CAVCO INDUSTRIES INC. - Quarter Report: 2009 December (Form 10-Q)

 

 

UNITED STATES
SECURITIES & EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission File Number 000-08822

Cavco Industries, Inc.

(Exact name of registrant as specified in its charter)

Delaware		56-2405642
(State or other jurisdiction of incorporation)		(IRS Employer Identification Number)

1001 North Central Avenue, Suite 800, Phoenix, Arizona 85004
(Address of principal executive offices) (Zip Code)

(602) 256-6263

(Former name, former address and former fiscal year, if changed since last year)

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 þ No o

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 o No o

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No þ

As of February 5, 2010, there were 6,541,684 shares of the registrant’s common stock, $.01 par value, issued and outstanding.

 

 

CAVCO INDUSTRIES, INC.
FORM 10-Q
December 31, 2009

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2009 (unaudited) and March 31, 2009			1
Consolidated Statements of Operations (unaudited) for the three and nine months ended December 31, 2009 and 2008			2
Consolidated Statements of Cash Flows (unaudited) for the nine months ended December 31, 2009 and 2008			3
Notes to Consolidated Financial Statements			4 – 11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12 – 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			18
Item 4. Controls and Procedures			19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			19
Item 1A. Risk Factors			19 – 20
Item 6. Exhibits			20
SIGNATURES			21
EXHIBIT INDEX			22
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements

CAVCO INDUSTRIES, INC.

(Dollars in thousands)

		December 31,				March 31,
		2009				2009
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	77,241			$	70,557
Short-term investments			496				4,464
Restricted cash			287				244
Accounts receivable			5,585				6,234
Inventories			15,245				9,333
Prepaid expenses and other current assets			7,754				3,676
Deferred income taxes			7,109				3,434
Total current assets			113,717				97,942
Property, plant and equipment, at cost:
Land			16,194				6,580
Buildings and improvements			20,608				7,355
Machinery and equipment			10,803				8,203
			47,605				22,138
Accumulated depreciation			(9,614	)			(9,279	)
			37,991				12,859
Inventory finance notes receivable, net			8,730				484
Goodwill and intangible assets, net			68,926				67,346
Total assets		$	229,364			$	178,631
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	1,870			$	739
Accrued liabilities			26,378				13,753
Total current liabilities			28,248				14,492
Deferred income taxes			20,278				16,099
Commitments and contingencies
Cavco Industries, Inc. stockholders’ equity
Preferred Stock, $.01 par value; 1,000,000 shares authorized; No shares issued or outstanding			—				—
Common Stock, $.01 par value; 20,000,000 shares authorized; Outstanding 6,541,684 and 6,506,843 shares, respectively			65				65
Additional paid-in capital			126,682				126,045
Retained earnings			19,288				21,930
Total Cavco Industries, Inc. stockholders’ equity			146,035				148,040
Noncontrolling interest			34,803				—
Total equity			180,838				148,040
Total liabilities and stockholders’ equity		$	229,364			$	178,631

See accompanying Notes to Consolidated Financial Statements

CAVCO INDUSTRIES, INC.

(Dollars in thousands, except per share amounts)

(Unaudited)

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Net sales		$	36,369			$	25,093			$	79,341			$	90,632
Cost of sales			33,106				22,440				71,836				80,090
Gross profit			3,263				2,653				7,505				10,542
Selling, general and administrative expenses			4,954				2,859				11,964				9,105
(Loss) income from operations			(1,691	)			(206	)			(4,459	)			1,437
Interest income			52				151				108				730
(Loss) income before income taxes			(1,639	)			(55	)			(4,351	)			2,167
Income tax benefit (expense)			471				165				1,512				(686	)
Net (loss) income			(1,168	)			110				(2,839	)			1,481
Less: net loss attributable to noncontrolling interest			(138	)			—				(197	)			—
Net (loss) income attributable to Cavco Industries, Inc. common stockholders		$	(1,030	)		$	110			$	(2,642	)		$	1,481
Net (loss) income per share attributable to Cavco Industries, Inc. common stockholders:
Basic		$	(0.16	)		$	0.02			$	(0.41	)		$	0.23
Diluted		$	(0.16	)		$	0.02			$	(0.41	)		$	0.22
Weighted average shares outstanding:
Basic			6,511,184				6,499,362				6,508,552				6,481,572
Diluted			6,511,184				6,693,418				6,508,552				6,695,654

See accompanying Notes to Consolidated Financial Statements

CAVCO INDUSTRIES, INC.

(Dollars in thousands)

(Unaudited)

		Nine Months Ended
		December 31,
		2009				2008
OPERATING ACTIVITIES
Net (loss) income		$	(2,839	)		$	1,481
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization			863				623
Deferred income taxes			1,157				1,531
Share-based compensation expense			270				156
Tax benefits from option exercises			317				329
Incremental tax benefits from option exercises			(277	)			(277	)
Gain on sale of property, plant and equipment			(10	)			(5	)
Changes in operating assets and liabilities:
Restricted cash			(43	)			239
Accounts receivable			2,746				2,397
Inventories			1,894				634
Prepaid expenses and other current assets			(4,070	)			(1,624	)
Inventory finance notes receivable			(8,246	)			—
Accounts payable and accrued liabilities			1,591				(5,110	)
Net cash (used in) provided by operating activities			(6,647	)			374
INVESTING ACTIVITIES
Purchases of property, plant and equipment			(178	)			(910	)
Proceeds from sale of property, plant and equipment			13				21
Purchase of Fleetwood Homes assets and certain liabilities			(25,799	)			—
Purchases of short-term investments			(1,488	)			—
Proceeds from sale of short-term investments			5,456				—
Net cash used in investing activities			(21,996	)			(889	)
FINANCING ACTIVITIES
Proceeds from exercise of stock options			50				769
Proceeds from issuance of Fleetwood Homes, Inc. stock			35,000				—
Incremental tax benefits from option exercises			277				277
Net cash provided by financing activities			35,327				1,046
Net increase in cash and cash equivalents			6,684				531
Cash and cash equivalents at beginning of period			70,557				73,610
Cash and cash equivalents at end of period		$	77,241			$	74,141
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes		$	—			$	45

See accompanying Notes to Consolidated Financial Statements

CAVCO INDUSTRIES, INC.

December 31, 2009
(Dollars in thousands, except per share data)
(Unaudited)

1. Basis of Presentation

The accompanying Consolidated Financial Statements of Cavco Industries, Inc., and its subsidiaries (collectively, the “Company” or “Cavco”), have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for Quarterly Reports on Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to such rules and regulations.

