UNITED STATES
SECURITIES AND 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 No.)
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 o No þ

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 þ 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 the 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 (Do not check if a smaller reporting company)		Smaller reporting company o

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 November 7, 2011, there were 6,890,196 shares of the registrant’s common stock, $.01 par value, issued and outstanding.

 

 

CAVCO INDUSTRIES, INC.
FORM 10-Q
September 30, 2011

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2011 (unaudited) and March 31, 2011			1
Consolidated Statements of Operations (unaudited) for the three and six months ended September 30, 2011 and 2010			2
Consolidated Statements of Cash Flows (unaudited) for the six months ended September 30, 2011 and 2010			3
Notes to Consolidated Financial Statements			4 - 32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			33 - 42
Item 3. Quantitative and Qualitative Disclosures About Market Risk			42
Item 4. Controls and Procedures			43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			44
Item 1A. Risk Factors			44
Item 5. Other Information			44
Item 6. Exhibits			44
SIGNATURES			45
EXHIBIT INDEX			46
Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements

CAVCO INDUSTRIES, INC.

(Dollars in thousands)

		September 30,				March 31,
		2011				2011
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	35,219			$	76,513
Restricted cash, current			7,067				436
Accounts receivable, net			13,236				6,571
Short term investments			5,608				—
Current portion of consumer loans receivable, net			20,260				—
Inventories			63,848				16,036
Assets held for sale			8,326				—
Prepaid expenses and other current assets			6,582				2,495
Debtor-in-possession note receivable			—				40,060
Deferred income taxes			5,479				4,720
Total current assets			165,625				146,831
Restricted cash			453				—
Investments			10,834				—
Consumer loans receivable, net			103,531				—
Inventory finance receivable, net			19,468				17,759
Property, plant and equipment, net			50,510				35,993
Goodwill and other intangibles, net			82,467				68,859
Total assets		$	432,888			$	269,442
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	10,802			$	3,495
Accrued liabilities			61,505				26,245
Construction lending line			4,528				—
Current portion of securitized financings			11,539				—
Noncontrolling interest note payable			—				36,000
Total current liabilities			88,374				65,740
Securitized financings			84,599				—
Deferred income taxes			11,772				17,214
Redeemable noncontrolling interest			83,804				35,819
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 6,890,196 and 6,817,606 shares, respectively			69				68
Additional paid-in capital			131,114				129,211
Retained earnings			33,297				21,390
Accumulated other comprehensive loss			(141	)			—
Total stockholders’ equity			164,339				150,669
Total liabilities, redeemable noncontrolling interest and stockholders’ equity		$	432,888			$	269,442

See accompanying Notes to Consolidated Financial Statements

CAVCO INDUSTRIES, INC.

(Dollars in thousands, except per share amounts)

(Unaudited)

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Net sales		$	130,008			$	45,888			$	228,989			$	93,393
Cost of sales			101,780				38,709				184,601				79,773
Gross profit			28,228				7,179				44,388				13,620
Selling, general and administrative expenses			21,588				5,489				38,578				10,725
Income from operations			6,640				1,690				5,810				2,895
Interest expense			(1,916	)			—				(3,377	)			—
Other income			255				266				615				446
Gain on bargain purchase			—				—				22,009				—
Income before income taxes			4,979				1,956				25,057				3,341
Income tax expense			(1,807	)			(757	)			(1,197	)			(1,292	)
Net income			3,172				1,199				23,860				2,049
Less: net income attributable to noncontrolling interest			1,487				519				11,953				851
Net income attributable to Cavco common stockholders		$	1,685			$	680			$	11,907			$	1,198
Net income per share attributable to Cavco common stockholders:
Basic		$	0.24			$	0.10			$	1.73			$	0.18
Diluted		$	0.24			$	0.10			$	1.72			$	0.18
Weighted average shares outstanding:
Basic			6,890,122				6,541,951				6,864,427				6,541,846
Diluted			6,937,807				6,747,116				6,921,458				6,763,020

See accompanying Notes to Consolidated Financial Statements

CAVCO INDUSTRIES, INC.

(Dollars in thousands)

(Unaudited)

		Six Months Ended
		September 30,
		2011				2010
OPERATING ACTIVITIES
Net income		$	23,860			$	2,049
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			2,751				679
Provision for credit losses			43				141
Deferred income taxes			(906	)			478
Share-based compensation expense			456				327
Non-cash interest income			(968	)			—
Non-cash interest expense			329				—
(Gain) loss on sale of property, plant and equipment			(53	)			237
Gain on bargain purchase			(22,009	)			—
Gain on sale of loans			(2,816	)			—
Gain on sale of investments			(21	)			—
Changes in operating assets and liabilities:
Restricted cash			(1,160	)			142
Accounts receivable			(3,549	)			868
Consumer loans originated			(36,198	)			—
Principal payments on consumer loans originated			5,129				—
Proceeds from sales of consumer loans			36,981				—
Inventories			(583	)			(76	)
Prepaid expenses and other current assets			(1,306	)			726
Inventory finance receivable			(1,725	)			(8,413	)
Accounts payable and accrued liabilities			13,320				(716	)
Net cash provided by (used in) operating activities			11,575				(3,558	)
INVESTING ACTIVITIES
Purchases of property, plant and equipment			(1,839	)			(459	)
Proceeds from sale of property, plant and equipment			1,044				15
Purchase of Palm Harbor assets and certain liabilities, net of cash acquired			(67,639	)			—
Purchases of investments			(2,053	)			—
Proceeds from sale of investments			1,986				—
Investment in debtor-in-possession note receivable			(6,238	)			—
Proceeds from payoff of debtor-in-possession note receivable			45,301				—
Net cash used in investing activities			(29,438	)			(444	)
FINANCING ACTIVITIES
Proceeds from exercise of stock options			1,448				—
Net proceeds from construction lending line			554				—
Payments on Virgo debt			(19,456	)			—
Payments on securitized financings			(5,977	)			—
Net cash used in financing activities			(23,431	)			—
Net decrease in cash and cash equivalents			(41,294	)			(4,002	)
Cash and cash equivalents at beginning of period			76,513				74,988
Cash and cash equivalents at end of period		$	35,219			$	70,986
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes		$	1,229			$	803
Cash paid during the period for interest		$	3,371			$	—

See accompanying Notes to Consolidated Financial Statements

CAVCO INDUSTRIES, INC.

