PALM HARBOR HOMES INC /FL/ - FORM 10-Q

PALM HARBOR HOMES INC /FL/ - FORM 10-Q - February 3, 2010

Attached files

Attached files

PALM HARBOR HOMES INC /FL/ Reports

file	filename
EX-31.2 - SECTION 302 CERTIFICATION OF CFO - PALM HARBOR HOMES INC /FL/	dex312.htm
EX-32.1 - SECTION 906 CERTIFICATION OF CEO AND CFO - PALM HARBOR HOMES INC /FL/	dex321.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - PALM HARBOR HOMES INC /FL/	dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

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

For the quarterly period ended December 25, 2009

Commission file number 0-26188

PALM HARBOR HOMES, INC.

(Exact name of registrant as specified in its charter)

Florida

59-1036634

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

15303 Dallas Parkway, Suite 800, Addison, Texas 75001-4600

(Address of principal executive offices) (Zip code)

972-991-2422

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Shares of common stock $.01 par value, outstanding on February 3, 2010 – 22,875,245.

PALM HARBOR HOMES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)


	December 25, 2009			March 27, 2009
	(Unaudited)			(As adjusted)
				(Note 1)
Assets
Cash and cash equivalents	$	7,711		$	12,374
Restricted cash		15,760			17,771
Investments		15,313			17,175
Trade receivables		18,359			23,458
Consumer loans receivable, net		178,544			191,597
Inventories		78,559			97,144
Assets held for sale		4,575			5,775
Prepaid expenses and other assets		8,621			10,451
Property, plant and equipment, net		32,049			35,937

Total assets	$	359,491		$	411,682


Liabilities and shareholders’ equity
Accounts payable	$	19,722		$	18,954
Accrued liabilities		38,364			45,882
Floor plan payable		44,402			49,401
Construction lending line		2,398			3,589
Securitized financings		126,130			140,283
Convertible senior notes, net		49,794			47,939

Total liabilities		280,810			306,048

Commitments and contingencies

Shareholders’ equity:
Common stock, $.01 par value		239			239
Additional paid-in capital		69,168			68,200
Retained earnings		24,970			54,522
Treasury shares		(15,717	)		(15,717	)
Accumulated other comprehensive income (loss)		21			(1,610	)

Total shareholders’ equity		78,681			105,634

Total liabilities and shareholders’ equity	$	359,491		$	411,682

See accompanying notes.

PALM HARBOR HOMES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)


	Three Months Ended						Nine Months Ended
	December 25, 2009			December 26, 2008			December 25, 2009			December 26, 2008
				(As adjusted)						(As adjusted)
				(Note 1)						(Note 1)
Net sales	$	71,802		$	89,642		$	229,020		$	330,379
Cost of sales		54,981			70,597			174,862			252,742
Selling, general and administrative expenses		24,119			29,323			73,154			91,586

Loss from operations		(7,298	)		(10,278	)		(18,996	)		(13,949	)

Interest expense		(4,046	)		(4,637	)		(13,064	)		(14,009	)
Gain on repurchases of convertible senior notes		—			467			—			4,242
Other income		2,232			655			2,671			1,819

Loss before income taxes		(9,112	)		(13,793	)		(29,389	)		(21,897	)

Income tax benefit (expense)		(66	)		58			(163	)		(184	)


Net loss	$	(9,178	)	$	(13,735	)	$	(29,552	)	$	(22,081	)


Net loss per common share – basic and diluted	$	(0.40	)	$	(0.60	)	$	(1.29	)	$	(0.97	)


Weighted average common shares outstanding – basic and diluted		22,875			22,875			22,875			22,857

See accompanying notes.

PALM HARBOR HOMES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Nine Months Ended
	December 25, 2009			December 26, 2008
				(As adjusted)
				(Note 1)
Operating Activities
Net loss	$	(29,552	)	$	(22,081	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		4,199			4,442
Provision for credit losses		2,229			2,269
Non-cash interest expense		2,659			2,217
Loss (gain) on disposition of assets		620			(1,055	)
Loss (gain) on sale of loans		50			(1,314	)
Gain on repurchases of convertible senior notes		—			(4,242	)
Provision for stock based compensation		164			108
Loss on sale of investments		91			63
Impairment of investment securities		243			199
Changes in operating assets and liabilities:
Restricted cash		2,011			7,389
Trade receivables		4,872			10,079
Consumer loans originated		(27,743	)		(22,586	)
Principal payments on consumer loans originated		10,526			32,616
Proceeds from sales of consumer loans		28,218			61,286
Inventories		18,585			15,217
Prepaid expenses and other assets		1,392			1,440
Accounts payable and accrued expenses		(7,058	)		(21,759	)

Net cash provided by operating activities		11,506			64,288

Investing Activities
Net disposals of property, plant and equipment		775			433
Purchases of investments		(2,358	)		(13,508	)
Sales of investments		5,757			18,378

Net cash provided by investing activities		4,174			5,303

Financing Activities
Net payments on proceeds from floor plan payable		(4,999	)		(1,109	)
Net payments on warehouse revolving debt		—			(42,175	)
Net payments on from construction lending line		(1,191	)		—
Payments to repurchase convertible senior notes		—			(9,121	)
Payments on securitized financings		(14,153	)		(20,362	)

Net cash used in financing activities		(20,343	)		(72,767	)
Net decrease in cash and cash equivalents		(4,663	)		(3,176	)
Cash and cash equivalents at beginning of period		12,374			28,206

Cash and cash equivalents at end of period	$	7,711		$	25,030

See accompanying notes.

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements reflect all adjustments, which include normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with U.S. generally accepted accounting principles. Certain footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted. The condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended March 27, 2009 included in the Company’s Form 10-K. Results of operations for any interim period are not necessarily indicative of results to be expected for a full year.

The balance sheet at March 27, 2009 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

Subsequent Events

The Company evaluated subsequent events after the balance sheet date of December 25, 2009 through the date of the filing, February 3, 2010.

General Business Environment

The prevailing economic uncertainties and depressed housing market have continued to challenge the factory-built housing industry and the Company’s business in the third quarter of fiscal 2010. The Company’s revenues for the quarter are indicative of the constrained demand for factory-built housing products resulting from a more restrictive financing environment and an over-supply of discounted site-built homes. While the Company’s third quarter revenues declined 19.9% over the prior year period, its gross margin increased to 23.4%, compared with 21.2% a year ago. In spite of the decline in sales, the Company has made considerable progress in managing its costs and improving its operating efficiencies in this current sales environment. The improved gross margins indicate improved manufacturing efficiencies, a higher internalization rate and a strong performance by the Company’s financial services subsidiaries, Standard Casualty and CountryPlace Mortgage.

Overall, the Company reduced its third quarter operating loss by $4.6 million from the prior year period. Included in these results is a one-time gain resulting from Palm Harbor Insurance Agency, a managing general agent for Standard Casualty Company, selling renewal rights and expiration information for certain insurance policies and the right to receive related premiums and commissions for those policies to a third party for approximately $1.8 million, net of cancellations. The sale was recognized in full in the third quarter and is classified as Other Income on the Consolidated Statement of Operations.

The Company has continued to revise its operating strategy and better position the Company to sustain this downturn and, at the same time, benefit from any market improvement when it occurs. The primary focus has been to maintain adequate liquidity for operations. On January 27, 2010, the Company reached an agreement with Textron Financial Corporation to amend the terms of its floor plan facility. The agreement provides for a gradual step-down of the current total committed amount of $45 million to $25 million between March 2010 and March 2011, favorably adjusts certain financial covenants, and temporarily allows for an increased percentage of eligible inventory to be borrowed subject to the total credit line between January 2010 and September 2010. Pursuant to this amendment, the expiration date for the remaining $25 million of the current $45 million facility was extended until April 2011, and in certain circumstances, such amount further extends through June 2012. Additionally, the Company, through CountryPlace Mortgage, has also closed on a new, four-year, $20 million secured term loan from entities managed by Virgo Investment Group LLC (“Virgo”). Net proceeds of $19.0 million, after fees, will be used for working capital and general corporate purposes. See Notes 6 and 17 for further details on these transactions.

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company has also taken additional steps to reduce its manufacturing capacity and distribution channels and realign its operational overhead to meet current and expected demand. As a result, the Company will be closing two factories and 21 underperforming sales centers and will have seven factories in operation and a total of 57 sales locations. The Company expects to incur restructuring charges of approximately $6.0 million over the next two fiscal quarters. Additionally, the Company will continue to identify ways to lower its quarterly selling, general and administrative expenses, increase margins and further reduce its receivables and inventory levels.

The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Given the difficult business environment in fiscal 2010, indicators of impairment exist with respect to approximately $29.6 million of long-lived assets in the factory-built housing segment. However, based upon events, circumstances and information available as of December 25, 2009, the Company’s estimates of undiscounted future cash flows related to these long-lived assets in the normal course of business indicate that such amounts would be recoverable. Nonetheless, it is reasonably possible that estimates of undiscounted cash flows could change in the near term and could result in impairment charges necessary to record the assets at fair value. The Company’s estimates of undiscounted future cash flows could change, for example, based upon changes in events, circumstances and information related to the long-lived assets or the factory-built housing segment generally, changes in overall business conditions, or changes resulting from Company realignments responsive to liquidity needs or consumer demand.

The Company’s amended floor plan financing facility with Textron Financial Corporation continues to include required financial covenants, and beginning in March 2010 through March 2011 will require certain reductions in the overall amounts borrowed under the facility. The Company believes that the combination of its cash on hand, net proceeds from the Virgo loan, floor plan financing, conforming mortgage sales, and other available borrowing alternatives will be adequate to support working capital, debt servicing and currently planned capital expenditure needs for the foreseeable future. However, because future cash flows and the availability of financing, as well as covenant compliance, is dependent upon a number of factors, including prevailing economic and financial conditions and other factors beyond the Company’s control, no assurances can be given in this regard.

Going forward, the Company will continue to focus on carefully managing its costs, achieving further gross margin improvement and maintaining adequate liquidity to sustain its business through this cycle. At the same time, the Company is pursuing innovative ways to both expand its product offering and reach new distribution channels to further drive revenues. Regardless of market conditions, the Company will continue to leverage its core strengths - the most trusted brand name in the industry, a diverse and high-quality product line, a profitable insurance and finance operation, manufacturing excellence and exceptional customer satisfaction.

