Form 10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

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 August 9, 2010 – 22,980,093.

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 accounting principles generally accepted in the United States have been omitted. The condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended March 26, 2010 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 26, 2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The Company is realizing the benefits of the restructuring actions it has taken over the past year to reduce its operational overhead and right-size its manufacturing capacity to match current and expected consumer demand. First quarter revenues increased 2.3% over the prior year period despite operating 25 fewer retail locations and one less manufacturing facility. Factory-built homes sold increased 25.8% during the first quarter of fiscal 2011 as compared to the prior year period; however, over the same period, average selling prices declined as a result of lower appraisal values and consumer demand for smaller, less expensive homes. The Company responded with an expansive product line that offers a wide range of price points.

The Company’s financial services operations have continued to be consistent performers through this volatile environment. Standard has seen a steady growth in policies and outstanding renewal rates. CountryPlace had an increase of 51.6% in loan originations during the first quarter of fiscal 2011. CountryPlace is an approved Fannie Mae and Ginnie Mae seller servicer and is now originating loans for realtors and site-builders and is in line to originate FHA Title I home loans when Ginnie Mae lifts its moratorium.

The Company’s amended floor plan financing facility with Textron Financial Corporation continues to include required financial covenants, and from now through March 2011 will require certain reductions in the overall amounts borrowed under the facility. 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 that the combination of the Company’s 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. See Note 6.

Going forward, the Company will continue to focus on managing its business for liquidity; gaining market share; reducing selling, general and administrative expenses and controlling marginal costs despite the raw material increases and product shifts; and growing its financial services division. At the same time, the Company will pursue ways to further expand its product offering and reach new distribution channels to increase revenues.

The following tables summarize the Company’s available-for-sale investment securities as of June 25, 2010 and March 26, 2010 (in thousands):

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 June 25, 2010 (in thousands):

During the first quarter of fiscal 2011, none of the Company’s available-for-sale equity were determined to be other-than-temporarily impaired. During the first quarter of fiscal 2010, eleven of the Company’s available-for-sale equity securities with a total carrying value of $0.4 million were determined to be other-than-temporarily impaired and a realized loss of $0.1 million was recorded in the Company’s consolidated statements of operations.

The Company’s investments in marketable equity securities consist of investments in common stock of bank trust and insurance companies and public utility companies ($1.4 million of the total fair value and $3,000 of the total unrealized losses) and industrial companies ($1.5 million of the total fair value and $93,000 of the total unrealized losses). The Company has seen increases in the market value of its stock portfolio during the first quarter of fiscal 2011, 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 June 25, 2010.

The amortized cost and fair value of the Company’s investment securities at June 25, 2010, 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.

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 quarter of 2011 and 2010 were approximately $101,000 and $218,000, respectively. Gross losses were approximately $1,000 and $381,000 for the first quarter of fiscal 2011 and 2010, respectively.

The allowance for loan losses and related additions and deductions to the allowance during the three months ended June 30, 2010 and June 30, 2009 are as follows (in thousands):

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. Payments received on nonaccrual loans are accounted for on a cash basis, first to interest and then to principal. Upon determining that a nonaccrual loan is impaired, interest accrued and the uncollected receivable prior to identification of nonaccrual status is charged to the allowance for loan losses. At June 30, 2010, 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 June 30, 2010 and March 31, 2010 (dollars in thousands):

Beginning in fiscal 2009, CountryPlace modified loans to retain borrowers with good payment history. These modifications were considered to represent credit concessions due to borrowers’ loss of income and other repayment matters impacting these borrowers. For the quarters ended June 30, 2010 and June 30, 2009, CountryPlace modified the payments or rates for approximately $0.3 million and $0.1 million, respectively. These loans are not reflected as non-performing loans but as troubled debt restructurings.

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 June 30, 2010 and March 31, 2010:

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 June 30, 2010 or March 31, 2010. Management believes the allowance for loan losses is adequate to cover estimated losses at June 30, 2010.

The Company has an agreement with Textron Financial Corporation for a floor plan facility. 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 the assets of the Company, excluding CountryPlace assets. During the third quarter of fiscal 2009, Textron announced that they wanted to perform 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:

As of June 25, 2010, the Company was required to comply with a minimum inventory turn of not less than 2.75:1, and a maximum quarterly net loss (before taxes and restructuring charges) not to exceed $15 million, as defined by the agreement. The Company was in compliance with these financial covenants as of June 25, 2010 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.