(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 (“GAAP”) 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 of 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 has evaluated subsequent events after the balance sheet date of September 30, 2011 through the date of the filing of this report with the SEC and other than sale of the Buda, Texas facility discussed below; there were no disclosable subsequent events. 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 June 3, 2011 (the “Form 10-K”).

During fiscal year 2010, the Company and an investment partner, Third Avenue Value Fund (“Third Avenue”), formed Fleetwood Homes, Inc. (“Fleetwood Homes”), with a contribution of $35.0 million each for equal fifty-percent ownership interests. On August 17, 2009, Fleetwood Homes (i) acquired seven operating manufactured housing plants, two idle factories, all related equipment, accounts receivable, inventory, certain trademarks and trade names, intellectual property, and specified contracts and leases; and (ii) assumed express warranty liabilities pertaining to certain of the previous operations of a predecessor company.

The results of the Fleetwood Homes operations have been included in the Consolidated Financial Statements and the related Notes in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 810, Consolidation (“ASC 810”). Management has determined that, under GAAP, 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 and management control of Fleetwood Homes. To that end, members of Cavco’s management hold all of the 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 “redeemable noncontrolling interest,” and is designated as such in the Consolidated Financial Statements (see Note 22).

During fiscal year 2011, Fleetwood Homes, through its wholly-owned subsidiary, Palm Harbor Homes, Inc., a Delaware corporation (“Palm Harbor” or “Palm Harbor Delaware”), entered into an agreement (the “Purchase Agreement”) with Palm Harbor Homes, Inc., a Florida corporation, and certain of its subsidiaries (collectively “Palm Harbor Florida”) to purchase substantially all of the assets and assume specified liabilities of Palm Harbor Florida, pursuant to an auction process under Section 363 of the U.S. Bankruptcy Code. The effective date of the transaction was April 23, 2011 (the “Acquisition Date”), except for Palm Harbor’s acquisition of the stock of Standard Casualty Co. The aggregate gross purchase price was $83.9 million and is exclusive of transaction costs, specified liabilities assumed and post-closing adjustments. Approximately $45.3 million of the purchase price was used to retire the Debtor-In-Possession (“DIP”) loan previously made by Fleetwood Homes to Palm Harbor Florida. The purchase price was funded by Fleetwood Homes’ cash on hand, along with equal contributions of $36.0 million each from the Company and Third Avenue. On June 7, 2011, regulatory approval of the acquisition of Standard Casualty Co. was received from the Texas Department of Insurance and on June 10, 2011 (the “SCC Acquisition Date”), Palm Harbor Delaware completed the purchase of the insurance subsidiary.

Palm Harbor Delaware acquired five operating manufactured housing production facilities, idled factories in nine locations, 49 operating retail locations, one office building, real estate, all related equipment, accounts receivable, customer deposits, inventory, certain trademarks and trade names, intellectual property, and specified contracts and leases. In addition, as of the Acquisition Date, Palm Harbor Delaware purchased all of the outstanding shares of CountryPlace Acceptance Corp., CountryPlace Mortgage, Ltd. and their wholly-owned finance subsidiaries (collectively, “CountryPlace”). Palm Harbor Delaware also acquired all of the outstanding shares of Standard Casualty Co., Standard Insurance Agency, Inc. and its subsidiary (collectively, “Standard”). Further, Palm Harbor Delaware assumed certain liabilities of Palm Harbor Florida, including primarily debt facilities of the finance subsidiaries (see Note 21). The results of the Palm Harbor operations since the Acquisition Date and SCC Acquisition Date have been included in the Consolidated Financial Statements and the related Notes in accordance with the provisions of ASC 810.

During the quarter ended September 30, 2011, the Company sold an idled production facility in Arabi, Georgia for $495,000 and real estate in Waxahachie, Texas for $600,000 resulting in an insignificant effect on the Consolidated Statements of Operations. Subsequent to September 30, the Company sold an idled manufacturing facility located at Buda, Texas for $1.3 million.

Standard is domiciled in Texas and is primarily a specialty writer of manufactured home physical damage insurance. Standard holds insurance licenses in multiple states; however, a significant portion of its writings occurs in Texas. In addition to writing direct policies, Standard assumes and cedes reinsurance in the ordinary course of business (see Note 12).

CountryPlace originates single-family residential mortgages secured by manufactured and site-built homes, and services, for itself and others, conforming mortgages, non-conforming land-home mortgages and manufactured homes chattel loans. CountryPlace is authorized by the U.S. Department of Housing and Urban Development (“HUD”) to directly endorse Federal Housing Administration (“FHA”) Title I and Title II mortgage insurance, is approved by the Government National Mortgage Association (“GNMA” or “Ginnie Mae”) to issue GNMA-insured mortgage-backed securities, and is authorized to sell mortgages to, and service mortgages for, the Federal National Mortgage Association (“FNMA” or “Fannie Mae”). A conforming mortgage or loan is one that conforms to the guidelines of a government-sponsored enterprise, such as Fannie Mae, or a government agency, such as FHA; a non-conforming mortgage or loan does not conform to these guidelines.

Revenue Recognition. 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 floorplan financed by the independent retailer through standard industry arrangements, which include repurchase agreements. Manufacturing sales financed under repurchase agreements are reduced by a provision for estimated repurchase obligations (see Note 14). The recognition of revenue from homes sold under inventory finance programs involving funds provided by the Company is deferred until such time that payment for the related inventory finance note receivable is received by the Company (see Note 6). 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.

At the Acquisition Date, management evaluated consumer loans receivable held for investment by CountryPlace to determine whether there was evidence of deterioration of credit quality and if it was probable that CountryPlace would be unable to collect all amounts due according to the loans’ contractual terms. The Company also considered expected prepayments and estimated the amount and timing of undiscounted expected principal, interest and other cash flows. The Company determined the excess of the loan pool’s scheduled contractual principal and contractual interest payments over the undiscounted cash flows expected as of the Acquisition Date as an amount that cannot be accreted into interest income (the non-accretable difference). The remaining difference is accreted into interest income over the remaining life of the loans (referred to as accretable yield). Interest income on consumer loans receivable is recognized as net sales.

For loans originated by CountryPlace and held for sale, loan origination fees and gains or losses on sales are recognized upon sale of the loans.

Premium income from insurance policies is recognized on an as-earned basis. Premium amounts collected are amortized on a straight-line basis into net sales over the life of the policy. Premiums earned are net of reinsurance ceded. Policy acquisition costs are also amortized as cost of sales over the life of the policy.