New Accounting Pronouncements

Codification. Effective July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became the single official source of authoritative, nongovernmental generally accepted accounting principles (“GAAP”) in the United States. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. Our accounting policies were not affected by the conversion to ASC. However, references to specific accounting standards in the footnotes to our consolidated financial statements have been changed to refer to the appropriate section of ASC.

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Fair Value. In September 2006, the FASB issued guidance, which defines fair value, establishes a market-based framework for measuring fair value and expands disclosures about fair value measurements. The guidance is contained in ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”). The guidance does not expand or require any new fair value measurements and is effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. In February 2008, the FASB deferred the effective date for most non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008. The Company adopted the provisions for financial assets and financial liabilities effective March 29, 2008 and adopted the remaining provisions for nonfinancial assets and nonfinancial liabilities on March 28, 2009. These new provisions did not have a material effect on the consolidated financial position, results of operations or cash flows.

Other-Than-Temporary Impairments. In April 2009, the FASB issued new guidance on the recognition of other-than-temporary impairments of investments in debt securities, as well as financial statement presentation and disclosure requirements for
other-than-temporary impairments of investments in debt and equity securities. The Company adopted the provisions of this guidance for the quarter ended June 26, 2009. The adoption did not have a material effect on the consolidated financial statements.

Subsequent Events. In May 2009, the FASB issued guidance that establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The guidance is contained in ASC Topic 855, “Subsequent Events” and requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The guidance is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. These new provisions did not have a material effect on the consolidated financial position, results of operations or cash flows. Note 1 to these condensed consolidated financial statements contains certain disclosures related to the adoption of these provisions.

Convertible Debt. On January 1, 2009, The Company adopted the Cash Conversion Subsections of ASC Subtopic 470-20, “Debt with Conversion and Other Options – Cash Conversion” (“Cash Conversion Subsections”), which clarify the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The Cash Conversion Subsections require issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. The Cash Conversion Subsections require bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in the consolidated statements of operations. Once adopted, the Cash Conversion Subsections require retrospective application to the terms of instruments as they existed for all periods presented. The adoption of the Cash Conversion Subsections affects the accounting for the Company’s 3.25% Convertible Senior Notes issued in 2004 and due 2024 (the “Notes”).

The Company adopted the Cash Conversion Subsections on March 28, 2009 and applied the provisions retrospectively to all periods presented. The retrospective application of this pronouncement affects fiscal years 2005 through 2009. The Company determined that the liability component of the convertible notes was $52.7 million and the equity component of the convertible notes was $22.3 million as of the date of issuance in fiscal 2005.

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables summarize the effect of the accounting changes resulting from the adoption of the Cash Conversion Subsections on the consolidated financial statements (in thousands, except per share date):


	Three months ended December 26, 2008									Nine months ended December 26, 2008
	As originally reported			Effects of change			As adjusted			As originally reported			Effects of change			As adjusted
Statements of Operations:
Interest expense	$	(3,896	)	$	(741	)	$	(4,637	)	$	(11,792	)	$	(2,217	)	$	(14,009	)
Gain on repurchases of convertible senior notes		570			(103	)		467			6,366			(2,124	)		4,242
Net loss		(12,891	)		(844	)		(13,735	)		(17,740	)		(4,341	)		(22,081	)
Net loss per common share – basic and diluted		(0.56	)		(0.04	)		(0.60	)		(0.78	)		(0.19	)		(0.97	)


	As of March 27, 2009
	As originally reported			Effects of change			As adjusted
Balance Sheets:
Convertible senior notes, net	$	53,845		$	(5,906	)	$	47,939
Additional paid-in capital		54,093			14,107			68,200
Retained earnings		62,723			(8,201	)		54,522
Total shareholders’ equity		99,728			5,906			105,634

	Nine Months ended December 26, 2008
	As originally reported			Effects of change			As adjusted
Statements of Cash Flows
Net loss	$	(17,740	)	$	(4,341	)	$	(22,081	)
Non-cash interest expense		—			2,217			2,217
Gain on repurchases of convertible senior notes		6,366			(2,124	)		4,242

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2.	Inventories

Inventories consist of the following (in thousands):


	December 25, 2009		March 27, 2009
Raw materials	$	5,330	$	8,198
Work in process		4,207		6,110
Finished goods at factory		1,677		2,934
Finished goods at retail		67,345		79,902

	$	78,559	$	97,144

Inventories are pledged as collateral with Textron. See Note 6.

3.	Investments

The following tables summarize the Company’s available-for-sale investment securities as of December 25, 2009 and March 27, 2009 (in thousands):


	December 25, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury and Government Agencies	$	1,475	$	84	$	—		$	1,559
Mortgage-backed securities		4,521		285		—			4,806
States and political subdivisions		989		12		(8	)		993
Corporate debt securities		4,458		352		—			4,810
Marketable equity securities		3,182		233		(270	)		3,145

Total	$	14,625	$	966	$	(278	)	$	15,313


	March 27, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Mortgage-backed securities	$	7,119	$	274	$	(2	)	$	7,391
States and political subdivisions		991		16		—			1,007
Corporate debt securities		5,612		27		(128	)		5,511
Marketable equity securities		4,355		20		(1,109	)		3,266

Total	$	18,077	$	337	$	(1,239	)	$	17,175

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table shows the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 25, 2009 (in thousands):


	Less than 12 months					12 Months or Longer				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
State and political subdivisions	$	534	$	(8	)	$	—	$	—	$	534	$	(8	)
Marketable equity securities		917		(270	)		—		—		917		(270	)

Total	$	1,451	$	(278	)	$	—	$	—	$	1,451	$	(278	)


	Less than 12 months					12 Months or Longer				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Mortgage-backed securities	$	509	$	(2	)	$	—	$	—	$	509	$	(2	)
Corporate debt securities		3,830		(128	)		—		—		3,830		(128	)
Marketable equity securities		1,611		(1,109	)		—		—		1,611		(1,109	)

Total	$	5,950	$	(1,239	)	$	—	$	—	$	5,950	$	(1,239	)

During the first nine months of fiscal 2010, 30 of the Company’s available-for-sale equity securities with a total carrying value of $0.8 million were determined to be other-than-temporarily impaired and a realized loss of $0.2 million was recorded in the Company’s consolidated statements of operations. During the first nine months of fiscal 2009, 2 of the Company’s available-for-sale equity securities with a total carrying value of $0.2 million were determined to be other-than-temporarily impaired and a realized loss of $0.2 million was recorded in the Company’s consolidated statements of operations.

The Company’s investments in marketable equity securities consist primarily of investments in common stock of industrial companies ($1.6 million of the total fair value and $229,000 of the total unrealized losses in common stock investments). The remaining marketable equity securities consist primarily of bank trust and insurance companies and public utility companies. The Company has seen increases in the market value of its stock portfolio during the first nine months of fiscal 2010, consistent with improvements seen in the overall stock market. Based on the improvements in the stock market and the Company’s ability and intent to hold the investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider the investments to be other-than-temporarily impaired at December 25, 2009.

The amortized cost and fair value of the Company’s investment securities at December 25, 2009, by contractual maturity, are shown in the table below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Amortized Cost		Fair Value
Due in less than one year	$	340	$	343
Due after one year through five years		5,978		6,388
Due after five years		5,125		5,437
Marketable equity securities		3,182		3,145

Total investment securities available-for-sale	$	14,625	$	15,313

Realized gains and losses from the sale of securities are determined using the specific identification method. Gross gains realized on the sales of investment securities for the first nine months of fiscal 2010 and 2009 were approximately $342,000 and $389,000, respectively. Gross losses were approximately $433,000 and $452,000 for the first nine months of fiscal 2010 and 2009, respectively.

4.	Restricted Cash

Restricted cash consists of the following (in thousands):


	December 25, 2009		March 27, 2009
Cash pledged as collateral for outstanding insurance programs and surety bonds	$	9,683	$	10,358
Cash related to customer deposits held in trust accounts		2,408		3,225
Cash related to CountryPlace customers’ principal and interest payments on the loans that are securitized		3,669		4,188

	$	15,760	$	17,771

5.	Consumer Loans Receivable and Allowance for Loan Losses

Consumer loans receivable, net, consist of the following (in thousands):


	December 31, 2009			March 31, 2009
Consumer loans receivable held for investment	$	184,438		$	198,169
Consumer loans receivable held for sale		1,455			1,148
Construction advances on non-conforming mortgages		2,216			3,638
Deferred financing costs, net		(5,123	)		(5,558	)
Allowance for loan losses		(4,442	)		(5,800	)

Consumer loans receivable, net	$	178,544		$	191,597

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The allowance for loan losses and related additions and deductions to the allowance during the nine months ended December 31, 2009 and December 31, 2008 are as follows (in thousands):


	Nine Months Ended
	December 31, 2009			December 31, 2008
Allowance for loan losses, beginning of period	$	5,800		$	8,975
Provision for credit losses		2,229			2,269
Loans charged off, net of recoveries		(3,587	)		(3,219	)
Reduction of reserve due to loan sale		—			(1,641	)

Allowance for loan losses, end of period	$	4,442		$	6,384

CountryPlace’s policy is to place loans on nonaccrual status when either principal or interest is past due and remains unpaid for 120 days or more. In addition, they place loans on nonaccrual status when there is a clear indication that the borrower has the inability or unwillingness to meet payments as they become due. At December 31, 2009, CountryPlace’s management was not aware of any potential problem loans that would have a material effect on loan delinquency or charge-offs. Loans are subject to continual review and are given management’s attention whenever a problem situation appears to be developing. The following table sets forth the amounts and categories of CountryPlace’s non-performing loans and assets as of December 31, 2009 and March 31, 2009 (dollars in thousands):


	December 31, 2009			March 31, 2009
Non-performing loans:
Loans accounted for on a nonaccrual basis	$	1,876		$	2,574
Accruing loans past due 90 days or more		2,994			390

Total nonaccrual and 90 days past due loans		4,870			2,964
Percentage of total loans		2.62	%		1.49	%
Other non-performing assets⁽¹⁾		1,318			2,048
Troubled debt restructurings		5,869			5,013

⁽¹⁾

Consists of land and homes acquired through foreclosure, which is carried at fair value less estimated selling expenses, and is included in prepaid and other assets on the consolidated balance sheets.

