restrictions on Payment of Certain Debt. Make any payments (whether voluntary or mandatory, or a prepayment, redemption, retirement, defeasance or acquisition) with respect to (a) the Existing Subordinated Debt, except as set forth in the Intercreditor Agreement or herein (and a Senior Officer of Borrower Agent shall certify to Agent in writing, not less than 5 Business Days prior to the date of payment, that all conditions under such Intercreditor Agreement or hereunder have been satisfied); or (b) any Borrowed Money (other than the Obligations) prior to its due date under the agreements evidencing such Debt as in effect on the Closing Date (or as amended thereafter with the consent of Agent).

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Notwithstanding the above:

(a)the Existing Subordinated Debt Lenders may (1) at any time exercise any and all rights under the Existing Subordinated Debt Documents to convert or redeem any of the Existing Subordinated Debt Notes into common equity of the Borrower Agent, and (2) so long as no Default or Event of Default exists or will exist as a result thereof, receive payment of principal and regularly scheduled interest, in cash, at the final scheduled maturity date of the Existing Subordinated Debt Obligations; and

(b)so long as no Default or Event of Default exists or will exist as a result thereof and immediately before and after giving effect to such payment Availability exceeds $3,000,000, the Existing Subordinated Debt Lenders shall have the right to cause the Borrower Agent to redeem, and the Borrower Agent shall redeem up to the following principal amount(s) of Existing Subordinated Debt Notes on each of the following redemption dates by delivering written notice of the exercise of such right to the Borrower Agent no later than the August 8th prior to the redemption dates: (i) up to $8,330,000 on August 31, 2006 (“First Redemption Date”), (ii) up to $9,230,000 on August 31, 2007 (“Second Redemption Date”), and (iii) up to $8,330,000 on September 2, 2008 (“Third Redemption Date”, and together with the First Redemption Date and the Second Redemption Date, collectively, the “Redemption Dates”).

(i)If the Existing Subordinated Debt Lenders elect to redeem any of the Existing Subordinated Debt Notes on the applicable Redemption Dates, the Existing Subordinated Debt Lenders will be required to first use at least $5,000,000 of cash collateral supporting the Existing Subordinated Debt Letter of Credit as repayment proceeds for the First Redemption Date and Second Redemption Date, respectively, to consummate the redemption; provided, that such Existing Subordinated Debt Letter of Credit is automatically reduced by the amount of any cash collateral which is released;

(ii)In the event the Borrower Agent is required to redeem any portion of the Existing Subordinated Debt Notes on one of the applicable Redemption Dates, which redemption, under the terms of the Existing Subordinated Debt Documents, (i) triggers the release of cash collateral for the Existing Subordinated Debt Letter of Credit and (ii) thereby reduces the Existing Subordinated Debt Letter of Credit by a corresponding amount of such released cash collateral, the Existing Subordinated Debt Lenders shall be permitted a right of redemption for an amount up to the additional $3,330,000 then called for redemption on the applicable Redemption Date, so long as (A) no greater than (1) $3,330,000 of redemption proceeds, on the First Redemption Date, and (2) $4,230,000 of redemption proceeds, on the Second Redemption Date, are derived from Borrowings hereunder, (B) the Borrower Agent has met the conditions referenced in Section 10.2.8(b)(iii) below, (C) with respect to the applicable Redemption Date, the Existing Subordinated Debt Lenders have used at least $5,000,000 of cash collateral securing the Existing Subordinated Debt Letter of Credit towards redemption of the Existing Subordinated Debt Notes on such specific Redemption Date (with the corresponding reduction to the Existing Subordinated Debt Letter of Credit), and (D) no Default or Event of Default then exists, or would result from such payment;

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(iii)The redemption conditions referenced above shall be: (i) with respect to the First Redemption Date, the Borrower Agent meeting one hundred percent (100%) of its budgeted EBITDA as disclosed to the Agent on the date hereof for the trailing six-month period ending on June 30, 2006, as evidenced by the delivery of financial statements in compliance with Section 10.1.2 together with a certificate signed by the chief financial officer of the Borrower Agent certifying as to such evidence, and (ii) with respect to the Second Redemption Date, the Borrower Agent meeting the requirements set out in clause (i) above and meeting at least ninety percent (90%) of its budgeted EBITDA as disclosed to the Agent on the date hereof for the trailing twelve-month period ending on June 30, 2007, as evidenced by the delivery of financial statements in compliance with Section 10.1.2 together with a certificate signed by the chief financial officer of the Borrower Agent certifying as to such evidence.

10.2.9 Fundamental Changes. Merge, combine or consolidate with any Person, or liquidate, wind up its affairs or dissolve itself, in each case whether in a single transaction or in a series of related transactions, except for mergers or consolidations of a wholly-owned Subsidiary with another wholly-owned Subsidiary or into a Borrower; change its name or conduct business under any fictitious name; change its tax, charter or other organizational identification number; or change its form or state of organization. Nothing in this Section 10.2.9 shall limit Borrowers’ ability to issue common capital stock upon conversion of the Subordinated Convertible Notes in accordance with its terms of the Intercreditor Agreement or exercise of the warrants issued in connection with the Subordinated Convertible Notes.

10.2.10 Subsidiaries. Form or acquire any Subsidiary after the Closing Date, except in accordance with Sections 10.1.9 and 10.2.5; or permit any existing Subsidiary to issue any additional Equity Interests except director’s qualifying shares.

10.2.11 Organic Documents. Amend, modify or otherwise change any of its Organic Documents as in effect on the Closing Date.

10.2.12 Tax Consolidation. File or consent to the filing of any consolidated income tax return with any Person other than Borrowers and Subsidiaries.

10.2.13 Accounting Changes. Make any material change in accounting treatment or reporting practices, except as required by GAAP and in accordance with Section 1.2; or change its Fiscal Year.

10.2.14 Restrictive Agreements. Become a party to any Restrictive Agreement, except (a) a Restrictive Agreement as in effect on the Closing Date and shown on Schedule 9.1.16; (b) a Restrictive Agreement relating to secured Debt permitted hereunder, if such restrictions apply only to the collateral for such Debt; and (c) customary provisions in leases and other contracts restricting assignment thereof.

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10.2.15 Hedging Agreements. Enter into any Hedging Agreement, except to hedge risks arising in the Ordinary Course of Business and not for speculative purposes.

10.2.16 Conduct of Business. Engage in any business, other than its business as conducted on the Closing Date and any activities incidental thereto.

10.2.17 Affiliate Transactions. Enter into or be party to any transaction with an Affiliate, except (a) transactions contemplated by the Loan Documents; (b) payment of reasonable compensation to officers and employees for services actually rendered, and loans and advances permitted by Section 10.2.7; (c) payment of customary directors’ fees and indemnities; (d) transactions solely among Borrowers; (e) transactions with Affiliates that were consummated prior to the Closing Date, as shown on Schedule 10.2.17; and (f) transactions with Affiliates in the Ordinary Course of Business, upon fair and reasonable terms fully disclosed to Agent and no less favorable than would be obtained in a comparable arm’s-length transaction with a non-Affiliate.

10.2.18 Plans. Become party to any Multiemployer Plan or Foreign Plan, other than any in existence on the Closing Date.

10.2.19 Amendments to Existing Subordinated Debt. Amend, supplement or otherwise modify any document, instrument or agreement relating to the Existing Subordinated Debt Documents except as set forth in the Intercreditor Agreement.

10.3Financial Covenants. For so long as any Commitments or Obligations are outstanding, Borrowers shall:

10.3.1 Fixed Charge Coverage Ratio. Maintain a Fixed Charge Coverage Ratio of at least the ratio set forth opposite each period below measured monthly as of the last day of each month.

Period	Minimum Fixed Charge Coverage Ratio
Month ending February 28, 2006 measured on a trailing 2 month basis	0.90:1.00
Month ending March 31, 2006, measured on a year-to-date basis	1.10:1.00
Month ending April 30, 2006, measured on a year-to-date basis	1.30:1.00
Months ending May 31, 2006 through December 31, 2006, measured on a year-to-date basis	1.50:1.00
Month ending January 31, 2007 and each month thereafter measured on a trailing 12 month basis	1.50:1.00

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SECTION 11.EVENTS OF DEFAULT; REMEDIES ON DEFAULT

11.1Events of Default. Each of the following shall be an “Event of Default” hereunder, if the same shall occur for any reason whatsoever, whether voluntary or involuntary, by operation of law or otherwise:

(a)Any Borrower fails to pay any Obligations when due (whether at stated maturity, on demand, upon acceleration or otherwise);

(b)Any representation, warranty or other written statement of any Obligor made in connection with any Loan Documents or transactions contemplated thereby is incorrect or misleading in any material respect when given;

(c)Any Borrower breaches or fail to perform any covenant contained in Sections 7.2, 7.3, 7.4, 7.6, 8.1, 8.2.4, 8.2.5, 8.6.2, 10.1.1, 10.1.2, 10.1.7, 10.1.8, 10.2 or 10.3;

(d)Any Obligor breaches or fails to perform any other covenant contained in any Loan Documents, and such breach or failure is not cured within 15 days after a Senior Officer of such Obligor has knowledge thereof or receives notice thereof from Agent, whichever is sooner; provided, however, that such notice and opportunity to cure shall not apply if the breach or failure to perform is not capable of being cured within such period or is a willful breach by an Obligor;

(e)Any Guarantor repudiates, revokes or attempts to revoke its Guaranty; any Obligor denies or contests the validity or enforceability of any Loan Documents or Obligations, or the perfection or priority of any Lien granted to Agent; or any Loan Document ceases to be in full force or effect for any reason (other than a waiver or release by Agent and Lenders);

(f)Any breach or default of an Obligor occurs under any document, instrument or agreement to which it is a party or by which it or any of its Properties is bound, relating to any Debt (other than the Obligations) in excess of $1,000,000, if the maturity of or any payment with respect to such Debt may be accelerated or demanded due to such breach;

(g)Any judgment or order for the payment of money is entered against an Obligor in an amount that exceeds, individually or cumulatively with all unsatisfied judgments or orders against all Obligors, $1,000,000 (net of any insurance coverage therefor acknowledged in writing by the insurer), unless a stay of enforcement of such judgment or order is in effect, by reason of a pending appeal or otherwise;

(h)Any loss, theft, damage or destruction occurs with respect to any Collateral if the amount not covered by insurance exceeds $500,000;

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(i)Any Obligor is enjoined, restrained or in any way prevented by any Governmental Authority from conducting any material part of its business; any Obligor suffers the loss, revocation or termination of any material license, permit, lease or agreement necessary to its business; there is a cessation of any material part of an Obligor’s business for a material period of time; any material Collateral or Property of an Obligor is taken or impaired through condemnation; any Obligor agrees to or commences any liquidation, dissolution or winding up of its affairs; or any Obligor ceases to be Solvent;

(j)Any Insolvency Proceeding is commenced by any Obligor; an Insolvency Proceeding is commenced against any Obligor and: such Obligor consents to the institution of the proceeding against it, the petition commencing the proceeding is not timely controverted by such Obligor, such petition is not dismissed within 30 days after its filing, or an order for relief is entered in the proceeding; a trustee (including an interim trustee) is appointed to take possession of any substantial Property of or to operate any of the business of any Obligor; or any Obligor makes an offer of settlement, extension or composition to its unsecured creditors generally;

(k)A Reportable Event occurs that constitutes grounds for termination by the Pension Benefit Guaranty Corporation of any Multiemployer Plan or appointment of a trustee for any Multiemployer Plan; any Multiemployer Plan is terminated or any such trustee is requested or appointed; any Obligor is in “default” (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan resulting from any withdrawal therefrom; or any event similar to the foregoing occurs or exists with respect to a Foreign Plan;

(l)Any Obligor or any of its Senior Officers is criminally indicted or convicted for (i) a felony committed in the conduct of such Obligor’s business, or (ii) any state or federal law (including the Controlled Substances Act, Money Laundering Control Act of 1986 and Illegal Exportation of War Materials Act) that could lead to forfeiture of any material Property or any Collateral;

(m)A “default” or “event of default” (as defined in the Existing Subordinated Debt Documents) shall occur under the Existing Subordinated Debt Documents;

(n)the subordination and/or lien priority provisions contained in the Intercreditor Agreement shall for any reason be revoked or invalidated, or otherwise cease to be in full force and effect, or (i) any Person shall contest in any manner the validity or enforceability of the Intercreditor Agreement, deny that it has any further liability or obligation thereunder, or take any action in violation thereof or fail to take any action required by the terms thereof, or (ii) the Obligations or Liens granted herein, for any reason shall not have the priority contemplated by this Agreement, or the Intercreditor Agreement; or

(o)the bonding or surety industry requires or is granted or deemed to have, collateral or subrogation rights with respect to any assets other than solely with respect to accounts receivable arising directly from the lone project which such bonding or surety company completed such project and not any other project which such bonding or surety company may also be providing bonds; or

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(p)Any event occurs or condition exists that has a Material Adverse Effect.