Consumer Loans Receivable. Consumer loans receivable consists of manufactured housing loans originated by CountryPlace (securitized, held for investment, or held for sale) and construction advances on mortgages. CountryPlace was acquired on April 23, 2011 in conjunction with the Palm Harbor transaction. The fair value of consumer loans receivable was calculated as of the Acquisition Date, as determined by the present value of expected future cash flows, with no allowance for loan loss recorded. The difference between the undiscounted cash flows expected and the investment in the loan is recognized as interest income on a level-yield method over the life of the loan. Increases in expected cash flows subsequent to the acquisition are recognized prospectively through adjustment of the yield on the loans over the remaining life. Decreases in expected cash flows subsequent to the acquisition are recognized as an allowance for loan loss. Interest income on consumer loans receivable is recognized in net sales.

Loans held for investment consist of loan contracts collateralized by the borrowers’ homes and, in some instances, related land. Construction loans in progress are stated at the aggregate amount of cumulative funded advances. Loans held for sale consist of loan contracts collateralized by single-family residential mortgages. Loans held for sale are stated at the lower of cost or market on an aggregate basis. Loans held for sale are loans that, at the time of origination, are originated with the intent to resell in the mortgage market to investors, such as Fannie Mae, with which the Company has pre-existing purchase agreements, or to sell as part of a Ginnie Mae insured pool of loans. Certain direct loan origination costs for loans held for sale are expensed as incurred.

Prior to being acquired by the Company, on July 12, 2005 and March 22, 2007, CountryPlace completed two securitizations of factory-built housing loan receivables. These two securitizations were accounted for as financings, which use the portfolio method of accounting in accordance with ASC 310, Receivables — Nonrefundable Fees and Other (“ASC 310”). The securitizations included provisions for removal of accounts, retention of certain credit loss risk by CountryPlace and other factors that preclude sale accounting of the securitizations under ASC 860, Transfers and Servicing. Both securitizations were accounted for as securitized borrowings; therefore, the related consumer loans receivable and securitized financings were included in CountryPlace’s financial statements. The Company acquired these balances during the first quarter of fiscal 2012 as a part of the Palm Harbor transaction. Since the Acquisition Date, the acquired consumer loans receivable and securitized financings are accounted for in a manner similar to ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”).

Allowance for Loan Losses. The primary portion of the allowance for loan losses reflects the Company’s judgment of the probable loss exposure on our inventory finance receivable as of the end of the reporting period. The allowance for loan loss is developed at a portfolio level. A range of probable losses is calculated and the Company makes a determination of the best estimate within the range of loan losses. The Company has historically been able to resell repossessed homes, thereby mitigating loss experience. If a default occurs and collateral is lost, the Company is exposed to loss of the full value of the home loan. If the Company determines that it is probable that a borrower will default, a specific reserve is determined and recorded within the estimated allowance for loan loss. The Company recorded an allowance for loan loss of $185,000 and $169,000 at September 30, 2011 and March 31, 2011, respectively (see Note 6).

Another portion of the allowance for loan losses relates to consumer loans receivable originated by CountryPlace after the Acquisition Date. This allowance for loan losses reflects CountryPlace’s judgment of the probable loss exposure on its loans originated since the Acquisition Date in the held for investment portfolio as of the end of the reporting period.

CountryPlace accounts for the loans that were in existence at the Acquisition Date in a manner similar to ASC 310-30. Management evaluated such loans as of the Acquisition Date to determine whether there was evidence of deterioration of credit quality and if it was probable that CountryPlace would be unable to collect all amounts due according to the loans’ contractual terms.

Over the life of the loans, CountryPlace continues to estimate cash flows expected to be collected. CountryPlace evaluates at the balance sheet date whether the present value of its loans, determined using the effective interest rate, has decreased and, if so, recognizes an allowance for loan loss subsequent to the Acquisition Date. The present value of any subsequent increase in the loan pool’s actual cash flows expected to be collected is used first to reverse any existing allowance for loan loss. Any remaining increase in cash flows expected to be collected adjusts the amount of accretable yield recognized on a prospective basis over the loan pool’s remaining life (see Note 5).

CountryPlace has modified payment amounts and/or interest rates for borrowers that, in management’s judgment, exhibited the willingness and ability to continue to pay and met certain other conditions. A modified loan is considered a troubled debt restructuring when two conditions are met: (i) the borrower is experiencing financial difficulty, and (ii) concessions are made by CountryPlace that it would not otherwise consider for a borrower with similar risk characteristics. These modified loans were considered to be troubled debt restructurings. CountryPlace no longer considers modified loans to be troubled debt restructurings once the modified loan is seasoned for six months, is not delinquent under the modified terms and is at a market rate of interest at the modification date.

Investment Securities. Management determines the appropriate classification of its investment securities at the time of purchase. The Company’s investments include marketable debt and equity securities that are held as available-for-sale. All investments classified as available-for-sale are recorded at fair value with any unrealized gains and losses reported in accumulated other comprehensive income (loss), net of tax if applicable. Realized gains and losses from the sale of securities are determined using the specific identification method.

Management regularly makes an assessment to determine whether a decline in value of an individual security is other-than-temporary. The Company considers the following factors when making its assessment: (i) the Company’s ability and intent to hold the investment to maturity, or a period of time sufficient to allow for a recovery in market value; (ii) whether it is probable that the Company will be able to collect the amounts contractually due; and (iii) whether any decision has been made to dispose of the investment prior to the balance sheet date. Investments on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the loss recorded in earnings.

Goodwill and Other Intangibles. The Company accounts for goodwill and other intangible assets in accordance with the provisions of FASB ASC 350, Intangibles—Goodwill and Other (“ASC 350”). As such, the Company tests goodwill annually for impairment by reporting unit and records an impairment charge if the implied fair value of a reporting unit, including goodwill, is less than its carrying value. As of September 30, 2011, all of the Company’s goodwill of $67.3 million is attributable to its manufacturing reporting unit. Certain intangibles are considered indefinite-lived and others are subject to amortization over their useful lives. Intangible assets are tested annually for impairment. In conjunction with the Palm Harbor transaction, the Company acquired $15.3 million of intangible assets (see Note 8).

Reserve for Property-Liability Insurance Claims and Claims Expense. Standard establishes reserves for claims and claims expense (“loss”) on reported and unreported claims of insured losses. Standard’s reserving process takes into account known facts and interpretations of circumstances and factors, including Standard’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. In the normal course of business, Standard may also supplement its claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process. The applicable reserve balance was $977,000 as of September 30, 2011.