Beginning in fiscal 2009, CountryPlace modified loans to retain borrowers with good payment history. These modifications were considered to represent credit concessions due to hurricane and other repayment matters (such as employment/financial stress) impacting these borrowers. As of December 31, 2009, CountryPlace has modified approximately $5.9 million of loans where principal and interest payments have been deferred or waived for periods ranging from one to three months. These loans are not reflected as non-performing loans but as troubled debt restructurings. As of December 31, 2009, the allowance for loan losses totaled $4.4 million of which $0.1 million is an impairment allowance for these loans. In addition, CountryPlace has modified the payment for approximately $1.2 million of loans and realized a loss of $0.3 million on these loans.

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Loan contracts secured by collateral that is geographically concentrated could experience higher rates of delinquencies, default and foreclosure losses than loan contracts secured by collateral that is more geographically dispersed. CountryPlace has loan contracts secured by factory-built homes located in the following key states as of December 31, 2009 and March 31, 2009:


	December 31, 2009		March 31, 2009
Texas	43.0	%	42.6	%
Arizona	6.4		6.3
Florida	7.0		7.1
California	2.1		2.2

The states of California, Florida and Arizona, and to a lesser degree Texas, have experienced economic weakness resulting from the decline in real estate values. The risks created by these concentrations have been considered by CountryPlace’s management in the determination of the adequacy of the allowance for loan losses. No other states had concentrations in excess of 10% of the principal balance of the consumer loans receivable as of December 31, 2009 or March 31, 2009. Management believes the allowance for loan losses is adequate to cover estimated losses at December 31, 2009.

6.	Floor Plan Payable

As of December 25, 2009, the Company had an agreement with Textron Financial Corporation for a $45.0 million floor plan facility expiring June 30, 2010. The advance rate for the facility is 90% of manufacturer’s invoice. This facility is used to finance a portion of the new home inventory at the Company’s retail sales centers and is secured by new home inventory and a portion of receivables from financial institutions. The Company’s liability under this credit facility was $44.4 million as of December 25, 2009.

During the third quarter of fiscal 2009, Textron announced that they are in the process of an orderly liquidation of certain of their commercial finance businesses, including their housing inventory finance business.

As of December 25, 2009, the Company was required to reduce the outstanding borrowings under the Textron facility to $40 million by December 31, 2009. However, on December 29, 2009, the Company and Textron agreed to an amendment to delay the requirement to reduce outstanding borrowings to $40 million until January 31, 2010. Additionally, certain other covenant and condition modifications to the agreement were made at the time. On January 27, 2010, Textron and the Company agreed to a further amendment that included, among other things, the following modifications:

•

Extends the maturity date from June 30, 2010 to the earlier of June 30, 2012 or one month prior to the date of the first repurchase option for the holder of the Company’s convertible senior notes;

•

Provides for a temporary protective advance exceeding the credit line;

•

Pledges 100% of the Company’s equity of Standard Casualty Company to Textron; and

•

Provides new financial covenants as follows:

•

Maximum quarterly net loss before taxes and restructuring charges - $15 million through the second quarter of fiscal 2011, $10 million for the third and fourth quarters of fiscal 2011 and $1 million of net income for all quarters thereafter

•

Maximum Loan-to-Collateral Coverage Ratio – 65% through the first quarter of fiscal 2011, 62% for the second quarter of fiscal 2011 and 60% for all quarters thereafter.

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

•

Maximum Credit Line - $45 million for the fourth quarter of fiscal 2010, $43 million for the first quarter of fiscal 2011, $38 million for the second quarter of fiscal 2011, $32 million for the third quarter of fiscal 2011, $28 million for the fourth quarter of fiscal 2011 and $25 million thereafter.

As of December 25, 2009, prior to executing the December 29, 2009 and January 27, 2010 amendments, the Company was required to comply with a loan-to-collateral value of 60% or less, a minimum inventory turn of not less than 2.75:1, and a maximum net loss (before tax) not to exceed $10 million, as defined by the agreement. Absent the December 29, 2009 amendment, the Company would have been in violation of the loan-to-collateral ratio at 64%. The December 29, 2009 amendment waived this covenant violation, as well as two other covenant violations expressly identified therein. The Company was in compliance with the remaining financial covenants as of December 25, 2009 and believes that covenant requirements under the amended Textron facility are achievable for the foreseeable future. However, in light of current market conditions, and because covenant compliance is dependent upon a number of factors, including prevailing economic and financial conditions and other factors beyond the Company’s control, no assurances can be given in this regard. Textron could also declare a loan violation due to a material adverse change, as defined in the agreement. Should a covenant violation occur, the Company would seek a waiver from Textron and consider any other available remedies. However, no assurances can be made that Textron would provide the Company with a waiver or that the Company will otherwise have available remedies and, if a loan violation were to occur and not be waived or remedied in accordance with the terms of the floor plan facility, Textron could declare an event of default and demand that the full amount of the facility be paid in full prior to maturity. Such a demand would result in, among other things, a cross default on the Company’s convertible senior notes described in Note 7.

7.	Convertible senior notes

In 2004, the Company issued $75.0 million aggregate principal amount of 3.25% Convertible Senior Notes due 2024 (the “Notes”) in a private, unregistered offering. Interest on the Notes is payable semi-annually in May and November. The note holders may require the Company to repurchase all or a portion of their notes for cash on May 15, 2011, May 15, 2014 and May 15, 2019 at a repurchase price equal to 100% of the principal amount of the notes to be repurchased plus accrued and unpaid interest, if any. Each $1,000 in principal amount of the Notes is convertible, at the option of the holder, at a conversion price of $25.92, or 38.5803 shares of our common stock upon the satisfaction of certain conditions and contingencies. For the three and nine months ended December 25, 2009 and December 26, 2008, the effect of converting the senior notes to 2.1 million and 2.3 million shares of common stock, respectively, was anti-dilutive, and was, therefore, not considered in determining diluted earnings and 2.3 million per share. During the first nine months of fiscal 2009, the Company repurchased $15.6 million principal amount of the Notes, which had a book value of $13.3 million net of debt discount, for $9.1 million in cash. The purchase price was allocated entirely to the liability component of the securities. The Company recorded a gain of $4.2 million in connection with the repurchase. The Company did not repurchase any Notes in the first nine months of fiscal 2010.

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The liability component related to the convertible senior notes are reflected in the condensed consolidated balance sheets as of December 25, 2009 and March 27, 2009 as follows (in thousands):


	December 25, 2009			March 27, 2009
Principal amount of the liability component	$	53,845		$	53,845
Unamortized debt discount		(4,051	)		(5,906	)

Covertible senior notes, net	$	49,794		$	47,939

Interest expense for the nine months ended December 25, 2009 and December 26, 2008 includes $1.9 million and $2.2 million, respectively, representing amortization of the debt discount at an effective interest rate of 9.11%.

8.	Securitized financings

On July 12, 2005, the Company, through its subsidiary CountryPlace, completed its initial securitization (2005-1) for approximately $141.0 million of loans, which was funded by issuing bonds totaling approximately $118.4 million. The bonds were issued in four different classes: Class A-1 totaling $36.3 million with a coupon rate of 4.23%; Class A-2 totaling $27.4 million with a coupon rate of 4.42%; Class A-3 totaling $27.3 million with a coupon rate of 4.80%; and Class A-4 totaling $27.4 million with a coupon rate of 5.20%. Maturity of the bonds is at varying dates beginning in 2006 through 2015 and were issued with an expected weighted average maturity of 4.66 years. The proceeds from the securitization were used to repay approximately $115.7 million of borrowings on the Company’s warehouse revolving debt with the remaining proceeds being used for general corporate purposes, including future origination of new loans. For accounting purposes, this transaction was structured as a securitized borrowing. CountryPlace’s obligation under this securitized financing is guaranteed by the Company.

On March 22, 2007, the Company, through its subsidiary CountryPlace, completed its second securitization (2007-1) for approximately $116.5 million of loans, which was funded by issuing bonds totaling approximately $101.9 million. The bonds were issued in four classes: Class A-1 totaling $28.9 million with a coupon rate of 5.484%; Class A-2 totaling $23.4 million with a coupon rate of 5.232%; Class A-3 totaling $24.5 million with a coupon rate of 5.593%; and Class A-4 totaling $25.1 million with a coupon rate of 5.846%. Maturity of the bonds is at varying dates beginning in 2008 through 2017 and were issued with an expected weighted average maturity of 4.86 years. The proceeds from the securitization were used to repay approximately $97.1 million of borrowings on the Company’s warehouse revolving debt with the remaining proceeds being used for general corporate purposes, including future origination of new loans. For accounting purposes, this transaction was also structured as a securitized borrowing.

9.	Notes payable to related parties

On April 27, 2009, the Company issued warrants to each of Capital Southwest Venture Corporation, Sally Posey and the Estate of Lee Posey (collectively, the lenders) to purchase up to an aggregate of 429,939 shares of common stock of the Company at a price of $3.14 per share, which was the closing price of the Company’s common stock on April 24, 2009. The Black-Scholes-Merton method was used to value the warrants, which resulted in the Company recording $0.8 million in non-cash interest expense in the first quarter of fiscal 2010. The warrants were granted in connection with a loan made by the lenders to the Company of an aggregate of $4.5 million pursuant to senior subordinated secured promissory notes between the Company and each of the lenders (collectively, the Promissory Notes). The proceeds were used for working capital purposes. The Promissory Notes were repaid in full on June 29, 2009. The warrants, which expire on April 24, 2019, contain anti-dilution provisions and other customary provisions. The Promissory Notes bore interest at the rate of LIBOR plus 2.0% and were secured by 150,000 shares of Standard’s common stock, which was later released upon repayment of the Promissory Notes.

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10.	Other Comprehensive Loss

The difference between net loss and total comprehensive loss for the three and nine months ended December 25, 2009 and December 26, 2008 is as follows (in thousands):


	Three Months Ended						Nine Months Ended
	December 25, 2009			December 26, 2008			December 25, 2009			December 26, 2008
Net loss	$	(9,178	)	$	(13,735	)	$	(29,552	)	$	(22,081	)
Unrealized gain (loss) on available-for-sale investments, net of tax		401			(630	)		1,563			(1,584	)
Amortization of interest rate hedge		22			23			68			73

Comprehensive loss	$	(8,755	)	$	(14,342	)	$	(27,921	)	$	(23,592	)

11.	Commitments and Contingencies

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position or results of operations or cash flows of the Company.

