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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 28, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 0-24268
PALM HARBOR HOMES, INC.
(Exact name of registrant as specified in our charter)
FLORIDA 59-1036634
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
15303 DALLAS PARKWAY, SUITE 800, ADDISON, TEXAS 75001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 991-2422
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of September 27, 2002, was $110,955,877
based on the closing price on that date of the Common Stock as quoted on the
Nasdaq Stock Market. As of June 2, 2003, 22,863,396 shares of the registrant's
Common Stock were issued and outstanding.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to our Annual Meeting of
Shareholders to be held July 23, 2003 are incorporated by reference in Part III.
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TABLE OF CONTENTS
Page
----
PART I
Item 1. Business........................................................................................ 1
Item 2. Properties...................................................................................... 8
Item 3. Legal Proceedings............................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders............................................. 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................... 10
Item 6. Selected Financial Data......................................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
Of Operations.............................................................................. 12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................................... 20
Item 8. Financial Statements and Supplementary Data..................................................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................................... 38
PART III
Item 10. Directors and Executive Officer of the Registrant............................................... 38
Item 11. Executive Compensation.......................................................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters........................................................................ 38
Item 13. Certain Relationships and Related Transactions.................................................. 38
Item 14. Controls and Procedures......................................................................... 38
Item 15. Exhibits, Financial Statement Schedules, and Report on Form 8-K................................. 39
Signatures......................................................................................................... 40
Certifications..................................................................................................... 41
Exhibit Index...................................................................................................... 43
PART I.
ITEM 1. BUSINESS
GENERAL
Palm Harbor Homes, Inc. is one of the leading manufacturers and
marketers of factory-built homes in the United States. Palm Harbor markets
nationwide through vertically integrated operations, encompassing manufactured
housing, modular housing, chattel and mortgage bank financing as well as
insurance. At March 28, 2003, Palm Harbor operated 19 manufacturing facilities
that sell homes in 32 states through 153 Company-owned retail superstores and
approximately 300 independent retail dealers and builders.
At March 28, 2003, the Company-owned retail superstores operated in
Alabama, Arizona, Arkansas, Colorado, Florida, Georgia, Indiana, Kentucky,
Louisiana, Maryland, Nevada, New Mexico, North Carolina, Ohio, Oklahoma, Oregon,
Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington and West
Virginia. With a net increase of two superstores in fiscal 2003, Palm Harbor
continued its long-term plan of increasing sales through Company-owned
superstores. Through our subsidiary, CountryPlace Mortgage, Ltd.
("CountryPlace"), Palm Harbor offers chattel and non-conforming land/home
mortgages to purchasers of manufactured homes sold by Company-owned retail
superstores and through our investment in a limited partnership, BSM Financial
L.P. ("BSM"), Palm Harbor offers conforming mortgages. Palm Harbor provides
property and casualty insurance for owners of manufactured homes through our
subsidiary, Standard Casualty Company. Management of Palm Harbor believes that
having the internal capability to provide financing and insurance complements
our manufacturing and marketing operations and has been additive to earnings.
FACTORY-BUILT OPERATIONS
Palm Harbor currently owns or leases 19 facilities located in Alabama,
Arizona, Florida, Georgia, North Carolina, Ohio, Oregon, Texas and Virginia. A
typical Palm Harbor manufacturing facility has approximately 100,000 square feet
of floor space and employs approximately 180 associates.
The following table sets forth the total sections produced and
factory-built homes sold, as well as the number of manufacturing facilities
operated by Palm Harbor, for the fiscal years indicated:
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Factory-built homes sold:
Single-section............................... 3,474 2,862 2,166 1,473 727
Multi-section................................ 12,154 11,439 8,663 8,465 7,280
Modular...................................... - - - - 670
------ ------ ------ ----- -----
Total factory-built homes sold.................. 15,628 14,301 10,829 9,938 8,677
====== ====== ====== ===== =====
Operating manufacturing
facilities (at end of fiscal year).......... 16 15 15 15 19
1
The principal materials used in the production of Palm Harbor's
factory-built homes include wood, wood products, gypsum wallboard, steel,
fiberglass insulation, carpet, vinyl, fasteners, appliances, electrical items,
windows and doors. Palm Harbor believes that the materials used in the
production of our factory-built homes are readily available at competitive
prices from a wide variety of suppliers. The two suppliers which accounted for
more than 5% of Palm Harbor's total purchases during the fiscal year ended March
28, 2003, represented only 7.5% and 5.6%, respectively, of our total purchases
during fiscal year 2003. Accordingly, Palm Harbor does not believe that the loss
of any single supplier would have a material adverse effect on our business.
MANUFACTURED HOUSING OPERATIONS
Palm Harbor manufactures single and multi-section manufactured homes
under various brand names including Palm Harbor, Masterpiece, Keystone,
CountryPlace, River Bend and Windsor Homes(TM). Palm Harbor offers over 150
floor plans and approximately 90% of the manufactured homes produced by Palm
Harbor are structurally or decoratively customized to the home buyer's
specifications. Although Palm Harbor produces a wide retail price range of
manufactured homes, the average retail sales price (excluding land) of Palm
Harbor's manufactured homes is approximately $63,000 and approximately 91% of
Palm Harbor's manufactured homes are multi-section.
A typical manufactured home built by Palm Harbor contains two to five
bedrooms, a living room, family room, dining room, kitchen, two or three
bathrooms and features central air conditioning and heating, a range,
refrigerator, carpeting and drapes. In addition, Palm Harbor offers optional
amenities, including dishwashers, washers, dryers, furniture packages and
specialty cabinets, as well as a wide range of colors, moldings and finishes.
Optional features usually associated with site-built homes such as stone
fireplaces, computer rooms, skylights, vaulted ceilings and whirlpool baths are
also offered. Palm Harbor has a unique package of energy saving construction
features referred to as "EnerGmiser(TM)" which includes, among other things,
additional insulation to reduce heating and cooling costs, and which exceeds
statutorily-mandated energy efficiency levels.
Palm Harbor's manufactured homes are designed and copyrighted after
extensive field research and consumer feedback. Palm Harbor has developed
engineering systems which, through the use of computer-aided technology, permit
customization of homes and assist with product development and enhancement.
Palm Harbor's facilities generally operate on a one shift per day, five
days per week basis, and Palm Harbor currently manufactures a typical
manufactured home in approximately five days. Palm Harbor's facilities have the
capacity to produce an aggregate of approximately 142 sections per day. The
current rate of production is 64 sections per day.
The finished manufactured homes are transported by independent trucking
companies to either the retail sales center or the customer's site. The
transportation cost is borne by the independent retailer. Retailers or other
independent installers are responsible for placing the manufactured home on
site, making utility hook-ups and, in certain instances, providing installation
and finish-out services. The industry practice is to have third parties hired by
the retailer provide the installation and finish-out services. Palm Harbor's
associates, rather than independent third parties, perform the finish out
services on manufactured homes sold through Company-owned retail superstores.
Palm Harbor believes our finish-out services ensure that Palm Harbor's quality
procedures are applied during the entire process and increases customer
satisfaction, thereby providing Palm Harbor an advantage over many of our
competitors.
Palm Harbor's backlog of manufactured housing orders as of June 2, 2003
was approximately $6.0 million, as compared to approximately $3.0 million as of
May 13, 2002. Since retailers may cancel orders prior to production without
penalty, Palm Harbor does not consider our order backlog to be firm orders;
however, such cancellations rarely occur. Because of the seasonality of the
manufactured housing market, the level of backlog generally declines during the
winter months.