11.2Remedies upon Default. If an Event of Default described in Section 11.1(j) occurs with respect to any Borrower, then to the extent permitted by Applicable Law, all Obligations shall become automatically due and payable and all Commitments shall terminate, without any action by Agent or notice of any kind. In addition, or if any other Event of Default exists, Agent may in its discretion (and shall upon written direction of Required Lenders) do any one or more of the following from time to time:

(a)declare any Obligations immediately due and payable, whereupon they shall be due and payable without diligence, presentment, demand, protest or notice of any kind, all of which are hereby waived by Borrowers to the fullest extent permitted by law;

(b)terminate, reduce or condition any Commitment, or make any adjustment to the Borrowing Base;

(c)require Obligors to Cash Collateralize LC Obligations, Bank Product Debt and other Obligations that are contingent or not yet due and payable, and, if Obligors fail promptly to deposit such Cash Collateral, Agent may (and shall upon the direction of Required Lenders) advance the required Cash Collateral as Revolver Loans (whether or not an Overadvance exists or is created thereby, or the conditions in Section 6 are satisfied); and

(d)exercise any other rights or remedies afforded under any agreement, by law, at equity or otherwise, including the rights and remedies of a secured party under the UCC. Such rights and remedies include the rights to (i) take possession of any Collateral; (ii) require Borrowers to assemble Collateral, at Borrowers’ expense, and make it available to Agent at a place designated by Agent; (iii) enter any premises where Collateral is located and store Collateral on such premises until sold (and if the premises are owned or leased by a Borrower, Borrowers agree not to charge for such storage); and (iv) sell or otherwise dispose of any Collateral in its then condition, or after any further manufacturing or processing thereof, at public or private sale, with such notice as may be required by Applicable Law, in lots or in bulk, at such locations, all as Agent, in its discretion, deems advisable. Agent shall have the right to conduct such sales on any Obligor’s premises, without charge, and such sales may be adjourned from time to time in accordance with Applicable Law. Agent shall have the right to sell, lease or otherwise dispose of any Collateral for cash, credit or any combination thereof, and Agent may purchase any Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of the purchase price, may set off the amount of such price against the Obligations.

11.3License. Agent is hereby granted an irrevocable, non-exclusive license or other right to use, license or sub-license (without payment of royalty or other compensation to any Person) any or all Intellectual Property of Borrowers, computer hardware and software, trade secrets, brochures, customer lists, promotional and advertising materials, labels, packaging materials and other Property, in advertising for sale, marketing, selling, collecting, completing manufacture of, or otherwise exercising any rights or remedies with respect to, any Collateral. Each Borrower’s rights and interests under Intellectual Property shall inure to Agent’s benefit.

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11.4Setoff. Agent, Lenders and their Affiliates are each authorized by Borrowers at any time during an Event of Default, without notice to Borrowers or any other Person, to set off and to appropriate and apply any deposits (general or special), funds, claims, obligations, liabilities or other Debt at any time held or owing by Agent, any Lender or any such Affiliate to or for the account of any Obligor against any Obligations, whether or not demand for payment of such Obligation has been made, any Obligations have been declared due and payable, are then due, or are contingent or unmatured, or the Collateral or any guaranty or other security for the Obligations is adequate.

11.5Remedies Cumulative; No Waiver.

11.5.1 Cumulative Rights. All covenants, conditions, provisions, warranties, guaranties, indemnities and other undertakings of Borrowers contained in the Loan Documents are cumulative and not in derogation or substitution of each other. In particular, the rights and remedies of Agent and Lenders are cumulative, may be exercised at any time and from time to time, concurrently or in any order, and shall not be exclusive of any other rights or remedies that Agent and Lenders may have, whether under any agreement, by law, at equity or otherwise.

11.5.2 Waivers. The failure or delay of Agent or any Lender to require strict performance by Borrowers with any terms of the Loan Documents, or to exercise any rights or remedies with respect to Collateral or otherwise, shall not operate as a waiver thereof nor as establishment of a course of dealing. All rights and remedies shall continue in full force and effect until Full Payment of all Obligations. No modification of any terms of any Loan Documents (including any waiver thereof) shall be effective, unless such modification is specifically provided in a writing directed to Borrowers and executed by Agent or the requisite Lenders, and such modification shall be applicable only to the matter specified. No waiver of any Default or Event of Default shall constitute a waiver of any other Default or Event of Default that may exist at such time, unless expressly stated. If Agent or any Lender accepts performance by any Obligor under any Loan Documents in a manner other than that specified therein, or during any Default or Event of Default, or if Agent or any Lender shall delay or exercise any right or remedy under any Loan Documents, such acceptance, delay or exercise shall not operate to waive any Default or Event of Default nor to preclude exercise of any other right or remedy. It is expressly acknowledged by Borrowers that any failure to satisfy a financial covenant on a measurement date shall not be cured or remedied by satisfaction of such covenant on a subsequent date.

SECTION 12.AGENT

12.1Appointment, Authority and Duties of Agent.

12.1.1 Appointment and Authority. Each Lender appoints and designates Bank of America as Agent hereunder. Agent may, and each Lender authorizes Agent to, enter into all Loan Documents to which Agent is intended to be a party and accept all Security Documents, for Agent’s benefit and the Pro Rata benefit of Lenders. Each Lender agrees that any action taken by Agent or Required Lenders in accordance with the provisions of the Loan Documents, and the exercise by Agent or Required Lenders of any rights or remedies set forth therein, together with all other powers reasonably incidental thereto, shall be authorized and binding upon all Lenders. Without limiting the generality of the foregoing, Agent shall have the sole and exclusive authority to (a) act as the disbursing and collecting agent for Lenders with respect to all payments and collections arising in connection with the Loan Documents; (b) execute and deliver as Agent each Loan Document, including any intercreditor or subordination agreement, and accept delivery of each Loan Document from any Obligor or other Person; (c) act as collateral agent for Secured Parties for purposes of perfecting and administering Liens under the Loan Documents, and for all other purposes stated therein; (d) manage, supervise or otherwise deal with Collateral; and (e) exercise all rights and remedies given to Agent with respect to any Collateral under the Loan Documents, Applicable Law or otherwise. The duties of Agent shall be ministerial and administrative in nature, and Agent shall not have a fiduciary relationship with any Lender, Secured Party, Participant or other Person, by reason of any Loan Document or any transaction relating thereto. Agent alone shall be authorized to determine whether any Accounts or Inventory constitute Eligible Accounts or Eligible Inventory, or whether to impose or release any reserve, which determinations and judgments, if exercised in good faith, shall exonerate Agent from liability to any Lender or other Person for any error in judgment.

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12.1.2 Duties. Agent shall not have any duties except those expressly set forth in the Loan Documents, nor be required to initiate or conduct any Enforcement Action except to the extent directed to do so by Required Lenders while an Event of Default exists. The conferral upon Agent of any right shall not imply a duty on Agent’s part to exercise such right, unless instructed to do so by Required Lenders in accordance with this Agreement.

12.1.3 Agent Professionals. Agent may perform its duties through agents and employees. Agent may consult with and employ Agent Professionals, and shall be entitled to act upon, and shall be fully protected in any action taken in good faith reliance upon, any advice given by an Agent Professional. Agent shall not be responsible for the negligence or misconduct of any agents, employees or Agent Professionals selected by it with reasonable care.

12.1.4 Instructions of Required Lenders. The rights and remedies conferred upon Agent under the Loan Documents may be exercised without the necessity of joinder of any other party, unless required by Applicable Law. Agent may request instructions from Required Lenders with respect to any act (including the failure to act) in connection with any Loan Documents, and may seek assurances to its satisfaction from Lenders of their indemnification obligations under Section 12.6 against all Claims that could be incurred by Agent in connection with any act. Agent shall be entitled to refrain from any act until it has received such instructions or assurances, and Agent shall not incur liability to any Person by reason of so refraining. Instructions of Required Lenders shall be binding upon all Lenders, and no Lender shall have any right of action whatsoever against Agent as a result of Agent acting or refraining from acting in accordance with the instructions of Required Lenders. Notwithstanding the foregoing, instructions by and consent of all Lenders shall be required in the circumstances described in Section 14.1.1, and in no event shall Required Lenders, without the prior written consent of each Lender, direct Agent to accelerate and demand payment of Loans held by one Lender without accelerating and demanding payment of all other Loans, nor to terminate the Commitments of one Lender without terminating the Commitments of all Lenders. In no event shall Agent be required to take any action that, in its opinion, is contrary to Applicable Law or any Loan Documents or could subject any Agent Indemnitee to personal liability.

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12.2Agreements Regarding Collateral and Field Examination Reports.

12.2.1 Lien Releases; Care of Collateral. Lenders authorize Agent to release any Lien with respect to any Collateral (a) upon Full Payment of the Obligations, (b) that is the subject of an Asset Disposition which Borrowers certify in writing to Agent is a Permitted Asset Disposition or a Lien which Borrowers certify is a Permitted Lien entitled to priority over Agent’s Liens (and Agent may rely conclusively on any such certificate without further inquiry), (c) that does not constitute a material part of the Collateral, or (d) with the written consent of all Lenders. Agent shall have no obligation whatsoever to any Lenders to assure that any Collateral exists or is owned by a Borrower, or is cared for, protected, insured or encumbered, nor to assure that Agent’s Liens have been properly created, perfected or enforced, or are entitled to any particular priority, nor to exercise any duty of care with respect to any Collateral.

12.2.2 Possession of Collateral. Agent and Lenders appoint each other Lender as agent for the purpose of perfecting Liens (for the benefit of Secured Parties) in any Collateral that, under the UCC or other Applicable Law, can be perfected by possession. If any Lender obtains possession of any such Collateral, it shall notify Agent thereof and, promptly upon Agent’s request, deliver such Collateral to Agent or otherwise deal with such Collateral in accordance with Agent’s instructions.

12.2.3 Reports. Agent shall promptly, upon receipt thereof, forward to each Lender copies of the results of any field audit or other examination or any appraisal prepared by or on behalf of Agent with respect to any Obligor or Collateral (“Report”). Each Lender agrees (a) that neither Bank of America nor Agent makes any representation or warranty as to the accuracy or completeness of any Report, and shall not be liable for any information contained in or omitted from any Report; (b) that the Reports are not intended to be comprehensive audits or examinations, and that Agent or any other Person performing any audit or examination will inspect only specific information regarding Obligations or the Collateral and will rely significantly upon Borrowers’ books and records as well as upon representations of Borrowers’ officers and employees; and (c) to keep all Reports confidential and strictly for such Lender’s internal use, and not to distribute any Report (or the contents thereof) to any Person (except to such Lender’s Participants, attorneys and accountants) or use any Report in any manner other than administration of the Loans and other Obligations. Each Lender agrees to indemnify and hold harmless Agent and any other Person preparing a Report from any action such Lender may take as a result of or any conclusion it may draw from any Report, as well as any Claims arising in connection with any third parties that obtain all or any part of a Report through such Lender.

12.3Reliance By Agent. Agent shall be entitled to rely, and shall be fully protected in relying, upon any certification, notice or other communication (including those by telephone, telex, telegram, telecopy or e-mail) believed by it to be genuine and correct and to have been signed, sent or made by the proper Person, and upon the advice and statements of Agent Professionals.

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12.4Action Upon Default. Agent shall not be deemed to have knowledge of any Default or Event of Default unless it has received written notice from a Lender or Borrower specifying the occurrence and nature thereof. If any Lender acquires knowledge of a Default or Event of Default, it shall promptly notify Agent and the other Lenders thereof in writing. Each Lender agrees that, except as otherwise provided in any Loan Documents or with the written consent of Agent and Required Lenders, it will not take any Enforcement Action, accelerate its Obligations, or exercise any right that it might otherwise have under Applicable Law to credit bid at foreclosure sales, UCC sales or other similar dispositions of Collateral. Notwithstanding the foregoing, however, a Lender may take action to preserve or enforce its rights against an Obligor where a deadline or limitation period is applicable that would, absent such action, bar enforcement of Obligations held by such Lender, including the filing of proofs of claim in an Insolvency Proceeding.