12.	Accrued Product Warranty Obligations

The Company provides the retail homebuyer a one-year limited warranty covering defects in material or workmanship in home structure, plumbing and electrical systems. The amount of warranty reserves recorded are estimated future warranty costs relating to homes sold, based upon the Company’s assessment of historical experience factors, such as actual number of warranty calls and the average cost per warranty call.

The accrued product warranty obligation is classified as accrued liabilities in the condensed consolidated balance sheets. The following table summarizes the accrued product warranty obligations at December 25, 2009 and December 26, 2008 (in thousands):


	Nine Months Ended
	December 25, 2009			December 26, 2008
Accrued warranty balance, beginning of period	$	2,972		$	5,425
Net warranty expense provided		3,697			6,824
Cash warranty payments		(4,872	)		(8,176	)

Accrued warranty balance, end of period	$	1,797		$	4,073

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

13.	Fair Value Measurements

The book value and estimated fair value of the Company’s financial instruments are as follows (dollars in thousands):


	December 25, 2009				March 27, 2009
	Book Value		Estimated Fair Value		Book Value		Estimated Fair Value
Cash and cash equivalents ⁽¹⁾	$	7,711	$	7,711	$	12,374	$	12,374
Restricted cash⁽¹⁾		15,760		15,760		17,771		17,771
Investments ⁽²⁾		15,313		15,313		17,175		17,175
Consumer loans receivables ⁽³⁾		185,893		178,707		199,317		193,029
Floor plan payable ⁽¹⁾		44,402		44,402		49,401		49,401
Construction lending line⁽¹⁾		2,398		2,398		3,589		3,589
Convertible senior notes⁽²⁾		49,794		18,399		47,939		13,461
Securitized financings ⁽⁴⁾		126,130		99,706		140,283		108,972
⁽¹⁾ The fair value approximates book value due to the instruments’ short term maturity. ⁽²⁾ The fair value is based on market prices. ⁽³⁾ Includes consumer loans receivable held for investment and held for sale. The fair value of the loans held for investment is based on the discounted value of the remaining principal and interest cash flows. The fair value of the loans held for sale approximates book value since the sales price of these loans is known as of December 25, 2009. ⁽⁴⁾ The fair value is estimated using quoted market prices for similar securities.

In accordance with guidance in ASC Topic 820, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):


	As of December 25, 2009
	Total		Level 1		Level 2		Level 3
Investments ⁽¹⁾	$	15,313	$	3,145	$	12,168	—
Other non-performing assets ⁽²⁾		1,318		—		1,318	—
⁽¹⁾Unrealized gains or losses on investments are recorded in accumulated other comprehensive loss at each measurement date. ⁽²⁾Consists of land and homes acquired through foreclosure.

14.	Business Segment Information

The Company operates principally in two segments: (1) factory-built housing, which includes manufactured housing, modular housing and retail operations and (2) financial services, which includes finance and insurance. The following table details net sales and income (loss) from operations by segment for the three and nine months ended December 25, 2009 and December 26, 2008 (in thousands):


	Three Months Ended						Nine Months Ended
	December 25, 2009			December 26, 2008			December 25, 2009			December 26, 2008
Net Sales
Factory-built housing	$	62,776		$	80,708		$	201,704		$	301,143
Financial services		9,026			8,934			27,316			29,236

	$	71,802		$	89,642		$	229,020		$	330,379

Income (loss) from operations
Factory-built housing	$	(5,774	)	$	(9,787	)	$	(15,865	)	$	(14,076	)
Financial services		4,214			4,309			12,358			13,632
General corporate expenses		(5,738	)		(4,800	)		(15,489	)		(13,505	)

	$	(7,298	)	$	(10,278	)	$	(18,996	)	$	(13,949	)

Interest expense	$	(4,046	)	$	(4,637	)	$	(13,064	)	$	(14,009	)
Gain on repurchase of convertible senior notes		—			467			—			4,242
Other income		2,232			655			2,671			1,819

Loss before income taxes	$	(9,112	)	$	(13,793	)	$	(29,389	)	$	(21,897	)

15.	Income Taxes

During the nine month periods ended December 25, 2009 and December 26, 2008, the Company recorded no federal income tax expense or benefit due to the availability of net operating loss carryforwards, which are not assured of realization. Tax expense recorded in these periods related to taxes payable in various states the Company does business. The Company expects to record no federal income tax expense or benefit for the remainder of fiscal 2010, as it is uncertain whether the Company is assured of realization of benefits associated with its net operating loss carryforwards.

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

16.	Stock Incentive Plan

Effective July 22, 2009, the Palm Harbor Homes, Inc. 2009 Stock Incentive Plan (the “Plan”) was adopted. The Plan allows for the issuance of up to 1,844,000 shares of common stock to the Company’s employees and outside directors in the form of
non-statutory stock options, incentive stock options and restricted stock awards. During the second quarter of fiscal 2010, the Company granted 1,217,040 shares at an exercise price equal to the market price of the Company’s common stock as of the date of grant or $3.02 per share. Such options have a 10 year term and vest over five years of service. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the Plan).

The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option valuation model that assumed an expected volatility of 65%, an expected term of 6.5 years, zero dividend payments, and a risk-free rate of 3%.

Expected volatilities are based on historical, implied, and expected volatilities from the Company and other comparable entities. The expected term of options granted is derived from the simplified method given the Company has not historically granted stock options. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

The grant-date fair value of options granted during the second quarter was $1.81 per share. As of December 25, 2009, there was approximately $2 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over 5 years. The outstanding stock options were not included in the calculation of dilutive EPS because to do so would be anti-dilutive.

17.	Subsequent Events

On January 29, 2010, the Company, through its subsidiary CountryPlace, entered into an agreement for a $20 million secured term loan from entities managed by Virgo Investment Group LLC. The facility has a maturity date of January 29, 2014 and bears interest at an annual rate of the Eurodollar Rate plus 12%. The Eurodollar Rate cannot be less than 3.0% nor greater than 4.5%. It is secured by, among other things, a pool of loans and securitization certificates contributed by CountryPlace and all capital stock and ownership interests in CountryPlace. CountryPlace will continue to service the pledged pool of loans. The facility allows for optional prepayments after one year subject to a prepayment premium as defined, provides for mandatory prepayments if and when excess cash flows as defined are generated by the CountryPlace securitized loan portfolio, contains restrictive financial covenants related to CountryPlace capital expenditures and the value of loans as compared to underlying collateral and includes other provisions and requirements found in similar agreements. The proceeds will be used by CountryPlace to repay the intercompany indebtedness to the Company and the Company expects to use the proceeds for working capital and general corporate purposes.

As partial consideration for the loan with Virgo, the Company issued warrants to purchase up to an aggregate of 1,296,634 shares of the Company’s common stock at a purchase price of $2.1594 per share. These warrants contain an anti-dilution provision that prevents the warrant holder’s fully-diluted percentage interest in the Company from being diluted in the event that any convertible securities of the Company are converted into other securities of the Company. The warrants also contain an
anti-dilution provision that prevents the warrant holder from having its percentage ownership in the Company diminished by more than 10% in the event that the Company issues additional securities. These anti-dilution provisions expire four years after the issuance of the warrants.

PART I. Financial Information

Item 1.

Financial Statements

See pages 1 through 18.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

We are one of the nation’s leading manufacturers and marketers of factory-built homes. We market nationwide through vertically integrated operations, encompassing manufactured and modular housing, financing and insurance. As of December 25, 2009, we operated nine manufacturing facilities that sell homes through 78 company-owned retail sales centers and builder locations and over 130 independent retail dealers, builders and developers. Through our subsidiary, CountryPlace, we currently offer conforming mortgages to purchasers of factory-built homes sold by company-owned retail sales centers and certain independent retail dealers, builders and developers. The loans originated through CountryPlace are sold to investors. We provide property and casualty insurance for owners of manufactured homes through our subsidiary, Standard Casualty.

The prevailing economic uncertainties and depressed housing market have continued to challenge the factory-built housing industry and our business in the third quarter of fiscal 2010. Our revenues for the quarter are indicative of the constrained demand for
factory-built housing products resulting from a more restrictive financing environment and an over-supply of discounted site-built homes. While our third quarter revenues declined 19.9% over the prior year period, our gross margin increased to 23.4%, compared with 21.2% a year ago. In spite of the decline in sales, we have made considerable progress in managing our costs and improving our operating efficiencies in this current sales environment. The improved gross margins indicate improved manufacturing efficiencies, a higher internalization rate and a strong performance by our financial services subsidiaries, Standard Casualty and CountryPlace Mortgage.

Overall, we reduced our third quarter operating loss by $4.6 million from the prior year period. Included in these results is a one-time gain resulting from Palm Harbor Insurance Agency, a managing general agent for Standard Casualty Company, selling renewal rights and expiration information for certain insurance policies and the right to receive related premiums and commissions for those policies to a third party for approximately $1.8 million, net of cancellations. The sale was recognized in full in the third quarter and is classified as Other Income on the Consolidated Statement of Operations.

We have continued to revise our operating strategy and better position us to sustain this downturn and, at the same time, benefit from any market improvement when it occurs. The primary focus has been to maintain adequate liquidity for operations. On January 27, 2010, we reached an agreement with Textron Financial Corporation to amend the terms of its floor plan facility. The agreement provides for a gradual step-down of the current total committed amount of $45 million to $25 million between March 2010 and March 2011, favorably adjusts certain financial covenants, and temporarily allows for an increased percentage of eligible inventory to be borrowed subject to the total credit line between January 2010 and September 2010. Pursuant to this amendment, the expiration date for the remaining $25 million of the current $45 million facility was extended until April 2011, and in certain circumstances, such amount further extends through June 2012. Additionally, we, through CountryPlace Mortgage, have also closed on a new,
four-year, $20 million secured term loan from entities managed by Virgo Investment Group LLC (“Virgo”). Net proceeds of $19.0 million, after fees, will be used for working capital and general corporate purposes. See Notes 6 and 17 for further details on these transactions.