Incurred But Not Reported Liabilities. Because reserves are estimates of unpaid portions of losses that have occurred, including incurred but not reported (“IBNR”) losses, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process. The ultimate cost of losses may vary from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. Standard regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve estimates are recorded in the period such changes are determined. The applicable reserve balance was $126,000 as of September 30, 2011.

Other Income. Other income totals $255,000 and $266,000 for the three months ended September 30, 2011 and 2010, respectively. For the six months ended September 30, 2011 and 2010, other income totaled $615,000 and $446,000, respectively. In fiscal 2012, other income consists of interest related to Debtor-in-Possession note receivable and inventory finance receivable balances, and of interest income earned on cash balances.

Accumulated other comprehensive income (loss). Accumulated other comprehensive income (loss) is comprised of unrealized gains and losses on available-for-sale investments.

Recent Accounting Pronouncements. In July 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which requires entities to provide new disclosures in their financial statements about their financing receivables, including credit risk exposures and the allowance for credit losses on a disaggregated basis. In April 2011, the FASB issued ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 clarifies when creditors should classify loan modifications as troubled debt restructurings. In addition, ASU 2011-02 deferred the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 to periods beginning after June 15, 2011. As of September 30, 2011, the Company has adopted all of the aforementioned provisions of ASU 2010-20 and ASU 2011-02.

In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The amendments affected the Company’s disclosures of pro forma information surrounding the Palm Harbor acquisition (see Note 21).

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The amendments are effective for public companies for interim and annual periods beginning after December 15, 2011. This update changes the wording used to describe many of the requirements for measuring fair value and for disclosing information about fair value measurements. The amendments in this update result in common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards (“IFRS”). The Company is currently evaluating the effect ASU 2011-04 will have on the Company’s disclosures in the Notes to Consolidated Financial Statements.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments in this update are effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2011. In this update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The Company is currently evaluating the effect ASU 2011-05 will have on the Company’s Consolidated Financial Statements and disclosures.

In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The amendments in this update are effective for public companies for fiscal years beginning after December 15, 2011. In this update, an entity has the option to first assess qualitative factors to determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then it is required to perform the first step of the two-step impairment test. However, if an entity concludes otherwise, then performing the two-step impairment test is unnecessary. Early adoption is permitted. The Company is currently evaluating the effect ASU 2011-08 will have on the Company’s disclosures in the Notes to Consolidated Financial Statements.

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. Restricted Cash

Restricted cash consists of the following (in thousands):

		September 30,				March 31,
		2011				2011
Cash related to CountryPlace customer payments in escrow accounts to be remitted to third parties		$	2,868			$	—
Cash related to CountryPlace customers’ principal and interest payments on securitized loans to be remitted to bondholders			2,059				—
Cash related to retail homebuyer deposits held in trust			1,952				436
Other restricted cash			641				—
		$	7,520			$	436

3. Investments

Available-for-sale securities were acquired during the first quarter of fiscal 2012 as a part of the Palm Harbor acquisition. In accordance with ASC 805, Business Combinations (“ASC 805”), the individual securities were valued at fair value as of the Acquisition Date and, therefore, no individual security has been in a continuous unrealized loss position for longer than 12 months as of September 30, 2011. The following table summarizes the Company’s available-for-sale investment securities, gross unrealized gains and losses and fair value, aggregated by investment category (in thousands):

		September 30, 2011
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. Treasury and Government Agencies		$	1,287			$	10			$	(1	)		$	1,296
Mortgage-backed securities			4,948				20				(18	)			4,950
States and political subdivisions			1,197				27				—				1,224
Corporate debt securities			4,041				3				(34	)			4,010
Marketable equity securities			5,397				11				(446	)			4,962
		$	16,870			$	71			$	(499	)		$	16,442

Based on 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 any investments to be other-than-temporarily impaired at September 30, 2011.

The Company’s investments in marketable equity securities consist of investments in common stock of bank trust, insurance, and public utility companies ($2.5 million of the total fair value and $46,000 of the total unrealized losses) and industrial and other companies ($2.5 million of the total fair value and $400,000 of the total unrealized losses).

The amortized cost and fair value of the Company’s investment securities, 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.

		September 30, 2011
		Amortized				Fair
		Cost				Value
Due in less than one year		$	645			$	646
Due after one year through five years			6,655				6,666
Due after five years through ten years			511				520
Due after ten years			3,662				3,648
Marketable equity securities			5,397				4,962
		$	16,870			$	16,442

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 three and six months ended September 30, 2011 were approximately $11,000 and $20,000, respectively. Gross losses realized were approximately $18,000 and $20,000 for the three and six months ended September 30, 2011, respectively.

4. Inventories

Inventories consist of the following (in thousands):

		September 30,				March 31,
		2011				2011
Raw materials		$	17,758			$	10,208
Work in process			4,627				2,499
Finished goods and other			41,463				3,329
		$	63,848			$	16,036

5. Consumer Loans Receivable

The Company acquired consumer loans receivable during the first quarter of fiscal 2012 as a part of the Palm Harbor transaction. Acquired consumer loans receivable held for investment were acquired at fair value and subsequently are accounted for in a manner similar to ASC 310-30. Consumer loans receivable held for sale are carried at the lower of cost or market value. The following table summarizes consumer loans receivable (in thousands):

		September 30,
		2011
Consumer loans receivable held for investment		$	115,683
Consumer loans receivable held for sale			4,122
Construction advances on non-conforming mortgages			4,308
Consumer loans receivable			124,113
Deferred financing fees and other, net			(322	)
Consumer loans receivable, net		$	123,791

As of the Acquisition Date, management evaluated consumer loans receivable held for investment by CountryPlace to determine whether there was evidence of deterioration of credit quality and if it was probable that CountryPlace would be unable to collect all amounts due according to the loan’s contractual terms. The Company also considered expected prepayments and estimated the amount and timing of undiscounted expected principal, interest and other cash flows. The Company determined the excess of the loan pool’s scheduled contractual principal and contractual interest payments over all cash flows expected as of the Acquisition Date as an amount that cannot be accreted into interest income (the non-accretable difference). The remaining difference is accreted into interest income over the remaining life of the loans (referred to as accretable yield). Interest income on consumer loans receivable is recognized as net sales.