2
MODULAR HOUSING OPERATIONS
Palm Harbor also manufactures modular homes principally through its
wholly-owned subsidiary Nationwide Custom Homes, Inc. ("Nationwide"). Modular
homes are built in accordance with state or local building codes and therefore
have the same specifications as traditional site-built homes. Nationwide's
modular homes include single story ranch homes, split-levels and two and three
story homes with a variety of floor plans and exteriors.
Nationwide operates three manufacturing facilities in Martinsville,
Virginia and one in Arabi, Georgia where we produce the majority of our modular
homes. Each home begins on a production line where a team of assemblers creates
the floor and walls of the house. It is then wheeled down a tracked path where
various stages of finish are performed and components are added - from wiring
and insulation early in the process to adding fixtures and floor coverings just
prior to shipping. Homes are shipped directly off the line. Once on site, the
homes are placed on the foundation, the roof is raised and the final seam of
roof shingles along the apes of the roofline is applied.
Nationwide markets its modular homes in an 11 state region consisting
of North Carolina, Virginia, West Virginia, Georgia, Tennessee, South Carolina,
Maryland, Pennsylvania, Florida, Alabama and Kentucky. Our modular products are
sold to two end markets - independent builders and consumers. Nationwide's
independent builder network consists of approximately 200 local builders that
receive the home and subsequently perform the finish-out services. Nationwide
also sells directly to consumers through our five retail locations.
Nationwide's backlog of modular homes as of June 2, 2003 was
approximately $28.4 million.
RETAIL OPERATIONS
Palm Harbor's homes are sold through a distribution network consisting
of retail superstores owned by Palm Harbor and independent dealers and builders.
The following table sets forth the number of homes sold by Palm Harbor through
each of these distribution channels, as well as the number of Company-owned
retail superstores and independent dealers and builders, during the past three
fiscal years:
MARCH 30, MARCH 29, MARCH 28,
2001 2002 2003
---- ---- ----
Homes sold by:
Company-owned superstores...................... 9,012 8,298 6,541
Independent dealers and builders............... 1,817 1,640 2,136
------ ----- -----
Total.......................................... 10,829 9,938 8,677
====== ===== =====
Number of:
Company-owned superstores...................... 145 151 153
Independent dealers and builders............... 150 100 300
------ ----- -----
Total.......................................... 295 251 453
====== ===== =====
Palm Harbor first established wholly-owned superstores in 1992, and
currently has 153 superstores in Alabama, Arizona, Arkansas, Colorado, Florida,
Georgia, Indiana, Kentucky, Louisiana, Maryland, Nevada, New Mexico, North
Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee,
Texas, Virginia, Washington and West Virginia. Palm Harbor plans to add
additional retail superstores in fiscal 2004.
3
Palm Harbor's independent retailer network principally consists of
local retailers, developers that market land/home packages and developers of
retirement lifestyle communities. No single independent retailer accounted for
5% or more of Palm Harbor's net sales during fiscal 2003. Palm Harbor provides
comprehensive sales training to our retail sales associates and brings them to
the manufacturing facilities for product training and to view new product
designs as they are developed. These training seminars, known as "Palm Harbor
University", facilitate the sale of Palm Harbor's homes by increasing the skill
and knowledge of the retail sales consultants. In addition, Palm Harbor displays
our products in trade shows and supports our retailers through the distribution
of floor plan literature, brochures, decor boards, banners and videos.
MARKETS SERVED
Management believes that Palm Harbor's broad geographic presence
lessens the impact of adverse economic trends specific to any one region, while
at the same time enabling Palm Harbor to capitalize on favorable regional
economic trends. The acquisition of Nationwide Custom Homes, Inc. ("Nationwide")
in June 2002 resulted in a shift in revenue, primarily between the Southeast and
Central regions. During the fiscal year ended March 28, 2003, the percentage of
Palm Harbor's revenues by region was as follows:
PERCENTAGE OF
REGION PRIMARY STATES REVENUE BY REGION
- --------- --------------------------------------------------------- -----------------
Southeast Florida, North Carolina, Alabama, Georgia, South Carolina,
Mississippi, Tennessee, Virginia, West Virginia, Maryland 45%
Central Texas, Oklahoma, Arkansas, Louisiana, Kansas 26
West New Mexico, Arizona, California, Colorado, Oregon,
Washington, Montana, Nevada, Utah, Wyoming, Idaho 23
Midwest Ohio, Michigan, Indiana, Kentucky, Illinois, Pennsylvania 6
---
100%
===
Manufactured housing is a regional business and the primary geographic
market for a typical manufacturing facility is within a 250-mile radius. Each of
Palm Harbor's manufacturing facilities typically serves 20 to 65 retailers, and
the facility sales staff maintains personal contact with each retailer, whether
Company-owned or independent. Palm Harbor's decentralized operations allow us to
be more responsive in addressing regional customer preferences of product
innovation and home design.
CONSUMER FINANCING
Historically, Palm Harbor has facilitated retail sales of our homes by
maintaining relationships with conventional lenders. Conventional lenders
provide two basic types of consumer financing in the manufactured housing
industry: chattel or personal property loans for purchasers of a home with no
real estate involved and land/home or mortgage loans which finance the land,
home and all improvements on the property. There are two types of mortgage loans
- - conforming and non-conforming. Conforming loans conform to FHA, VA, Freddie
Mac and Fannie Mae. Generally, the type of required foundations installed
conform to Federal requirements and the borrower must meet certain criteria.
Non-conforming loans are financed by a major bank or lending institution which
does not require a specific foundation type and have more flexible criteria.
Effective January 1, 2002, Texas House Bill 1869 was implemented. This bill
requires all manufactured houses in Texas, which are not placed on leased land,
to be financed with mortgage loans versus chattel loans. The introduction of
Texas House Bill 1869 has resulted in a growing shift in financing toward
conforming loans. Two houses of the Texas legislature have approved Texas Senate
Bill 521 which, if not vetoed by the governor, will reverse Texas House Bill
1869.
We believe that our ability to provide financing to our customers on
competitive terms improves our responsiveness to the financing needs of
prospective purchasers and provides an additional source of earnings for Palm
Harbor. Through CountryPlace, Palm Harbor offers customary chattel loans and
non-conforming land/home mortgage loans. Through BSM, Palm Harbor offers
conventional mortgage financing. Financing services by CountryPlace are
currently being offered only through Company-owned retail superstores.
4
During fiscal 2003, CountryPlace began holding all of its loan
originations for investment on its balance sheet and ceased selling loans to
other lenders. CountryPlace originated approximately $ 32.7 million of loans for
its own investment portfolio in fiscal 2003. CountryPlace intends to service and
collect its portfolio of loans using its own employees and systems implemented
during the year.
FLOOR PLAN FINANCING
In accordance with manufactured housing industry practice,
substantially all retailers finance a portion of their purchases of manufactured
homes through wholesale "floor plan" financing arrangements. Under a typical
floor plan financing arrangement, a financial institution provides the retailer
with a loan for the purchase price of the home and maintains a security interest
in the home as collateral. The financial institution which provides financing to
the retailer customarily requires Palm Harbor to enter into a separate
repurchase agreement with the financial institution under which Palm Harbor is
obligated, upon default by the retailer and under certain other circumstances,
to repurchase the financed home at declining prices over the term of the
repurchase agreement (which generally ranges from 12 to 18 months). The price at
which Palm Harbor may be obligated to repurchase a home under these agreements
is based upon Palm Harbor's original invoice price plus certain administrative
and shipping expenses. Palm Harbor's obligation under these repurchase
agreements ceases upon the purchase of the home by the retail customer.