We have also taken additional steps to reduce our manufacturing capacity and distribution channels and realign our operational overhead to meet current and expected demand. As a result, we will be closing two factories and 21 underperforming sales centers and will have seven factories in operation and a total of 57 sales locations. We expect to incur restructuring charges of approximately $6.0 million over the next two fiscal quarters. Additionally, we will continue to identify ways to lower our quarterly selling, general and administrative expenses, increase margins and further reduce our receivables and inventory levels.

We record impairment losses on long-lived assets used in operations when events and circumstances indicate that long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Given the difficult business environment in fiscal 2010, indicators of impairment exist with respect to approximately $29.6 million of long-lived assets in the factory-built housing segment. However, based upon events, circumstances and information available as of December 25, 2009, our estimates of undiscounted future cash flows related to these long-lived assets in the normal course of business indicate that such amounts would be recoverable. Nonetheless, it is reasonably possible that estimates of undiscounted cash flows could change in the near term and could result in impairment charges necessary to record the assets at fair value. Our estimates of undiscounted future cash flows could change, for example, based upon changes in events, circumstances and information related to the long-lived assets or the factory-built housing segment generally, changes in overall business conditions, or changes resulting from our realignments responsive to liquidity needs or consumer demand.

Our amended floor plan financing facility with Textron Financial Corporation continues to include required financial covenants, and beginning in March 2010 through March 2011 will require certain reductions in the overall amounts borrowed under the facility. We believe that the combination of its cash on hand, net proceeds from the Virgo loan, floor plan financing, conforming mortgage sales, and other available borrowing alternatives will be adequate to support working capital, debt servicing and currently planned capital expenditure needs for the foreseeable future. However, because future cash flows and the availability of financing, as well as covenant compliance, is dependent upon a number of factors, including prevailing economic and financial conditions and other factors beyond our control, no assurances can be given in this regard.

Going forward, we will continue to focus on carefully managing our costs, achieving further gross margin improvement and maintaining adequate liquidity to sustain our business through this cycle. At the same time, we are pursuing innovative ways to both expand our product offering and reach new distribution channels to further drive revenues. Regardless of market conditions, we will continue to leverage our core strengths - the most trusted brand name in the industry, a diverse and high-quality product line, a profitable insurance and finance operation, manufacturing excellence and exceptional customer satisfaction.

The following table sets forth certain items of our condensed consolidated statements of operations as a percentage of net sales for the periods indicated.


	Three Months Ended				Nine Months Ended
	December 25, 2009		December 26, 2008		December 25, 2009		December 26, 2008
Net Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	76.6		78.8		76.4		76.5

Gross profit	23.4		21.2		23.6		23.5
Selling, general and administrative expenses	33.6		32.7		31.9		27.7

Loss from operations	(10.2	)	(11.5	)	(8.3	)	(4.2	)
Interest expense	(5.6	)	(5.2	)	(5.7	)	(4.2	)
Gain on repurchases of convertible senior notes	—		0.5		—		1.3
Other income	3.1		0.7		1.2		0.6

Loss before income taxes	(12.7	)	(15.5	)	(12.8	)	(6.5	)
Income tax benefit (expense)	(0.1	)	0.1		(0.1	)	(0.1	)

Net loss	(12.8	)%	(15.4	)%	(12.9	)%	(6.6	)%

The following table summarizes certain key sales statistics as of and for the three and nine months ended December 25, 2009 and December 26, 2008.


	Three Months Ended				Nine Months Ended
	December 25, 2009		December 26, 2008		December 25, 2009		December 26, 2008
Homes sold through company-owned retail sales centers and builder locations		578		654		1,754		2,391
Homes sold to independent dealers, builders and developers		177		213		496		809
Total new factory-built homes sold		755		867		2,250		3,200
Average new manufactured home price - retail	$	64,000	$	69,000	$	67,000	$	74,000
Average new manufactured home price - wholesale	$	50,000	$	65,000	$	52,000	$	54,000
Average new modular home price - retail	$	158,000	$	178,000	$	165,000	$	174,000
Average new modular home price - wholesale	$	77,000	$	67,000	$	75,000	$	71,000
Number of company-owned retail sales centers at end of period		75		82		75		82
Number of company-owned builder locations at end of period		3		4		3		4

Three Months Ended December 25, 2009 Compared to Three Months Ended December 26, 2008

Net Sales. Net sales decreased 19.9% to $71.8 million in the third quarter of fiscal 2010 from $89.6 million in the third quarter of fiscal 2009. This decrease is primarily the result of a $17.9 million decrease in factory-built housing net sales. Financial services net revenues were essentially flat compared to the third quarter of fiscal 2009. The decline in factory-built housing net sales is primarily due to a 12.9% decrease in the total number of factory-built homes sold coupled with decreases in the average selling prices of new manufactured and modular homes. The decrease in the total number of factory-built homes sold reflects the severe state of the factory-built housing industry, the prevailing economic uncertainties, credit crisis and general consumer paralysis that has kept potential homebuyers on the sidelines. Homes sold to independent dealers, builders and developers decreased 16.9% in the third quarter of fiscal 2010 largely due to slowdowns in sales to lifestyle communities in the three key states of Florida, California and Arizona, which historically were some of our most profitable states. The decrease in the average selling prices is the result of our customers moving down market and buying smaller, less expensive homes.

Gross Profit. As a percentage of net sales, gross profit increased to 23.4% in the third quarter of fiscal 2010 as compared to the third quarter of fiscal 2009. In dollars, gross profit decreased to $16.8 million in the third quarter of fiscal 2010 from $19.0 million in the third quarter of fiscal 2009. Gross profit for the factory-built housing segment increased to 16.9% of net sales in the third quarter of fiscal 2010 from 15.5% in the third quarter of fiscal 2009. Factory-built housing margins increased primarily due to an increase in the internalization rate from 69% in the third quarter of fiscal 2009 to 73% in the third quarter of fiscal 2010. Gross profit for the financial services segment decreased $0.3 million in the third quarter of fiscal 2010.

Selling, General and Administrative Expenses. In dollars, selling, general and administrative expenses decreased $5.2 million to $24.1 million in the third quarter of fiscal 2010 from $29.3 million in the third quarter of fiscal 2009. Of this $5.2 million decrease, $5.9 million related to the factory-built housing segment and $0.2 million related to financial services. This decrease was offset by an increase of $1.0 million related to general corporate expenses. The decline in selling, general and administrative expenses related to the factory-built housing segment resulted from a reduction of seven operating sales centers and two factories versus prior year, in addition to a decrease in the fixed expenses of our ongoing operations. The increase in general corporate expenses was primarily due to increased costs associated with insurance benefits and consultant fees. As a percentage of net sales, selling, general and administrative expenses increased to 33.6% of net sales in the third quarter of fiscal 2010 as compared to 32.7% of net sales in the third quarter of fiscal 2009.

Interest Expense. Interest expense decreased 12.7% to $4.0 million in the third quarter of fiscal 2010 from $4.6 million in the third quarter of fiscal 2009. Interest expense decreased due to decreased interest expense of $0.2 million related to securitized financings and $0.4 million related to floor plan payable.

Gain on Repurchases of Convertible Senior Notes. During the third quarter of fiscal 2009, we repurchased $1.2 million principal amount of our convertible senior notes, which had a book value of $1.1 million net of debt discount, for $0.6 million in cash. We recorded a gain of $0.5 million in connection with the repurchases.

Other Income. Other income increased 240.7% to $2.2 million in the third quarter of fiscal 2010 from $0.7 million in the third quarter of fiscal 2009. This increase is primarily due to $1.8 million received from the sale to a third party of a portion of Palm Harbor Insurance Agency’s book of business, including rights to future commissions, profit sharing and renewals.

Income Tax Benefit (Expense). Income tax expense was $66,000 in the third quarter of fiscal 2010 as compared to a benefit of $58,000 in the third quarter of fiscal 2009. The tax benefit in the third quarter of fiscal 2009 resulted from additional benefits for a reduction in Texas margin tax for prior tax years and was offset by taxes payable in various states we do business.

Nine Months Ended December 25, 2009 Compared to Nine Months Ended December 26, 2008

Net Sales. Net sales decreased 30.7% to $229.0 million in the first nine months of fiscal 2010 from $330.4 million in the first nine months of fiscal 2009. This decrease is primarily the result of an $99.4 million decrease in factory-built housing net sales and a $1.9 million decrease in financial services net revenues. The decline in factory-built housing net sales is primarily due to a 29.7% decrease in the total number of factory-built homes sold coupled with decreases in the average retail selling prices of new manufactured and modular homes. The decrease in the total number of factory-built homes sold reflects the severe state of the factory-built housing industry, the prevailing economic uncertainties, credit crisis and general consumer paralysis that has kept potential homebuyers on the sidelines. Homes sold to independent dealers, builders and developers decreased 38.7% in the first nine months of fiscal 2010 largely due to slowdowns in sales to lifestyle communities in the three key states of Florida, California and Arizona, which historically were some of our most profitable states. The decrease in the average selling prices is the result of our customers moving down market and buying smaller, less expensive homes. The decrease in financial services net revenues reflects a decline in the average consumer loans receivable balance from $231.6 million for the first nine months of fiscal 2009 to $185.1 million for the first nine months of fiscal 2010, resulting from the sale of approximately $51.3 million of loans in April 2008.

Gross Profit. As a percentage of net sales, gross profit remained essentially flat at 23.6% in the first nine months of fiscal 2010 as compared to 23.5% in the first nine months of fiscal 2009. In dollars, gross profit decreased to $54.2 million in the first nine months of fiscal 2010 from $77.6 million in the first nine months of fiscal 2009. Gross profit for the factory-built housing segment decreased to 17.8% of net sales in the first nine months of fiscal 2010 from 18.9% in the first nine months of fiscal 2009.
Factory-built housing margins were impacted by competitive pressure in the current housing market, somewhat offset by improved manufacturing efficiencies and an increase in the internalization rate from 69% in the first nine months of fiscal 2009 to 74% in the first nine months of fiscal 2010. Gross profit for the financial services segment decreased $2.5 million in the first nine months of fiscal 2010 due to decreased net revenues as explained above in the net sales section.