		September 30,				April 23,
		2011				2011
Consumer loans receivable held for investment — contractual amount		$	311,020			$	339,166
Purchase Discount
Accretable			(111,381	)			(118,335	)
Non-accretable			(83,502	)			(100,151	)
Allowance for loan losses			—				—
Less consumer loans receivable reclassified as other assets			(454	)			—
Total consumer loans receivable held for investment, net		$	115,683			$	120,680

Over the life of the loans, the Company continues to estimate cash flows expected to be collected by CountryPlace. The Company evaluates at the balance sheet date whether the present value of its loans determined using the effective interest rate has decreased and, if so, recognizes an allowance for loan loss subsequent to the Acquisition Date. The present value of any subsequent increase in the loan pool’s actual cash flows expected to be collected is used first to reverse any existing allowance for loan loss. Any remaining increase in cash flows expected to be collected adjusts the amount of accretable yield recognized on a prospective basis over the loan pool’s remaining life.

The changes in accretable yield on acquired consumer loans receivable held for investment were as follows:

		Three Months Ended				Six Months Ended
		September 30,				September 30,
		2011				2011
Balance at the beginning of the period		$	115,471			$	—
Additions			—				118,335
Accretion			(4,090	)			(6,954	)
Balance at the end of the period		$	111,381			$	111,381

CountryPlace’s consumer loans receivable consists of fixed-rate, fixed-term, fully-amortizing single-family home loans. These loans are either secured by a manufactured home, excluding the land upon which the home is located (chattel property loans and retail installment sale contracts), or by a combination of the home and the land upon which the home is located (real property mortgage loans). The real property mortgage loans are primarily for manufactured homes. Combined land and home loans are further disaggregated by the type of loan documentation: those conforming to the requirements of Government-Sponsored Enterprises (GSEs), and those that are non-conforming. In most instances, CountryPlace’s loans are secured by a first-lien position and are provided for the consumer purchase of a home. In rare instances CountryPlace may provide other types of loans in second-lien or unsecured positions. Accordingly, CountryPlace classifies its loans receivable as follows: chattel loans, conforming mortgages, non-conforming mortgages, and other loans.

In measuring credit quality within each segment and class, CountryPlace uses commercially available credit scores (“FICO”). At the time of each loan’s origination, CountryPlace obtained credit scores from each of the three primary credit bureaus, if available. To evaluate credit quality of individual loans, CountryPlace uses the mid-point of the available credit scores, or if only two scores are available, the Company uses the lower of the two. CountryPlace does not update credit bureau scores after the time of origination.

The following table disaggregates CountryPlace’s gross consumer loans receivable for each class by portfolio segment and credit quality indicator as of September 30, 2011 (in thousands):

		Consumer Loans Held for Investment																Consumer
		Securitized				Securitized								Construction				Loans Held
		2005				2007				Unsecuritized				Advances				For Sale				Total
Asset Class
Credit Quality Indicator
Chattel loans
0-619		$	1,490			$	989			$	943			$	—			$	—			$	3,422
620-719			21,832				14,802				1,300				—				—				37,934
720+			25,230				17,139				789				—				—				43,158
Subtotal			48,552				32,930				3,032				—				—				84,514
Conforming mortgages
0-619		—				—				419				663				594				1,676
620-719			—				—				988				2,079				2,175				5,242
720+			—				—				112				1,566				1,353				3,031
Subtotal			—				—				1,519				4,308				4,122				9,949
Non-conforming mortgages
0-619			97				869				2,945				—				—				3,911
620-719			2,240				8,928				5,468				—				—				16,636
720+			2,356				5,178				1,550				—				—				9,084
Subtotal			4,693				14,975				9,963				—				—				29,631
Other loans
Subtotal			—				—				19				—				—				19
		$	53,245			$	47,905			$	14,533			$	4,308			$	4,122			$	124,113

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. Consumer loans receivable secured by factory-built homes are located in the key states shown below with the corresponding percentage of loans aged 61 days or more:

September 30, 2011
						Aging 61 days or more
		Portfolio				Percent of state’s				Percent of total
State		concentration				loan balance				loan balance
Texas			43.2	%			1.10	%			0.47	%
New Mexico			6.6	%			0.59	%			0.04	%
Arizona			6.6	%			3.93	%			0.26	%
Florida			6.4	%			1.14	%			0.07	%
California			2.1	%			3.37	%			0.07	%
All others			35.1	%			1.73	%			0.67	%
			100.0	%							1.58	%

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 management in the determination of the accretable yield and the adequacy of any allowance for loan losses. Other than Texas, no other states had concentrations in excess of 10% of the principal balance of the consumer loans receivable as of September 30, 2011.

6. Inventory Finance Receivables and Allowance for Loan Loss

The Company’s inventory finance receivables balance consists of two classes: (i) amounts loaned by the Company under participation inventory financing programs; and (ii) direct inventory financing arrangements for the home product inventory needs of our independent distribution base.

Under the terms of the participation programs, the Company provides loans to independent financial institutions representing a significant portion of the funds that such financiers then lend to retailers to finance their inventory purchases of our products. The participation inventory finance receivables are unsecured general obligations of the independent floorplan lenders.

Under the terms of the direct inventory finance arrangements, the Company provides all of the inventory finance funds. The notes are secured by the inventory collateral and other security depending on the borrower’s (retailer’s) circumstances. The other terms of direct inventory finance arrangements vary depending on the needs of the borrower and the opportunity for the Company, but generally follow the same tenets as the participation programs.

Inventory finance receivables, net, consist of the following by class of financing receivable (in thousands):

		September 30,				March 31,
		2011				2011
Direct inventory finance receivables		$	12,972			$	12,157
Participation inventory finance receivables			6,681				5,771
Allowance for loan loss			(185	)			(169	)
		$	19,468			$	17,759

The Company evaluates the potential for loss from its participation inventory finance programs based on the independent lender’s overall financial stability and has determined that an applicable allowance for loan loss was not needed at either September 30, 2011 or March 31, 2011.