In the opinion of management, these statements include all the normal recurring adjustments necessary to fairly state the Company’s Consolidated Financial Statements. The Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the interim periods are not necessarily indicative of the results or cash flows for the full year. Certain prior period amounts have been reclassified to conform to current period classification. The Company suggests that these Consolidated Financial Statements be read in conjunction with the audited Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K filed with the SEC on May 21, 2009 (the “Form 10-K”).

In June 2009, the Financial Accounting Standards Board (“FASB”) approved the FASB Accounting Standards Codification (the “Codification” or “ASC”) as the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases issued by the SEC are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification has become non-authoritative. The Codification does not change GAAP, but instead introduces a new structure that combines existing authoritative standards into a comprehensive, topically organized online database. The Codification became effective for financial statements issued for interim and annual periods ending after September 15, 2009. The implementation of the Codification did not impact our financial statements or disclosures other than references to authoritative accounting literature are now made in accordance with the Codification.

As discussed further in Note 8, on July 15, 2009, the Company and an investment partner, Third Avenue Value Fund (“Third Avenue”), formed FH Holding, Inc. (“FH”), with an equity contribution of $35.0 million each for equal fifty-percent ownership interests. On July 21, 2009, FH entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Fleetwood Enterprises, Inc. (“Fleetwood”) and certain of its subsidiaries to purchase certain assets and liabilities of its manufactured housing business. On August 17, 2009 (the “Acquisition Date”), FH acquired seven operating manufactured housing plants and two idle factories. FH also purchased all related equipment, accounts receivable, inventory, certain trademarks and trade names, intellectual property, and specified contracts and leases; and assumed express warranty liabilities pertaining to certain of the previous operations. The purchase price of the transaction was $25.8 million and was paid in cash.

Effective August 20, 2009, the name of the Company’s new subsidiary was changed from FH Holding, Inc. to Fleetwood Homes, Inc. (“Fleetwood Homes”). The results of the new Fleetwood Homes operations have been included in the Consolidated Financial Statements and the related Notes since the Acquisition Date in accordance with the provisions of FASB ASC Topic 810 Consolidation. Management has determined that, although Fleetwood Homes is only fifty-percent owned by the Company, Cavco has a controlling interest and is required to fully consolidate the results of Fleetwood Homes. The primary factors that contributed to this determination were Cavco’s board control and management control of Fleetwood Homes. To that end, members of Cavco’s management hold two out of three total seats on the board of directors of Fleetwood Homes. In addition, as part of a management services agreement among Cavco, Fleetwood Homes and Third Avenue, Cavco provides all executive-level management services to Fleetwood Homes including, among other things, general management oversight, marketing and customer relations, accounting and cash management. Third Avenue’s financial interest in Fleetwood Homes is considered a “noncontrolling interest,” as determined by generally accepted accounting principles, and is designated as such in the Consolidated Financial Statements.

The Company’s inventory finance notes receivable balance consists of amounts loaned by the Company under special inventory financing programs for the benefit of our independent retailers’ home product inventory needs. Under the terms of these programs, the Company provides a significant portion of the funds that third-party financiers then lend to finance retail inventories of our products. In certain of these programs, the Company also assumes the risk of loss and therefore recorded an applicable loss reserve. While some manufacturers are unable or have elected not to participate in such inventory finance programs, the Company’s financial capabilities have enabled such sources of manufactured home inventory finance to be available to retailers for Cavco and Fleetwood Homes products.

The Company’s deferred tax assets primarily result from financial statement accruals not currently deductible for tax purposes, and its deferred tax liabilities primarily result from tax amortization of goodwill. The Company increased its deferred tax balances during the second fiscal quarter ended September 30, 2009 as a result of the Fleetwood Homes acquisition.

The Company complies with the provisions of FASB ASC 740, Income Taxes, which clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FASB ASC 740 also provides guidance on derecognizing, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has recorded an insignificant amount of unrecognized tax benefits and there would be an insignificant effect on the effective tax rate if all unrecognized tax benefits were recognized. The Company classifies interest and penalties related to unrecognized tax benefits in tax expense.

The income tax benefit recognized during the nine months ended December 31, 2009, is the result of current period taxable losses and the Company’s belief that it will be able to fully realize the benefits associated with its deferred tax assets. Income tax returns are filed in the U.S. federal jurisdiction and in several state jurisdictions. The Company is no longer subject to examination by the Internal Revenue Service (“IRS”) for years before fiscal year 2007. In June 2009, the Arizona Department of Revenue completed its audit for the fiscal years ended March 31, 2004 through March 31, 2006, which resulted in an insignificant overpayment refunded to the Company during the second quarter of fiscal year 2010. The Company is no longer subject to examinations by tax authorities in Arizona and California for years before fiscal year 2006. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to the Company’s financial position. The total amount of unrecognized tax benefit related to any particular tax position is not anticipated to change significantly within the next 12 months.

During the first quarter of fiscal year 2010, the Company moved its park model and vacation cabin manufacturing operations from its Specialty plant to a second production line at its Cavco West facility (formerly known as the Litchfield facility). Both of these plants are located in the metropolitan area of Phoenix, Arizona. This move provided greater capabilities for the production of park models, cabins, and other specialty buildings, created improved overall operational efficiencies at the Cavco West factory, and is serving to gradually reduce overhead expenses. The costs associated with this transition were not material. The Company is evaluating its options with respect to the idle Specialty plant, including the potential sale or lease of the facility.

Revenue from homes sold to independent retailers is generally recognized when the home is shipped, at which time title passes to the independent retailer, and collectability is reasonably assured. Homes sold to independent retailers are generally either paid for prior to shipment or financed by the independent retailer through standard industry arrangements, which include repurchase agreements. Manufacturing sales are reduced by a provision for estimated repurchase obligations (see Note 4). Revenue from homes sold under special inventory finance programs involving funds provided by the Company is deferred until such time that payment for the related loan receivable is received by the Company. Retail sales by Company-owned retail locations are recognized when funding is reasonably assured, the customer has entered into a legally binding sales contract, title has transferred and the home is accepted by the customer, delivered and permanently located at the customer’s site.

In September 2006, the FASB issued a pronouncement, now included in FASB ASC Topic 820, Fair Value Measurements and Disclosures, which defines the term “fair value”, establishes a framework for measuring fair value and enhances related disclosures. This guidance was effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued another pronouncement that delayed the effective date of the guidance to fiscal years beginning after November 15, 2008 for the majority of non-financial assets and non-financial liabilities. Therefore, effective April 1, 2008, the Company adopted the guidance for financial assets and liabilities and, effective April 1, 2009, the Company adopted the guidance for non-financial assets and non-financial liabilities, which had no effect on our consolidated financial position, results of operations or cash flows. As of December 31, 2009, the Company had no assets or liabilities required to be measured at fair value pursuant to FASB ASC 820.