Selling, General and Administrative Expenses. In dollars, selling, general and administrative expenses decreased $18.4 million to $73.2 million in the first nine months of fiscal 2010 from $91.6 million in the first nine months of fiscal 2009. Of this $18.4 million decrease, $18.0 million related to the factory-built housing segment and $1.2 million related to financial services and was offset by $0.7 million increase in general corporate expenses. The decline in selling, general and administrative expenses related to the
factory-built housing segment resulted from a reduction of seven operating sales centers and two factories versus prior year and a major decrease in the fixed expenses of our ongoing operations. The decline in selling, general and administrative expenses related to the financial services segment is due primarily to decreased compensation expense resulting from a reduction in headcount. As a percentage of net sales, selling, general and administrative expenses increased to 31.9% of net sales in the first nine months of fiscal 2010 as compared to 27.7% of net sales in the first nine months of fiscal 2009.

Interest Expense. Interest expense decreased 6.3% to $13.1 million in the first nine months of fiscal 2010 from $14.0 million in the first nine months of fiscal 2009. Interest expense decreased $0.9 million due to decreased interest expense of $0.7 million related to securitized financings, $0.4 million related to convertible senior notes, and $0.5 million related to floor plan payable. These decreases are offset by noncash interest expense of $0.8 million related to warrants issued in connection with $4.5 million of short term Promissory Notes.

Gain on Repurchases of Convertible Senior Notes. During the first nine months of fiscal 2009, we repurchased $15.6 million principal amount of our convertible senior notes, which had a book value of $13.3 million net of debt discount, for $9.1 million in cash. We recorded a gain of $4.2 million in connection with the repurchases.

Other Income. Other income increased 46.8% to $2.7 million in the first nine months of fiscal 2010 from $1.8 million in the first nine months of fiscal 2009. This increase is primarily due to $1.8 million received from the sale to a third party of a portion of Palm Harbor Insurance Agency’s book of business, including rights to future commissions, profit sharing, and renewals.

Income Tax Expense. Income tax expense was $163,000 in the first nine months of fiscal 2010 as compared to $184,000 in the first nine months of fiscal 2009. Tax expense recorded in these periods related to taxes payable in various states we do business. We do not expect to record federal income tax expense for the remainder of fiscal 2010 due to the availability of net operating loss carryforwards.

Liquidity and Capital Resources

Cash and cash equivalents totaled $7.7 million at December 25, 2009, down $4.7 million from $12.4 million at March 27, 2009. Net cash provided by operating activities was $11.5 million in the first nine months of fiscal 2010 as compared to $64.3 million in the first nine months of fiscal 2009. The decrease in net cash provided by operating activities is primarily attributable to $61.3 million of consumer loans sold in the first nine months of fiscal 2009.

Net cash provided by investing activities was $4.2 million in the first nine months of fiscal 2010 as compared to $5.3 million in the first nine months of fiscal 2009. Net cash provided by investing activities in the first nine months of fiscal 2010 was primarily the result of $3.4 million in net cash received from the sale of investments and $0.8 million resulting from net disposals of property, plant and equipment. Net cash provided by investing activities in the first nine months of fiscal 2009 was primarily the result of $4.9 million in net cash received from the sale of investments and $0.4 million resulting from net purchases of property, plant and equipment.

Net cash used in financing activities was $20.3 million in the first nine months of fiscal 2010 as compared to $72.8 million in the first nine months of fiscal 2009. Net cash used in financing activities in the first nine months of fiscal 2010 was primarily the result of $5.0 million used to pay down the floor plan facility, $14.2 million used for payments on securitized financings and $1.2 million used for payments on the construction lending line. Net cash used in financing activities in the first nine months of fiscal 2009 was primarily attributable to $42.2 million used to repay in full and terminate the warehouse borrowing facility, $20.4 million used for payments on securitized financings, $9.1 million used to repurchase $15.6 million principal amount of our convertible senior notes, and $1.1 million used for payments on the floor plan facility.

As of December 25, 2009, we had an agreement with Textron Financial Corporation for a $45.0 million floor plan facility expiring June 30, 2010. The advance rate for the facility is 90% of manufacturer’s invoice. This facility is used to finance a portion of the new home inventory at our retail sales centers and is secured by new home inventory and a portion of receivables from financial institutions. Our liability under this credit facility was $44.4 million as of December 25, 2009.

As of December 25, 2009, we were required to reduce the outstanding borrowings under the Textron facility to $40 million by December 31, 2009. However, on December 29, 2009, we agreed with Textron to an amendment to delay the requirement to reduce outstanding borrowings to $40 million until January 31, 2010. Additionally, certain other covenant and condition modifications to the agreement were made at the time. On January 27, 2010, we agreed with Textron to a further amendment that included, among other things, the following modifications:

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Extends the maturity date from June 30, 2010 to the earlier of June 30, 2012 or one month prior to the date of the first repurchase option for the holder of our convertible senior notes;

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Provides for a temporary protective advance exceeding the credit line;

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Pledges 100% of our equity of Standard Casualty Company to Textron; and

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Provides new financial covenants as follows:

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Maximum Loan-to-Collateral Coverage Ratio – 65% through the first quarter of fiscal 2011, 62% for the second quarter of fiscal 2011 and 60% for all quarters thereafter.

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As of December 25, 2009, prior to executing the December 29, 2009 and January 27, 2010 amendments, we were required to comply with a loan-to-collateral value of 60% or less, a minimum inventory turn of not less than 2.75:1, and a maximum net loss (before taxes) not to exceed $10 million, as defined by the agreement. Absent the December 29, 2009 amendment, we would have been in violation of the loan-to-collateral ratio at 64%. The December 29, 2009 amendment waived this covenant violation, as well as two other covenant violations expressly identified therein. We were in compliance with the remaining financial covenants as of December 25, 2009 and believe that covenant requirements under the amended Textron facility are achievable for the foreseeable future. However, in light of current market conditions, and because covenant compliance is dependent upon a number of factors, including prevailing economic and financial conditions and other factors beyond our control, no assurances can be given in this regard. Textron could also declare a loan violation due to a material adverse change, as defined in the agreement. Should a covenant violation occur, we would seek a waiver from Textron and consider any other available remedies. However, no assurances can be made that Textron would provide us with a waiver or that we will otherwise have available remedies and, if a loan violation were to occur and not be waived or remedied in accordance with the terms of the floor plan facility, Textron could declare an event of default and demand that the full amount of the facility be paid in full prior to maturity. Such a demand would result in, among other things, a cross default on our convertible senior notes described in Note 7.

On January 29, 2010, through our subsidiary CountryPlace, we entered into an agreement for a $20 million secured term loan from entities managed by Virgo Investment Group LLC. The facility has a maturity date of January 29, 2014 and bears interest at an annual rate of the Eurodollar Rate plus 12%. The Eurodollar Rate cannot be less than 3.0% nor greater than 4.5%. It is secured by, among other things, a pool of loans and securitization certificates contributed by CountryPlace and all capital stock and ownership interests in CountryPlace. CountryPlace will continue to service the pledged pool of loans. The facility allows for optional prepayments after one year subject to a prepayment premium as defined, provides for mandatory prepayments if and when excess cash flows as defined are generated by the CountryPlace securitized loan portfolio, contains restrictive financial covenants related to CountryPlace capital expenditures and the value of loans as compared to underlying collateral and includes other provisions and requirements found in similar agreements. The proceeds will be used by CountryPlace to repay the intercompany indebtedness to us and we expect to use the proceeds for working capital and general corporate purposes.

As partial consideration for the loan with Virgo, we issued warrants to purchase up to an aggregate of 1,296,634 shares of our common stock at a purchase price of $2.1594 per share. These warrants contain an anti-dilution provision that prevents the warrant holder’s fully-diluted percentage interest in our company from being diluted in the event that any of our convertible securities are converted into other securities of our company. The warrants also contain an anti-dilution provision that prevents the warrant holder from having its percentage ownership in our company diminished by more than 10% in the event that we issue additional securities. These anti-dilution provisions expire four years after the issuance of the warrants.

In 2004, Palm Harbor issued $75.0 million aggregate principal amount of 3.25% Convertible Senior Notes due 2024 (the “Notes”) in a private, unregistered offering. Interest on the Notes is payable semi-annually in May and November. The note holders may require the Company to repurchase all or a portion of their notes for cash on May 15, 2011, May 15, 2014 and May 15, 2019 at a repurchase price equal to 100% of the principal amount of the notes to be repurchased plus accrued and unpaid interest, if any. Each $1,000 in principal amount of the Notes is convertible, at the option of the holder, at a conversion price of $25.92, or 38.5803 share of our common stock upon the satisfaction of certain conditions and contingencies. For the three and nine months ended December 25, 2009 and December 26, 2008, the effect of converting the senior notes to 2.1 million and 2.3 million shares of common stock, respectively, was anti-dilutive, and was, therefore, not considered in determining diluted earning per share. During the first nine

months of fiscal 2009, we repurchased $15.6 million principal amount of the Notes, which had a book value of $13.3 million net of debt discount, for $9.1 million in cash. We recorded a gain of $4.2 million in connection with the repurchase. We did not repurchase any Notes in the first nine months of fiscal 2010.

In January 2009, CountryPlace obtained a $10.0 million construction lending line to use for financing mortgage loans during the construction period. There is no expiration period for the agreement, but CountryPlace is obligated to repurchase individual loans within 180 days from the date of original purchase of each respective loan by the financial institution. Historically, the construction period has been approximately ninety days. The construction lender has full discretion to accept or decline each individual loan purchase requested by CountryPlace. The maximum advance for loans purchased is 92% of the loan amount. The interest rate on unpaid amounts advanced is 10%. CountryPlace had outstanding unpaid advances under the facility of 2.4 million as of December 31, 2009. The facility contains certain requirements relating to the documentation of the loans purchased and amounts drawn during the construction period of each individual loan, which are customary in the industry. CountryPlace funds the difference between the amounts advanced under the facility and the balance of any additional loan.