With respect to the direct inventory finance notes receivable, the risk of loss is spread over numerous borrowers. Borrower inventory levels and activity are monitored in conjunction with third-party service providers, where applicable, to estimate the potential for loss on the related notes receivable, considering potential exposures including repossession costs, remarketing expenses, impairment of value and the risk of collateral loss. The Company has historically been able to resell repossessed unused homes, thereby mitigating loss experience. If a default occurs and collateral is lost, the Company is exposed to loss of the full value of the home loan. If the Company determines that it is probable that a borrower will default, a specific reserve is determined and recorded within the estimated allowance for loan loss. The Company recorded an allowance for loan loss of $185,000 and $169,000 at September 30, 2011 and March 31, 2011, respectively. The following table represents changes in the estimated allowance for loan losses, including related additions and deductions to the allowance for loan loss applicable to the direct inventory finance receivables (in thousands):

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Balance at beginning of period		$	173			$	149			$	169			$	40
Provision for credit losses			12				32				16				137
Loans charged off, net of recoveries			—				—				—				4
Balance at end of period		$	185			$	181			$	185			$	181

The following table disaggregates inventory finance notes receivable and the estimated allowance for loan loss for each class of financing receivable by evaluation methodology (in thousands):

		Direct Inventory Finance								Participation Inventory Finance
		September 30,				March 31,				September 30,				March 31,
		2011				2011				2011				2011
Inventory finance notes receivable:
Collectively evaluated for impairment		$	12,228			$	11,116			$	—			$	—
Individually evaluated for impairment			744				1,041				6,681				5,771
		$	12,972			$	12,157			$	6,681			$	5,771
Allowance for loan loss:
Collectively evaluated for impairment		$	(185	)		$	(169	)		$	—			$	—
Individually evaluated for impairment			—				—				—				—
		$	(185	)		$	(169	)		$	—			$	—

Loans are subject to regular review and are given management’s attention whenever a problem situation appears to be developing. Loans with indicators of potential performance problems are placed on watch list status and are subject to additional monitoring and scrutiny. Nonperforming status includes loans accounted for on a non-accrual basis and accruing loans with principal payments past due 90 days or more. The Company’s policy is to place loans on nonaccrual status when interest is past due and remains unpaid 90 days or more or 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 recorded on a cash basis, first to interest and then to principal. Charge-offs occur when it becomes probable that outstanding amounts will not be recovered. At September 30, 2011, the Company did not have any loans on nonaccrual status and was not aware of any potential problem loans that would have a material effect on the inventory finance receivables balance. The following table disaggregates the Company’s inventory finance receivables by class and credit quality indicator (in thousands):

		Direct Inventory Finance								Participation Inventory Finance
		September, 30				March 31,				September, 30				March 31,
		2011				2011				2011				2011
Risk profile based on payment activity:
Performing		$	12,878			$	11,995			$	6,681			$	5,771
Watch list			94				162				—				—
Nonperforming			—				—				—				—
		$	12,972			$	12,157			$	6,681			$	5,771

The Company has concentrations of inventory finance notes receivable related to factory-built homes located in the following states, measured as a percentage of inventory finance receivables principal balance outstanding as of September 30, 2011 and March 31, 2011:

		September 30,				March 31,
		2011				2011
Arizona			23.3	%			21.9	%
Texas			14.5	%			18.0	%
California			4.3	%			9.0	%

The States of California, Arizona, and to a lesser degree Texas, have experienced economic weakness. The risks created by these concentrations have been considered in the determination of the adequacy of the allowance for loan losses. The Company did not have concentrations in excess of 10% of the principal balance of the inventory finance receivables in any other states as of September 30, 2011 or March 31, 2011, respectively.

7. Property, Plant and Equipment

Property, plant and equipment are carried at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of each asset. Estimated useful lives for significant classes of assets are as follows: buildings and improvements 10 to 39 years, and machinery and equipment 3 to 25 years. Repairs and maintenance charges are expensed as incurred. Property, plant and equipment consist of the following (in thousands):

		September 30,				March 31,
		2011				2011
Property, plant and equipment, at cost:
Land		$	20,036			$	16,046
Buildings and improvements			26,839				19,672
Machinery and equipment			15,803				11,453
			62,678				47,171
Accumulated depreciation			(12,168	)			(11,178	)
Property, plant and equipment, net		$	50,510			$	35,993

8. Goodwill and Other Intangibles

Intangible assets principally consist of goodwill, trademarks and trade names, state insurance licenses, customer relationships, technology, insurance business in force, and policies and renewal rights. Goodwill, trademarks and trade names and state insurance licenses are indefinite-lived intangible assets and are tested for impairment annually and whenever events or circumstances indicate that more likely than not impairment has occurred. During the six months ended September 30, 2011 and 2010, no impairment expense was recorded. The remaining intangibles are amortized over their estimated useful lives and are reviewed for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. The value of customer relationships is amortized over 4 to 11 years, technology over 7 to 10 years, insurance business in force over one year and insurance policies and renewal rights over 15 years.

Goodwill and other intangibles consist of the following as of September 30, 2011 and March 31, 2011 (in thousands):

		September 30, 2011												March 31, 2011
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		Amount				Amortization				Amount				Amount				Amortization				Amount
Goodwill		$	67,346			$	—			$	67,346			$	67,346			$	—			$	67,346
Trademarks and trade names			6,250				—				6,250				800				—				800
State insurance licenses			1,100				—				1,100				—				—				—
Total indefinite-lived intangible assets			74,696				—				74,696				68,146				—				68,146
Customer relationships			6,200				(617	)			5,583				800				(87	)			713
Insurance business in force			2,070				(1,107	)			963				—				—				—
Technology			900				(39	)			861				—				—				—
Insurance policies and renewal rights			374				(10	)			364				—				—				—
Total goodwill and other intangible assets		$	84,240			$	(1,773	)		$	82,467			$	68,946			$	(87	)		$	68,859

Amortization expense recognized on intangible assets during the three and six months ended September 30, 2011 was $1.3 million and $1.7 million, respectively. Amortization expense of $13,000 and $26,000 was recognized during the three and six months ended September 30, 2010, respectively.

9. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

		September 30,				March 31,
		2011				2011
Estimated warranties		$	10,809			$	9,371
Customer deposits			9,863				1,857
Salaries, wages and benefits			9,606				4,342
Unearned premiums			5,842				—
Deferred margin			4,365				4,305
Accured taxes			3,233				707
Accrued insurance			3,077				1,731
Accrued volume rebates			1,940				885
Insurance loss reserves			1,103				—
Reserve for repurchase commitments			815				597
Other (various)			10,852				2,450
		$	61,505			$	26,245

10. Warranties

Homes are generally 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								Six Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Balance at beginning of period		$	11,483			$	12,991			$	9,371			$	13,891
Liability assumed with Palm Harbor			—				—				1,932				—
Charged to costs and expenses			2,456				1,073				5,462				2,286
Payments and deductions			(3,130	)			(2,173	)			(5,956	)			(4,286	)
Balance at end of period		$	10,809			$	11,891			$	10,809			$	11,891

11. Debt Obligations

The Company acquired securitized financings during the first quarter of fiscal 2012 as a part of the Palm Harbor acquisition. Acquired securitized financings were acquired at fair value, which resulted in a discount, and subsequently are accounted for a manner similar to ASC 310-30 to accrete the discount.

The Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for consumer loans receivable held for investment to determine the expected cash flows on securitized financings and the contractual payments. The amount of contractual principal and contractual interest payments due on the securitized financings in excess of all cash flows expected as of the Acquisition Date cannot be accreted into interest expense (the non-accretable difference). The remaining amount is accreted into interest expense over the remaining life of the obligation (referred to as accretable yield).

		September 30,				April 23,
		2011				2011
Securitized financings — contractual amount		$	125,917			$	134,205
Purchase Discount
Accretable			(29,779	)			(32,072	)
Non-accretable (1)			—				—
Total securitized financings, net		$	96,138			$	102,133

Over the life of the loans, the Company continues to estimate cash flows expected to be paid on securitized financings. The Company evaluates at the balance sheet date whether the present value of its securitized financings determined using the effective interest rate, has increased or decreased. The present value of any subsequent change in cash flows expected to be paid adjusts the amount of accretable yield recognized on a prospective basis over the securitized financing’s remaining life.

The changes in accretable yield on securitized financings were as follows:

		Three Months Ended				Six Months Ended
		September 30,				September 30,
		2011				2011
Balance at the beginning of the period		$	31,346			$	—
Additions			—				32,072
Accretion			(1,567	)			(2,293	)
Balance at the end of the period		$	29,779			$	29,779

On July 12, 2005, prior to the acquisition of Palm Harbor and CountryPlace, 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. For accounting purposes, this transaction was structured as a securitized borrowing. As of September 30, 2011, the Class A-1 and Class A-2 bonds had been retired.

On March 22, 2007, 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%. The bonds mature at varying dates beginning in 2008 through 2017 and were issued with an expected weighted average maturity of 4.86 years. For accounting purposes, this transaction was also structured as a securitized borrowing. As of September 30, 2011, the Class A-1 and Class A-2 bonds had been retired.

12. Reinsurance

Standard is primarily a specialty writer of manufactured home physical damage insurance. Certain of Standard’s premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. The ceded reinsurance agreements provide Standard with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. Standard remains obligated for amounts ceded in the event that the reinsurers do not meet their obligations. Substantially all of Standard’s assumed reinsurance is with one entity.

The effects of reinsurance on premiums written and earned are as follows (in thousands):

		Three Months Ended								SCC Acquisition Date to
		September 30, 2011								September 30, 2011
		Written				Earned				Written				Earned
Direct premiums		$	436			$	324			$	629			$	411
Assumed premiums — nonaffiliate			2,572				2,434				3,481				3,214
Ceded premiums — nonaffiliate			(398	)			(398	)			(513	)			(513	)
Net premiums		$	2,610			$	2,360			$	3,597			$	3,112

Typical insurance policies written or assumed by Standard have a maximum coverage of $300,000 per claim, of which Standard cedes $240,000 of the risk of loss per reinsurance. Therefore, Standard maintains risk of loss limited to $60,000 per claim on typical policies. Amounts are recoverable by Standard through reinsurance for catastrophic losses in excess of $500,000 per occurrence up to a maximum of $7.5 million in the aggregate.

13. Income Taxes

The Company’s deferred tax assets primarily result from financial statement accruals not currently deductible for tax purposes and differences in the acquired basis of certain assets, and its deferred tax liabilities primarily result from tax amortization of goodwill and other intangible assets. The Company complies with the provisions of FASB ASC 740, Income Taxes (“ASC 740”), 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. 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.

Income tax returns are filed in the U.S. federal jurisdiction and in several state jurisdictions. In July 2011, the Internal Revenue Service (“IRS”) completed its examination of the Company’s federal income tax return for the fiscal year ended March 31, 2009. The examination resulted in an insignificant payment of additional taxes. The Company is no longer subject to examination by the IRS for years before fiscal year 2007. 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. The provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year.

14. Commitments and 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, calculated from the date of sale to the retailer) and the risk of loss is further reduced by the resale value of the homes. The maximum amount for which the Company was contingently liable under such agreements approximated $12.1 million at September 30, 2011, without reduction for the resale value of the homes. The Company applies FASB ASC 460, Guarantees (“ASC 460”), and FASB ASC 450-20, Loss Contingencies (“ASC 450-20”), to account for its liability for repurchase commitments. Under the provisions of 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 ASC 450-20. The Company recorded an estimated liability of $815,000 and $597,000 at September 30, 2011 and March 31, 2011, respectively, related to these commitments.

Letters of Credit. The Company maintains a $100,000 outstanding letter of credit with J.P. Morgan Chase Bank N.A. issued to satisfy the remaining requirements of the self-funded workers’ compensation program which concluded on September 30, 2006. To secure certain reinsurance contracts, Standard has an irrevocable letter of credit of $5.0 million outstanding at September 30, 2011 related to assumed premiums as assurance that Standard will fulfill its reinsurance obligations. This letter of credit is secured by certain of the Company’s investments. Standard also maintains an irrevocable standby letter of credit of $2.0 million related to a supply bond for a construction project for Palm Harbor Homes. CountryPlace maintains an irrevocable standby letter of credit of $100,000 related to state licensing requirements. There have been no draws on any of the aforementioned letters of credit.

Construction-Period Mortgages. CountryPlace funds construction-period mortgages through periodic advances during the period of home construction. At the time of initial funding, CountryPlace commits to fully fund the loan contract in accordance with a predetermined schedule. Subsequent advances are contingent upon the performance of contractual obligations by the seller of the home and the borrower. Construction-period mortgages are carried in the consolidated balance sheet at the actual amount of cumulative advances, which are included in consumer loans receivable. The total loan contract amount, less cumulative advances, represents an off-balance sheet contingent commitment of CountryPlace to fund future advances.