Additionally, as of June 25, 2010, the Company was in an overadvanced position as it had a loan-to-collateral coverage ratio of 75% which exceeded the maximum requirement of 65% and resulted in its having an increased percentage of eligible inventory borrowed subject to the total credit line by $4.9 million. Although the agreement permits overadvances at the lender’s discretion, the Company is currently in discussions with Textron to approve this overadvance. There can be no guarantees that the Company will be successful in obtaining this approval. Textron could require the Company to repay the $4.9 million overadvance and declare an event of default and demand that the full amount of the facility be paid prior to maturity should the Company not make the payment.

The Company’s liability under this credit facility was $35.9 million as of June 25, 2010.

In fiscal 2005, 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 Notes are senior, unsecured obligations and rank equal in right of payment to all of the Company’s existing and future unsecured and senior indebtedness. 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 the Company’s common stock upon the satisfaction of certain conditions and contingencies. For the first quarters of fiscal 2011 and 2010, the effect of converting the senior notes to 2.1 million shares of common stock was anti-dilutive, and was, therefore, not considered in determining diluted earnings per share.

The liability component related to the convertible senior notes is being amortized through May, 2011 and is reflected in the condensed consolidated balance sheets as of June 25, 2010 and March 26, 2010 as follows (in thousands):

Interest expense for the first quarters of fiscal 2011 and 2010 totaled $0.9 million and $1.1 million, respectively, of which $0.7 million and $0.6 million, respectively, represented amortization of the debt discount at an effective interest rate of 9.11%.

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 servicing 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.

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 agreement provides an option for CountryPlace to exercise a subsequent commitment to borrow an additional $5.0 million, which expires on August 1, 2010. Currently, the Company does not expect CountryPlace to exercise the secondary commitment. 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%. The proceeds were 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.

The agreement also contains financial covenants that CountryPlace must comply with. CountryPlace shall not incur capital expenditures exceeding $300K in any fiscal year; and the maximum amount of the Virgo loan divided by the value of the collateral securing the loan shall not exceed the ratios below for more than three consecutive months during the applicable periods:

For the fiscal quarter ended June 25, 2010, CountryPlace was in compliance with the financial covenants with a loan-to-value ratio of 0.34:1.

As a precedent to Virgo making the loan, the parties also agreed to create a special purpose vehicle (SPV) to hold certain mortgage loans as collateral. Under the agreement, CountryPlace transferred its right, title, and interest to certain manufactured housing installment sales contracts and mortgages, along with certain related property, to a newly created subsidiary, CountryPlace Mortgage Holdings, LLC (“Mortgage SPV”). On January 29, 2010, the transferred sales contracts and mortgages consisted of $39.4 million of the overcollateralization on the 2005-1 and 2007-1 securitizations (Class X and R certificates), and $19.8 million of certain other mortgage loans held for investment that were not previously securitized.

The Mortgage SPV is consolidated on the Company’s financial statements as CountryPlace will continue to service the mortgage loans and collect the related service fee and residual income even after the termination of the loan facility, is obligated to repurchase or substitute contracts that materially adversely affect the Mortgage SPV’s interest, and will be solely liable for losses incurred by the Mortgage SPV.

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, subject to certain exceptions. These anti-dilution provisions expire four years after the issuance of the warrants. For the first quarter of fiscal 2011, the effect of converting the warrants to common stock, was anti-dilutive, and, therefore, was not considered in determining diluted earnings per share.

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 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. For the first quarters of fiscal 2011 and 2010, the effect of converting the warrants to common stock, was anti-dilutive, and, therefore, was not considered in determining diluted earnings per share. 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.

The difference between net loss and total comprehensive loss for the three months ended June 25, 2010 and June 26, 2009 is as follows (in thousands):

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.

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 June 25, 2010 and June 26, 2009 (in thousands):

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

In accordance with 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 had no level 3 securities at the end of the first quarter ended June 25, 2010.

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.

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

No significant transfers between Level 1 and Level 2 occurred during the three months ended June 25, 2010. The Company’s policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.

There were no assets measured at fair value on a non-recurring basis as of June 25, 2010.

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 months ended June 25, 2010 and June 26, 2009 (in thousands):

During the three month periods ended June 25, 2010 and June 26, 2009, 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 2011, as it is uncertain whether the Company is assured of realization of benefits associated with its net operating loss carryforwards.

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. As of June 25, 2010, the Company has granted options twice. During the first quarter of fiscal 2011, the Company granted options for 129,080 shares at an exercise price equal to the market price of the Company’s common stock as of the date of the grant or $2.76 per share and during the second quarter of fiscal 2010, the Company granted options for 1,217,040 shares at an exercise price of $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).