12.5Ratable Sharing. If any Lender shall obtain any payment or reduction of any Obligation, whether through set-off or otherwise, in excess of its share of such Obligation, determined on a Pro Rata basis or in accordance with Section 5.6.1, as applicable, such Lender shall forthwith purchase from Agent, Issuing Bank and the other Lenders such participations in the affected Obligation as are necessary to cause the purchasing Lender to share the excess payment or reduction on a Pro Rata basis or in accordance with Section 5.6.1, as applicable. If any of such payment or reduction is thereafter recovered from the purchasing Lender, the purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest.

12.6Indemnification of Agent Indemnitees.

12.6.1 Indemnification. EACHLENDER SHALL INDEMNIFY AND HOLD HARMLESS AGENT INDEMNITEES, TO THE EXTENT NOT REIMBURSED BY OBLIGORS (BUT WITHOUT LIMITING THE INDEMNIFICATION OBLIGATIONS OF OBLIGORS UNDER ANY LOAN DOCUMENTS), ON A PRO RATA BASIS, AGAINST ALL CLAIMS THAT MAY BE INCURRED BY OR ASSERTED AGAINST ANY AGENT INDEMNITEE. If Agent is sued by any receiver, trustee in bankruptcy, debtor-in-possession or other Person for any alleged preference from an Obligor or fraudulent transfer, then any monies paid by Agent in settlement or satisfaction of such proceeding, together with all interest, costs and expenses (including attorneys’ fees) incurred in the defense of same, shall be promptly reimbursed to Agent by Lenders to the extent of each Lender’s Pro Rata share.

12.6.2 Proceedings. Without limiting the generality of the foregoing, if at any time (whether prior to or after the Commitment Termination Date) any proceeding is brought against any Agent Indemnitees by an Obligor, or any Person claiming through an Obligor, to recover damages for any act taken or omitted by Agent in connection with any Obligations, Collateral, Loan Documents or matters relating thereto, or otherwise to obtain any other relief of any kind on account of any transaction relating to any Loan Documents, each Lender agrees to indemnify and hold harmless Agent Indemnitees with respect thereto and to pay to Agent Indemnitees such Lender’s Pro Rata share of any amount that any Agent Indemnitee is required to pay under any judgment or other order entered in such proceeding or by reason of any settlement, including all interest, costs and expenses (including attorneys’ fees) incurred in defending same. In Agent’s discretion, Agent may reserve for any such proceeding, and may satisfy any judgment, order or settlement, from proceeds of Collateral prior to making any distributions of Collateral proceeds to Lenders.

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12.7Limitation on Responsibilities of Agent. Agent shall not be liable to Lenders for any action taken or omitted to be taken under the Loan Documents, except for losses directly and solely caused by Agent’s gross negligence or willful misconduct. Agent does not assume any responsibility for any failure or delay in performance or any breach by any Obligor or Lender of any obligations under the Loan Documents. Agent does not make to Lenders any express or implied warranty, representation or guarantee with respect to any Obligations, Collateral, Loan Documents or Obligor. No Agent Indemnitee shall be responsible to Lenders for any recitals, statements, information, representations or warranties contained in any Loan Documents; the execution, validity, genuineness, effectiveness or enforceability of any Loan Documents; the genuineness, enforceability, collectibility, value, sufficiency, location or existence of any Collateral, or the validity, extent, perfection or priority of any Lien therein; the validity, enforceability or collectibility of any Obligations; or the assets, liabilities, financial condition, results of operations, business, creditworthiness or legal status of any Obligor or Account Debtor. No Agent Indemnitee shall have any obligation to any Lender to ascertain or inquire into the existence of any Default or Event of Default, the observance or performance by any Obligor of any terms of the Loan Documents, or the satisfaction of any conditions precedent contained in any Loan Documents.

12.8Successor Agent and Co-Agents.

12.8.1 Resignation; Successor Agent. Subject to the appointment and acceptance of a successor Agent as provided below, Agent may resign at any time by giving at least 30 days written notice thereof to Lenders and Borrowers. Upon receipt of such notice, Required Lenders shall have the right to appoint a successor Agent which shall be (a) a Lender or an Affiliate of a Lender; or (b) a commercial bank that is organized under the laws of the United States or any state or district thereof, has a combined capital surplus of at least $200,000,000 and (provided no Default or Event of Default exists) is reasonably acceptable to Borrowers. If no successor agent is appointed prior to the effective date of the resignation of Agent, then Agent may appoint a successor agent from among Lenders. Upon acceptance by a successor Agent of an appointment to serve as Agent hereunder, such successor Agent shall thereupon succeed to and become vested with all the powers and duties of the retiring Agent without further act, and the retiring Agent shall be discharged from its duties and obligations hereunder but shall continue to have the benefits of the indemnification set forth in Sections 12.6 and 14.2. Notwithstanding any Agent’s resignation, the provisions of this Section 12 shall continue in effect for its benefit with respect to any actions taken or omitted to be taken by it while Agent. Any successor by merger or acquisition of the stock or assets of Bank of America shall continue to be Agent hereunder without further act on the part of the parties hereto, unless such successor resigns as provided above.

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12.8.2 Separate Collateral Agent. It is the intent of the parties that there shall be no violation of any Applicable Law denying or restricting the right of financial institutions to transact business in any jurisdiction. If Agent believes that it may be limited in the exercise of any rights or remedies under the Loan Documents due to any Applicable Law, Agent may appoint an additional Person who is not so limited, as a separate collateral agent or co-collateral agent. If Agent so appoints a collateral agent or co-collateral agent, each right and remedy intended to be available to Agent under the Loan Documents shall also be vested in such separate agent. Every covenant and obligation necessary to the exercise thereof by such agent shall run to and be enforceable by it as well as Agent. Lenders shall execute and deliver such documents as Agent deems appropriate to vest any rights or remedies in such agent. If any collateral agent or co-collateral agent shall die or dissolve, become incapable of acting, resign or be removed, then all the rights and remedies of such agent, to the extent permitted by Applicable Law, shall vest in and be exercised by Agent until appointment of a new agent.

12.9Due Diligence and Non-Reliance. Each Lender acknowledges and agrees that it has, independently and without reliance upon Agent or any other Lenders, and based upon such documents, information and analyses as it has deemed appropriate, made its own credit analysis of each Obligor and its own decision to enter into this Agreement and to fund Loans and participate in LC Obligations hereunder. Each Lender has made such inquiries concerning the Loan Documents, the Collateral and each Obligor as such Lender feels necessary. Each Lender further acknowledges and agrees that the other Lenders and Agent have made no representations or warranties concerning any Obligor, any Collateral or the legality, validity, sufficiency or enforceability of any Loan Documents or Obligations. Each Lender will, independently and without reliance upon the other Lenders or Agent, and based upon such financial statements, documents and information as it deems appropriate at the time, continue to make and rely upon its own credit decisions in making Loans and participating in LC Obligations, and in taking or refraining from any action under any Loan Documents. Except for notices, reports and other information expressly requested by a Lender, Agent shall have no duty or responsibility to provide any Lender with any notices, reports or certificates furnished to Agent by any Obligor or any credit or other information concerning the affairs, financial condition, business or Properties of any Obligor (or any of its Affiliates) which may come into possession of Agent or any of Agent’s Affiliates.

12.10Replacement of Certain Lenders. In the event that any Lender (a) fails to fund its Pro Rata share of any Loan or LC Obligation hereunder, and such failure is not cured within two Business Days, (b) defaults in performing any of its obligations under the Loan Documents, or (c) fails to give its consent to any amendment, waiver or action for which consent of all Lenders was required and Required Lenders consented, then, in addition to any other rights and remedies that any Person may have, Agent may, by notice to such Lender within 120 days after such event, require such Lender to assign all of its rights and obligations under the Loan Documents to Eligible Assignee(s) specified by Agent, pursuant to appropriate Assignment and Acceptance(s) and within 20 days after Agent’s notice. Agent is irrevocably appointed as attorney-in-fact to execute any such Assignment and Acceptance if the Lender fails to execute same. Such Lender shall be entitled to receive, in cash, concurrently with such assignment, all amounts owed to it under the Loan Documents, including all principal, interest and fees through the date of assignment (but excluding any prepayment charge).

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12.11Remittance of Payments and Collections.

12.11.1 Remittances Generally. All payments by any Lender to Agent shall be made by the time and on the day set forth in this Agreement, in immediately available funds. If no time for payment is specified or if payment is due on demand by Agent and request for payment is made by Agent by 11:00 a.m. on a Business Day, payment shall be made by Lender not later than 2:00 p.m. on such day, and if request is made after 11:00 a.m., then payment shall be made by 11:00 a.m. on the next Business Day. Payment by Agent to any Lender shall be made by wire transfer, in the type of funds received by Agent. Any such payment shall be subject to Agent’s right of offset for any amounts due from such Lender under the Loan Documents.

12.11.2 Failure to Pay. If any Lender fails to pay any amount when due by it to Agent pursuant to the terms hereof, such amount shall bear interest from the due date until paid at the rate determined by Agent as customary in the banking industry for interbank compensation. In no event shall Borrowers be entitled to receive credit for any interest paid by a Lender to Agent.

12.11.3 Recovery of Payments. If Agent pays any amount to a Lender in the expectation that a related payment will be received by Agent from an Obligor and such related payment is not received, then Agent may recover such amount from each Lender that received it. If Agent determines at any time that an amount received under any Loan Document must be returned to an Obligor or paid to any other Person pursuant to Applicable Law or otherwise, then, notwithstanding any other term of any Loan Document, Agent shall not be required to distribute such amount to any Lender. If any amounts received and applied by Agent to any Obligations are later required to be returned by Agent pursuant to Applicable Law, Lenders shall pay to Agent, on demand, such Lender’s Pro Rata share of the amounts required to be returned.

12.12Agent in its Individual Capacity. As a Lender, Bank of America shall have the same rights and remedies under the other Loan Documents as any other Lender, and the terms “Lenders,” “Required Lenders” or any similar term shall include Bank of America in its capacity as a Lender. Each of Bank of America and its Affiliates may accept deposits from, maintain deposits or credit balances for, invest in, lend money to, provide Bank Products to, act as trustee under indentures of, serve as financial or other advisor to, and generally engage in any kind of business with, Obligors and their Affiliates, as if Bank of America were any other bank, without any duty to account therefor (including any fees or other consideration received in connection therewith) to the other Lenders. In their individual capacity, Bank of America and its Affiliates may receive information regarding Obligors, their Affiliates and their Account Debtors (including information subject to confidentiality obligations), and each Lender agrees that Bank of America and its Affiliates shall be under no obligation to provide such information to Lenders, if acquired in such individual capacity and not as Agent hereunder.

12.13Agent Titles. Each Lender, other than Bank of America, that is designated (on the cover page of this Agreement or otherwise) by Bank of America as an “Agent” or “Arranger” of any type shall not have any right, power, responsibility or duty under any Loan Documents other than those applicable to all Lenders, and shall in no event be deemed to have any fiduciary relationship with any other Lender.

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12.14No Third Party Beneficiaries. This Section 12 is an agreement solely among Lenders and Agent, and, except with respect to the notice requirement provided in Section 12.8.1, does not confer any rights or benefits upon Borrowers or any other Person. As between Borrowers and Agent, any action that Agent may take under any Loan Documents shall be conclusively presumed to have been authorized and directed by Lenders as herein provided.

SECTION 13.BENEFIT OF AGREEMENT; ASSIGNMENTS AND PARTICIPATIONS

13.1Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of Borrowers, Agent and Lenders and their respective successors and assigns, except that (a) no Borrower shall have the right to assign its rights or delegate its obligations under any Loan Documents, and (b) any assignment by a Lender must be made in compliance with Section 13.3. Agent may treat the Person which made any Loan as the owner thereof for all purposes until such Person makes an assignment in accordance with Section 13.3. Any authorization or consent of a Lender shall be conclusive and binding on any subsequent transferee or assignee of such Lender.

13.2Participations.