In December 2007, the FASB issued its pronouncements regarding business combinations and noncontrolling interest in consolidated financial statements, currently contained in FASB ASC Topic 805, Business Combinations, and FASB ASC Topic 810, Consolidation, respectively, which significantly changed the financial accounting and reporting of business combination transactions and noncontrolling interests in consolidated financial statements. The pronouncements were effective for fiscal years beginning after December 15, 2008. Therefore, effective April 1, 2009, the Company adopted the new business combination and consolidation guidance, which affected the accounting for the Fleetwood Homes transaction that closed on August 17, 2009. As a result of the new business combinations pronouncement, $750 in acquisition-related transaction costs were required to be expensed as incurred in fiscal year 2010 rather than capitalized as part of the purchase price. Also, the differing treatment of these transaction-related costs for tax purposes affected the deferred income taxes recorded as of the Acquisition Date. In addition, the new noncontrolling interest guidance resulted in classifying Third Avenue’s financial interest in Fleetwood Homes as a “noncontrolling interest” in the equity section of the Balance Sheet rather than being presented as a mezzanine item between liabilities and equity.

In May 2009, the FASB issued its pronouncement regarding subsequent events intended to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The pronouncement, now included in FASB ASC Topic 855, Subsequent Events, requires disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, and is effective for interim and annual periods ending after June 15, 2009. The Company has evaluated subsequent events after the balance sheet date of December 31, 2009 through the date of issuance, February 9, 2010, and there were no disclosable subsequent events as of February 9, 2010.

For a description of other significant accounting policies used by the Company in the preparation of its Consolidated Financial Statements, please refer to Note 1 of the Notes to Consolidated Financial Statements in the Form 10-K.

2. Composition of Certain Financial Statement Captions

Inventories consist of the following (in thousands):

		December 31,				March 31,
		2009				2009
Raw materials		$	9,552			$	4,380
Work in process			2,898				1,570
Finished goods			2,795				3,383
		$	15,245			$	9,333

Accrued liabilities consist of the following (in thousands):

		December 31,				March 31,
		2009				2009
Estimated warranties		$	15,001			$	5,902
Salaries, wages and benefits			2,422				1,152
Deferred margin			1,725				390
Accrued insurance			1,510				1,467
Accrued volume rebates			1,277				863
Reserve for repurchase commitments			990				741
Customer deposits			851				899
Other (various)			2,602				2,339
		$	26,378			$	13,753

3. Warranties

Homes are warranted against manufacturing defects for a period of one year commencing at the time of sale to the retail customer. Estimated costs relating to home warranties are provided at the date of sale. The Company has recorded a liability for estimated future warranty costs relating to homes sold based upon management’s assessment of historical experience factors, an estimate of the amount of homes in the distribution channel and current industry trends. Activity in the liability for estimated warranties was as follows (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Balance at beginning of period		$	16,101			$	6,524			$	5,902			$	6,619
Liability assumed with Fleetwood Homes			—				—				11,184				—
Charged to costs and expenses			1,463				1,164				2,741				4,511
Payments and deductions			(2,563	)			(1,444	)			(4,826	)			(4,886	)
Balance at end of period		$	15,001			$	6,244			$	15,001			$	6,244

4. Contingencies

Repurchase Contingencies — The Company is contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for retailers of its products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to retailers in the event of default by the retailer. The risk of loss under these agreements is spread over numerous retailers. The price the Company is obligated to pay generally declines over the period of the agreement (generally 18 to 36 months) and is further reduced by the resale value of the homes. The maximum amount for which the Company was contingently liable under such agreements approximated $14,922 at December 31, 2009, without reduction for the resale value of the homes. The Company applies the Guarantees Topic of the FASB Accounting Standards Codification (FASB ASC 460) and FASB ASC 450-20, Loss Contingencies, to account for its liability for repurchase commitments. Under the provisions of FASB ASC 460, the Company records the greater of the estimated value of the non-contingent obligation or a contingent liability for each repurchase arrangement under the provisions of FASB ASC 450-20. The Company recorded an estimated liability of $990 at December 31, 2009 related to these commitments.

Letter of Credit — The Company maintains a $550 outstanding letter of credit with J.P. Morgan Chase Bank N.A. for any remaining claims under a self-funded workers’ compensation program, which concluded on September 30, 2006. There have been no draws against the letter of credit.

Legal Matters — The Company is party to certain legal proceedings that arise in the ordinary course and are incidental to its business. Certain of the claims pending against the Company in these proceedings allege, among other things, breach of contract and warranty, product liability and personal injury. Although litigation is inherently uncertain, based on past experience and the information currently available, management does not believe that the currently pending and threatened litigation or claims will have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations. However, future events or circumstances currently unknown to management will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on the Company’s consolidated financial position, liquidity or results of operations in any future reporting periods.

5. Stock-Based Compensation

The Company maintains stock incentive plans whereby stock option grants or awards of restricted stock may be made to certain officers, directors and key employees. The plans, which are shareholder approved, permit the award of up to 1,350,000 shares of the Company’s common stock, of which 414,626 shares were still available for grant at December 31, 2009. When options are exercised, new shares of the Company’s common stock are issued. Stock options may not be granted below 100% of the fair market value of the Company’s common stock at the date of grant and generally expire seven years from the date of grant. Stock options and awards of restricted stock vest over a three to five-year period. The stock incentive plans provide for accelerated vesting of stock options and removal of restrictions on restricted stock awards upon a change in control (as defined in the plans).

The following table summarizes the option activity within the Company’s stock-based compensation plans for the nine months ended December 31, 2009:

		Number
		of Shares
Outstanding at March 31, 2009			576,079
Granted			140,000
Exercised			(34,499	)
Outstanding at December 31, 2009			681,580
Exercisable at December 31, 2009			519,330

A summary of restricted stock activity within the Company’s share-based compensation plans and changes for the six months ended December 31, 2009 is as follows:

		Number
		of Shares
Nonvested at March 31, 2009			1,182
Vested			(342	)
Nonvested at December 31, 2009			840

6. Earnings Per Share

Basic earnings per share is computed based on the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted-average number of shares of common stock outstanding during the period increased by the weighted-average number of dilutive common stock equivalents outstanding during the period, using the treasury stock method. However, when a net loss exists, no potential common stock equivalents are included in the computation of the diluted per-share amount because the computation would result in an anti-dilutive per-share amount. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Net (loss) income attributable to Cavco Industries, Inc. common stockholders		$	(1,030	)		$	110			$	(2,642	)		$	1,481
Weighted average shares outstanding:
Basic			6,511,184				6,499,362				6,508,552				6,481,572
Common stock equivalents — treasury stock method			—				194,056				—				214,082
Diluted			6,511,184				6,693,418				6,508,552				6,695,654
Net (loss) income per share attributable to Cavco Industries, Inc. common stockholders:
Basic		$	(0.16	)		$	0.02			$	(0.41	)		$	0.23
Diluted		$	(0.16	)		$	0.02			$	(0.41	)		$	0.22

Anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the three months ended December 31, 2009 and 2008 were 222,406 and 13,424, respectively. There were 236,132 and 4,768 anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the nine months ended December 31, 2009 and 2008, respectively.