The risk of loss under such repurchase agreements is mitigated by the
fact that (i) only 18% of Palm Harbor's homes are sold to independent retailers;
(ii) a majority of the homes sold by Palm Harbor to independent retailers are
pre-sold to specific retail customers; (iii) Palm Harbor monitors each
retailer's inventory position on a regular basis; (iv) sales of Palm Harbor's
manufactured homes are spread over a large number of retailers; (v) none of Palm
Harbor's independent retailers accounted for more than 5% of Palm Harbor's net
sales in fiscal 2003; (vi) the price Palm Harbor is obligated to pay declines
over time and (vii) Palm Harbor is, in most cases, able to resell homes
repurchased from credit sources in the ordinary course of business without
incurring significant losses. Palm Harbor estimates that our potential
obligations under such repurchase agreements were approximately $10.4 million as
of March 28, 2003. During the fiscal years ended March 30, 2001, March 29, 2002
and March 28, 2003, net expenses incurred by Palm Harbor under these repurchase
agreements totaled $132,000, $212,000 and $69,000, respectively.
Beginning in fiscal 2000, lenient credit standards, which had
facilitated increased industry-wide wholesale shipments in previous years,
tightened, resulting in declining wholesale shipments, declining margins and
lower retail sales levels for most industry participants. In March 2002, Conseco
Finance Servicing Corp. ("Conseco"), announced that they were exiting the
wholesale financing, or floor plan lending, business. In September 2002,
Deutsche Financial Services Corporation ("Deutsche") announced that they were
exiting the floor plan financing business as well. The exit of these and other
floor plan lenders affected the $140 million floor plan facilities used by Palm
Harbor in fiscal 2002 to finance the new inventory of manufactured homes at our
retail superstores. In response, Palm Harbor gradually reduced its new home
retail inventory and obtained a $100 million syndicated floor plan facility with
a financial institution during fiscal 2003.
COMPETITION
The manufactured housing industry is highly competitive at both the
manufacturing and retail levels, with competition based upon several factors,
including price, product features, reputation for service and quality, depth of
field inventory, promotion, merchandising and the terms of retail customer
financing. In addition, manufactured homes compete with new and existing
site-built homes, as well as apartments, townhouses and condominiums. Palm
Harbor does not view any of our competitors as being dominant in the industry,
although some of Palm Harbor's competitors possess substantially greater
manufacturing, distribution and marketing resources than Palm Harbor.
Although many lenders to the manufactured housing industry have reduced
their volume or gone out of business, there are still competitors to
CountryPlace and BSM in the markets where Palm Harbor does business. These
competitors include national, regional and local banks, independent finance
companies, mortgage brokers and mortgage banks. None of these competitors is
considered to be dominant or to have a material impact on the financing
opportunities at CountryPlace or BSM.
5
GOVERNMENT REGULATION
Palm Harbor's manufactured homes are subject to a number of federal,
state and local laws, codes and regulations. Construction of manufactured
housing is governed by the National Manufactured Housing Construction and Safety
Standards Act of 1974, as amended (the "Home Construction Act"). In 1976, the
Department of Housing and Urban Development ("HUD") issued regulations under the
Home Construction Act establishing comprehensive national construction
standards. The HUD regulations, known collectively as the Federal Manufactured
Home Construction and Safety Standards, cover all aspects of manufactured home
construction, including structural integrity, fire safety, wind loads, thermal
protection and ventilation. Such regulations preempt conflicting state and local
regulations on such matters, and are subject to continual change. Palm Harbor's
manufacturing facilities and the plans and specifications of our manufactured
homes have been approved by a HUD-certified inspection agency. Further, an
independent HUD-certified third-party inspector regularly reviews Palm Harbor's
manufactured homes for compliance with the HUD regulations during construction.
Failure to comply with applicable HUD regulations could expose Palm Harbor to a
wide variety of sanctions, including mandated closings of Palm Harbor
manufacturing facilities. Palm Harbor believes our manufactured homes meet or
surpass all present HUD requirements.
Manufactured and site-built homes are all typically built with paneling
and other products that contain formaldehyde resins. Since February 1985, HUD
has regulated the allowable concentrations of formaldehyde in certain products
used in manufactured homes and requires manufacturers to warn purchasers as to
formaldehyde-associated risks. The Environmental Protection Agency (the "EPA")
and other governmental agencies have in the past evaluated the effects of
formaldehyde. Palm Harbor uses materials in our manufactured homes that meet HUD
standards for formaldehyde emissions and believes we comply with HUD and other
applicable government regulations in this regard.
The transportation of manufactured homes on highways is subject to
regulation by various federal, state and local authorities. Such regulations may
prescribe size and road use limitations and impose lower than normal speed
limits and various other requirements.
Palm Harbor's manufactured homes are subject to local zoning and
housing regulations. In certain cities and counties in areas where Palm Harbor's
homes are sold, local governmental ordinances and regulations have been enacted
which restrict the placement of manufactured homes on privately-owned land or
which require the placement of manufactured homes in manufactured home
communities. Such ordinances and regulations may adversely affect Palm Harbor's
ability to sell homes for installation in communities where they are in effect.
A number of states have adopted procedures governing the installation of
manufactured homes. Utility connections are subject to state and local
regulation and must be complied with by the retailer or other person installing
the home. Modular homes are subject to local codes with state certification and
regulation.
Certain Palm Harbor warranties may be subject to the Magnuson-Moss
Warranty Federal Trade Commission Improvement Act, which regulates the
descriptions of warranties on products. The description and substance of Palm
Harbor's warranties are also subject to a variety of state laws and regulations.
A number of states require manufactured home producers to post bonds to ensure
the satisfaction of consumer warranty claims.
6
A variety of laws affect the financing of the homes manufactured by
Palm Harbor. The Federal Consumer Credit Protection Act (Truth-in-Lending) and
Regulation Z promulgated thereunder require written disclosure of information
relating to such financing, including the amount of the annual percentage rate
and the finance charge. The Federal Fair Credit Reporting Act also requires
certain disclosures to potential customers concerning credit information used as
a basis to deny credit. The Federal Equal Credit Opportunity Act and Regulation
B promulgated thereunder prohibit discrimination against any credit applicant
based on certain specified grounds. The Real Estate Settlement Procedures Act
and Regulation X promulgated thereunder require certain disclosures regarding
the nature and costs of real estate settlements. The Federal Trade Commission
has adopted or proposed various Trade Regulation Rules dealing with unfair
credit and collection practices and the preservation of consumers' claims and
defenses. Installment sales contracts eligible for inclusion in a Government
National Mortgage Association program are subject to the credit underwriting
requirements of the Federal Housing Association. Manufactured homes in Texas
that are not placed on leased land are subject to Texas House Bill 1869, which
requires them to be financed with a conforming mortgage. Two houses of the Texas
legislature have approved Texas Senate Bill 521 which, if not vetoed by the
governor, will reverse Texas House Bill 1869. A variety of state laws also
regulate the form of the installment sale contracts or financing documents and
the allowable deposits, finance charge and fees chargeable pursuant to
installment sale contracts or financing documents. The sale of insurance
products by Palm Harbor is subject to various state insurance laws and
regulations which govern allowable charges and other insurance practices.
Palm Harbor's operations are also subject to federal, state and local
laws and regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. Governmental
authorities have the power to enforce compliance with their regulations, and
violations may result in the payment of fines, the entry of injunctions or both.
The requirements of such laws and enforcement policies have generally become
more strict in recent years. Accordingly, Palm Harbor is unable to predict the
ultimate cost of compliance with environmental laws and enforcement policies.
See "Item 3. Legal Proceedings."
ASSOCIATES
As of March 28, 2003, Palm Harbor had approximately 4,600 associates.