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 June 25, 2010, we operated eight manufacturing facilities that sell homes through 56 company-owned retail sales centers and builder locations and approximately 140 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.

We are realizing the benefits of the restructuring actions we have taken over the past year to reduce our operational overhead and right-size our manufacturing capacity to match current and expected consumer demand. First quarter revenues increased 2.3% over the prior year period despite operating 25 fewer retail locations and one less manufacturing facility. Factory-built homes sold increased 25.8% during the first quarter of fiscal 2011 as compared to the prior year period; however, over the same period, average selling prices declined as a result of lower appraisal values and consumer demand for smaller, less expensive homes. We responded with an expansive product line that offers a wide range of price points.

Our financial services operations have continued to be consistent performers through this volatile environment. Standard has seen a steady growth in policies and outstanding renewal rates. CountryPlace had an increase of 51.6% in loan originations during the first quarter of fiscal 2011. CountryPlace is an approved Fannie Mae and Ginnie Mae seller servicer and is now originating loans for realtors and site-builders and is in line to originate FHA Title I home loans when Ginnie Mae lifts its moratorium.

Our amended floor plan financing facility with Textron Financial Corporation continues to include required financial covenants, and from now through March 2011 will require certain reductions in the overall amounts borrowed under the facility. 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 that the combination of our 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. See Note 6.

Going forward, we will continue to focus on managing our business for liquidity; gaining market share; reducing selling, general and administrative expenses and controlling marginal costs despite the raw material increases and product shifts; and growing our financial services division. At the same time, we will pursue ways to further expand our product offering and reach new distribution channels to increase revenues.

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

The following table summarizes certain key sales statistics as of and for the three months ended June 25, 2010 and June 26, 2009.

Three Months Ended June 25, 2010 Compared to Three Months Ended June 26, 2009

Net Sales. Net sales increased 2.3% to $84.3 million in the first quarter of fiscal 2011 from $82.4 million in the first quarter of fiscal 2010. Factory-built housing net sales increased $2.3 million while financial services net revenues decreased $0.3 million. The increase in factory-built housing net sales is primarily due to a 25.8% increase in the total number of factory-built homes sold offset by decreases in the average selling prices of new manufactured and modular homes. Average selling prices declined as a result of depressed appraisal values, consumer demand for smaller, less

expensive homes, and a 91% increase in the number of single wide manufactured homes sold. The decrease in financial services net revenues reflects a decline in the average consumer loans balance from $190.3 million in the first quarter of fiscal 2010 to $175.0 million in the first quarter of fiscal 2011 resulting from the normal amortization and prepayment of loans.

Gross Profit. In the first quarter of fiscal 2011, gross profit decreased to 22.0% of net sales, or $18.6 million, from 23.4% of net sales, or $19.3 million in the first quarter of fiscal 2010. Gross profit for the factory-built housing segment decreased to 17.0% of net sales in the first quarter of fiscal 2011 from 18.4% in the first quarter of fiscal 2010. The decline in factory-built housing gross profit is primarily the result of a spike early in the quarter in raw material costs and consumer demand for lower priced homes, which have slightly lower margins. This decline was offset by an increase in the internalization rate from 74% in the first quarter of fiscal 2010 to 77% in the first quarter of fiscal 2011. Gross profit for the financial services segment decreased $0.1 million in the first quarter of fiscal 2011 due to decreased net revenues as explained above in the net sales section.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $20.5 million, or 24.3% of net sales, in the first quarter of fiscal 2011 from $24.4 million, or 29.6% of net sales, in the first quarter of fiscal 2010. Of this $3.8 million decrease, $4.4 million related to the factory-built housing segment and was offset by increases in general corporate expenses of $0.4 million and in financial services of $0.2 million. The decline in selling, general and administrative expenses for the factory-built housing segment resulted primarily from a reduction of approximately 25 less operating retail sales centers and one less manufacturing facility. The increase in general corporate expenses was primarily due to additional costs incurred for financial advisors to assist us in our restructuring plan.

Interest Expense. Interest expense decreased 15.3% to $4.2 million in the first quarter of fiscal 2011 from $5.0 million in the first quarter of fiscal 2010. Interest expense decreased by $0.8 million due to the warrants on the fiscal 2010 promissory notes and further by $0.3 million, $0.2 million and $0.2 million due to lower principal balances of convertible senior notes, securitized financings and floor plan payable, respectively. This decline was partially offset by interest expense on the new Virgo debt of $0.7 million.