13.2.1 Permitted Participants; Effect. Any Lender may, in the ordinary course of its business and in accordance with Applicable Law, at any time sell to a financial institution (“Participant”) a participating interest in the rights and obligations of such Lender under any Loan Documents. Despite any sale by a Lender of participating interests to a Participant, such Lender’s obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for performance of such obligations, such Lender shall remain the holder of its Loans and Commitments for all purposes, all amounts payable by Borrowers shall be determined as if such Lender had not sold such participating interests, and Borrowers and Agent shall continue to deal solely and directly with such Lender in connection with the Loan Documents. Each Lender shall be solely responsible for notifying its Participants of any matters under the Loan Documents, and Agent and the other Lenders shall not have any obligation or liability to any such Participant. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 5.9 unless Borrowers agree otherwise in writing.

13.2.2 Voting Rights. Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, waiver or other modification of any Loan Documents other than that which forgives principal, interest or fees, reduces the stated interest rate or fees payable with respect to any Loan or Commitment in which such Participant has an interest, postpones the Commitment Termination Date or any date fixed for any regularly scheduled payment of principal, interest or fees on such Loan or Commitment, or releases any Borrower, Guarantor or substantial portion of the Collateral.

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13.2.3 Benefit of Set-Off. Borrowers agree that each Participant shall have a right of set-off in respect of its participating interest to the same extent as if such interest were owing directly to a Lender, and each Lender shall also retain the right of set-off with respect to any participating interests sold by it. By exercising any right of set-off, a Participant agrees to share with Lenders all amounts received through its set-off, in accordance with Section 12.5 as if such Participant were a Lender.

13.3Assignments.

13.3.1 Permitted Assignments. A Lender may assign to any Eligible Assignee any of its rights and obligations under the Loan Documents, as long as (a) each assignment is of a constant, and not a varying, percentage of the transferor Lender’s rights and obligations under the Loan Documents and, in the case of a partial assignment, is in a minimum principal amount of $5,000,000 (unless otherwise agreed by Agent in its discretion) and integral multiples of $1,000,000 in excess of that amount; (b) except in the case of an assignment in whole of a Lender’s rights and obligations, the aggregate amount of the Commitments retained by the transferor Lender be at least $5,000,000 (unless otherwise agreed by Agent in its discretion); and (c) the parties to each such assignment shall execute and deliver to Agent, for its acceptance and recording, an Assignment and Acceptance. Nothing herein shall limit the right of a Lender to pledge or assign any rights under the Loan Documents to (i) any Federal Reserve Bank or the United States Treasury as collateral security pursuant to Regulation A of the Board of Governors and any Operating Circular issued by such Federal Reserve Bank, or (ii) counterparties to swap agreements relating to any Loans; provided, however, that any payment by Borrowers to the assigning Lender in respect of any Obligations assigned as described in this sentence shall satisfy Borrowers’ obligations hereunder to the extent of such payment, and no such assignment shall release the assigning Lender from its obligations hereunder.

13.3.2 Effect; Effective Date. Upon delivery to Agent of an assignment notice in the form of Exhibit B and a processing fee of $5,000, such assignment shall become effective as specified in the notice, if it complies with this Section 13.3. From the effective date of such assignment, the Eligible Assignee shall for all purposes be a Lender under the Loan Documents, and shall have all rights and obligations of a Lender thereunder. Upon consummation of an assignment, the transferor Lender, Agent and Borrowers shall make appropriate arrangements for issuance of replacement and/or new Notes, as appropriate.

13.4Tax Treatment. If any interest in a Loan Document is transferred to a Transferee that is organized under the laws of any jurisdiction other than the United States or any state or district thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 5.10.

13.5Representation of Lenders. Each Lender represents and warrants to each Borrower, Agent and other Lenders that none of the consideration used by it to fund its Loans or to participate in any other transactions under this Agreement constitutes for any purpose of ERISA or Section 4975 of the Internal Revenue Code assets of any “plan” as defined in Section 3(3) of ERISA or Section 4975 of the Internal Revenue Code and the interests of such Lender in and under the Loan Documents shall not constitute plan assets under ERISA.

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SECTION 14.MISCELLANEOUS

14.1Consents, Amendments and Waivers.

14.1.1 Amendment. No modification of any Loan Document, including any extension or amendment of a Loan Document or any waiver of a Default or Event of Default, shall be effective without the prior written agreement of Agent, with the consent of Required Lenders, and each Obligor party to such Loan Document; provided, however, that

(a)without the prior written consent of Agent, no modification shall be effective with respect to any provision in a Loan Document that relates to any rights, duties or discretion of Agent;

(b)without the prior written consent of Issuing Bank, no modification shall be effective with respect to any LC Obligations or Section 2.3;

(c)without the prior written consent of each affected Lender, no modification shall be effective that would (i) increase the Commitment of such Lender; or (ii) reduce the amount of, or waive or delay payment of, any principal, interest or fees payable to such Lender; and

(d)without the prior written consent of all Lenders (except a defaulting Lender as provided in Section 4.2), no modification shall be effective that would (i) extend the Revolver Termination Date; (ii) alter Section 5.6, 7.1 (except to add Collateral), or 14.1.1; (iii) amend the definitions of Borrowing Base (and the defined terms used in such definition), Pro Rata or Required Lenders; (iv) increase any advance rate, or increase total Commitments; (vi) release Collateral with a book value greater than $500,000 during any calendar year, except as currently contemplated by the Loan Documents; or (vii) release any Obligor from liability for any Obligations, if such Obligor is Solvent at the time of the release.

14.1.2 Limitations. The agreement of Borrowers shall not be necessary to the effectiveness of any modification of a Loan Document that deals solely with the rights and duties of Lenders, Agent and/or Issuing Bank as among themselves. Only the consent of the parties to any agreement relating to a Bank Product shall be required for any modification of such agreement, and no Affiliate of a Lender that is party to a Bank Product agreement shall have any other right to consent to or participate in any manner in modification of any other Loan Document. The making of any Loans during the existence of a Default or Event of Default shall not be deemed to constitute a waiver of such Default or Event of Default, nor to establish a course of dealing. Any waiver or consent granted by Lenders hereunder shall be effective only if in writing, and then only in the specific instance and for the specific purpose for which it is given.

14.1.3 Payment for Consents. No Borrower will, directly or indirectly, pay any remuneration or other thing of value, whether by way of additional interest, fee or otherwise, to any Lender (in its capacity as a Lender hereunder) as consideration for agreement by such Lender with any modification of any Loan Documents, unless such remuneration or value is concurrently paid, on the same terms, on a Pro Rata basis to all Lenders providing their consent.

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14.2Indemnity. EACH BORROWER SHALL INDEMNIFY AND HOLD HARMLESS THE INDEMNITEES AGAINST ANY CLAIMS THAT MAY BE INCURRED BY OR ASSERTED AGAINST ANY INDEMNITEE (OTHER THAN CLAIMS BROUGHT BY ONE INDEMNITEE AGAINST ANOTHER), INCLUDING CLAIMS ARISING FROM THE NEGLIGENCE OF AN INDEMNITEE. In no event shall any party to a Loan Document have any obligation thereunder to indemnify or hold harmless an Indemnitee with respect to a Claim that is (i) determined in a final, non-appealable judgment by a court of competent jurisdiction to result from the gross negligence or willful misconduct of such Indemnitee, or (ii) for a personal injury.

14.3Notices and Communications.

14.3.1 Notice Address. Subject to Section 4.1.4, all notices, requests and other communications by or to a party hereto shall be in writing and shall be given to any Borrower, at Borrower Agent’s address shown on the signature pages hereof, and to any other Person at its address shown on the signature pages hereof (or, in the case of a Person who becomes a Lender after the Closing Date, at the address shown on its Assignment and Acceptance), or at such other address as a party may hereafter specify by notice in accordance with this Section 14.3. Each such notice, request or other communication shall be effective only (a) if given by facsimile transmission, when transmitted to the applicable facsimile number, if confirmation of receipt is received; (b) if given by mail, three Business Days after deposit in the U.S. mail, with first-class postage pre-paid, addressed to the applicable address; or (c) if given by personal delivery, when duly delivered to the notice address with receipt acknowledged. Notwithstanding the foregoing, no notice to Agent pursuant to Section 2.1.4, 2.3, 3.1.2, 4.1.1 or 5.3.3 shall be effective until actually received by the individual to whose attention at Agent such notice is required to be sent. Any written notice, request or other communication that is not sent in conformity with the foregoing provisions shall nevertheless be effective on the date actually received by the noticed party. Any notice received by Borrower Agent shall be deemed received by all Borrowers.

14.3.2 Electronic Communications; Voice Mail. Electronic mail and internet websites may be used only for routine communications, such as financial statements, Borrowing Base Certificates and other information required by Section 10.1.2, administrative matters, distribution of Loan Documents for execution, and matters permitted under Section 4.1.4. Agent and Lenders make no assurances as to the privacy and security of electronic communications. Electronic and voice mail may not be used as effective notice under the Loan Documents.

14.3.3 Non-Conforming Communications. Agent and Lenders may rely upon any notices purportedly given by or on behalf of any Borrower even if such notices were not made in a manner specified herein, were incomplete or were not confirmed, or if the terms thereof, as understood by the recipient, varied from a later confirmation. Each Borrower shall indemnify and hold harmless each Indemnitee from any liabilities, losses, costs and expenses arising from any telephonic communication purportedly given by or on behalf of a Borrower.

14.4Performance of Borrowers’ Obligations. Agent may, in its discretion at any time and from time to time, at Borrowers’ expense, pay any amount or do any act required of a Borrower under any Loan Documents or otherwise lawfully requested by Agent to (a) enforce any Loan Documents or collect any Obligations; (b) protect, insure, maintain or realize upon any Collateral; or (c) defend or maintain the validity or priority of Agent’s Liens in any Collateral, including any payment of a judgment, insurance premium, warehouse charge, finishing or processing charge, or landlord claim, or any discharge of a Lien. All payments, costs and expenses (including Extraordinary Expenses) of Agent under this Section shall be reimbursed to Agent by Borrowers, on demand, with interest from the date incurred to the date of payment thereof at the Default Rate applicable to Base Rate Revolver Loans. Any payment made or action taken by Agent under this Section shall be without prejudice to any right to assert an Event of Default or to exercise any other rights or remedies under the Loan Documents.

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14.5Credit Inquiries. Each Borrower hereby authorizes Agent and Lenders (but they shall have no obligation) to respond to usual and customary credit inquiries from third parties concerning any Borrower or Subsidiary.

14.6Severability. Wherever possible, each provision of the Loan Documents shall be interpreted in such manner as to be valid under Applicable Law. If any provision is found to be invalid under Applicable Law, it shall be ineffective only to the extent of such invalidity and the remaining provisions of the Loan Documents shall remain in full force and effect.

14.7Cumulative Effect; Conflict of Terms. The provisions of the Loan Documents are cumulative. The parties acknowledge that the Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters, and they agree that these are cumulative and that each must be performed as provided. Except as otherwise specifically provided in another Loan Document (by specific reference to the applicable provision of this Agreement), if any provision contained herein is in direct conflict with any provision in another Loan Document, the provision herein shall govern and control.

14.8Counterparts; Facsimile Signatures. Any Loan Document may be executed in counterparts, each of which taken together shall constitute one instrument. Loan Documents may be executed and delivered by facsimile, and they shall have the same force and effect as manually signed originals. Agent may require confirmation by a manually-signed original, but failure to request or deliver same shall not limit the effectiveness of any facsimile signature.

14.9Entire Agreement. Time is of the essence of the Loan Documents. The Loan Documents embody the entire understanding of the parties with respect to the subject matter thereof and supersede all prior understandings regarding the same subject matter.

14.10Obligations of Lenders. The obligations of each Lender hereunder are several, and no Lender shall be responsible for the obligations or Commitments of any other Lender. Amounts payable hereunder to each Lender shall be a separate and independent debt, and each Lender shall be entitled, to the extent not otherwise restricted hereunder, to protect and enforce its rights arising out of the Loan Documents. It shall not be necessary for Agent or any other Lender to be joined as an additional party in any proceeding for such purposes. Nothing in this Agreement and no action of Agent or Lenders pursuant to the Loan Documents shall be deemed to constitute Agent and Lenders to be a partnership, association, joint venture or any other kind of entity, nor to constitute control of any Borrower. Each Borrower acknowledges and agrees that in connection with all aspects of any transaction contemplated by the Loan Documents, Borrowers, Agent, Issuing Bank and Lenders have an arms-length business relationship that creates no fiduciary duty on the part of Agent, Issuing Bank or any Lender, and each Borrower, Agent, Issuing Bank and Lender expressly disclaims any fiduciary relationship.