All of Palm Harbor's associates are non-union. Palm Harbor has not experienced
any labor-related work stoppages and believes that our relationship with our
associates is good.
7
ITEM 2. PROPERTIES
Palm Harbor currently owns or leases properties at 19 manufacturing
facilities in nine states. Palm Harbor owns substantially all of our machinery
and equipment. Palm Harbor believes our facilities are adequately maintained and
suitable for the purposes for which they are used. The following table sets
forth certain information with respect to properties at Palm Harbor's
manufacturing facilities:
COMMENCEMENT APPROXIMATE
STATE CITY OF PRODUCTION OWNED/LEASED SQUARE FEET
----- ---- ------------- ------------ -----------
Alabama Boaz 1986 Leased 97,683
1993 Leased 75,164
Arizona Tempe 1978 Owned 103,500
Casa Grande 1997 Owned 90,000
Florida Plant City 1981 Owned 93,600
1985 Owned 87,200
Georgia Arabi 1999 Owned 97,970
LaGrange 1996 Owned 200,000
North Carolina Albemarle 1994 Owned 112,700
Siler City 1988 Owned 91,200
1996 Leased 40,000
Ohio Sabina 1988 Owned 85,000
Oregon Millersburg 1995 Owned 168,650
Texas Austin 1981 Owned 103,800
1992 Owned 77,000
Burleson 1993 Owned 94,300
Fort Worth 1993 Owned 121,300
Buda 1994 Owned 88,275
Virginia Martinsville 1969 Owned 43,505
1972 Owned 148,346
1974 Owned 56,593
1996 Owned 75,262
In addition to our production facilities, Palm Harbor owns certain
properties upon which 40 of our Company-owned retail superstores are located.
Palm Harbor also leases approximately 48,000 square feet of office space in
Addison, Texas for our corporate headquarters. Palm Harbor's corporate
headquarters lease expires in 2013.
ITEM 3. LEGAL PROCEEDINGS
Palm Harbor is not currently subject to any pending or threatened
litigation, other than routine litigation arising in the ordinary course of
business, none of which is expected to have a material adverse effect on the
business, financial condition or results of operations of Palm Harbor.
8
In late 1992, Palm Harbor removed an underground storage tank formerly
used to store gasoline from the site of our Tempe, Arizona manufacturing
facility. Palm Harbor is currently working in cooperation with the Arizona
Department of Environmental Quality to assess and respond to gasoline related
hydrocarbons detected in soil and groundwater at this site. Under certain
circumstances, a state fund may be available to compensate responsible parties
for petroleum releases from underground storage tanks. Palm Harbor is evaluating
the extent of the corrective action that may be necessary. Site characterization
is complicated by the presence of contaminants associated with the Indian Bend
Wash Area Superfund Site described below. At this time, Palm Harbor does not
expect that the costs of any corrective action or assessments related to the
tank will have a material adverse effect on our financial condition, results of
operations or cash flows.
Palm Harbor's Tempe facility is partially located within a large area
that has been identified by the Environmental Protection Agency as the Indian
Bend Wash Area Superfund Site. Under federal law, certain persons known as
potentially responsible parties ("PRPs") may be held strictly liable on a joint
and several basis for all cleanup costs and natural resource damages associated
with the release of hazardous substances from a facility. The average cost to
clean up a site listed on the National Priorities List is over $30 million. The
Indian Bend Superfund Site is listed on the National Priorities List. Groups of
PRPs may include current owners and operators of a facility, owners and
operators of a facility at the time of disposal of hazardous substances,
transporters of hazardous substance and those who arrange for the treatment or
disposal of hazardous substances at a site. No government agency, including the
EPA, has indicated that Palm Harbor has been or will be named as a PRP or that
we are otherwise responsible for the contamination present at the Indian Bend
Superfund Site. In general, although no assurance can be given as to the future
actions of either the EPA or PRPs who may incur cleanup costs related to this
site, Palm Harbor does not believe that our ownership of property partially
located within the Indian Bend Superfund Site will have a material adverse
effect on our financial condition, results of operations or cash flows.
In 1994, Palm Harbor removed two underground storage tanks used to
store petroleum substances from property we own in Georgia. In November 2001,
Palm Harbor received a letter from the Georgia Department of Natural Resources
indicating no further action was necessary with respect to these storage tanks.
The letter, however, did not preclude additional action by the State if
contaminants were found in adjoining properties. At this time, Palm Harbor does
not expect that the costs of future assessment and corrective action related to
the tanks will have a material adverse effect on our financial condition,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this Report to a vote of security holders, through the solicitation
of proxies or otherwise.
9
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Palm Harbor's Common Stock has been traded on the Nasdaq National Stock
Market under the symbol "PHHM" since July 31, 1995, the date on which Palm
Harbor completed our initial public offering. The following table sets forth,
for the period indicated, the high and low sales information per share of the
Common Stock as reported on the Nasdaq National Stock Market.
FISCAL 2003 HIGH LOW
- ----------- ------- -------
First Quarter ................................. $ 25.09 $ 19.85
Second Quarter ................................ 19.50 11.17
Third Quarter ................................. 19.12 10.12
Fourth Quarter ................................ 18.84 14.35
- ------------------------------------------------------------------------
FISCAL 2002 HIGH LOW
- ----------- ------- -------
First Quarter ................................. $ 24.12 $ 15.00
Second Quarter ................................ 26.99 16.90
Third Quarter ................................. 25.00 18.20
Fourth Quarter ................................ 24.55 20.44
- ------------------------------------------------------------------------
On June 2, 2003, the last reported sale price of Palm Harbor's Common
Stock on the Nasdaq National Stock Market was $18.42. As of June 2, 2003, there
were approximately 810 record holders of the Common Stock, and approximately
3,000 holders of the Common Stock overall based on an estimate of the number of
individual participants represented by security position listings.
Palm Harbor has never paid cash dividends on our Common Stock. The
Board of Directors intends to retain any future earnings generated by Palm
Harbor to support operations and to finance expansion and does not intend to pay
cash dividends on our Common Stock for the foreseeable future. The payment of
cash dividends in the future will be at the discretion of the Board of Directors
and will depend upon a number of factors such as Palm Harbor's earnings levels,
capital requirements, financial condition and other factors deemed relevant by
the Board of Directors. Future loan agreements may or may not restrict or
prohibit the payment of dividends.
10
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information regarding
Palm Harbor's financial position and operating results which has been extracted
from Palm Harbor's financial statements for the five fiscal years ended March
28, 2003. The information should be read in conjunction with Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and accompanying Notes
included elsewhere in this report.