Other Income. Other income increased 134.2% to $0.5 million in the first quarter of fiscal 2011 from $0.2 million in the first quarter of fiscal 2010. This increase is primarily due to an increase in income received from the sale of mortgages. CountryPlace sold 90 mortgages in the first quarter of fiscal 2011 as compared to 55 mortgages in the first quarter of fiscal 2010.

Income Tax Expense. Income tax expense was $0.1 million for the first quarter of fiscal 2011 as compared to $0.2 million for the first quarter of fiscal 2010. The expense recorded in these periods related to taxes payable in various states the Company does business. The Company recorded no federal income tax expense or benefit in these periods due to the availability of net operating loss carryforwards, which are not assured of realization.

Cash and cash equivalents totaled $16.9 million at June 25, 2010, down $9.8 million from $26.7 million at March 26, 2010. Net cash provided by operating activities was $19,000 in the first quarter of fiscal 2011 as compared to $10.9 million in the first quarter of fiscal 2010. The essentially flat net cash provided by operating activities in the first quarter of fiscal 2011 resulted from a decrease in inventories, loan sales, and extended payables and was offset by an increase in receivables and restricted cash as well as operating losses.

Net cash used in investing activities was $0.2 million in the first quarter of fiscal 2011 as compared to $4.5 million provided by investing activities in the first quarter of fiscal 2010. Net cash used in investing activities in the first quarter of fiscal 2011 was primarily the result of $0.2 million resulting from purchases of property, plant and equipment. Net cash provided by investing activities in the first quarter of fiscal 2010 was primarily the result of $3.7 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 used in financing activities was $9.7 million in the first quarter of fiscal 2011 as compared to $5.4 million in the first quarter of fiscal 2010. Net cash used in financing activities in the first quarter of fiscal 2011 was the result of $6.4 million used to pay down the floor plan facility, $4.0 million used for payments on securitized financings, $0.2 million used to repay the Virgo debt and is offset by $0.9 million in net proceeds from the construction lending line. Net cash used in the first quarter of fiscal 2010 was the result of $6.0 million used to pay down the floor plan facility and $5.2 million used for payments on securitized financings, which was offset by $4.5 million of proceeds received from notes payable to related parties and $1.2 million in proceeds from the construction lending line.

We have an agreement with Textron Financial Corporation for a floor plan facility. 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 our assets, excluding CountryPlace assets. During the third quarter of fiscal 2009, Textron announced that they wanted to perform an orderly liquidation of certain of their commercial finance businesses, including their housing inventory finance business.

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:

As of June 25, 2010, we were required to comply with a minimum inventory turn of not less than 2.75:1, and a maximum quarterly net loss (before taxes and restructuring charges) not to exceed $15 million, as defined by the agreement. We were in compliance with these financial covenants as of June 25, 2010 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.

Additionally, as of June 25, 2010, we were in an overadvanced position as we had a loan-to-collateral coverage ratio of 75% which exceeded the maximum requirement of 65% and resulted in our having an increased percentage of eligible inventory borrowed subject to the total credit line by $4.9 million. Although our agreement permits overadvances at the lender’s discretion, we are currently in discussions with Textron to approve this overadvance. There can be no guarantees that we will be successful in obtaining this approval. Textron could require us to repay the $4.9 million overadvance and declare an event of default and demand that the full amount of the facility be paid prior to maturity should we not make the payment.

In fiscal 2005, we 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 Notes are senior, unsecured obligations and rank equal in right of payment to all of our existing and future unsecured and senior indebtedness. The note holders may require us 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 first quarters of fiscal 2011 and 2010, the effect of converting the senior notes to 2.1 million shares of common stock, was anti-dilutive, and, therefore, was not considered in determining diluted earnings per share.

On July 12, 2005, we, through CountryPlace, completed our 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 our 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 servicing obligation under this securitized financing is guaranteed by us.

On March 22, 2007, we, through CountryPlace, completed our 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 our 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.

Upon completion of the 2007-1 securitization, CountryPlace extinguished its interest rate swap agreement on its variable rate debt which was used to hedge against an increase in variable interest rates. Upon extinguishment of the hedge, CountryPlace recorded a loss of $1.0 million, net of tax, for the change in fair value to other comprehensive income (loss), which is amortized to interest expense over the life of the loans.

CountryPlace currently originates conforming mortgage loans for sale to Fannie Mae and other investors. CountryPlace plans to retain the associated servicing rights. In addition, CountryPlace plans to continue holding its remaining portfolio of chattel, non-conforming mortgages for investment on a long-term basis. CountryPlace makes loans to borrowers that it believes are credit worthy based on its credit guidelines. However, originating and holding loans for investment subjects CountryPlace to more credit and interest rate risk than originating loans for resale. The ability of customers to repay their loans may be affected by a number of factors and if customers do not repay their loans, the profitability and cash flow of the loan portfolio would be adversely affected and we may incur additional loan losses.