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14.11Confidentiality. During the term of this Agreement and for 12 months thereafter, Agent and Lenders agree to take reasonable precautions to maintain the confidentiality of any information that Borrowers deliver to Agent and Lenders and identify as confidential at the time of delivery, except that Agent and any Lender may disclose such information (a) to their respective officers, directors, employees, Affiliates and agents, including legal counsel, auditors and other professional advisors; (b) to any party to the Loan Documents from time to time; (c) pursuant to the order of any court or administrative agency; (d) upon the request of any Governmental Authority exercising regulatory authority over Agent or such Lender (Agent or any Lender who receives such request shall provide notice thereof to Borrower Agent); (e) which ceases to be confidential, other than by an act or omission of Agent or any Lender, or which becomes available to Agent or any Lender on a nonconfidential basis; (f) to the extent reasonably required in connection with any litigation relating to any Loan Documents or transactions contemplated thereby, or otherwise as required by Applicable Law; (g) to the extent reasonably required for the exercise of any rights or remedies under the Loan Documents; (h) to any actual or proposed party to a Bank Product or to any Transferee, as long as such Person agrees to be bound by the provisions of this Section; (i) to the National Association of Insurance Commissioners or any similar organization, or to any nationally recognized rating agency that requires access to information about a Lender’s portfolio in connection with ratings issued with respect to such Lender; (j) to any investor or potential investor in an Approved Fund that is a Lender or Transferee, but solely for use by such investor to evaluate an investment in such Approved Fund, or to any manager, servicer or other Person in connection with its administration of any such Approved Fund; or (k) with the consent of Borrowers. Any party to whom confidential information of Borrowers is disclosed shall be advised of the confidential nature of the information, and except in the case of (c) and (d) above, shall have agreed to or be deemed to be subject to the confidentiality provisions of this Section. Notwithstanding the foregoing, Agent and Lenders may issue and disseminate to the public general information describing this credit facility, including the names and addresses of Borrowers and a general description of Borrowers’ businesses, and may use Borrowers’ names in advertising and other promotional materials.

14.12[Intentionally Omitted].

14.13GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, UNLESS OTHERWISE SPECIFIED, SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO ANY CONFLICT OF LAW PRINCIPLES (BUT GIVING EFFECT TO FEDERAL LAWS RELATING TO NATIONAL BANKS).

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14.14Consent to Forum; Arbitration.

14.14.1Forum.EACH BORROWER HEREBY CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF ANY FEDERAL OR STATE COURT SITTING IN OR WITH JURISDICTION OVER CALIFORNIA, IN ANY PROCEEDING OR DISPUTE RELATING IN ANY WAY TO ANY LOAN DOCUMENTS, AND AGREES THAT ANY SUCH PROCEEDING SHALL BE BROUGHT BY IT SOLELY IN ANY SUCH COURT. EACH BORROWER IRREVOCABLY WAIVES ALL CLAIMS, OBJECTIONS AND DEFENSES THAT IT MAY HAVE REGARDING SUCH COURT’S PERSONAL OR SUBJECT MATTER JURISDICTION, VENUE OR INCONVENIENT FORUM. Nothing herein shall limit the right of Agent or any Lender to bring proceedings against any Obligor in any other court. Nothing in this Agreement shall be deemed to preclude enforcement by Agent of any judgment or order obtained in any forum or jurisdiction.

14.14.2 Arbitration. Notwithstanding any other provision of this Agreement to the contrary, any controversy or claim among the parties relating in any way to any Obligations or Loan Documents, including any alleged tort, shall at the request of any party hereto be determined by binding arbitration conducted in accordance with the United States Arbitration Act (Title 9 U.S. Code). Arbitration proceedings will be determined in accordance with the Act, the then-current rules and procedures for the arbitration of financial services disputes of the American Arbitration Association (“AAA”), and the terms of this Section. In the event of any inconsistency, the terms of this Section shall control. If AAA is unwilling or unable to serve as the provider of arbitration or to enforce any provision of this Section, Agent may designate another arbitration organization with similar procedures to serve as the provider of arbitration. The arbitration proceedings shall be conducted in Los Angeles or Pasadena, California. The arbitration hearing shall commence within 90 days of the arbitration demand and close within 90 days thereafter. The arbitration award must be issued within 30 days after close of the hearing (subject to extension by the arbitrator for up to 60 days upon a showing of good cause), and shall include a concise written statement of reasons for the award. The arbitrator shall give effect to applicable statutes of limitation in determining any controversy or claim, and for these purposes, service on AAA under applicable AAA rules of a notice of claim is the equivalent of the filing of a lawsuit. Any dispute concerning this Section or whether a controversy or claim is arbitrable shall be determined by the arbitrator. The arbitrator shall have the power to award legal fees to the extent provided by this Agreement. Judgment upon an arbitration award may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuant to a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. No controversy or claim shall be submitted to arbitration without the consent of all parties if, at the time of the proposed submission, such controversy or claim relates to an obligation secured by Real Estate, but if all parties do not consent to submission of such a controversy or claim to arbitration, it shall be determined as provided in the next sentence. At the request of any party, a controversy or claim that is not submitted to arbitration as provided above shall be determined by judicial reference; and if such an election is made, the parties shall designate to the court a referee or referees selected under the auspices of the AAA in the same manner as arbitrators are selected in AAA sponsored proceedings and the presiding referee of the panel (or the referee if there is a single referee) shall be an active attorney or retired judge; and judgment upon the award rendered by such referee or referees shall be entered in the court in which proceeding was commenced. None of the foregoing provisions of this Section shall limit the right of Agent or Lenders to exercise self-help remedies, such as setoff, foreclosure or sale of any Collateral or to obtain provisional or ancillary remedies from a court of competent jurisdiction before, after or during any arbitration proceeding. The exercise of a remedy does not waive the right of any party to resort to arbitration or reference. At Agent’s option, foreclosure under a Mortgage may be accomplished either by exercise of power of sale thereunder or by judicial foreclosure.]

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14.15Waivers by Borrowers. To the fullest extent permitted by Applicable Law, each Borrower waives (a) the right to trial by jury (which Agent and each Lender hereby also waives) in any proceeding, claim or counterclaim of any kind relating in any way to any Loan Documents, Obligations or Collateral; (b) presentment, demand, protest, notice of presentment, default, non-payment, maturity, release, compromise, settlement, extension or renewal of any commercial paper, accounts, contract rights, documents, instruments, chattel paper and guaranties at any time held by Agent on which a Borrower may in any way be liable, and hereby ratifies anything Agent may do in this regard; (c) notice prior to taking possession or control of any Collateral; (d) any bond or security that might be required by a court prior to allowing Agent to exercise any rights or remedies; (e) the benefit of all valuation, appraisement and exemption laws; (f) any claim against Agent or any Lender, on any theory of liability, for special, indirect, consequential, exemplary or punitive damages (as opposed to direct or actual damages) in any way relating to any Enforcement Action, Obligations, Loan Documents or transactions relating thereto; and (g) notice of acceptance hereof. Each Borrower acknowledges that the foregoing waivers are a material inducement to Agent and Lenders entering into this Agreement and that Agent and Lenders are relying upon the foregoing in their dealings with Borrowers. Each Borrower has reviewed the foregoing waivers with its legal counsel and has knowingly and voluntarily waived its jury trial and other rights following consultation with legal counsel. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court.

14.16Patriot Act Notice. Agent and Lenders hereby notify Borrowers that pursuant to the requirements of the Patriot Act, Agent and Lenders are required to obtain, verify and record information that identifies each Borrower, including its legal name, address, tax ID number and other information that will allow Agent and Lenders to identify it in accordance with the Patriot Act. Agent and Lenders will also require information regarding each personal guarantor, if any, and may require information regarding Borrowers’ management and owners, such as legal name, address, social security number and date of birth.

[Remainder of page intentionally left blank; signatures begin on following page]

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EXHIBIT A

to

Loan and Security Agreement

ASSIGNMENT AND ACCEPTANCE

Reference is made to the Loan and Security Agreement dated as of March __, 2006, as amended (“Loan Agreement”), among MODTECH HOLDINGS, INC., a Delaware corporation (“Borrower Agent”) and these Subsidiaries of Borrower Agent parties thereto (individually, a “Borrower” and collectively “Borrowers”), BANK OF AMERICA, N.A., as agent (“Agent”) for the financial institutions from time to time party to the Loan Agreement (“Lenders”), and such Lenders. Terms are used herein as defined in the Loan Agreement.

______________________________________ (“Assignor”) and ______________________________________ “Assignee”) agree as follows:

1.Assignor hereby assigns to Assignee and Assignee hereby purchases and assumes from Assignor (a) a principal amount of $________ of Assignor’s outstanding Revolver Loans and $___________ of Assignor’s participations in LC Obligations, and (b) the amount of $__________ of Assignor’s Revolver Commitment (which represents (____%) of the total Revolver Commitments); and (the foregoing items being, collectively, the “Assigned Interest”), together with an interest in the Loan Documents corresponding to the Assigned Interest. This Agreement shall be effective as of the date (“Effective Date”) indicated in the corresponding Assignment Notice delivered to Agent, provided such Assignment Notice is executed by Assignor, Assignee, Agent and Borrower Agent, if applicable. From and after the Effective Date, Assignee hereby expressly assumes, and undertakes to perform, all of Assignor’s obligations in respect of the Assigned Interest, and all principal, interest, fees and other amounts which would otherwise be payable to or for Assignor’s account in respect of the Assigned Interest shall be payable to or for Assignee’s account, to the extent such amounts accrue on or after the Effective Date.

2.Assignor (i) represents that as of the date hereof, prior to giving effect to this assignment, its Revolver Commitment is $__________, and the outstanding balance of its Revolver Loans and participations in LC Obligations is $__________; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Agreement or any other instrument or document furnished pursuant thereto, other than that Assignor is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrowers or the performance by Borrowers of their obligations under the Loan Documents. [Assignor is attachingthe Note[s] held by it and requests that Agent exchange such Note[s] for new Notes payable to Assignee [and Assignor].]

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3.Assignee (i) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance; (ii) confirms that it has received copies of the Loan Agreement and such other Loan Documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (iii) agrees that it shall, independently and without reliance upon Assignor and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents; (iv) confirms that it is an Eligible Assignee; (v) appoints and authorizes Agent to take such action as agent on its behalf and to exercise such powers under the Loan Agreement as are delegated to Agent by the terms thereof, together with such powers as are incidental thereto; (vi) agrees that it will observe and perform all obligations that are required to be performed by it as a “Lender” under the Loan Documents; and (vii) represents and warrants that the assignment evidenced hereby will not result in a non-exempt “prohibited transaction” under Section 406 of ERISA.

4.Assignee acknowledges and agrees that it will not sell or otherwise dispose of the Assigned Interest or any portion thereof, or grant any participation therein, in a manner which, or take any action in connection therewith which, would violate the terms of any Loan Documents.

5.This Agreement and all rights and obligations shall be interpreted in accordance with and governed by the laws of the State of ________________. If any provision hereof would be invalid under Applicable Law, then such provision shall be deemed to be modified to the extent necessary to render it valid while most nearly preserving its original intent; no provision hereof shall be affected by another provision’s being held invalid.

6.Each notice or other communication hereunder shall be in writing, shall be sent by messenger, by telecopy or facsimile transmission or by first-class mail, shall be deemed given when sent and shall be sent as follows:

(a)If to Assignee, to the following address (or to such other address as Assignee may designate from time to time):

(b)If to Assignor, to the following address (or to such other address as Assignor may designate from time to time):

Payments hereunder shall be made by wire transfer of immediately available Dollars as follows:

If to Assignee, to the following account (or to such other account as Assignee may designate from time to time):

ABA No._______________________

Account No.____________________

Reference: _____________________

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If to Assignor, to the following account (or to such other account as Assignor may designate from time to time):

ABA No._______________________

Account No.____________________

Reference: _____________________

IN WITNESS WHEREOF, this Assignment and Acceptance is executed as of _____________.