7. Discontinued Operations

The Company has plans to dispose of certain of its retail sales centers and these operations are considered discontinued retail operations. Included in the accompanying Consolidated Balance Sheet are finished goods inventories to be liquidated in conjunction with the disposal of these retail sales centers of approximately $275 at December 31, 2009. There were no operating losses for the three and nine months ended December 31, 2009 or 2008 for the stores identified for disposal as the costs related to the liquidation of inventory were consistent with management’s expectations of net realizable values. Net sales for the retail sales centers to be disposed of approximated $535 and $9 for the three month periods ended December 31, 2009 and 2008, respectively, and $1,063 and $1,617 for the nine month periods ended December 31, 2009 and 2008, respectively.

8. Acquisition

On July 15, 2009, the Company and an investment partner, Third Avenue, formed FH Holding, Inc. with an equity contribution of $35.0 million each for equal fifty-percent ownership interests. The Company entered into agreements with FH and Third Avenue related to the formation and operation of the new entity, including a shareholders’ agreement, a registration rights agreement, and a management services agreement.

On July 21, 2009, FH entered into a Purchase Agreement with Fleetwood Enterprises, Inc. and certain of its subsidiaries to purchase certain assets and liabilities of its manufactured housing business. On August 17, 2009, FH acquired seven operating manufactured housing plants and two idle factories. FH also purchased all related equipment, accounts receivable, inventory, certain trademarks and trade names, intellectual property, and specified contracts and leases; and assumed express warranty liabilities pertaining to certain of the previous operations. The operating manufactured housing plants are located in Nampa, Idaho; Woodburn, Oregon; Riverside, California; Waco, Texas; Lafayette, Tennessee; Douglas, Georgia; and Rocky Mount, Virginia. The idle plants are located in Woodland, California and Waco, Texas.

In addition, in accordance with the Purchase Agreement, the parties or their affiliates entered into a number of ancillary agreements related to the transaction, including: (1) a transition services agreement, pursuant to which Fleetwood will provide certain fee-based transition services to FH; and (2) a co-existence agreement describing the rights to certain of Fleetwood’s transferred intellectual property. These agreements were subsequently assigned by Fleetwood to unrelated third parties as part of its plan of reorganization pursuant to Chapter 11 of the United States Bankruptcy Code.

Effective August 20, 2009, the name of the Company’s new subsidiary was changed from FH Holding, Inc. to Fleetwood Homes, Inc. The results of the new Fleetwood Homes operations have been included in the Consolidated Financial Statements and the related Notes since the Acquisition Date in accordance with the provisions of FASB ASC Topic 810 Consolidation. Management has determined that, although Fleetwood Homes is only fifty-percent owned by the Company, Cavco has a controlling interest and is required to fully consolidate the results of Fleetwood Homes. The primary factors that contributed to this determination were Cavco’s board control and management control of Fleetwood Homes. To that end, members of Cavco’s management hold two out of three total seats on the board of directors of Fleetwood Homes. In addition, as part of the management services agreement, Cavco provides all executive-level management services to Fleetwood Homes including, among other things, general management oversight, marketing and customer relations, accounting and cash management. Third Avenue’s financial interest in Fleetwood Homes is considered a “noncontrolling interest,” as determined by generally accepted accounting principles, and is designated as such in the Consolidated Financial Statements.

The transaction expanded the Company’s geographic reach to a national level by adding factories serving the South, Mid-Atlantic and Northwest regions. The Company expects to achieve certain synergies and cost reductions by eliminating redundant processes and overhead.

The acquisition-date fair value of the cash consideration transferred totaled $25.8 million. Neither Fleetwood Homes nor the Company incurred debt in connection with the purchase or subsequent operations.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands). The provisional measurements of certain assets and liabilities, including intangible assets and deferred income tax assets and liabilities are subject to change.

		August 17,
		2009
Accounts receivable		$	2,097
Inventory			7,806
Property, plant and equipment			25,800
Deferred income tax assets			4,581
Intangible assets			1,600
Total identifiable assets acquired		$	41,884
Accounts payable and accrued liabilities		$	(12,115	)
Deferred income tax liabilities			(3,928	)
Total liabilities assumed			(16,043	)
Net identifiable assets acquired			25,841
Goodwill			—
Net assets acquired		$	25,841

Of the $1,600 of acquired intangible assets, $800 was provisionally assigned to trademarks and trade names, which are considered indefinite lived intangible assets and are not subject to amortization and $800 was provisionally assigned to customer-related intangible subject to a useful life of 15 years amortized on a straight-line basis.

The fair value of accounts receivables acquired is $2,097, with the gross contractual amount being $2,305. The Company determined that $208 would be uncollectible and reduced the purchase price by $208 per the terms of the purchase agreement.

The Company recognized $750 of acquisition related costs that were expensed as incurred. These costs were recognized in selling, general and administrative expenses on the consolidated statement of operations.

For the three months ended December 31, 2009, Fleetwood Homes recorded net sales of $20,707 and net loss of $276. For the period from the acquisition date through December 31, 2009, the amounts included in the Company’s consolidated statement of operations were $33,039 in net sales and a $394 net loss.

The Company is not required to present the pro-forma consolidated statements of operations as if Fleetwood Homes had been included in the consolidated results of the Company for the nine months ending December 31, 2009 and December 31, 2008 because the transaction did not meet any of the thresholds to be considered significant. Generally, the acquisition of a business is considered to be significant if any of the significance tests pursuant to Regulation S-X Rule 1-02(w) (i.e. the asset, income, or investment test) exceed the 20% level. In addition, disclosure of the Fleetwood Homes pro-forma data is impracticable because only certain Fleetwood Homes manufactured housing plants were purchased out of bankruptcy and reliable financial data suitable for this purpose was not available.