At present, asset-backed and mortgage-backed securitization markets are effectively closed to CountryPlace and other manufactured housing lenders, and no assurances can be made that a securitization or other term financing market will be available to CountryPlace in the future. At such time in the future that any securitization or other term financing market re-emerges, CountryPlace intends to resume originating chattel and non-conforming mortgages for its investment portfolio. While we believe CountryPlace will be able to obtain liquidity through sales of conforming mortgages to Fannie Mae and other investors, no assurances can be made that these investors will continue to purchase loans secured by factory-built homes, or that CountryPlace will successfully complete transactions on acceptable terms and conditions, if at all.

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 agreement provides an option for CountryPlace to exercise a subsequent commitment to borrow an additional $5.0 million, which expires on August 1, 2010. Currently, the Company does not expect CountryPlace to exercise the secondary commitment. 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%. The proceeds were used by CountryPlace to repay the intercompany indebtedness to us and we expect to use the proceeds for working capital and general corporate purposes.

For the quarter ended June 30, 2010, CountryPlace was in compliance with the financial covenants with a loan-to-value ratio of 0.34:1.

As a precedent to Virgo making the loan, the parties also agreed to create a special purpose vehicle (SPV) to hold certain mortgage loans as collateral. Under the agreement, CountryPlace transferred its right, title, and interest to certain manufactured housing installment sales contracts and mortgages, along with certain related property, to a newly created subsidiary, CountryPlace Mortgage Holdings, LLC (“Mortgage SPV”). On January 29, 2010, the transferred sales contracts and mortgages consist of $39.4 million of the overcollateralization on the 2005-1 and 2007-1 securitizations (Class X and R certificates), and $19.8 million of certain other mortgage loans held for investment that were not previously securitized.

The Mortgage SPV is consolidated on our financial statements as CountryPlace will continue to service the mortgage loans and collect the related service fee and residual income even after the termination of the loan facility, is obligated to repurchase or substitute contracts that materially adversely affect the Mortgage SPV’s interest, and will be solely liable for losses incurred by the Mortgage SPV.

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 the Company from being diluted in the event that any of our convertible securities are converted into any other of our securities. 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, subject to certain exceptions. These anti-dilution provisions expire four years after the issuance of the warrants. For the first quarter of fiscal 2011, the effect of converting the warrants to common stock, was anti-dilutive, and, therefore, was not considered in determining diluted earnings per share.

Typically our wholesale customers pay within 15 days. During fiscal 2009, we began building barracks and other housing for the U.S. Government. These government contracts have longer payment periods, which have put pressure on our cash balance. In response to these cash pressures, 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 the stock on April 24, 2009. The Black-Scholes-Merton 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. For the first quarters of fiscal 2011 and 2010, the effect of converting the warrants to common stock, was anti-dilutive, and, therefore, was not considered in determining diluted earnings per share. 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.

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 that the combination of our 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.

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:

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

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 June 25, 2010, we had approximately $193 million of long-term indebtedness outstanding. In addition, under the Virgo credit agreement, CountryPlace is 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 decreased the number of operating manufacturing plants by ten and decreased the number of retail sales centers we own by 61 to align current and expected regional demand. 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.

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. Government agencies such as FHA, Fannie Mae and Freddie Mac, which are important insurers or 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:

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.

In the first quarter of fiscal 2011, approximately 44% of our net sales were generated in Texas and approximately 11% 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.

We may have insufficient cash available to repurchase our convertible senior notes if a significant portion of the notes are put to us on the repurchase dates.

As of June 25, 2010, we had $53.8 million in principal that remains outstanding under our 3.25% Convertible Senior Notes due 2024 (the Notes). Holders of the 2024 Notes may require us to repurchase all or a portion of their 2024 Notes at 100% of their principal amount plus accrued and unpaid interest for cash on May 15, 2011, May 15, 2014 and May 15, 2019. We cannot guarantee that we will have sufficient funds or will be able to arrange for additional financing to pay the principal amount or purchase price due. In that case, our failure to purchase any tendered notes would constitute an event of default under the indenture, thereby requiring the Notes to become immediately due and payable.