FISCAL YEAR ENDED
----------------------------------------------------------
MARCH 26, MARCH 31, MARCH 30, MARCH 29, MARCH 28,
1999 2000 2001 2002 2003(2)
--------- --------- --------- --------- ---------
(In thousands, except per share data)
STATEMENT OF INCOME:
Net sales $ 761,374 $ 777,471 $ 650,451 $ 627,380 $ 573,130
Cost of sales 530,698 530,415 443,131 426,356 408,725
--------- --------- --------- --------- ---------
Gross profit 230,676 247,056 207,320 201,024 164,405
Selling, general and
administrative expenses 158,916 180,224 165,896 168,171 157,474
--------- --------- --------- --------- ---------
Income from operations 71,760 66,832 41,424 32,853 6,931
Interest expense (9,728) (10,245) (12,792) (8,377) (6,676)
Other income 4,933 7,034 7,279 6,450 4,874
--------- --------- --------- --------- ---------
Income before income taxes and cumulative
effect of change in accounting principle 66,965 63,621 35,911 30,926 5,129
Income tax expense 26,788 25,025 14,034 11,478 1,908
--------- --------- --------- --------- ---------
Income before cumulative effect of change
in accounting principle 40,177 38,596 21,877 19,448 3,221
Cumulative effect of change in accounting
principle - - (2,048) - -
--------- --------- --------- --------- ---------
Net income $ 40,177 $ 38,596 $ 19,829 $ 19,448 $ 3,221
========= ========= ========= ========= =========
Net income per common share -
basic and diluted $ 1.69 $ 1.66 $ 0.87 $ 0.85 $ 0.14
========= ========= ========= ========= =========
Weighted average common shares
outstanding - basic 23,783 23,225 22,760 22,820 22,913
Weighted average common shares
outstanding - diluted 23,838 23,255 22,772 22,820 22,913
OPERATING DATA:
Number of new factory-built homes sold 15,628 14,301 10,829 9,938 8,677
Multi-section manufactured homes sold as a
percentage of total manufactured homes sold 78% 80% 80% 85% 91%
Number of manufacturing facilities (1) 16 15 15 15 19
Number of company-owned superstores (1) 120 133 145 151 153
Number of company-owned builder locations (1) - - - - 5
BALANCE SHEET DATA:
Total assets $ 427,410 $ 457,174 $ 468,368 $ 473,271 $ 482,567
Other debt obligations 3,382 3,149 2,908 2,742 2,567
Shareholders' equity 195,325 217,176 235,652 256,657 260,174
(1)As of the end of the applicable period.
(2)On June 7, 2002, Palm Harbor acquired Nationwide Custom Homes,
Inc. ("Nationwide"), a manufacturer and marketer of modular homes.
Nationwide contributed $51.2 million in revenues and $4.3 million in
income from operations in fiscal 2003.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The manufactured housing industry continues to be affected by several
challenges including limited retail and wholesale financing availability,
increased levels of repossessions, excessive retail inventory levels and
manufacturing capacity. The tightening of credit standards, which began in
mid-1999, has resulted in reduced retail sales levels, declining wholesale
shipments and declining margins for most industry participants. Industry-wide
shipments for calendar 2002 were down 13% from a year ago and down 55% since the
1998 peak in shipments.
In March 2002, Conseco Finance Servicing Corp. ("Conseco"), formerly
the manufactured housing industry's largest floor plan and consumer lender,
announced that they were exiting both the floor plan financing and chattel
lending businesses. Also, Deutsche Financial Services ("Deutsche") exited the
manufactured housing floor plan lending business. In September 2002, when
Deutsche announced their intentions to exit the business, Palm Harbor had a $105
million floor plan facility with Deutsche, of which $85.3 million was
outstanding. The Deutsche floor plan facility has been replaced in part by a
syndicated floor plan facility led by another financial institution.
With the recent exit of most of the major industry chattel and
non-conforming mortgage lenders, Palm Harbor expanded its finance subsidiary,
CountryPlace Mortgage, Ltd. ("CountryPlace"), from being only an originator of
loans into a servicer as well. During fiscal 2003, CountryPlace originated
$32.7 million of loans to be held for investment on its balance sheet. These
loans were funded through borrowings from its warehouse facility, as well as
capital contributions and borrowings from Palm Harbor. CountryPlace is servicing
all of the loans held for investment in its portfolio and will originate loans
only through Company-owned retail superstores.
During the first quarter of fiscal 2003, Palm Harbor entered into an
agreement to become the sole limited partner and 50% owner of BSM Financial L.P.
("BSM"), a major Dallas mortgage banking firm that has experience and capability
in generating conforming and government insured loans in the site built, modular
and manufactured housing markets.
In addition, Palm Harbor purchased Nationwide Custom Homes
("Nationwide"), a leading manufacturer and marketer of modular homes. This
acquisition should enable Palm Harbor to appeal to homebuyers not reached by our
manufactured housing distribution or manufactured housing retail financing.
Despite these difficult conditions, Palm Harbor's consolidated
operating results were profitable this fiscal year. Additionally, Palm Harbor
profitably increased market share and reduced inventories, while continuing our
growth strategy of opening new retail superstores and expanding CountryPlace.
During fiscal 2003, the number of Company-owned retail superstores increased by
two to 153. CountryPlace Mortgage, Palm Harbor's finance subsidiary, and
Standard Casualty Company, Palm Harbor's insurance subsidiary, continued to be
additive to consolidated sales and net income.
Palm Harbor had cash and cash equivalents of $45.6 million at March 28,
2003. In addition, Palm Harbor's practice of manufacturing only to retail
customer order coupled with closely monitored retail receivables and stocking
levels has enabled us to tightly manage retail receivables and new home
inventory levels. Retail receivables and new home inventory per retail
superstore have declined 14% since the beginning of the fiscal year.
The manufactured housing industry is affected by cyclical downturns and
seasonal fluctuations that often make difficult period-to-period comparisons of
our revenues and operating results.
12
The following table sets forth certain items of Palm Harbor's Statement of
Income as a percentage of net sales for the periods indicated.
FISCAL YEAR ENDED
---------------------------------
MARCH 30, MARCH 29, MARCH 28,
2001 2002 2003
---------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 68.1 68.0 71.3
---------------------------------
Gross profit 31.9 32.0 28.7
Selling, general and administrative expenses 25.5 26.8 27.5
---------------------------------
Income from operations 6.4 5.2 1.2
Interest expense (2.0) (1.3) (1.2)
Interest income and other 1.1 1.0 0.9
---------------------------------
Income before income taxes and cumulative effect of change
in accounting principle 5.5 4.9 0.9
---------------------------------
Income tax expense 2.2 1.8 0.3
---------------------------------
Income before cumulative effect of change in accounting principle 3.3 3.1 0.6
Cumulative effect of change in accounting principle (0.3) - -
---------------------------------
Net income 3.0% 3.1% 0.6%
=================================
The following table summarizes certain key sales statistics as of and for the
period indicated.
FISCAL YEAR ENDED
---------------------------------
MARCH 30, MARCH 29, MARCH 28,
2001 2002 2003
---------------------------------
Company homes sold through
Company-owned retail superstores 8,964 8,268 6,526
Total new factory-built homes sold 10,829 9,938 8,677
Average new home price - retail $ 59,000 $ 60,000 $ 63,000
Number of retail superstores at
end of period 145 151 153
Homes sold to independent dealers and builders 1,817 1,640 2,136
2003 COMPARED TO 2002
NET SALES. Net sales decreased 8.6% to $573.1 million in 2003 from $627.4
million in 2002. The decrease in net sales was primarily due to the reduction of
retail financing available in the manufactured housing industry partially offset
by the addition of modular sales which totaled $51.2 million in fiscal 2003. The
volume of manufactured homes sold through Company-owned retail superstores
declined 21.1% while overall manufactured housing unit volume, which includes
sales to independent retailers, declined 19.4% in fiscal 2003. This decline in
volume is partially offset by an increase in the average selling price of a new
manufactured home to $63,000 in 2003 from $60,000 in 2002. This increase in
average selling price resulted from a slight shift in product mix towards
multi-section manufactured homes. Multi-section manufactured homes represented
91% of Palm Harbor's manufactured homes sold in 2003. The number of
Company-owned retail superstores increased from 151 at the end of fiscal 2002 to
153 at the end of fiscal 2003.
GROSS PROFIT. In fiscal 2003, gross profit as a percentage of net sales declined
to 28.7% from 32.0% in fiscal 2002. Gross profit decreased 18.2% to $164.4
million in 2003 compared to $201.0 million in 2002. This decrease, both as a
percentage of sales and in absolute dollars, is principally the result of the
contraction of retail financing and the intensely competitive industry
environment. The percentage of manufactured homes sold through Company-owned
retail superstores decreased from 83% in fiscal 2002 to 82% in fiscal 2003.