The foregoing description of the Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the Purchase Agreement, which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 23, 2009.

9. Stockholders’ Equity

The following table represents changes in equity, including stockholders’ equity attributable to Cavco’s stockholders and non-controlling interests (in thousands):

		Cavco Industries, Inc. Stockholders																Equity
										Additional								Attributable to
		Common Stock								paid-in				Retained				Noncontrolling
		Shares				Amount				capital				earnings				Interest				Total
Balance, March 31, 2009			6,506,843			$	65			$	126,045			$	21,930			$	—			$	148,040
Stock option exercises and associated tax benefits			34,841				—				367				—				—				367
Share-based compensation			—				—				270				—				—				270
Capital contribution			—				—				—				—				35,000				35,000
Net loss			—				—				—				(2,642	)			(197	)			(2,839	)
Balance, December 31, 2009			6,541,684			$	65			$	126,682			$	19,288			$	34,803			$	180,838

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

Introduction

The following should be read in conjunction with the Company’s Consolidated Financial Statements and the related Notes that appear in Item 1 of this Report. References to “Note” or “Notes” refer to the Notes to the Company’s Consolidated Financial Statements that appear in Item 1 of this Report.

Overview

Headquartered in Phoenix, Arizona, the Company designs and produces factory-built homes, which are sold to a network of retailers located throughout the continental United States. The products we manufacture are sold under a variety of brand names including “Cavco Homes” and “Fleetwood Homes.” We are the 2^nd largest producer of HUD code manufactured homes in the United States, based on wholesale shipments derived from 2008 total home production data of both Cavco and Fleetwood Homes published by Manufactured Home Merchandiser magazine. The Company is also a leading producer of park model homes and vacation cabins in the United States.

Recent Growth

As previously reported, the Company and an investment partner, Third Avenue Value Fund, acquired certain manufactured housing assets and liabilities of Fleetwood Enterprises, Inc. on August 17, 2009 through their jointly owned corporation, FH Holding, Inc., subsequently re-named Fleetwood Homes, Inc. Third Avenue Management is an investment advisor to Third Avenue Value Fund and is a principal stockholder of the Company.

Financial information for Fleetwood Homes is included in the Company’s Consolidated Financial Statements and the related Notes that appear in Item 1 of this report. Fleetwood Homes was formed by the Company and Third Avenue with each contributing $35.0 million in exchange for equal ownership interests. Although the Company holds a fifty-percent financial interest in Fleetwood Homes, its results of operations are required to be fully consolidated. Third Avenue’s financial interest in Fleetwood Homes is considered a “noncontrolling interest,” as determined by generally accepted accounting principles, and is designated as such in the Consolidated Financial Statements.

The transaction included seven manufactured housing plants located in Nampa, Idaho; Woodburn, Oregon; Riverside, California; Waco, Texas; Lafayette, Tennessee; Douglas, Georgia; and Rocky Mount, Virginia, and two idle factories located in Woodland, California and Waco, Texas. Also, Fleetwood Homes purchased all related equipment, accounts receivable, inventory, certain trademarks and trade names, intellectual property, and specified contracts and leases and assumed express warranty liabilities pertaining to certain of the previous operations. The purchase price of the transaction was $25.8 million and was paid in cash (see Note 8). Neither Fleetwood Homes nor the Company incurred debt in connection with the purchase or subsequent operations.

As of December 31, 2009, in addition to the seven factories listed above, the Company also continued to operate its two homebuilding facilities located in Phoenix, Arizona as well as its factory in Seguin, Texas. The integration of the Cavco and Fleetwood Homes operations has progressed well. Operating styles and management philosophies have been merged and the business has begun to operate as a cohesive organization. We are in the process of expanding our product offerings throughout the combined organization via the sharing of product designs and production methods. The supportive response by our customer base to the acquisition has been encouraging. We expect to realize some operating efficiency improvements as a result of our larger size and buying power although for a period of time, transition related expenses will mask a portion of such cost savings.

The combined cash and cash equivalents of the Company totaled approximately $77.2 million on December 31, 2009. We believe this level of capitalization should provide resources to the operations of the Company sufficient to endure depressed current market conditions and to establish a solid base for continued growth as conditions improve. We believe that the acquisition will be a positive long-term strategic move for both the Cavco and Fleetwood Homes brands.

Industry and Company Outlook

The manufactured housing industry and the Company continue to operate at low production and shipment levels. General economic challenges remain, including turmoil in the mortgage loan markets, overall housing sector weakness, and low consumer confidence levels.

Excess site-built home inventory has had an adverse impact on the contingency contract process, wherein potential homebuyers must sell their existing home in order to facilitate the purchase of a new manufactured home. In addition, many on-site home builders with high inventory levels are offering sizable incentives to homebuyers, creating added competition for the factory-built housing industry. Also, competition from sales of repossessed site-built homes has negatively impacted retail sales of new manufactured homes. As the site-built housing industry improves, these negative impacts on the manufactured housing industry may begin to decrease. The Manufactured Housing Institute recently reported that national home shipments for the industry as a whole were down 39.2% for calendar year 2009, compared to the prior year.

The Company has operated with a minimal backlog throughout fiscal years 2009 and 2010. The backlog of sales orders at December 31, 2009 varied among our ten factories, but in total was $2.5 million, which is less than one week of production.

Low margins on homes sold have characterized the current fiscal year to date, the result of low price-point homes becoming an increasingly larger part of the Company’s production mix. Margins are also impacted by production inefficiencies inherent in the current environment of reduced order rates. The Company has acted promptly to align its production levels with the reduced incoming order flow, but has had limited ability to manage product pricing to maintain historical gross margins. In addition, raw material prices have decreased only modestly in fiscal year 2010 compared to the last fiscal year. The resulting squeeze on gross margins continues to adversely affect the financial results of the Company.

In an effort to further streamline our cost structure in this environment, during the first quarter of fiscal year 2010, the Company moved its park model and vacation cabin manufacturing operations from its Specialty plant in Phoenix, Arizona to a second production line at its Cavco West facility (formerly known as the Litchfield facility), also located in the Phoenix area. This move provided greater capabilities for the production of park models, cabins, and other specialty buildings, created improved overall operational efficiencies at the Cavco West factory, and is serving to gradually reduce overhead expenses. The costs associated with this transition were immaterial. The Company is evaluating its options with respect to the idle Specialty plant, including the potential sale or lease of the facility.