(“Assignee”)

By___________________________________

Title:

(“Assignor”)

By___________________________________

Title:

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EXHIBIT B

to

Loan and Security Agreement

ASSIGNMENT NOTICE

Reference is made to (i) the Loan and Security Agreement dated as of March __, 2006, as amended (“Loan Agreement”), amongMODTECH HOLDINGS, INC., a Delaware corporation (“Borrower Agent”) and these Subsidiaries of Borrower Agent parties thereto (individually, a “Borrower” and collectively “Borrowers”), BANK OF AMERICA, N.A., as agent (“Agent”) for the financial institutions from time to time party to the Loan Agreement (“Lenders”), and such Lenders; and (ii) the Assignment and Acceptance dated as of ____________, 20__ (“Assignment Agreement”) between __________________ (“Assignor”) and ____________________ (“Assignee”). Terms are used herein as defined in the Loan Agreement.

Assignor hereby notifies Borrowers and Agent of Assignor’s intent to assign to Assignee pursuant to the Assignment Agreement (a) a principal amount of $________ of Assignor’s outstanding Revolver Loans and $___________ of Assignor’s participations in LC Obligations, and (b) the amount of $__________ of Assignor’s Revolver Commitment (which represents (____%) of the total Revolver Commitments) (the foregoing items being, collectively, the “Assigned Interest”), together with an interest in the Loan Documents corresponding to the Assigned Interest. This Agreement shall be effective as of the date (“Effective Date”) indicated below, provided this Assignment Notice is executed by Assignor, Assignee, Agent and Borrower Agent, if applicable. Pursuant to the Assignment Agreement, Assignee has expressly assumed all of Assignor’s obligations under the Loan Agreement to the extent of the Assigned Interest, as of the Effective Date.

For purposes of the Loan Agreement, Agent shall deem Assignor’s Revolver Commitment to be reduced by $_________, and Assignee’s Revolver Commitment to be increased by $_________.

The address of Assignee to which notices and information are to be sent under the terms of the Loan Agreement is:

The address of Assignee to which payments are to be sent under the terms of the Loan Agreement is shown in the Assignment and Acceptance.

This Notice is being delivered to Borrowers and Agent pursuant to Section 13.3 of the Loan Agreement. Please acknowledge your acceptance of this Notice by executing and returning to Assignee and Assignor a copy of this Notice.

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IN WITNESS WHEREOF, this Assignment Notice is executed as of _____________.

(“Assignee”)

By___________________________________

Title:

(“Assignor”)

By___________________________________

Title:

ACKNOWLEDGED AND AGREED,

AS OF THE DATE SET FORTH ABOVE:

BORROWER AGENT:*

MODTECH HOLDINGS, INC.

By_______________________________

Title:

4.   No signature required if Assignee is a Lender, U.S.-based Affiliate of a Lender or Approved Fund, or if an Event of Default exists.

BANK OF AMERICA, N.A.,

as Agent

By_______________________________

Title:

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SCHEDULE 1.1

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Loan and Security Agreement

COMMITMENTS OF LENDERS

Lender	Revolver Commitment	Total Commitments
Bank of America, N.A.	$25,000,000	$25,000,000

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SCHEDULE 8.5

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Loan and Security Agreement

DEPOSIT ACCOUNTS

Depository Bank	Type of Account	Account Number
Union Bank of California	Concentration	2100703044
Union Bank of California	Payroll	2100703052
Union Bank of California	Checking	9080009213
Bank of America	Concentration	1496202541
Bank of America	Payroll/taxes	1496002542

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SCHEDULE 8.6.1

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Loan and Security Agreement

BUSINESS LOCATIONS

1. Borrowers currently have the following business locations, and no others:

Chief Executive Office: 2830 Barrett Avenue, Perris, CA 92571

Other Locations: 310 Gibbs Blvd., Glen Rose, TX. 76043; 5301 W. Madison, Phoenix, AZ 85043; 1602 Industrial Park Dr., Plant City, FL 33566;517A Fyffe Avenue, Stockton, CA 95203

2. Borrowers maintain their books and records relating to Accounts and General Intangibles at: 2830 Barrett Avenue, Perris, CA 92571

3. Borrowers have had no office, place of business or agent for process located in any county other than as set forth above, except: N/A

4. Each Subsidiary currently has the following business locations, and no others:

Chief Executive Office: N/A

Other Locations: N/A

5. Each Subsidiary maintains its books and records relating to Accounts and General Intangibles at: N/A; all dormant; no assets or books and records

6. Each Subsidiary has had no office, place of business or agent for process located in any county other than as set forth above, except: N/A

7. The following bailees, warehouseman, similar parties and consignees hold inventory of a Borrower or one of its Subsidiaries: N/A

Name and Address of Party Nature of Relationship Amount of Inventory Owner of Inventory

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SCHEDULE 9.1.4

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Loan and Security Agreement

NAMES AND CAPITAL STRUCTURE

1. The corporate names, jurisdictions of incorporation, and authorized and issued Equity Interests of each Borrower and Subsidiary are as follows:

Name	Jurisdiction	Number and Class of Authorized Shares	Number and Class of Issued Shares
Innovative Modular Structures, Inc.	Florida	2,000	1,000
Coastal Modular Buildings, Inc.	Delaware	100	100
Trac Modular Manufacturing, Inc.	Arizona	50,000	5,000
Miller Acquisition Corp.	Delaware	100	0
Modtech Merger Corp.	Delaware	100	0

Innovative and Trac Modular have had their corporate charters either suspended or revoked due to the failure to pay the annual minimum franchise tax. Both Miller Acquisition Corp and Modtech Merger Corp. were formed to be used in connection with a proposed merger with Miller Building Systems, Inc. that was to take place in 1999- 2000, but did not occur. All of the subsidiaries are inactive and have no assets, operations or income.

2. The record holders of Equity Interests of each Borrower and Subsidiary are as follows: Borrower is a publicly traded company with approximately 66 record shareholders. Modtech Holdings, Inc. owns all of the outstanding shares of common stock of Innovative Modular Structures, Inc. and Coastal Modular Buildings, Inc. It owns 4,000 shares of the outstanding common stock of Trac Modular Manufacturing, Inc. Raymond Schmuck, Jr. and Christine Cobb own 400 and 600 shares, respectively, of Trac Modular Manufacturing, Inc.

Name Class of Stock Number of Shares Record Owner

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3. All agreements binding on holders of Equity Interests of Borrowers and Subsidiaries with respect to such interests are as follows: N/A

4. The name of each Affiliate of a Borrower and the nature of the affiliation are as follows: N/A

5. A total of approximately 22 individuals and institutions hold warrants to acquire 1,460,268 shares of common stock of Modtech Holdings, Inc. The warrants contain customary anti-dilution provisions which, if triggered, will increase the number of shares that can be purchased upon exercise of the warrants.

6. Officers, directors and employees of Modtech Holdings, Inc. hold options issued pursuant to the company's stock option plans which as of March 1, 2006 are exercisable, in the aggregate, for 1,373,300shares of the company's common stock.

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SCHEDULE 9.1.5

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Loan and Security Agreement

FORMER NAMES AND COMPANIES

1. Each Borrower’s and Subsidiary’s correct corporate name, as registered with the Secretary of State of its state of incorporation, is shown on Schedule 9.1.4.

2. In the conduct of their businesses during five years preceding the Closing Date, Borrowers and Subsidiaries have used the following names:

Entity	Fictitious, Trade or Other Name
Modtech Holdings, Inc.	Modtech
Modtech Holdings, Inc.	United Modular
Modtech Holdings, Inc.	Modtech Inc.
Modtech Holdings, Inc.	United Modular Technology
Modtech Holdings, Inc.	Modcrete
Modtech Holdings, Inc.	Modtech Telecom
Modtech Holdings, Inc.	Coastal Modular Buildings
Modtech Holdings, Inc.	Innovative Modular Structures
Modtech Holdings, Inc.	Office Master of Texas
Modtech Holdings, Inc.	SPI Holdings
SPI Manufacturing Inc.	Rosewood Enterprises
Modtech Holdings, Inc.	Rancho
Modtech Holdings, Inc.	Trac
Modtech Holdings, Inc.	Trac Modular Manufacturing
Modtech Holdings, Inc.	Arizona Millwork
Arizona Millwork Inc.	Rosewood Installation Services
Arizona Millwork Inc.	Rosewood Enterprises, The Shed Shop
Modtech Holdings, Inc.	Miller Structures Co., Inc. of California
Modtech Inc.	Del Tech
Ronfran Inc.	Standard Pacific Industries

Office Master of Texas, Inc., Coastal Modular Buildings, Inc., Innovative Modular Structures, Inc., and Trac Modular Manufacturing, Inc. and Rosewood Enterprises, Inc., SPI Holdings, Inc. were at one time operating subsidiaries of Modtech Holdings, Inc. All such subsidiaries have either been merged with and into Modtech Holdings, Inc. dissolved or had their corporate charters suspended, revoked or declared inactive for failure to pay the annual minimum franchise tax.

3. In the five years preceding the Closing Date, no Borrower or Subsidiary has been the surviving corporation of a merger or combination, except:

Modtech Holdings, Inc.

4. In the five years preceding the Closing Date, no Borrower or Subsidiary has acquired any substantial part of the assets of any Person, except: N/A

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SCHEDULE 9.1.8

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Loan and Security Agreement

LOSSES

Modtech Holdings, Inc. incurred a net loss of $9.0 million for the 3-month period ended December 31, 2005 and a net loss of $21.1 million for 12-month period ended December 31, 2005.

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SCHEDULE 9.1.10

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Loan and Security Agreement

TAXES

Innovative Modular Structures, Inc. and Trac Modular Manufacturing, Inc. have not filed federal or state tax returns in years and have not paid any taxes, including, without limitation, the minimum annual franchise tax in years. The corporations have not have any operations or income during the period they have not paid taxes or filed returns.

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SCHEDULE 9.1.12

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Loan and Security Agreement

PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES

1. Borrowers’ and Subsidiaries’ patents: N/A

Patent Owner Status in Patent Office Federal Registration Number Registration Date

2. Borrowers’ and Subsidiaries’ trademarks:

Trademark	Owner	Status in Trademark Office	Federal Registration Number	Registration Date
Modcrete	Modtech Holdings, Inc.	Registered, possibly abandoned	78208029	1/28/03
Modtech Telecom	Modtech Holdings, Inc.	Registered, possibly abandoned	76371867	2/14/02
United Modular	Modtech Holdings, Inc.	Registered, possibly abandoned	2598642	7/23/02
Modtech	Modtech Holdings, Inc.	Registered	2699855	3/25/03
United Modular Technology	Modtech Holdings, Inc.	Registered, possibly abandoned	75866601	12/7/99
The Right Space, At the Right Time, For the Right Price	Modtech Holdings, Inc.	Registered	78680057	7/27/05

Modtech Holdings, Inc. currently only uses the trademarks "Modtech" and "The Right Space, At the Right Time, For the Right Price" in its business. The other marks are no longer in use.

3. Borrowers’ and Subsidiaries’ copyrights: N/A

Copyrights	Owner	Status in Copyright Office	Federal Registration Number	Registration Date
Architectural Plans & Drawings for 2 story relocatable building 30' x 33'	Modtech Holdings, Inc.	Registered	VA1160334	September 26, 2002
Architectural Plans & Drawings for 2 story relocatable building 48' x 40'	Modtech Holdings, Inc.	Registered	VA1149006	September 25, 2002
Architectural Plans & Drawings for relocatable classroom building 30' x 32' expandable to 270' x 32'	Modtech Holdings, Inc.	Registered	VA1149005	September 25, 2002
Architectural Plans & Drawings for relocatable classroom building 24' x 40' expandable to 144'' x 40'	Modtech Holdings, Inc.	Registered	VA1147591	September 23, 2002
Architectural Plans & Drawings for relocatable building 24' x 40''	Modtech, Inc. (predecessor to Modtech Holdings, Inc.)	Registered	VA902842	July 20, 1998
Architectural Plans & Drawings for relocatable classroom building 24' x 40'	Modtech, Inc. (predecessor to Modtech Holdings, Inc.)	Registered	VA902841	July 20, 1998
Architectural Plans & Drawings for relocatable building for model 24' x 40'	Modtech, Inc. (predecessor to Modtech Holdings, Inc.)	Registered	VA880041	April 15, 1998

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4. Borrowers’ and Subsidiaries’ licenses (other than routine business licenses, authorizing them to transact business in local jurisdictions): N/A

Licensor	Description of License	Term of License	Royalties Payable
None

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SCHEDULE 9.1.15

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Loan and Security Agreement

ENVIRONMENTAL MATTERS

Borrower's leased facility at 5301 West Madison, Phoenix, Arizona is located within a 25 square mile are listed by the Arizona Department of Environmental Quality on the state priority list for contaminated sites. According to a 1998 environmental site assessment report pertaining to the facility, neither Borrower nor the prior operators or owners of the property have been identified as potentially responsible parties at the site. The report identified no historical activity on the property that was likely to have been a source of the contaminants at the site.