On April 27, 2009, we issued warrants to each of Capital Southwest Venture Corporation, Sally Posey and the Estate of Lee Posey (collectively, the lenders) to purchase up to an aggregate of 429,939 shares of our common stock at a price of $3.14 per share, which was the closing price of our common stock on April 24, 2009. The Black-Scholes method was used to value the warrants, which resulted in us recording $0.8 million in non-cash interest expense in the first quarter of fiscal 2010. The warrants were granted in connection with a loan made by the lenders to us of an aggregate of $4.5 million pursuant to senior subordinated secured promissory notes between us and each of the lenders (collectively, the Promissory Notes). The proceeds were used for working capital purposes. The Promissory Notes were repaid in full on June 29, 2009. The warrants, which expire on April 24, 2019, contain anti-dilution provisions and other customary provisions. The Promissory Notes bore interest at the rate of LIBOR plus 2.0% and were secured by 150,000 shares of Standard’s common stock, which was later released upon repayment of the Promissory Notes.

We believe that our cash on hand and the proceeds from the Virgo loan, floor plan financing, conforming mortgage sales, and any other available borrowing alternatives will be adequate to support working capital, debt servicing and currently planned capital expenditure needs for the foreseeable future. However, because future cash flows and the availability of financing, as well as covenant compliance, is dependent upon a number of factors, including prevailing economic and financial conditions and other factors beyond our control, no assurances can be given in this regard.

Forward-Looking Information/Risk Factors

Certain statements contained in this annual report are forward-looking statements within the safe harbor provisions of the Securities Litigation Reform Act. Forward-looking statements give our current expectations or forecasts of future events and can be identified by the fact that they do not relate strictly to historical or current facts. Investors should be aware that all forward-looking statements are subject to risks and uncertainties and, as a result of certain factors, actual results could differ materially from these expressed in or implied by such statements. These risks include such assumptions, risks, uncertainties and factors associated with the following:

Our significant debt obligations, or our incurrence of additional debt, could limit our flexibility in managing our business and could materially and adversely affect our financial performance.

We are highly leveraged. As of December 25, 2009, we had approximately $180 million of long-term indebtedness outstanding. In addition, on January 29, 2010, we entered into a credit agreement with entities managed by Virgo Investment Group, LLC, pursuant to which we have borrowed $20 million. Under the Virgo credit agreement, we are permitted to incur up to $4.8 million in additional debt, subject to certain limitations. Being so highly leveraged could have a material adverse effect on our business, financial condition, operating results, and ability to satisfy our obligations under our indebtedness.

Recent turmoil in the credit markets and the financial services industry may reduce the demand for our homes and the availability of home mortgage financing, among other things.

Recently, the credit markets and the financial services industry have been experiencing a period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the United States federal government. While the ultimate outcome of these events cannot be predicted, it may have a material adverse effect on us, our liquidity, our ability to borrow money to finance our operations from our existing lenders or otherwise, and could also adversely impact the availability of financing to our customers.

We continue to reduce our manufacturing capacity and distribution channels to effectively align with current and expected regional demand to maintain operating profitability. If the economy continues to worsen, our return to operating profitability will be delayed.

Since March 2006, we have idled nine manufacturing plants and decreased the number of retail sales centers we own by 38 to effectively align current and expected regional demand. In addition, we will be closing two more manufacturing plants and 21 underperforming sales centers during the fourth quarter of fiscal 2010. If the U.S. economy continues to slow, financial markets continue to decline, and more layoffs occur nationally, our realignment will not allow us to return to operating profitability and further cost savings and other measures will be required.

Deterioration in economic conditions in general could further reduce the demand for homes and impact customers’ ability to repay their loans to CountryPlace and, as a result, could reduce our earnings and adversely affect our financial condition.

Changes in national and local economic conditions could have a negative impact on our business. Adverse changes in employment levels, job growth, consumer confidence and income, interest rates and population growth may further reduce demand, depress prices for our homes and cause homebuyers to cancel their agreements to purchase our homes, thereby possibly reducing earnings and adversely affecting our business and results of operations. These adverse changes may also impact customers’ ability to repay their loans to CountryPlace which could adversely affect the profitability and cash flow from CountryPlace’s loan portfolio and our ability to satisfy our obligations under our indebtedness to Virgo. Recent changes in these economic variables have had an adverse affect on consumer demand for, and the pricing of, our homes, causing our revenues to decline and future deterioration in economic conditions could have further adverse effects.

Changes in laws or other events that adversely affect liquidity in the secondary mortgage market could hurt our business.

The government-sponsored enterprises, principally Fannie Mae and Freddie Mac, play a significant role in buying home mortgages and creating investment securities that they either sell to investors or hold in their portfolios. These organizations provide liquidity to the secondary mortgage market. Fannie Mae and Freddie Mac have recently experienced financial difficulties. Any new federal laws or regulations that restrict or curtail their activities, or any other events or conditions that prevent or restrict these enterprises from continuing their historic businesses, could affect the ability of our customers to obtain the mortgage loans or could increase mortgage interest rates or credit standards, which could reduce demand for our homes and/or the loans that we originate and adversely affect our results of operations.

Financing for our retail customers may be limited, which could affect our sales volume.

Our retail customers who do not use CountryPlace generally either pay cash or secure financing from third party lenders, which have been negatively affected by adverse loan origination experience. Several major lenders, which had previously provided financing for our customers, have exited the manufactured housing finance business. Reduced availability of such financing is currently having an adverse effect on both the manufactured housing business and our home sales. Availability of financing is dependent on the lending practices of financial institutions, financial markets, governmental policies and economic conditions, all of which are largely beyond our control. Quasi-governmental agencies such as FHA, Fannie Mae and Freddie Mac, which are important purchasers of loans from financial institutions, have tightened standards relating to the manufactured housing loans that they will buy. Most states classify manufactured homes as personal property rather than real property for purposes of taxation and lien perfection, and interest rates for manufactured homes are generally higher and the terms of the loans shorter than for site-built homes. There can be no assurance that affordable retail financing for manufactured homes will continue to be available on a widespread basis. If third party financing were to become unavailable or were to be further restricted, this could have a material adverse effect on our results of operations.

The factory-built housing industry is currently in a prolonged slump with no recovery in sight.

Historically, the factory-built housing industry has been highly cyclical and seasonal and has experienced wide fluctuations in aggregate sales. The factory-built housing industry is currently in a prolonged slump with no near-term recovery. We are subject to volatility in operating results due to external factors beyond our control such as:

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the level and stability of interest rates;

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unemployment trends;

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the availability of retail home financing;

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the availability of wholesale financing;

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the availability of homeowners’ insurance in coastal markets;

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housing supply and demand;

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international tensions and hostilities;

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levels of consumer confidence;

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inventory levels;

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severe weather conditions; and

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regulatory and zoning matters.

Sales in our industry are also seasonal in nature, with sales of homes traditionally being stronger in the spring, summer and fall months. The cyclical and seasonal nature of our business causes our net sales and operating results to fluctuate and makes it difficult for management to forecast sales and profits in uncertain times. As a result of seasonal and cyclical downturns, results from any quarter should not be relied upon as being indicative of performance in future quarters.

If the current crisis continues for an extended period of time, or if the crisis worsens, we could face significant problems caused by a lack of liquidity.

We are currently experiencing an extreme crisis in the national and global economy generally as well as in the housing market specifically. This crisis has materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in certain cases has resulted in the unavailability of certain types of financing. Continued uncertainty in the credit and equity markets may negatively impact our ability to access additional financing at reasonable terms or at all, which may negatively affect our ability to conduct our operations or refinance our existing debt. Disruptions in the equity markets may also make it more difficult for us to raise capital through the issuance of additional shares of our common stock. In light of this economic crisis and the challenging business conditions that we are currently facing, we are focusing a significant amount of effort on cash generation and preservation. However, there can be no guarantee that these efforts or any other efforts we take to increase our liquidity will be successful. If the current economic crisis continues for an extended period of time, or if the crisis worsens, we may have insufficient liquidity to meet our financial obligations in the future.

Reduced availability of wholesale financing could have a material adverse effect on us.

We finance a portion of our new inventory at our retail sales centers through wholesale “floor plan” financing arrangements. Through these arrangements, financial institutions provide us with a loan for the purchase price of the home. Since the beginning of the industry downturn in 1999, several major floor plan lenders have exited the floor plan financing business. As of December 25, 2009, we had an agreement with Textron Financial Corporation for a $45.0 million floor plan facility expiring June 30, 2010. The advance rate for the facility is 90% of manufacturer’s invoice. This facility is used to finance a portion of the new home inventory at our retail sales centers and is secured by new home inventory and a portion of receivables from financial institutions. Our liability under this credit facility was $44.4 million as of December 25, 2009 .

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Extends the maturity date from June 30, 2010 to the earlier of June 30, 2012 or one month prior to the date of the first repurchase option for the holder of our convertible senior notes;

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Provides for a temporary protective advance exceeding the credit line;

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Pledges 100% of our equity of Standard Casualty Company to Textron; and

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Provides new financial covenants as follows:

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Maximum Loan-to-Collateral Coverage Ratio – 65% through the first quarter of fiscal 2011, 62% for the second quarter of fiscal 2011 and 60% for all quarters thereafter.

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We face increased competition from site builders of residential housing, which may reduce our net sales.

Our homes compete with homes that are built on site. The sales of site built homes are declining and new home inventory is increasing, which is resulting in more site built homes being available at lower prices. Appraisal values of site built homes are declining with greater availability of lower priced site built homes in the market. The increase in availability, along with the decreased price of site built homes, could make them more competitive with our homes. As a result, the sales of our homes could decrease, which could negatively impact our results of operations.

If CountryPlace’s customers are unable to repay their loans, CountryPlace may be adversely affected.

CountryPlace makes loans to borrowers that it believes are creditworthy based on its credit guidelines. However, the ability of these customers to repay their loans may be affected by a number of factors, including, but not limited to:

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national, regional and local economic conditions;

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changes or continued weakness in specific industry segments;

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natural hazard risks affecting the region in which the borrower resides; and

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employment, financial or life circumstances.

If customers do not repay their loans, CountryPlace may repossess or foreclose in order to liquidate its loan collateral and minimize losses. The homes and land securing the loan are subject to fluctuating market values, and proceeds realized from liquidating repossessed or foreclosed property are highly susceptible to adverse movements in collateral values. Recent and continued trends in general house price depreciation and increasing levels of unemployment may result in additional defaults and exacerbate actual loss severities upon collateral liquidation beyond those normally experienced by CountryPlace. CountryPlace has a significant concentration (approximately 43%) of its borrowers in Texas. To date, Texas has experienced less severe house price depreciation and more stable economic conditions than other parts of the country. However, these conditions may change in the future, and a downturn in economic conditions in Texas could severely affect the performance of CountryPlace’s loans. In addition, CountryPlace has loans in several states that are experiencing rapid house price depreciation, such as Florida, Arizona, and California. This may adversely affect the willingness of CountryPlace’s borrowers in these states to repay their loans and result in lower realized proceeds from liquidating repossessed or foreclosed property in these states.