Inventory financing for the industry’s wholesale distribution chain continues to be in short supply. Faced with illiquid capital markets in late calendar year 2008, each of the manufactured housing sector’s remaining inventory finance lenders initiated radical changes, including one company’s announcement to cease their lending activities entirely. The participation of others is subject to more restrictive terms that continue to evolve. In connection with certain of these programs, the Company provides a significant portion of the funds that third-party financiers then lend to finance retail inventories of our products. In certain of these programs, the Company also assumes the risk of loss and therefore recorded an applicable loss reserve. While some manufacturers are unable or have elected not to participate in such inventory finance programs, the Company’s financial capabilities have enabled such sources of manufactured home inventory finance to be available to retailers for Cavco and Fleetwood Homes products. We believe that our involvement in the wholesale financing of inventory purchases of Cavco and Fleetwood Homes product is quite helpful to retailers and allows our products to have continued exposure to potential homebuyers. This initiative coincides with ongoing efforts to expand our distribution base in all of our markets with existing and new retailers.

Consumer financing for the retail purchase of manufactured homes needs to become more available before marked emergence from current lows can occur. Restrictive underwriting guidelines, irregular appraisal processes, evolving regulatory processes, reductions in the number of and commitment by market lenders, and limited secondary market availability for manufactured home loans have combined as significant restraints to recovery in the industry. We are working alongside industry peers to encourage favorable legislative action on behalf of the mortgage financing needs of potential buyers of affordable homes in a number of ways, including our support of industry associations and their efforts in this regard. While some progress has been made in this area, such as increased loan limits for government backed home-only loans, a meaningful positive impact in the form of increased home orders at our factories has yet to be realized.

Meanwhile, we have intensified our efforts to identify niche market opportunities where our diverse product lines and custom building capabilities provide our company with a competitive advantage. Green construction processes and environmentally-friendly building materials have long been a part of our home-building process and their popularity is expected to grow. From bamboo flooring and tank-less water heaters to solar-powered homes, our products are diverse and tailored to a wide range of consumer interests. Innovation in housing design is a forte of the Company and we continue to introduce new models at competitive price points with expressive interiors and exteriors that complement home styles in the areas in which they are located.

Although times are difficult, we remain optimistic about our long-term prospects. We believe that we are located in attractive geographic markets, we have a diverse line of products and we maintain a conservative cost structure, which enables us to build great value into our homes. The Company has worked diligently throughout the past few years to maintain a strong financial position. Our debt-free balance sheet and solid position in cash and cash equivalents should help us to avoid the liquidity problems faced by many other companies and enable us to act effectively as market opportunities present themselves.

In January 2008, we announced a stock repurchase program. A total of $10 million may be used to repurchase our outstanding common stock. The repurchases may be made in the open market or in privately negotiated transactions in compliance with applicable state and federal securities laws and other legal requirements. The level of repurchase activity is subject to market conditions and other investment opportunities. The plan does not obligate us to acquire any particular amount of common stock and may be suspended or discontinued at any time. The repurchase program will be funded using our available cash. No repurchases have been made under this program to date.

Regulatory Developments

The American Housing Rescue and Foreclosure Prevention Act was enacted in 2008 to provide assistance by way of legislation for the housing industry, including the manufactured housing industry. Among other things, the Act provides for increased loan limits for chattel (home-only) loans to $69,678, up 43% from the previous limit of $48,600 set in 1992. All changes were implemented effective June 1, 2009. Chattel loans have languished in recent years and the increased loan limit is meant to broaden opportunities for prospective homeowners.

The American Recovery and Reinvestment Act of 2009 included an $8,000 tax credit for a limited period to homebuyers who have not owned a home in the previous 3 years, subject to other conditions. The Worker, Homeownership, and Business Assistance Act of 2009 extended and expanded the first-time homebuyer credit, authorized a $6,500 credit for long-time homeowners buying a new principal residence and raised the income limitations for homeowners claiming the credit. In addition to federal programs, certain states have provided incentives to promote the purchase of new homes. These and other regulatory changes may provide some stimulus going forward; however, given consumer concern about the state of the economy, we are cautious in developing expectations of any positive results from the new legislation.

Results of Operations — (Dollars in thousands, except average sales price amounts)

Three and nine months ended December 31, 2009 compared to 2008

Net Sales. Total net sales increased 44.9% to $36,369 for the three months ended December 31, 2009 compared to $25,093 for the comparable quarter last year. The third quarter 2010 results include the Fleetwood Homes operations which, as previously reported, were acquired during the second quarter of the current fiscal year. For the nine months ended December 31, 2009, net sales decreased 12.5% to $79,341 compared to $90,632 for the same period last year.

Net Loss. Net loss attributable to Cavco Stockholders for the three and nine months ended December 31, 2009 was $1,030 and $2,642, respectively, compared to net income of $110 and $1,481 for the comparable quarter and nine-month period last year, respectively.

Gross Profit. Gross profit as a percent of sales decreased to 9.0% for the three months ended December 31, 2009 from 10.6% for the same period last year and decreased to 9.5% for the nine months ended December 31, 2009 from 11.6% last year. The gross profit was negatively affected by lower margins typically associated with lower average selling prices. The average sales price per floor of $22,571 for the three months ended December 31, 2009 was 14.9% lower than the $26,535 average sales price per floor last year. For the nine months ended December 31, 2009, the average sales price per floor decreased 10.3% to $23,483 compared to $26,170 last year. The downward movement in the average wholesale selling price is primarily from currently depressed market conditions. The gross profit was also adversely affected by reduced production efficiencies inherent with low capacity utilization.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 73.3% or $2,095, to $4,954, or 13.6% of net sales, for the three months ended December 31, 2009 versus $2,859, or 11.4% of net sales, for the same period last year. For the nine month period ended December 31, 2009, selling, general and administrative expenses increased 31.4% or $2,859 to $11,964 from $9,105 last year. The increase relates primarily to $750 in non-recurring acquisition related costs for the purchase of the Fleetwood Homes assets and additional expenses due to the increased size of the consolidated Company.

Interest Income. Interest income represents income earned on short-term investments and unrestricted cash and cash equivalents held at various times throughout the period. Our interest income decreased 65.6% to $52 for the three months ended December 31, 2009 as compared to $151 during the prior year period. For the nine month period ended December 31, 2009, interest income decreased 85.2% to $108 from $730 last year. The decrease resulted from the effect of lower interest rates earned on our investments in U.S. Treasury money market funds and short-term bank certificates of deposit.

Income Taxes. The income tax benefit recognized during the three and nine months ended December 31, 2009 is the result of current period losses and the Company’s belief that it will be able to fully realize the benefits associated with its deferred tax assets. For the nine month periods ended December 31, 2009 and 2008, the effective income tax rate was approximately 35% and 32%, respectively.