One of Borrower's former subsidiaries, Innovative Modular, Inc. owned property in Florida. The property was sold in 2004 and the buyer was advised of the requirement by Florida Department of Environmental Protection that a Declaration of Restrictive Covenant be recorded against the property as a result of prior contamination. The contamination was the result of crushed asphalt being used as fill in the parking lot. The restriction which was requested in 2001, but never filed prior to the sale, prohibited residential use of the property.

Innovative has since ceased all operations, currently has no known assets or liabilities and has been suspended in Florida for failure to pay the minimum annual franchise tax.

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SCHEDULE 9.1.16

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Loan and Security Agreement

RESTRICTIVE AGREEMENTS

N/A

Entity Agreement Restrictive Provisions

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SCHEDULE 9.1.17

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Loan and Security Agreement

LITIGATION

1. Proceedings and investigations pending against Borrowers or Subsidiaries:

The following is a list of all proceedings and investigations currently pending against Borrower. With the exception of the TRICO PIPES case described below, Borrower does not believe that an adverse decision in any of these cases is reasonably likely to have a Material Adverse Effect.

1.1Title of Action: BAYSIDE SOLUTIONS, INC. v. MODTECH HOLDINGS, INC., LIBERTY UNION HIGH SCHOOL DISTRICT, LIBERTY MUTUAL INSURANCE COMPANY.

Nature of Action: The plaintiff alleges that Modtech failed to pay Bayside Solutions $300,000 for the temporary labor staff Bayside provided on the Heritage High School project.

Complaining Parties: Bayside Solutions, Inc., a California corporation.

Jurisdictional or Tribunal: Contra Costa County Superior Court

Case #CO6 00636

1.2Title of Action: TRICO PIPES, ARAM HODESS and MICAH LONG on behalf of themselves and all other similarly situated persons; and PLUMBERS AND STEAMFITTERS LOCAL UNION NO. 159 v. MODTECH HOLDINGS, INC; BAYSIDE SOLUTIONS, INC; and DOES 1 through 50, inclusive.

Nature of Action: Lawsuit

Plaintiffs allege that they worked on a public works project and that Bayside, a temporary labor service used by Modtech, did not pay them properly and violated the wage and hour laws for public work projects. These individuals worked on the Liberty Union (Heritage project); plaintiffs further allege that local apprentices were not used on the same project and that others employed by Modtech on various public works projects are similarly situated and have not been paid properly. This has been filed as a Class Action suit, but has not yet been certified as a Class Action.

Complaining Parties: TRICO PIPES, ARAM HODESS and MICAH LONG, and PLUMBERS AND STEAMFITTERS LOCAL UNION NO. 159.

Jurisdictional or Tribunal: Superior Court, County of Alameda

Case No. RG 06252511

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1.3 Title of Action: HERIBERTO LEPEZ, SILVIA LOPEZ, PEDRO GALAVIZ on behalf of themselves and in the interest of the general public, v. LEONARD CAMPBELL, INC., dba LC CONTRACTORS, MODTECH HOLDINGS, INC., dba MODTECH and DOES 1 through 50 inclusive.

Nature of Action: Lawsuit

Plaintiffs allege that they provided labor to Campbell on various public works projects where Campbell was acting as a sub to Modtech. Plaintiffs claim that they were not paid a prevailing wage by Campbell and are seeking to recover damages from both Campbell and Modtech. Plaintiffs have yet to state the amount of damages they are claiming.

Complaining Parties: HERIBERTO LEPEZ, SILVIA LOPEZ, and PEDRO GOLAVIZ

Jurisdictional or Tribunal: Superior Court of California, County of Sacramento.

Case No. 05AS00514

1.4Title of Action: TNT Construction Services v. Modtech Holdings, Inc. aka Modtech, Inc., and Does 1 through 100, inclusive.

Nature of Action: Lawsuit

Plaintiff is a subcontractor to Modtech Holdings, Inc. Plaintiff alleges that Modtech breached its contract with TNT by having others complete its scope of work and that TNT was not paid for change order work it completed.

Complaining Parties: TNT Construction Services

Jurisdictional or Tribunal: Riverside County Superior Court

Case No. RIC439652

1.5Title of Action: Contractors & Employees 401k Plan as sponsored by Leonard Campbell, Inc.

Nature of Action: Investigation

The US Department of Labor is investigating to determine if Leonard Campbell made appropriate contributions to the required pension plans.

Complaining Parties: Unknown

Jurisdictional or Tribunal: Investigative authority of the Secretary of Labor.

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1.6Title of Action: NORMAN S. WRIGHT MECHANICAL EQUIPMENT CORP. v. TRAHAN MECHANICAL, INC., a business entity, form unknown, purporting to be a California corporation; MODTECH HOLDINGS, INC., a business entity, form unknown, purporting to be a Delaware corporation; LIBERTY MUTUAL INSURANCE COMPANY, a business entity, form unknown, purporting to be a Massachusetts corporation; LIBERTY UNION HIGH SCHOOL DISTRICT, a public entity; and DOES 1-50, inclusive.

Nature of Action: Lawsuit

Being sued by Plaintiff, NORMAN S. WRIGHT MECHANICAL EQUIPMENT CORP., a California corporation , for breach of contract; monies due; quantum meruit; account stated; action on payment bond, foreclosure of stop notice by Trahan Mechanical, Inc. a subcontractor for Modtech Holdings, Inc.

Complaining Parties: NORMAN S. WRIGHT MECHANICAL EQUIPMENT CORP.

Jurisdictional or Tribunal: Contra Costa County Superior Court

Case No. C06-00242

1.7Title of Action: DIRECT DIGITAL CONTROLS v. TRAHAN MECHANICAL, INC.; MODTECH, INC.; LIBERTY UNION HIGH SCHOOL DISTRICT; LIBERTY MUTUAL INSURANCE COMPANUY; and DOES 1 through 10, inclusive.

Nature of Action: Lawsuit

Being sued by Plaintiff Direct Digital Controls, Inc., for complaint for damages for breach of contract; to enforce stop notice and for recovery on Contractor’s payment bond against Trahan Mechanical, a subcontractor for Modtech Holdings, Inc.

Complaining Parties: DIRECT DIGITAL CONTROLS, INC.

Jurisdictional or Tribunal: Contra Costa County Superior Court

Case No. C06-00149

2. The only threatened proceedings or investigations of which any Borrower or Subsidiary is aware are as follows: N/A

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SCHEDULE 9.1.19

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Loan and Security Agreement

PENSION PLANS

N/A

1. Borrowers and Subsidiaries have the following Multiemployer Plans: N/A

Party Type of Multiemployer Plan

2. Borrowers and Subsidiaries have the following Foreign Plans: N/A

Party Description of Plan

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SCHEDULE 9.1.21

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Loan and Security Agreement

LABOR CONTRACTS

N/A

Borrowers and Subsidiaries are party to the following collective bargaining agreements, management agreements and consulting agreements:

N/A

Parties Type of Agreement Term of Agreement

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SCHEDULE 10.2.2

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Loan and Security Agreement

EXISTING LIENS

The following parties have Liens against some or all of Borrower's assets:

Citicorp Vendor Finance, Inc. (equipment lease)

Amphora Limited (all assets)

U.S. National Bank Association (certificate of deposit)

Fortress Credit Corp. (all assets)

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SCHEDULE 10.2.17

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Loan and Security Agreement

EXISTING AFFILIATE TRANSACTIONS

N/A

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EX-10.35

AMENDMENT AGREEMENT

AMENDMENTAGREEMENT (this " Amendment"), dated as of March 31, 2006, by and among Modtech Holdings, Inc., a Delaware corporation, with headquarters located at 2830 Barrett Avenue, Perris, California 92571 (the "Company") and Amphora Limited (the "Investor").

WHEREAS:

A. The Company and the Investor entered into that certain Securities Purchase Agreement, dated as of December 31, 2004, as amended (the "Securities Purchase Agreement"), pursuant to which, among other things, the Investor purchased from the Company an Amended and Restated Senior Secured Convertible Note dated as of August 5, 2005 (the "Note"), which is convertible into shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), in accordance with the terms thereof.

B. The Company and the Investor desire to enter into this Amendment pursuant to which the Note shall be amended to revise certain terms and conditions set forth therein.

C. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings ascribed to them in the Note.

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the Company and the Investors hereby agree as follows:

1. AMENDMENTS TO NOTE.

(a) Section 9 of the Note is hereby amended and restated to read in its entirety as follows:

"(9)HOLDER'S RIGHT OF OPTIONAL REDEMPTION.

(a)The Holder shall have the right, in its sole discretion to require that the Company redeem a portion of this Note (a "Holder Optional Redemption") by delivering written notice thereof (a "Holder Optional Redemption Notice" and, collectively with the Event of Default Redemption Notice, the Change of Control Redemption Notice and the Mandatory Redemption Notice, the "Redemption Notices" and each a "Redemption Notice") to the Company no later than the August 8^th prior to any Optional Redemption Date. The Holder Optional Redemption Notice shall indicate the Conversion Amount the Holder is electing to have redeemed on such Optional Redemption Date (the "Holder Optional Redemption Amount"); provided, however, that such Holder Optional Redemption Amount indicated shall not exceed the applicable Optional Redemption Amount. The portion of this Note subject to redemption pursuant to this Section 9(a) shall be redeemed by the Company in cash at a price equal to the Conversion Amount being redeemed (the "Holder Optional Redemption Price" and, collectively with the Event of Default Redemption Price, the Change of Control Redemption Price and the Mandatory Redemption Price, the "Redemption Prices" and, each a "RedemptionPrice"); provided, however, that, only with respect to the First Optional Redemption Date and the Second Optional Redemption Date, in the event the Company is prohibited by the terms of the Current Credit Facility and/or the Intercreditor Agreement to redeem in cash (and the Company has not otherwise received any necessary consent of the requisite parties thereunder to take such action) all or any portion of the Holder Optional Redemption Amount (such amount not able to be redeemed, the "Optional Redemption Shortfall Amount"), the Company may, at its option, and so long as the Equity Conditions shall have been satisfied (or waived in writing by the Holder) during the period from and including the Company Conversion Notice Due Date through and including the applicable Optional Redemption Date, satisfy its obligations under this Section 9 with respect to the redemption of all or any portion of such Optional Redemption Shortfall Amount by delivery of shares of Common Stock to the Holder (the "Company Conversion Option"). If the Company exercises the Company Conversion Option, it shall deliver to the Holder an irrevocable notice (the "Company Conversion Notice") no later than the August 15^th prior to the applicable Optional Redemption Date (the "Company Conversion Notice Due Date") (A) stating that the Company is exercising such conversion option, (B) stating the portion of the Optional Redemption Shortfall Amount that is the subject of the Company Conversion Option (the "Company Conversion Amount") and (C) only with respect to the First Optional Redemption Date and the Second Optional Redemption Date, certifying that the applicable condition set forth in Section 4.3(d) of the Intercreditor Agreement has not been met (the "Intercreditor Condition"). In the event that the Intercreditor Condition has not been met, unless the Company has in good faith determined that such failure to meet the Intercreditor Condition does not constitute material, nonpublic information relating to the Company and its Subsidiaries, the Company shall, prior to or contemporaneously with the delivery of the relevant Company Conversion Notice, make publicly available (on a Current Report on Form 8-K or otherwise) the fact that such condition has not been met for the applicable Optional Redemption Date. If the Company determines that no public disclosure is required pursuant to the foregoing sentence, the Holder shall be allowed to presume that such failure to meet the Intercreditor Condition does not constitute material, nonpublic information relating to the Company and its Subsidiaries. On the day immediately following the last day of the Company Conversion Measuring Period, the Company shall provide notice to the Holder of the applicable Company Conversion Price. Any Company Conversion Amount shall be converted as of the applicable Optional Redemption Date by dividing such Company Conversion Amount by the Company Conversion Price.