Some of CountryPlace’s loans may be illiquid and their value difficult to determine or realize.

Some of the loans CountryPlace has originated or may originate in the future may not have a liquid market, or the market may contract rapidly in the future and the loans may become illiquid. Although CountryPlace offers loan products and prices its loans at levels that it believes are marketable at the time of credit application approval, market conditions for mortgage-related loans have deteriorated rapidly and significantly recently. CountryPlace’s ability to respond to changing market conditions is bound by credit approval and funding commitments it makes in advance of loan completion. In this environment, it is difficult to predict the types of loan products and characteristics that may be susceptible to future market curtailments and tailor our loan offerings accordingly. As a result, no assurances can be given that the market value of our loans will not decline in the future, or that a market will continue to exist for all of our loan products.

If CountryPlace is unable to develop sources of long-term funding it may be unable to resume originating chattel and non-conforming mortgage loans.

In the past, CountryPlace securitized loans as its primary source of long-term financing for chattel and non-conforming mortgages. CountryPlace used a warehouse borrowing facility to provide liquidity while aggregating loans prior to securitization. Because of recent significant and continued deterioration in the asset securitization market, CountryPlace is presently unable to rely on warehouse financing for liquidity and can no longer plan to securitize its loans. As a result, CountryPlace has ceased originating chattel and non-conforming mortgage loans for its own portfolio until it determines that a term financing market exists or can be developed for such products. At present, no such market exists, and no assurance can be given that one will develop, or that asset securitization will again be viable term financing method for CountryPlace. Further, no assurance can be given that warehouse financing will be available with economically favorable terms and conditions.

If interest rates increase, the market value of loans held for investment and loans available for sale may be adversely affected.

Fixed rate loans originated by CountryPlace prior to long-term financing or sale to investors are exposed to the risk of increased interest rates between the time of loan origination and term financing or sale. If interest rates for term financings or in the whole-loan market increase after loans are originated, the loans may suffer a decline in market value and our interest margin spreads could be reduced. From time to time, CountryPlace has entered into interest rate swap agreements to hedge its exposure to such interest rate risk. However, CountryPlace does not always maintain hedges or hedge the entire balances of all loans. Furthermore, interest rate swaps may be ineffective in hedging CountryPlace’s exposure to interest rate risk.

If CountryPlace is unable to adequately and timely service its loans, it may adversely affect its results of operations.

Although CountryPlace has originated loans since 1995, it has limited loan servicing and collections experience. In 2002, it implemented new systems to service and collect the portfolio of loans it originates. The management of CountryPlace has industry experience in managing, servicing and collecting loan portfolios; however, many borrowers require notices and reminders to keep their loans current and to prevent delinquencies and foreclosures. If there is a substantial increase in the delinquency rate that results from improper servicing or loan performance, the profitability and cash flow from the loan portfolio could be adversely affected and impair CountryPlace’s ability to continue to originate and sell loans to investors.

Increased prices and unavailability of raw materials could have a material adverse effect on us.

Our results of operations can be affected by the pricing and availability of raw materials. In fiscal 2009, average prices of our raw materials increased 5% compared to fiscal 2008, and in fiscal 2008, average raw materials prices decreased 2% compared to fiscal 2007. Although we attempt to increase the sales prices of our homes in response to higher materials costs, such increases typically lag behind the escalation of materials costs. Although lumber costs have moderated, three of the most important raw materials used in our operations - lumber, gypsum wallboard and insulation - have experienced significant price fluctuations in the past several fiscal years. Although we have not experienced any shortage of such building materials today, there can be no assurance that sufficient supplies of lumber, gypsum wallboard and insulation, as well as other materials, will continue to be available to us on terms we regard as satisfactory.

Our repurchase agreements with floor plan lenders could result in increased costs.

In accordance with customary practice in the manufactured housing industry, we enter into repurchase agreements with various financial institutions pursuant to which we agree, in the event of a default by an independent retailer in its obligation to these credit sources, to repurchase manufactured homes at declining prices over the term of the agreements, typically 12 to 18 months. The difference between the gross repurchase price and the price at which the repurchased manufactured homes can then be resold, which is typically at a discount to the original sale price, is an expense to us. Thus, if we were obligated to repurchase a large number of manufactured homes in the future, this would increase our costs, which could have a negative effect on our earnings. Tightened credit standards by lenders and more aggressive attempts to accelerate collection of outstanding accounts with retailers could result in defaults by retailers and consequently repurchase obligations on our part may be higher than has historically been the case. During the first nine months of fiscal 2010, fiscal 2009 and fiscal 2008, we did not incur any significant losses under these repurchase agreements.

We are dependent on our principal executive officer and the loss of his service could adversely affect us.

We are dependent to a significant extent upon the efforts of our principal executive officer, Larry H. Keener, Chairman of the Board and Chief Executive Officer. The loss of the services of our principal executive officer could have a material adverse effect upon our business, financial condition and results of operations. Our continued growth is also dependent upon our ability to attract and retain additional skilled management personnel.

We are controlled by three shareholders, who may determine the outcome of all elections.

Approximately 52% of our outstanding common stock is beneficially owned or controlled by the estate of Lee Posey (our former Chairman Emeritus), Sally Posey, and Capital Southwest Corporation and its affiliates. As a result, these shareholders, acting together, are able to determine the outcome of elections of our directors and thereby control the management of our business.

The manufactured housing industry is highly competitive and some of our competitors have stronger balance sheets and cash flow, as well as greater access to capital, than we do. As a result of these competitive conditions, we may not be able to sustain past levels of sales or profitability.

The manufactured housing industry is highly competitive, with relatively low barriers to entry. Manufactured and modular homes compete with new and existing site-built homes and to a lesser degree, with apartments, townhouses and condominiums. Competition exists at both the manufacturing and retail levels and is based primarily on price, product features, reputation for service and quality, retailer promotions, merchandising and terms of consumer financing. Some of our competitors have substantially greater financial, manufacturing, distribution and marketing resources than we do. As a result of these competitive conditions, we may not be able to sustain past levels of sales or profitability. In addition, one of our competitors provides the largest single source of retail financing in our industry and if they were to discontinue providing this financing, our operating results could be adversely affected.

If our retail customers are unable to obtain insurance for factory-built homes, our sales volume and results of operations may be adversely affected.

We sell our factory-built homes to retail customers located throughout the United States including in coastal areas, such as Florida. In the third quarter of fiscal 2010, approximately 15% of our net sales were generated in Florida. Some of our retail customers in these areas have experienced difficulty obtaining insurance for our factory-built homes due to adverse weather-related events in these areas, primarily hurricanes. If our retail customers face continued and increased difficulty in obtaining insurance for the homes we build, our sales volume and results of operations may be adversely affected.

We are concentrated geographically, which could harm our business.

In the third quarter of fiscal 2010, approximately 37% of our net sales were generated in Texas and approximately 15% of our net sales were generated in Florida. While Texas has lagged the national recession to a certain extent, a further decline in the economy of Texas could have a material adverse effect on our results of operations as well.

Item 3.

Quantitive and Qualitative Disclosure About Market Risk

We are exposed to market risks related to fluctuations in interest rates on our variable rate debt, which consists primarily of our liability under retail floor plan financing arrangements. For variable interest rate obligations, changes in interest rates generally do not impact fair market value, but do affect future earnings and cash flows. Assuming our level of variable rate debt as of December 25, 2009 is held constant, each one percentage point increase in interest rates occurring on the first day of the year would result in an increase in interest expense for the coming year of approximately $ 0.4 million.

CountryPlace is exposed to market risk related to the accessibility and terms of long-term financing of its loans. In the past, CountryPlace accessed the asset-based securities market to provide term financing of its chattel and non-conforming mortgage originations. At present, asset-backed and mortgage-backed securitization markets are effectively closed to CountryPlace and other manufactured housing lenders. Accordingly, it is unlikely that CountryPlace can continue to securitize its loan originations as a means to obtain long-term funding. This inability to continue to securitize its loans caused CountryPlace to discontinue origination of chattel loans and non-conforming mortgages until other sources of funding are available.

We are also exposed to market risks related to our fixed rate consumer loans receivable balances and our convertible senior notes. For fixed rate loans receivable, changes in interest rates do not change future earnings and cash flows from the receivables. However, changes in interest rates could affect the fair market value of the loan portfolio. Assuming CountryPlace’s level of loans held for investment as of December 31, 2009 is held constant, a 10% increase in average interest rates would increase the fair value of CountryPlace’s portfolio by approximately $1.9 million. For our fixed rate convertible senior notes, changes in interest rates could affect the fair market value of the related debt. Assuming the amount of convertible senior notes as of December 25, 2009 is held constant, a 10% decrease in interest rates would increase the fair value of the notes by approximately $0.5 million.

Item 4.

Controls and Procedures

Under the supervision and with the participation of our principal executive officer and principal financial officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange act of 1934) as of December 25, 2009. Based on that evaluation, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures were effective as of December 25, 2009.

There has been no change to our internal control over financial reporting during the quarter ended December 25, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. Other Information

Item 1.

Legal Proceedings – Not applicable

Item 2.

Unregistered Sales of Equity in Securities and Use of Proceeds – Not applicable

Item 3.

Defaults upon Senior Securities – Not applicable

Item 4.

Submission of Matters to a Vote of Security Holders – Not applicable

Item 5.

Other information – Not applicable

Item 6.

Exhibits

(a)

The following exhibits are filed as part of this report:


Exhibit No.		Description
31.1		Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: February 3, 2010


		Palm Harbor Homes, Inc.
		(Registrant)

By:		/s/ Kelly Tacke
		Kelly Tacke
		Executive Vice President and Chief Financial Officer

By:		/s/ Larry H. Keener
		Larry H. Keener
		Chairman of the Board and Chief Executive Officer

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company