Discontinued Retail Operations. The Company has plans to dispose of certain of its retail sales centers and these operations are considered discontinued retail operations (see Note 7).

Liquidity and Capital Resources

We believe that cash and cash equivalents and short-term investments at December 31, 2009, together with cash flow from operations, will be sufficient to fund our operations and provide for growth for the next twelve months and into the foreseeable future. Because of the Company’s strong cash position, the Company has not sought, nor does it have access to, external sources of liquidity, such as a credit facility; however, depending on our operating results and strategic opportunities, we may need to seek additional or alternative sources of financing. There can be no assurance that such financing would be available on satisfactory terms, if at all. If this financing were not available, it could be necessary for us to reevaluate our long-term operating plans to make more efficient use of our existing capital resources. The exact nature of any changes to our plans that would be considered depends on various factors, such as conditions in the factory-built housing industry and general economic conditions outside of our control.

Projected cash to be provided by or used in operations in the coming year is largely dependent on sales volume. Operating activities required the use of $6,647 of cash during the nine months ended December 31, 2009 as compared to providing $374 during the same period last year. Cash used in operating activities for the current period primarily funded operating losses before non-cash charges, inventory finance initiatives and an increase in prepaid expenses and other current assets, offset in part by a decrease in trade receivables and inventories and an increase in accounts payable and accrued liabilities. Cash generated by operating activities during the nine months ended December 31, 2008 was mainly the result of operating income before non-cash charges and lower trade receivables, offset in part by an increase in the Company’s prepaid expenses and other current assets and a decrease in trade payables, customer deposits and accrued salaries, wages and benefits.

Investing activities required the use of $21,996 of cash during the nine months ended December 31, 2009 compared to the use of $889 of cash during the same period last year. Cash used by investing activities in the current period comprised primarily of $25,799 for the acquisition of the Fleetwood Homes assets, offset in part by net proceeds of $3,968 from sales of short-term investments in bank certificates of deposit. During the nine months ended December 31, 2008, cash was used in investing activities mainly for the purchase of our previously leased retail lot located in Albuquerque, New Mexico, as well as normal recurring capital expenditures in all of our factories.

Financing activities provided $35,327 and $1,046 in cash during the nine months ended December 31, 2009 and 2008, respectively, resulting from proceeds in the current fiscal period from the issuance of Fleetwood Homes, Inc. stock to Third Avenue Value Fund for $35,000 with the remaining cash generated by financing activities in the current and prior year period associated with the issuance of common stock and related incremental tax benefits upon exercise of stock options under our stock incentive plans.

Critical Accounting Policies

In Part II, Item 7 of our Form 10-K, under the heading “Critical Accounting Policies”, we have provided a discussion of the critical accounting policies that management believes affect its more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

Recent Accounting Pronouncements

In September 2006, the FASB issued a pronouncement, now included in FASB ASC Topic 820, Fair Value Measurements and Disclosures, which defines the term “fair value”, establishes a framework for measuring fair value and enhances related disclosures. This guidance was effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued another pronouncement that delayed the effective date of the guidance to fiscal years beginning after November 15, 2008 for the majority of non-financial assets and non-financial liabilities. Therefore, effective April 1, 2008, the Company adopted the guidance for financial assets and liabilities and, effective April 1, 2009, the Company adopted the guidance for non-financial assets and non-financial liabilities, which had no effect on our consolidated financial position, results of operations or cash flows. As of December 31, 2009, the Company had no assets or liabilities required to be measured at fair value pursuant to FASB ASC 820.

In December 2007, the FASB issued its pronouncements regarding business combinations and noncontrolling interest in consolidated financial statements, currently contained in FASB ASC Topic 805, Business Combinations, and FASB ASC Topic 810, Consolidation, respectively, which significantly changed the financial accounting and reporting of business combination transactions and noncontrolling interests in consolidated financial statements. The pronouncements were effective for fiscal years beginning after December 15, 2008. Therefore, effective April 1, 2009, the Company adopted the new business combination and consolidation guidance, which affected the accounting for the Fleetwood Homes transaction that closed on August 17, 2009. As a result of the new business combinations pronouncement, $750 in acquisition-related transaction costs were required to be expensed as incurred in fiscal year 2010 rather than capitalized as part of the purchase price. Also, the differing treatment of these transaction-related costs for tax purposes affected the deferred income taxes recorded as of the Acquisition Date. In addition, the new noncontrolling interest guidance resulted in classifying Third Avenue’s financial interest in Fleetwood Homes as a “noncontrolling interest” in the equity section of the Balance Sheet rather than being presented as a mezzanine item between liabilities and equity.

In May 2009, the FASB issued its pronouncement regarding subsequent events intended to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The pronouncement, now included in FASB ASC Topic 855, Subsequent Events, requires disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, and is effective for interim and annual periods ending after June 15, 2009. The Company has evaluated subsequent events after the balance sheet date of December 31, 2009 through the date of issuance, February 9, 2010, and there were no disclosable subsequent events as of February 9, 2010.

In June 2009, the Financial Accounting Standards Board approved the FASB Accounting Standards Codification (the “Codification” or “ASC”) as the source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases issued by the SEC are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification has become non-authoritative. The Codification does not change GAAP, but instead introduces a new structure that combines existing authoritative standards into a comprehensive, topically organized online database. The Codification became effective for financial statements issued for interim and annual periods ending after September 15, 2009. The implementation of the Codification did not impact our financial statements or disclosures other than references to authoritative accounting literature are now made in accordance with the Codification.

From time to time, new accounting pronouncements are issued by the FASB or the SEC that are adopted by the Company as of the specified effective dates. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.