(b)In the event there is an Optional Redemption Shortfall Amount and the Equity Conditions shall not have been satisfied as required (or waived), the Holder may, at its option, require the Company to convert all or any portion of the Optional Redemption Shortfall Amount (such amount, the "Holder Optional Conversion Amount") on the applicable Optional Redemption Date by delivering shares of Common Stock to the Holder (the "Holder Optional Conversion Option"). The Holder shall state in each Holder Optional Redemption Notice delivered at any time when the Holder is electing the Holder Optional Conversion Option whether such Holder will exercise the Holder Optional Conversion Option in the event there is an Optional Redemption Shortfall Amount. Any Holder Optional Conversion Amount shall be converted as of the applicable Optional Redemption Date by dividing such Holder Optional Conversion Amount by the Company Conversion Price.

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(c)Redemptions required by this Section 9 shall be made in accordance with the provisions of Section 13 and any conversions required by this Section upon election by the Company of the Company Conversion Option or the Holder of the Holder Optional Conversion Option shall be made in accordance with the provisions of Section 3(c). Notwithstanding anything to the contrary in this Section 9, but subject to Section 3(d), until the Holder receives the Redemption Price and/or the shares deliverable in connection with any Company Conversion Amount or Holder Optional Conversion Amount, the Holder Optional Redemption Amount may be converted, in whole or in part, by the Holder into Common Stock pursuant to Section 3, and any such conversion shall reduce the Holder Optional Redemption Amount in the manner set forth by the Holder in the applicable Conversion Notice."

(b) Section 15(e) of the Note is hereby amended and restated to read in its entirety as follows:

"(e)Financial Covenants. On and after February 1, 2006, the Company shall satisfy or otherwise comply with each of the financial covenants set forth in the Exhibit II hereto in each calendar month. The Company shall (i) provide to the Holder a certificate certifying compliance with these financial covenants, contemporaneously with the delivery of any similar compliance certificate the Company is required to provide to the lenders or designated agent under the Current Credit Facility, and (ii) prior to or simultaneously with the delivery to the Holder of any such compliance certificate stating that the Company has failed to satisfy any financial covenant hereunder, publicly disclose such failure."

(c) Section 17 of the Note is hereby amended and restated to read in its entirety as follows:

"REDUCTION OF LETTER OF CREDIT AMOUNT. The Letter of Credit Amount shall be reduced by $5,000,000 if on any Optional Redemption Date either (a) the holders of the Notes exercise the Holder Optional Redemption on an Optional Redemption Date for the Aggregate Optional Redemption Amount or (b) (i) if the Holder Optional Redemption has not been fully exercised by each Holder on any Optional Redemption Date and (ii) (x) on the First Optional Redemption Date, the Company has been Profitable for two (2) Calendar Quarters prior to such First Optional Redemption Date, (y) on the Second Optional Redemption Date, the Company has been Profitable for two (2) Calendar Quarters during the period beginning after the First Optional Redemption Date through the Second Optional Redemption Date, or (z) on the Third Optional Redemption Date, the Company has been Profitable for one (1) Calendar Quarter during the period beginning after the Second Optional Redemption Date through the Third Optional Redemption Date (each of the foregoing (x), (y) and (z), a "Profitability Target"). In the event that the holders of the Notes exercise the Holder Optional Redemption for less than the Aggregate Optional Redemption Amount on any Optional Redemption Date and the Profitability Target for such Optional Redemption Date has not been met, the Letter of Credit Amount shall be reduced by an amount equal to the product of (1) $5,000,000, multiplied by (2) a fraction (A) the numerator of which is the aggregate Conversion Amount redeemed by all holders on such Optional Redemption Date and (B) the denominator of which is the Aggregate Optional Redemption Amount."

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(d) Section 31(k) of the Note is hereby amended and restated to read in its entirety as follows:

""Company Conversion Price" means, as of any date of determination, that price which shall be computed as 90% of the arithmetic average of the Weighted Average Price of the Common Stock during each of the thirty (30) consecutive Trading Days of the thirty (30) Trading Day period commencing on the Trading Day immediately following the Company Conversion Notice Due Date (such period, the "Company Conversion Measuring Period")."

(e) Section 31(m) of the Note is hereby amended and restated to read in its entirety as follows:

""Current Credit Facility" means the Loan and Security Agreement, dated as of March 31, 2006, among the Company, as borrower, the lenders from time to time party thereto and Bank of America, N.A., as Agent, together with any amendments, restatements, renewals, refundings, refinancings or other extensions thereof."

(f) Section 31(r) of the Note is hereby amended and restated to read in its entirety as follows:

""First Optional Redemption Date" means August 31, 2006; provided, however, that in the event that the Company shall pay the Optional Redemption Shortfall Amount in shares of Common Stock, such Optional Redemption Shortfall Amount shall be due on September 28, 2006."

(g) Section 31(v) of the Note is hereby amended and restated to read in its entirety as follows:

""Intercreditor Agreement" means that certain intercreditor agreement dated as of March 31, 2006 among the Company, Bank of America, N.A., as first lien collateral agent, and Amphora Limited, as second lien collateral agent."

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(h) Section 31(mm) of the Note is hereby amended and restated to read in its entirety as follows:

""Second Optional Redemption Date" means August 31, 2007; provided, however, that in the event that the Company shall pay the Optional Redemption Shortfall Amount in shares of Common Stock, such Optional Redemption Shortfall Amount shall be due on October 1, 2007."

(i) Section 31(rr) of the Note is hereby amended and restated to read in its entirety as follows:

""Third Optional Redemption Date" means September 2, 2008."

(j) A new Section 32 is hereby added to the Note reading as follows:

"(32)DISCLOSURE. Upon receipt or delivery by the Company of any notice in accordance with the terms of this Note, unless the Company has in good faith determined that the matters relating to such notice do not constitute material, nonpublic information relating to the Company or its Subsidiaries, the Company shall within one Business Day after any such receipt or delivery publicly disclose such material, nonpublic information on a Current Report on Form 8-K or otherwise. In the event that the Company believes that a notice contains material, nonpublic information, relating to the Company or its Subsidiaries, the Company shall indicate to the Holder contemporaneously with delivery of such notice, and in the absence of any such indication, the Holder shall be allowed to presume that all matters relating to such notice do not constitute material, nonpublic information relating to the Company or its Subsidiaries."

(k) Exhibit II of the Note is hereby amended and restated in its entirety by Exhibit II attached hereto.

2. DISCLOSURE OF AMENDMENT.

On or before 8:30 a.m., New York Time, onthe first (1^st) Business Day following the Effective Date (as defined below), the Company shall file a Current Report on Form 8-K describing the terms of this Amendment and attaching a copy of the form of this Amendment.

3. CONDITIONS TO EFFECTIVENESS.

This Amendment shall not become effective (the "Effective Date") until the satisfaction of each of the following conditions, provided that such conditions are for the Investor's sole benefit and may be waived by the Investor at any time in its sole discretion by providing the Company with written notice thereof:

5

(a) The Company shall have duly executed this Amendment and delivered the same to the Investor.

(b) The Board of Directors of the Company shall have adopted resolutions authorizing and approving this Amendment and the transactions contemplated hereby.

4. MISCELLANEOUS.

(a) Expenses. The Company shall reimburse the Investor for its reasonable legal expenses incurred in connection with the execution of this Amendment and any and all documents executed in connection therewith.

(b) Counterparts. This Amendment may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party; provided that a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature.

(c) Headings. The headings of this Amendment are for convenience of reference and shall not form part of, or affect the interpretation of, this Amendment.

(d) Severability. If any provision of this Amendment shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Amendment in that jurisdiction or the validity or enforceability of any provision of this Amendment in any other jurisdiction.

(e) No Third Party Beneficiaries. This Amendment is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.

(f) Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Amendment and the consummation of the transactions contemplated hereby.

(g) No Strict Construction. The language used in this Amendment will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

(h) Governing Law. This Amendment shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Amendment shall be governed by, the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York.

6

(i) Reaffirmation. The Company hereby: (1) confirms and agrees that, except as expressly amended or modified hereby, the Note, the Securities Purchase Agreement and each other Transaction Document to which it is a party is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects, except that on and after the Amendment Effective Date all references in any such Transaction Document to "the Note", "thereto", "thereof", "thereunder" or words of like import referring to the Note shall mean the Note as amended by this Amendment; and (ii) confirms and agrees that to the extent that any such Transaction Document purports to assign or pledge to the Amphora Limited, in its capacity as collateral agent (the "Collateral Agent") for the Investor and the holders of the Securities, or to grant to the Collateral Agent a security interest in or lien on, any collateral as security for the obligations of the Company from time to time existing in respect of the Note and any other Transaction Document, such pledge, assignment and/or grant of the security interest or lien is hereby ratified and confirmed.

[Signature Page Follows]

7

IN WITNESS WHEREOF, the Investor and the Company have caused their respective signature page to this Amendment to be duly executed as of the date first written above.

COMPANY: MODTECH HOLDINGS, INC.
By:
	Name:
	Title

[Signature Page to Amendment Agreement]

IN WITNESS WHEREOF, the Investor and the Company have caused their respective signature page to this Amendment to be duly executed as of the date first written above.

INVESTOR: AMPHORA LIMITED
By:
	Name:
	Title

[Signature Page to Amendment Agreement]

EXHIBIT II

FINANCIAL COVENANTS

So long as any principal of or interest on this Note (whether or not due) shall remain unpaid or outstanding, the Company shall:

(a)Fixed Charge Coverage Ratio. Maintain a Fixed Charge Coverage Ratio of at least the ratio set forth opposite each period below measured monthly as of the last day of each month.

Period	Minimum Fixed Charge Coverage Ratio
Month ending February 28, 2006 measured on a trailing 2 month basis	0.81:1.00
Month ending March 31, 2006, measured on a year-to-date basis	0.99:1.00
Month ending April 30, 2006, measured on a year-to-date basis	1.17:1.00
Months ending May 31, 2006 through December 31, 2006, measured on a year-to-date basis	1.35:1.00
Month ending January 31, 2007 and each month thereafter measured on a trailing 12 month basis	1.35:1.00

Capitalized terms used in this Exhibit II and not otherwise define in this Note shall have the respective meanings ascribed to them in the Current Credit Facility, as in effect on March 31, 2006.

EX-23.1

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Modtech Holdings, Inc.:

We consent to the incorporation by reference in the registration statements (No. 333-102933, No. 333-91204, No. 333-79023 and No. 333-81169) on Form S-8 of Modtech Holdings, Inc. of our report dated April 4, 2006, with respect to the consolidated balance sheet of Modtech Holdings, Inc. and Subsidiaries as of December 31, 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year ended December 31, 2005, and the related financial statement schedule II for the year ended December 31, 2005, which report appears in the December 31, 2005 Annual Report on Form 10-K of Modtech Holdings, Inc.

/s/ Peterson & Co., LLP

San Diego, Califormia

April 4, 2006

EX-23.2

EXHIBIT 23.2

Consent of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Modtech Holdings, Inc.:

We consent to the incorporation by reference in the registration statements (No. 333-102933, No. 333-91204, No. 333-79023 and No. 333-81169) on Form S-8 of Modtech Holdings, Inc. of our report dated June 16, 2005, with respect to the consolidated balance sheet of Modtech Holdings, Inc. as of December 31, 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2004, and the related financial statement schedule II for each of the years in the two-year period ended December 31, 2004, which report appears in the December 31, 2005 Annual Report on Form 10-K of Modtech Holdings, Inc.

/s/    KPMG LLP

Costa Mesa, California

April 4, 2006

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, David M. Buckley, certify that:

1. I have reviewed this annual report on Form 10-K of Modtech Holdings, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:	/s/ DAVID M. BUCKLEY
	David M. Buckley
	President / Chief Executive Officer April 4, 2006

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Dennis L. Shogren, certify that:

1. I have reviewed this annual report on Form 10-K of Modtech Holdings, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:	/s/ DENNIS L. SHOGREN
	Dennis L. Shogren Chief Financial Officer April 4, 2006

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CEO PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies, in his capacity as Chief Executive Officer of Modtech Holdings, Inc. (the “Company”), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on his knowledge:

•the Annual Report of the Company on Form 10-K for the year ended December 31, 2005, (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and

•the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: April 4, 2006

By:	/s/ DAVID M. BUCKLEY
	David M. Buckley
	President / Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CFO PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies, in his capacity as Chief Financial Officer of Modtech Holdings, Inc. (the “Company”), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on his knowledge:

•the Annual Report of the Company on Form 10-K for the year ended December 31, 2005, (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and

•the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: April 4, 2006

By:	/s/ DENNIS L. SHOGREN
	Dennis L. Shogren
	Chief Financial Officer