13
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net sales,
selling, general and administrative expenses increased to 27.5% in 2003 from
26.8% in 2002. Selling, general and administrative expenses decreased $10.7
million, or 6.4%, to $157.5 million in 2003 from $168.2 million in 2002. This
reduction reflects Palm Harbor's focus on reducing fixed costs somewhat offset
by its continued commitment to building brand awareness via advertising and
expenses associated with the expansion of CountryPlace and the rollout of Palm
Harbor's new mortgage lending operations. Additionally, selling, general and
administrative expenses for fiscal 2003 include ten months of Nationwide's fixed
expenses.
INTEREST EXPENSE. Interest expense decreased 20.3% to $6.7 million in 2003 from
$8.4 million in 2002. This decrease was primarily due to a decrease in the prime
interest rate from 4.75% at the end of fiscal 2002 to 4.25% at the end of fiscal
2003 coupled with a decrease in the floor plan liability.
INTEREST INCOME AND OTHER. Interest income and other decreased 24.4% to $4.9
million in fiscal 2003 from $6.5 million in fiscal 2002. This decrease was
primarily the result of decreased interest income in fiscal 2003, decreased
income earned on a real estate investment in fiscal 2003 and a loss on
short-term investments in fiscal 2003, partially offset by Palm Harbor's equity
interest in the earnings of its limited partnership, BSM, which was $3.4 million
in fiscal 2003 and zero in fiscal 2002.
2002 COMPARED TO 2001
NET SALES. Net sales decreased 3.5% to $627.4 million in 2002 from $650.5
million in 2001. The decrease in net sales was primarily due to competitive
conditions in the manufactured housing industry as indicated by a decrease of
7.9% in the volume of homes sold through Company-owned retail superstores while
overall unit volume, which includes sales to independent retailers, declined
8.2% in fiscal 2002. This decline in volume is partially offset by an increase
in the average selling price of a new home, which resulted from a continued
shift in product mix towards multi-section homes. Of the homes sold by the
Company, 85% were multi-section in fiscal 2002 versus 80% in fiscal 2001. The
number of Company-owned superstores increased from 145 at the end of fiscal 2001
to 151 at the end of fiscal 2002.
GROSS PROFIT. In fiscal 2002, gross profit as a percentage of net sales
increased slightly to 32.0% from 31.9% in fiscal 2001. Gross profit decreased
3.0% to $201.0 million in 2002 compared to $207.3 million in 2001. Palm Harbor
sold 83% of its homes through Company-owned retail superstores in both fiscal
2002 and fiscal 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net sales,
selling, general and administrative expenses increased, as planned, to 26.8% in
2002 from 25.5% in 2001. Selling, general and administrative expenses increased
$2.3 million, or 1.4%, to $168.2 million in 2002 from $165.9 million in 2001,
primarily due to Palm Harbor's continued commitment to building brand awareness
via advertising, startup expenses associated with the net increase of six retail
superstores opened during fiscal 2002 as well as those expected to be opened in
fiscal 2003 and training costs associated with people development.
INTEREST EXPENSE. Interest expense decreased 34.5% to $8.4 million in 2002 from
$12.8 million in 2001. This decrease was primarily due to a decrease in the
prime interest rate from 8.0% at the end of fiscal 2001 to 4.75% at the end of
fiscal 2002 coupled with a decrease in the floor plan liability.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities totaled $23.9 million in 2001,
compared to $34.5 million in 2002 and $48.0 million in 2003. Cash provided by
operating activities increased in fiscal 2003 primarily due to decreases in
trade receivables, inventories, and overhead expenditures. Cash provided by
operations was adequate to support Palm Harbor's working capital needs, capital
expenditures, floor plan payments, investment purchases, expansion of
CountryPlace and the rollout of new mortgage lending operations during fiscal
2003.
14
Capital expenditures were $14.1 million, $14.8 million and $6.5 million
in fiscal 2001, 2002 and 2003, respectively. In 2001, capital expenditures
included $8.2 million for additional retail superstores and approximately $5.9
million primarily for improvements in mature manufacturing facilities. In 2002,
capital expenditures included $7.2 million for additional retail superstores and
approximately $7.6 million primarily for improvements in mature manufacturing
facilities. In 2003, capital expenditures included $1.5 million for additional
retail superstores and approximately $5.0 million primarily for improvements in
mature manufacturing facilities. Palm Harbor expects capital expenditures to
approximate $9 million during 2004 primarily for the purpose of improving mature
manufacturing facilities and adding retail superstores.
During the fourth quarter of fiscal 2003, Palm Harbor executed a $100.0
million syndicated floor plan facility with a financial institution. The advance
rate for this facility is 90% of manufacturer's invoice. On March 19, 2006, $65
million of this facility will expire and the remaining $35 million will expire
via orderly liquidations by the end of September 2003. Palm Harbor is exploring
several options to replace this portion of the facility. Palm Harbor has a
second facility with another financial institution for $10.0 million, which
automatically renews each year unless notification of cancellation is received
by the financial institution. These facilities are used to finance a major
portion of the home inventory at our retail superstores and are secured by a
portion of our home inventory and receivables from financial institutions. The
interest rates on the facilities are prime (4.25% at March 28, 2003) or prime
plus 1.0% to 3.0% for aged units, of which we have none. These two floor plan
facilities contain certain provisions regarding minimum financial requirements
which we must maintain in order to borrow against the facilities. As of March
28, 2003, Palm Harbor was in compliance with our $100.0 million floor plan
facility and had obtained a limited forbearance with respect to a violation of
our minimum covenant requirements on our $10.0 million facility. Palm Harbor had
$134,977,000 and $114,437,000 outstanding on these floor plan credit facilities
at March 29, 2002 and March 28, 2003, respectively.
With the exit of several major industry retail lenders over recent
months, Palm Harbor is expanding CountryPlace from being an originator of loans
into a securitizer and servicer of loans as well. CountryPlace has entered into
an agreement with a financial institution for a $125 million warehouse facility
to fund chattel loans originated by company-owned retail superstores. This
facility is collateralized by specific receivables pledged to the facility and
bears interest at the rate of LIBOR plus 1.25% (2.5625% at March 28, 2003). The
facility terminates on March 19, 2004. The facility provides for an advance of
65% against the outstanding principal balance of eligible receivables as further
defined in the warehouse agreement. CountryPlace had outstanding borrowings
under this facility of $15,135,000 as of March 28, 2003. The facility contains
certain requirements relating to the performance and composition of the
receivables pledged to the facility and certain financial covenants, which are
customary in the industry. The facility also requires Palm Harbor and
CountryPlace to maintain a minimum balance of shareholders equity. As of March
28, 2003, both Palm Harbor and CountryPlace were in compliance with these
requirements. In connection with the warehouse borrowing facility, Palm Harbor
agreed to fund in cash to CountryPlace, up to 25% of each loan loss incurred. As
of March 28, 2003 there had been no losses related to any loans in the portfolio
and no such loss funding was required. Additionally, Palm Harbor has entered
into an intercompany financing arrangement with CountryPlace that provides for
up to $25 million of funding to be used for the growth of CountryPlace's
portfolio and operations. As of March 28, 2003, approximately $4.1 million was
advanced to CountryPlace under this intercompany financing arrangement.
CountryPlace currently intends to originate and hold loans for
investment on a long-term basis. CountryPlace intends to securitize its loan
portfolio on a routine basis. While the Company believes it will be able to
obtain additional liquidity through the securitization of such loans, no
assurances can be made that the Company will successfully complete
securitization transactions on acceptable terms and conditions, if at all.