The ultimate realization of our deferred income tax assets is dependent upon generating future taxable income, executing tax planning strategies, and reversals of existing taxable temporary differences. We have recorded a valuation allowance against our deferred income tax assets. The valuation allowance will fluctuate as conditions change.

Our ability to utilize net operating losses (“NOLs”), built-in losses (“BILs”), and tax credit carryforwards to offset our future taxable income and/or to recover previously paid taxes would be limited if we were to undergo an “ownership change” within the meaning of Section 382 of the Internal Revenue Code (the “IRC”). In general, an “ownership change” occurs whenever the percentage of the stock of a corporation owned by “5-percent shareholders” (within the meaning of Section 382 of the IRC) increases by more than 50 percentage points over the lowest percentage of the stock of such corporation owned by such “5-percent shareholders” at any time over the testing period.

An ownership change under Section 382 of the IRC would establish an annual limitation to the amount of NOLs, BILs, and tax credit carryforwards we could utilize to offset our taxable income in any single year. The application of these limitations might prevent full utilization of the deferred tax assets attributable to our NOLs, BILs, and tax credit carryforwards. We have not experienced an ownership change as defined by Section 382. To preserve our ability to utilize NOLs, BILs, and other tax benefits in the future without a Section 382 limitation, we adopted a shareholder rights plan, which is triggered upon certain transfers of our securities. There can be no assurance that we will not undergo an ownership change within the meaning of Section 382.

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.

Natural disasters and severe weather conditions could delay deliveries, increase costs, and decrease demand for new homes in affected areas.

Our homebuilding operations are located in many areas that are subject to natural disasters and severe weather. The occurrence of natural disasters or severe weather conditions can delay new home deliveries, increase costs by damaging inventories, reduce the availability of materials, and negatively impact the demand for new homes in affected areas. Furthermore, if our insurance does not fully cover business interruptions or losses resulting from these events, our earnings, liquidity, or capital resources could be adversely affected.

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:

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. In the past, CountryPlace entered into interest rate swap agreements to hedge its exposure to such interest rate risk from prior to arranging term-financing such as securitization. However, CountryPlace does not currently hedge the interest rate risk for mortgage loans in various stages of origination prior to sale, except to the extent that it enters into forward delivery commitments with investors for certain mortgages that are executed but for which construction is incomplete.

As a result of the Company restructuring its retail operations, there are substantially fewer retail sales centers than in fiscal 2009 to assist CountryPlace in disposing of repossessed homes. The restructurings have resulted in the Company no longer having retail sales centers in several geographic areas in which CountryPlace has loans outstanding. In these areas, CountryPlace must now liquidate repossessed homes through independent manufactured home dealers and brokers at wholesale prices. This is likely to reduce the defaulted loan amounts recovered versus retail sales through the Company’s sales centers. In addition, house prices in general may continue to decline and adversely affect the prices realized by CountryPlace for repossessed homes. We believe that our reserves are adequate to cover these defaulted loans but no assurances can be made.

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 2010, average prices of our raw materials increased 4% compared to fiscal 2009, and in fiscal 2009, average raw materials prices increased 5% compared to fiscal 2008. 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 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 51% of our outstanding common stock is beneficially owned or controlled by Sally Posey Trust, 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 first quarter of fiscal 2011, approximately 11% 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.

There have been no material changes from the information provided in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of the Company’s Annual Report on Form 10-K for the year ended March 26, 2010.

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 June 25, 2010. 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 June 25, 2010.

There has been no change to our internal control over financial reporting during the quarter ended June 25, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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.


		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


	June 25, 2010			March 26, 2010
	(Unaudited)
Assets
Cash and cash equivalents	$	16,857		$	26,705
Restricted cash		18,267			16,330
Investments		16,113			16,041
Trade receivables		20,870			18,533
Consumer loans receivable, net		173,778			176,143
Inventories		55,964			60,303
Assets held for sale		6,538			6,538
Prepaid expenses and other assets		9,939			9,909
Property, plant and equipment, net		26,557			27,251

Total assets	$	344,883		$	357,753


Liabilities and shareholders’ equity
Accounts payable	$	24,792		$	20,713
Accrued liabilities		37,590			39,987
Floor plan payable		35,867			42,249
Construction lending line		4,752			3,890
Securitized financings		118,490			122,494
Virgo debt, net		18,360			18,518
Convertible senior notes, net		51,194			50,486

Total liabilities		291,045			298,337

Commitments and contingencies

Shareholders’ equity:
Common stock, $.01 par value		239			239
Additional paid-in capital		70,030			69,919
Retained (deficit) earnings		(2,337	)		3,389
Treasury shares		(13,949	)		(13,949	)
Accumulated other comprehensive income (loss)		(145	)		(182	)