Loan contracts with off-balance sheet commitments are summarized below (in thousands):

		September 30,
		2011
Construction loan contract amount		$	9,185
Cumulative advances			(4,308	)
Remaining construction contingent commitment		$	4,877

Representations and Warranties of Mortgages Sold. CountryPlace sells loans to GSEs and whole-loan purchasers. In connection with these activities, CountryPlace provides to the GSEs and whole-loan purchasers, representations and warranties related to the loans sold. These representations and warranties generally relate to the ownership of the loan, the validity of the lien securing the loan, the loan’s compliance with the criteria for inclusion in the sale transactions, including compliance with underwriting standards or loan criteria established by the buyer, and CountryPlace’s ability to deliver documentation in compliance with applicable laws. Generally, representations and warranties may be enforced at any time over the life of the loan. Upon a breach of a representation, CountryPlace may be required to repurchase the loan or to indemnify a party for incurred losses. Repurchase demands and claims for indemnification payments are reviewed on a loan-by-loan basis to validate if there has been a breach requiring repurchase. CountryPlace manages the risk of repurchase through underwriting and quality assurance practices and by servicing the mortgage loans to investor standards. CountryPlace maintains a reserve for these contingent repurchase and indemnification obligations. This reserve of $272,000 as of September 30, 2011, included in accrued liabilities, reflects management’s estimate of probable loss. CountryPlace considers a variety of assumptions, including borrower performance (both actual and estimated future defaults), historical repurchase demands and loan defect rates to estimate the liability for loan repurchases and indemnifications. There were no claim requests during the six months ended September 30, 2011, and no claims open for review as of September 30, 2011.

Interest Rate Lock Commitments. In originating loans for sale, CountryPlace issues interest rate lock commitments (“IRLCs”) to prospective borrowers and third-party originators. These IRLCs represent an agreement to extend credit to a loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to loan closing or sale. These IRLCs bind CountryPlace to fund the approved loan at the specified rate regardless of whether interest rates or market prices for similar loans have changed between the commitment date and the closing date. As such, outstanding IRLCs are subject to interest rate risk and related loan sale price risk during the period from the date of the IRLC through the earlier of the loan sale date or IRLC expiration date. The loan commitments generally range between 30 and 180 days; however, borrowers are not obligated to close the related loans. As a result, CountryPlace is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. CountryPlace maintains a reserve for loan price adjustments related to this interest rate risk. The recorded reserve was $618,000 as of September 30, 2011. In determining the adequacy of this reserve, CountryPlace considers recent fallout rate experience by type of origination source and forward loan pricing information provided by investors for various loan types and terms.

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.

15. Stockholders’ Equity

The following table represents changes in stockholders’ equity attributable to Cavco’s stockholders and redeemable non-controlling interest for the six months ended September 30, 2011 (dollars in thousands):

						Equity Attributable to Cavco Stockholders
		Redeemable												Additional								Accumulated
		Noncontrolling				Common Stock								Paid-in				Retained				Other
		Interest				Shares				Amount				Capital				Earnings				Loss				Total
Balance, March 31, 2011		$	35,819				6,817,606			$	68			$	129,211			$	21,390			$	—			$	150,669
Stock option exercises and associated tax benefits			—				72,590				1				1,447				—				—				1,448
Share-based compensation			—				—				—				456				—				—				456
Note payable conversion			36,173				—				—				—				—				—				—
Net income			11,953				—				—				—				11,907				—				11,907
Other comprehensive loss			(141	)			—				—				—				—				(141	)			(141	)
Balance, September 30, 2011		$	83,804				6,890,196			$	69			$	131,114			$	33,297			$	(141	)		$	164,339

16. Other Comprehensive Income

The difference between net income and total comprehensive income for the three and six months ended September 30, 2011 and September 30, 2010 is as follows (in thousands):

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Net income		$	3,172			$	1,199			$	23,860			$	2,049
Unrealized loss on available-for-sale investments, net of tax			(219	)			—				(282	)			—
Comprehensive income		$	2,953			$	1,199			$	23,578			$	2,049

17. 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 272,026 shares were still available for grant at September 30, 2011. 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 period determined by the plan administrator, typically a one 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).

Stock-based compensation cost charged against income for the three and six months ended September 30, 2011, was approximately $271,000 and $456,000, respectively. The Company recorded stock-based compensation expense of $189,000 and $327,000 for the three and six months ended September 30, 2010, respectively.

As of September 30, 2011, total unrecognized compensation cost related to stock options was approximately $2.4 million and the related weighted-average period over which it is expected to be recognized is approximately 2.5 years.

The following table summarizes the option activity within the Company’s stock-based compensation plans for the six months ended September 30, 2011:

		Number
		of Shares
Outstanding at March 31, 2011			401,500
Granted			77,100
Exercised			(72,250	)
Outstanding at September 30, 2011			406,350
Exercisable at September 30, 2011			164,500

A summary of restricted stock activity within the Company’s share-based compensation plans and changes for the six months ended September 30, 2011 is as follows:

		Number
		of Shares
Nonvested at March 31, 2011			498
Vested			(340	)
Nonvested at September 30, 2011			158

18. Earnings Per Share

Basic earnings per common share is computed based on the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed based on the combination of dilutive common share equivalents, comprised of shares issuable under the Company’s share-based compensation plans and the weighted-average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money options to purchase shares, which is calculated based on the average share price for each period using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share:

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Net income attributable to Cavco common stockholders		$	1,685			$	680			$	11,907			$	1,198
Weighted average shares outstanding:
Basic			6,890,122				6,541,951				6,864,427				6,541,846
Common stock equivalents — treasury stock method			47,685				205,165				57,031				221,174
Diluted			6,937,807				6,747,116				6,921,458				6,763,020
Net income per share attributable to Cavco common stockholders:
Basic		$	0.24			$	0.10			$	1.73			$	0.18
Diluted		$	0.24			$	0.10			$	1.72			$	0.18

Anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the three months ended September 30, 2011 and 2010 were 16,609 and 9,376, respectively. There were 7,387 and 1,856 anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the six months ended September 30, 2011 and 2010, respectively.

19. Fair Value Measurements

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

		September 30, 2011								March 31, 2011
		Book				Estimated				Book				Estimated
		Value				Fair Value				Value				Fair Value
Cash and cash equivalents (1)		$	35,219			$	35,219			$	76,513			$	76,513
Restricted cash (1)			7,520				7,520				436				436
Investments (2)			16,442				16,442				—				—
Consumer loans receivable (3)			123,791				123,127				—				—
Inventory finance receivable (4)			19,468				19,468				17,759				17,759
Construction lending line (1)			4,528				4,528				—				—
Securitized financings (5)			96,138				99,671				—				—