In July 1999, Palm Harbor's Board of Directors authorized, subject to
certain business and market conditions, the use of up to $20.0 million to
repurchase Palm Harbor's common stock. In July 2000, the Board of Directors
authorized another $20.0 million for common stock repurchases. As of May 26,
2003, Palm Harbor had invested $20.0 million in the common stock buyback
program.
Palm Harbor believes that cash flows from operations, together with
floor plan financing and other available borrowing alternatives in addition to
the warehouse facility, will be adequate to support our working capital,
currently planned capital expenditure needs and expansion of CountryPlace over
the next twelve months. However, because future cash flows and the availability
of financing will depend on a number of factors, including prevailing economic
and financial conditions, business, the market for asset backed securitizations,
and other factors beyond Palm Harbor's control, no assurances can be given in
this regard.
15
CONTRACTUAL OBLIGATIONS AND COMMITMENTS (dollars in thousands)
The following tables summarize Palm Harbor's contractual obligations
and contingent commitments at March 28, 2003. For additional information related
to these obligations, see the Notes to Consolidated Financial Statements.
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------
LESS THAN 1-3 4-5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
----- ------ ----- ----- -----
Floor plan payable $114,437 $114,437 $ - $ - $ -
Warehouse revolving debt 15,135 15,135 - - -
Other debt obligations 2,567 190 2,377 - -
Operating leases 21,763 5,449 5,437 3,232 7,645
-------- -------- -------- -------- --------
Total contractual cash obligations $153,902 $135,211 $ 7,814 $ 3,232 $ 7,645
======== ======== ======== ======== ========
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
------------------------------------------------------------------------
TOTAL
AMOUNTS LESS THAN 1-3 4-5 AFTER 5
COMMITTED 1 YEAR YEARS YEARS YEARS
--------- --------- ----- ----- -------
Repurchase obligations (1) $ 10,409 $ 10,205 $ 204 $ - $ -
Letters of credit (2) 4,482 4,282 200 - -
--------- --------- -------- --------- --------
Total commercial commitments (3) $ 14,891 $ 14,487 $ 404 $ - $ -
========= ========= ======== ========= ========
(1) Palm Harbor has contingent repurchase obligations outstanding at March 28,
2003 which have a finite life but are replaced as Palm Harbor continues to
sell our manufactured homes to dealers under repurchase agreements with
financial institutions. The cost of these contingent repurchase obligations
to Palm Harbor was $132,000, $212,000 and $69,000 during fiscal 2001, 2002,
and 2003, respectively. For additional information on Palm Harbor's
repurchase obligations, see critical accounting policies - reserve for
repurchase obligations.
(2) Palm Harbor has provided letters of credit to providers of certain of our
insurance policies. While the current letters of credit have a finite life,
they are subject to renewal at different amounts based on the requirements
of the insurance carriers. Palm Harbor has recorded insurance expense based
on anticipated losses related to these policies as is customary in the
manufactured housing industry.
(3) Palm Harbor has contingent obligations related to installment loan
contracts sold with recourse. See Note 13 to the financial statements for a
discussion of such recourse contingent obligations.
CRITICAL ACCOUNTING POLICIES
Palm Harbor's discussion and analysis of its financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires Palm Harbor to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. Management bases its estimates and judgments
on historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
IMPAIRMENT OF INTANGIBLE ASSETS. In assessing the recoverability of
Palm Harbor's intangibles, we must make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the respective
assets. If these estimates or their related assumptions change in the future,
Palm Harbor may be required to record impairment charges for these assets.
16
REVENUE RECOGNITION. Retail sales, including shipping charges, are
recognized when a down payment is received, the customer enters 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. Homes sold
to independent retailers are recognized when the home is shipped which is when
the title passes to the independent retailer. The transportation cost is borne
by the independent retailer.
WARRANTIES. Palm Harbor provides the retail home buyer a one-year
limited warranty covering defects in material or workmanship in home structure,
plumbing and electrical systems. We record a liability for estimated future
warranty costs relating to homes sold, based upon our assessment of historical
experience factors. Factors we use in the estimation of the warranty liability
include historical warranty experience related to the actual number of calls and
the average cost per call. Although we maintain reserves for such claims based
on our assessments as described above, which to date have been adequate, there
can be no assurance that warranty expense levels will remain at current levels
or that such reserves will continue to be adequate. A large number of warranty
claims exceeding our current warranty expense levels could have a material
effect on Palm Harbor's results of operations.
RESERVE FOR REPURCHASE OBLIGATIONS. Manufactured housing companies
enter into repurchase agreements with financial institutions which have provided
wholesale floor plan financing to independent retailers. These agreements
generally provide that in the event of a retailer's default Palm Harbor will
repurchase the financed home from the lending institution at declining prices
over the term of the repurchase agreement (generally 12 -18 months). The risk of
loss under such repurchase agreements is mitigated by the fact that (i) only 18%
of Palm Harbor Harbor's homes are sold to independent retailers; (ii) a majority
of the homes sold by Palm Harbor to independent retailers are pre-sold to
specific retail customers; (iii) Palm Harbor monitors each retailer's inventory
position on a regular basis; (iv) sales of Palm Harbor's manufactured homes are
spread over a large number of retailers; (v) none of Palm Harbor's independent
retailers accounted for more than 5% of Palm Harbor's net sales in fiscal 2003;
(vi) the price Palm Harbor is obligated to pay declines over time and (vii) Palm
Harbor is, in most cases, able to resell homes repurchased from credit sources
in the ordinary course of business without incurring significant losses. Since
mid-1999, the manufactured housing industry has been affected by three major
challenges - retail financing availability, repossessions and retail inventory
levels. The rapid growth in the number of retailers prior to the deterioration
of retail financing has resulted in an imbalance between retail inventory levels
and consumer demand. If retail financing was to significantly weaken further,
the inventory imbalance could result in even greater price competition, gross
margin deterioration and have an overall material adverse effect on Palm
Harbor's operating results. While Palm Harbor's practice of manufacturing only
to order coupled with closely monitored retail stocking levels has enabled us to
continue to tightly manage inventories, we are unable to predict the impact on
Palm Harbor's results if industry conditions were to further deteriorate.
ALLOWANCE FOR LOAN LOSSES. CountryPlace originates and holds for
investment purposes loans related to the retail sale of manufactured Palm Harbor
homes, with such loans being collateralized primarily by the manufactured home.
Palm Harbor provides, at the time of sale, allowances for estimated future loan
losses. The allowance for loan gives consideration to the composition of the
loan portfolio, including number of delinquencies and historical loss
experience, and expectations as to future loan losses based upon industry
knowledge. Although Palm Harbor maintains an allowance for loan losses based
upon these expectations and other criteria, future differences between Palm
Harbor's expectations with respect to loan losses and actual losses incurred in
the portfolio could differ, and require Palm Harbor to provide additional
allowances.
NEW ACCOUNTING PRONOUNCEMENTS
On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." Effective March 30, 2002, Palm
Harbor adopted SFAS No. 146 which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of commitment to an exit or disposal plan. The provisions of SFAS
No. 146 are effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of SFAS No. 146 did not have a material effect
on Palm Harbor's financial position, results of operations and cash flows.
17
In December 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Effective March 30, 2002, Palm Harbor
adopted Interpretation No. 45 which clarifies the requirement for recognition of
a liability by a guarantor at the inception of the guarantee, based on the fair
value of the non-contingent obligation to perform. Interpretation No. 45 must be
applied prospectively to guarantees entered into or modified after December 31,
2002. The adoption of Interpretation No. 45 did not have a material effect on
Palm Harbor's financial position, results of operations and cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." Under previous practices, certain entities were
included in consolidated financial statements based upon controlling voting
interests or in other special situations. Under Interpretation No. 46, certain
previously unconsolidated entities will be required to be included in
consolidated financial statements of the primary beneficiary, as defined. For
variable interest entities, often referred to as special purpose entities,
created after January 31, 2003, Interpretation No. 46 is effective immediately.