Total shareholders’ equity		53,838			59,416

Total liabilities and shareholders’ equity	$	344,883		$	357,753


	Three Months Ended
	June 25, 2010			June 26, 2009
Net sales	$	84,345		$	82,421
Cost of sales		65,752			63,097
Selling, general and administrative expenses		20,547			24,378

Loss from operations		(1,954	)		(5,054	)

Interest expense		(4,204	)		(4,964	)
Other income		534			228

Loss before income taxes		(5,624	)		(9,790	)

Income tax expense		(102	)		(188	)


Net loss	$	(5,726	)	$	(9,978	)


Net loss per common share – basic and diluted	$	(0.25	)	$	(0.44	)


Weighted average common shares outstanding – basic and diluted		22,980			22,875


	Three Months Ended
	June 25, 2010			June 26, 2009
Operating Activities
Net loss	$	(5,726	)	$	(9,978	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1,286			1,456
Provision for credit losses		949			837
Non-cash interest expense		708			1,393
(Gain) loss on disposition of assets		(13	)		416
Gain on sale of loans		(517	)		(40	)
Provision for stock based compensation		111			—
(Gain) loss on sale of investments		(100	)		163
Impairment of investment securities		—			135
Changes in operating assets and liabilities:
Restricted cash		(1,937	)		102
Trade receivables		(2,337	)		(1,677	)
Consumer loans originated		(12,207	)		(8,821	)
Principal payments on consumer loans originated		3,821			3,795
Proceeds from sales of consumer loans		10,319			7,145
Inventories		4,339			8,353
Prepaid expenses and other assets		(350	)		1,773
Accounts payable and accrued expenses		1,673			5,824

Net cash provided by operating activities		19			10,876

Investing Activities
Net (purchases) disposals of property, plant and equipment		(236	)		803
Purchases of investments		(799	)		(856	)
Sales of investments		850			4,534

Net cash (used in) provided by investing activities		(185	)		4,481

Financing Activities
Net payments on floor plan payable		(6,382	)		(5,965	)
Net proceeds from construction lending line		862			1,210
Proceeds from notes payable to related parties		—			4,500
Payments on Virgo debt		(158	)		—
Payments on securitized financings		(4,004	)		(5,162	)

Net cash used in financing activities		(9,682	)		(5,417	)
Net (decrease) increase in cash and cash equivalents		(9,848	)		9,940
Cash and cash equivalents at beginning of period		26,705			12,374

Cash and cash equivalents at end of period	$	16,857		$	22,314


	June 25, 2010		March 26, 2010
Raw materials	$	5,348	$	4,927
Work in process		3,023		4,085
Finished goods at factory		959		1,324
Finished goods at retail		46,634		49,967

	$	55,964	$	60,303


	June 25, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury and Government Agencies	$	1,474	$	76	$	—		$	1,550
Mortgage-backed securities		5,326		281		—			5,607
States and political subdivisions		1,240		17		(2	)		1,255
Corporate debt securities		4,452		316		—			4,768
Marketable equity securities		2,883		146		(96	)		2,933

Total	$	15,375	$	836	$	(98	)	$	16,113


	March 26, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury and Government Agencies	$	1,724	$	69	$	—		$	1,793
Mortgage-backed securities		5,232		268		(4	)		5,496
States and political subdivisions		1,240		17		(7	)		1,250
Corporate debt securities		4,455		325		—			4,780
Marketable equity securities		2,674		97		(49	)		2,722

Total	$	15,325	$	776	$	(60	)	$	16,041


	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	$	537	$	(2	)	$	—	$	—		$	537	$	(2	)
Marketable equity securities		832		(93	)		99		(3	)		931		(96	)

Total	$	1,369	$	(95	)	$	99	$	(3	)	$	1,468	$	(98	)


	Amortized Cost		Fair Value
Due in less than one year	$	974	$	990
Due after one year through five years		7,158		7,620
Due after five years		4,360		4,570
Marketable equity securities		2,883		2,933

Total investment securities available-for-sale	$	15,375	$	16,113


	June 25, 2010		March 26, 2010
Cash pledged as collateral for outstanding insurance programs and surety bonds	$	9,917	$	9,917
Cash related to customer deposits held in trust accounts		3,568		2,496
Cash related to CountryPlace customers’ principal and interest payments on the loans that are securitized		4,782		3,917