Forward-looking Statements

Forward-looking statements involve risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. In addition to the Risk Factors described in Part I, Item 1A. Risk Factors in our Form 10-K, factors that could affect our results and cause them to materially differ from those contained in the forward-looking statements include, but are not limited to:

	•		We operate in an industry that is currently experiencing a prolonged and significant downturn;
	•		Tightened credit standards and curtailed lending activity by retail lenders have contributed to a constrained consumer financing market, which may continue or could intensify;
	•		The availability of wholesale financing for industry retailers is limited due to a reduced number of floor plan lenders and reduced lending limits;
	•		Our operating results could be affected by geographic concentration and declining housing demand;
	•		We have incurred net losses in current and certain prior periods and there can be no assurance that we will generate income in the future;
	•		A write-off of all or part of our goodwill could adversely affect our operating results and net worth;
	•		The cyclical and seasonal nature of the manufactured housing industry causes our revenues and operating results to fluctuate, and we expect this cyclicality and seasonality to continue in the future;
	•		Our liquidity and ability to raise capital may be limited;
	•		We have contingent repurchase obligations related to wholesale financing provided to industry retailers;
	•		The manufactured housing industry is highly competitive, and competition may increase the adverse effects of industry conditions;
	•		If we are unable to establish or maintain relationships with independent retailers who sell our homes, our sales could decline;
	•		Our results of operations can be adversely affected by labor shortages and the pricing and availability of raw materials;
	•		If the manufactured housing industry is not able to secure favorable local zoning ordinances, our sales could decline and our business could be adversely affected;

	•		The loss of any of our executive officers could reduce our ability to execute our business strategy and could have a material adverse effect on our business and results of operations;
	•		Certain provisions of our organizational documents could delay or make more difficult a change in control of our Company;
	•		Volatility of stock price;
	•		Deterioration in economic conditions in general and continued turmoil in the credit markets could reduce our earnings and financial condition;
	•		We may not be able to successfully integrate Fleetwood Homes and any future acquisition or attain the anticipated benefits and Fleetwood Homes and other future acquisitions may adversely impact the Company’s liquidity; and
	•		Our participation in certain wholesale financing programs for the purchase of our products by industry retailers may expose us to additional risk of credit loss, which could adversely impact the Company’s liquidity and results of operations.

We may make additional written or oral forward-looking statements from time to time in filings with the SEC or in public news releases or statements. Such additional statements may include, but are not limited to, projections of revenues, income or loss, capital expenditures, acquisitions, plans for future operations, financing needs or plans, the impact of inflation and plans relating to our products or services, as well as assumptions relating to the foregoing.

Statements in this Report on Form 10-Q, including those set forth in this section, may be considered “forward looking statements” within the meaning of Section 21E of the Securities Act of 1934. These forward-looking statements are often identified by words such as “estimate,” “predict,” “hope,” “may,” “believe,” “anticipate,” “plan,” “expect,” “require,” “intend,” “assume,” and similar words.

Forward-looking statements contained in this Report on Form 10-Q speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. We do not intend to publicly update or revise any forward-looking statement contained in this Report on Form 10-Q or in any document incorporated herein by reference to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

Item 3.		Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss arising from adverse changes in market prices and interest rates. We may from time to time be exposed to interest rate risk inherent in our financial instruments, but are not currently subject to foreign currency or commodity price risk. We manage our exposure to these market risks through our regular operating and financing activities. We are not currently a party to any market risk sensitive instruments that could be reasonably expected to have a material effect on our financial condition or results of operations.

Our operations are interest rate sensitive. As overall manufactured housing demand can be adversely affected by increases in interest rates, a significant increase in wholesale or mortgage interest rates may negatively affect the ability of retailers and home buyers to secure financing. Higher interest rates could unfavorably impact our revenues, gross margins and net earnings. Our business is also sensitive to the effects of inflation, particularly with respect to raw material and transportation costs. We may not be able to offset inflation through increased selling prices.

Item 4.		Controls and Procedures

(a) Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were effective.

(b) Changes In Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) that occurred during the fiscal quarter ended December 31, 2009, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.		Legal Proceedings

Information regarding reportable legal proceedings is contained in Part I, Item 3, Legal Proceedings, in our Form 10-K. The following describes legal proceedings, if any, that became reportable during the quarter ended December 31, 2009, and, if applicable, amends and restates descriptions of previously reported legal proceedings in which there have been material developments during such quarter.

We are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. Certain of the claims pending against us in these proceedings allege, among other things, breach of contract and warranty, product liability and personal injury. Although litigation is inherently uncertain, based on past experience and the information currently available, management does not believe that the currently pending and threatened litigation or claims will have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations. However, future events or circumstances currently unknown to management will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.

Item 1A.		Risk Factors

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, Item 1A, Risk Factors, in our Form 10-K, which could materially affect our business, financial condition or future results. The risks described in this Report and in our Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

The risk factors included in our Form 10-K and our Form 10-Q for the quarterly periods ended September 30, 2009 and June 30, 2009 have not materially changed other than as follows:

(1)

With respect to an additional risk factor related to the acquisition of Fleetwood Homes and any potential acquisitions.

We may not be able to successfully integrate Fleetwood Homes and any future acquisition or attain the anticipated benefits and the acquisition of Fleetwood Homes and other future acquisitions may adversely impact the Company’s liquidity.

We recently completed the acquisition of certain manufactured housing assets and liabilities of Fleetwood Homes. We may also consider other strategic acquisitions if such opportunities arise. Any transactions that we consider may involve a number of risks including the diversion of our management’s attention from our existing business for those transactions that we complete, or possible adverse effects on our operating results during the integration process and on our liquidity. In addition, we may not be able to successfully or profitably integrate, operate, maintain and manage the newly acquired operations or employees of Fleetwood Homes or potential future acquisitions. We may not be able to maintain uniform standards, controls, procedures and policies, which may lead to operational inefficiencies.

(2)

With respect to an additional risk factor related to inventory finance programs and associated notes receivable and credit loss reserve.

Our participation in certain wholesale financing programs for the purchase of our products by industry retailers may expose us to additional risk of credit loss, which could adversely impact the Company’s liquidity and results of operations.

We are exposed to risks associated with the creditworthiness of certain customers and business partners, including independent retailers and inventory financing partners, many of whom may be adversely affected by the volatile conditions in the financial markets. These conditions could result in financial instability or other adverse effects at any of our customers or business partners. The consequences of such adverse effects could include delinquencies by retailers who purchase our product under special inventory financing initiatives and deterioration of collateral values. In addition, we may incur losses if our collateral cannot be recovered or liquidated at prices sufficient to recover recorded notes receivable balances. The realization of any of these factors may adversely affect our cash flow, profitability and financial condition.

Item 6.		Exhibits

See Exhibit Index.

All other items required under Part II are omitted because they are not applicable.

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.

EXHIBIT INDEX

Exhibit No.				Exhibit
	3.1	(1)		Restated Certificate of Incorporation
	3.2	(2)		Certificate of Amendment of Restated Certificate of Incorporation
	3.3	(3)		Amended and Restated Bylaws
	10.1	(4)		Asset Purchase Agreement dated July 2009 by and among FH Holding, Inc., Fleetwood Enterprises, Inc. and certain of its subsidiaries.
	31.1	*		Certification of the Principal Executive Officer Pursuant to Rule 13-14(a) under the Securities Exchange Act of 1934
	31.2	*		Certification of the Principal Financial Officer pursuant to Rule 13-14(a) under the Securities Exchange Act of 1934
	32	**		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002