	$	18,267	$	16,330


	June 30, 2010			March 31, 2010
Consumer loans receivable held for investment	$	174,929		$	179,549
Consumer loans receivable held for sale		2,033			558
Construction advances on non-conforming mortgages		4,505			4,148
Deferred financing costs, net		(4,799	)		(5,096	)
Allowance for loan losses		(2,890	)		(3,016	)

Consumer loans receivable, net	$	173,778		$	176,143


	Three Months Ended
	June 30, 2010			June 30, 2009
Allowance for loan losses, beginning of period	$	3,016		$	5,800
Provision for credit losses		949			837
Loans charged off, net of recoveries		(1,075	)		(918	)

Allowance for loan losses, end of period	$	2,890		$	5,719


	June 30, 2010			March 31, 2010
Non-performing loans:
Loans accounted for on a nonaccrual basis	$	930		$	1,219
Accruing loans past due 90 days or more		195			594

Total nonaccrual and 90 days past due loans		1,125			1,813
Percentage of total loans		0.64	%		1.01	%
Other non-performing assets ⁽¹⁾		1,650			1,566
Troubled debt restructurings		829			1,268


	June 30, 2010		March 31, 2010
Texas	43.4	%	43.2	%
Arizona	6.4		6.3
Florida	6.7		6.6
California	2.0		2.1


	June 25, 2010			March 26, 2010
Principal amount of the liability component	$	53,845		$	53,845
Unamortized debt discount		(2,651	)		(3,359	)

Convertible senior notes, net	$	51,194		$	50,486


Time Period		Maximum Loan-to-Value Ratio
Twelve Months Ended 2/1/2011		0.36:1
Twelve Months Ended 2/1/2012		0.35:1
Twelve Months Ended 2/1/2013		0.34:1
Twelve Months Ended 2/1/2014		0.33:1


	June 25, 2010				March 26, 2010
	Book Value		Estimated Fair Value		Book Value		Estimated Fair Value
Cash and cash equivalents ⁽¹⁾	$	16,857	$	16,857	$	26,705	$	26,705
Restricted cash ⁽¹⁾		18,267		18,267		16,330		16,330
Investments ⁽²⁾		16,113		16,113		16,041		16,041
Consumer loans receivables ⁽³⁾		176,962		171,931		180,107		175,934
Floor plan payable ⁽¹⁾		35,867		35,867		42,249		42,249
Construction lending line ⁽¹⁾		4,752		4,752		3,890		3,890
Convertible senior notes, net ⁽²⁾		51,194		38,768		50,486		36,076
Securitized financings ⁽⁴⁾		118,490		117,580		122,494		120,019
Virgo debt, net ⁽⁵⁾		18,360		17,790		18,518		18,213
⁽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 June 30, 2010. ⁽⁴⁾ The fair value is estimated using recent asset-backed and commercial real estate securities. ⁽⁵⁾ The fair value is estimated based on the remaining cash flows discounted at the implied yield when the transaction was closed.


	As of June 25, 2010
	Total		Level 1		Level 2		Level 3
Securities issued by the U.S. Treasury and Government	$	1,550	$	—	$	1,550	$	—
Mortgage-backed securities ⁽¹⁾		5,607		—		5,607		—
Securities issued by states and political subdivisions ⁽¹⁾		1,255		—		1,255		—
Corporate debt securities ⁽¹⁾		4,768		—		4,768		—
Marketable equity securities ⁽¹⁾		2,933		2,933		—		—
Other non-performing assets ⁽²⁾		1,650		—		1,650		—

	As of March 26, 2010
	Total		Level 1		Level 2		Level 3
Securities issued by the U.S. Treasury and Government	$	1,793	$	—	$	1,793	$	—
Mortgage-backed securities ⁽¹⁾		5,496		—		5,496		—
Securities issued by states and political subdivisions ⁽¹⁾		1,249		—		1,249		—
Corporate debt securities ⁽¹⁾		4,780		—		4,780		—
Marketable equity securities ⁽¹⁾		2,722		2,722		—		—
Other non-performing assets ⁽²⁾		1,566		—		1,566		—
⁽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.


	Three Months Ended
	June 25, 2010			June 26, 2009
Net Sales
Factory-built housing	$	75,646		$	73,390
Financial services		8,699			9,031

	$	84,345		$	82,421

Income (loss) from operations
Factory-built housing	$	(279	)	$	(4,014	)
Financial services		3,529			3,850
General corporate expenses		(5,204	)		(4,890	)

	$	(1,954	)	$	(5,054	)

Interest expense	$	(4,204	)	$	(4,964	)
Other income		534			228

Loss before income taxes	$	(5,624	)	$	(9,790	)


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