Palm Harbor is currently evaluating the impact of Interpretation No. 46 on our
financial position, results of operations and cash flows.
FORWARD-LOOKING INFORMATION/RISK FACTORS
Certain statements contained in this annual report are forward-looking
statements within the safe harbor provisions of the Securities Litigation Reform
Act. Forward-looking statements give our current expectations or forecasts of
future events and can be identified by the fact that they do not relate strictly
to historical or current facts. Investors should be aware that all
forward-looking statements are subject to risks and uncertainties and, as a
result of certain factors, actual results could differ materially from these
expressed in or implied by such statements. These risks include such
assumptions, risks, uncertainties and factors associated with the following:
- AVAILABILITY OF RETAIL FINANCING. Since mid-1999, loans to purchase
manufactured houses have been subjected to elevated credit standards,
resulting in reduced lending volumes and consequently reduced sales in
the manufactured housing industry. A further tightening of chattel or
mortgage credit standards may cause Palm Harbor to experience
significant sales declines.
- AVAILABILITY OF WHOLESALE FINANCING. Several floor plan lenders have
chosen to exit the manufactured housing business, thereby reducing the
amount of credit available to industry retailers. Further reductions
in the availability of floor plan lending may adversely affect Palm
Harbor's inventory levels of new homes.
- ABILITY TO SECURITIZE OR FUND LOANS. CountryPlace originates chattel
and non-conforming land home mortgage loans that are funded with
proceeds from its warehouse borrowing facility borrowings from Palm
Harbor. CountryPlace intends to enter into asset-backed securitization
transactions to obtain longer term funding for these loan purchases.
The proceeds from these securitizations will be used to repay
borrowings from the warehouse facility and Palm Harbor, as well as to
purchase new loans. The asset-backed securitization market for
manufactured housing lenders has continued to deteriorate in the past
year in terms of access to the markets as well as pricing and credit
enhancement levels. If CountryPlace is unable to securitize its loans
on terms that are economical, it will be required to seek other
sources of long term funding.
- ABILITY TO SERVICE NEW LOANS. Although CountryPlace has originated
loans since 1995, it has limited loan servicing and collections
experience. CountryPlace has implemented new systems to service and
collect the portfolio of loans it originates. The management of
CountryPlace has industry experience in managing, servicing and
collecting a loan portfolio. However, if CountryPlace is not
successful in its servicing and collection efforts, the profitability
and cash flow from the loan portfolio on its balance sheet could be
adversely affected.
- ABILITY OF CUSTOMERS TO REPAY LOANS. CountryPlace makes loans to
borrowers that it believes are creditworthy based on its credit
guidelines. These customers may experience adverse employment,
financial, or life circumstances that affect their ability to repay
their loans. If customers do not repay their loans, the profitability
and cash flow from the loan portfolio on its balance sheet could be
adversely affected.
18
- MANAGEMENT'S ABILITY TO ATTRACT AND RETAIN EXECUTIVE OFFICERS AND
OTHER KEY PERSONNEL. Palm Harbor is dependent on the services and
performance of our executive officers, including our Chairman of the
Board, Lee Posey and our President and Chief Executive Officer, Larry
Keener. The loss of the services of two or more of our executive
officers could have a material adverse effect upon the Company's
business, financial condition and results of operations.
- CONTROL BY EXISTING SHAREHOLDERS. Approximately 55% of the outstanding
Common Stock of Palm Harbor is beneficially owned or controlled by Mr.
Posey, Capital Southwest Corporation and its wholly owned subsidiary,
Capital Southwest Venture Corporation and William R. Thomas, President
of Capital Southwest Corporation. As a result, these shareholders,
acting together, will be able to determine the outcome of elections of
Palm Harbor's directors and thereby control the management of Palm
Harbor's business.
- IMPACT OF INFLATION. The past several years have shown a relatively
moderate rate of inflation which Palm Harbor has been able to offset
through increased selling prices. A material increase in inflation in
the future could adversely affect Palm Harbor's operating results.
- COMPETITIVE PRODUCT ADVERTISING, PROMOTIONAL AND PRICING ACTIVITY.
There are numerous manufactured housing companies in the industry and
many have their own retail distribution systems and consumer finance
operations. In addition to competition within the manufactured housing
industry, our products also compete with other forms of lower to
moderate-cost housing, including site-built homes, apartments,
townhouses and condominiums. If we are unable to address this
competition, growth in each segment of our business could be limited.
- CYCLICALITY OF THE MANUFACTURED HOUSING INDUSTRY. The cyclical and
seasonal nature of the industry causes our revenues and operating
results to fluctuate and makes it hard for management to forecast
sales and profits in uncertain times. As a result of seasonal and
cyclical downturns, we may experience fluctuations in our operating
results that make difficult period-to-period comparisons.
- VOLATILITY IN OUR STOCK PRICE. Our stock is traded on the Nasdaq
National Stock Market and is therefore subject to market fluctuations.
During fiscal 2003, our stock price ranged from a low of $10.12 per
share to a high of $25.09 per share.
- TERRORIST ATTACKS/WAR. Market disruptions and other effects resulting
from the terrorist attacks on September 11, 2001 and actions,
including armed conflict by the United States and other governments in
reaction thereto may materially adversely affect us.
19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Palm Harbor is exposed to market risks related to fluctuations in
interest rates on our variable rate debt, which consists primarily of our
liabilities under retail floor plan financing arrangements and warehouse
revolving debt, and our fixed rate loans receivable balances. Palm Harbor is not
involved in any other market risk sensitive contracts or investments such as
interest rate swaps, futures contracts, or other types of derivative financial
instruments.
For variable interest rate obligations, changes in interest rates
generally do not impact fair market value, but do affect future earnings and
cash flows. Assuming Palm Harbor and CountryPlace's level of variable rate debt
as of March 28, 2003 is held constant, each one percentage point increase in
interest rates occurring on the first day of the year would result in an
increase in interest expense for the coming year of approximately $1.25 million.
For fixed rate loans receivable, changes in interest rates generally do
not change future earnings and cash flows, but do affect the fair market value
of the loan portfolio. Assuming CountryPlace's level of loans held for
investment as of March 28, 2003 is held constant, a 10% increase in average
interest rates would decrease the fair value of the Company's portfolio by
approximately $2.4 million.
CountryPlace is exposed to market risk related to the accessibility and
terms of financing in the asset-backed securities market. CountryPlace intends
to securitize its loan portfolio as a means to obtain long term fixed interest
rate funding. The asset-backed securities market for manufactured housing has
been volatile during the past year. The inability to securitize its loans would
require CountryPlace to seek other sources of funding or to reduce or eliminate
its loan originations if other sources of funding are not available.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors
Board of Directors
Palm Harbor Homes, Inc.
We have audited the accompanying consolidated balance sheets of Palm Harbor
Homes, Inc. and Subsidiaries (the "Company") as of March 29, 2002 and March 28,
2003, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three fiscal years in the period ended March 28,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Palm Harbor Homes,
Inc. and Subsidiaries at March 29, 2002 and March 28, 2003, and the consolidated
results of their operations and their cash flows for each of the three fiscal
years in the period ended March 28, 2003, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 1 to the financial statements, in fiscal 2001 the Company
changed its method of accounting for revenue recognition and in fiscal 2002 the
Company changed its method of accounting for goodwill.
Dallas, Texas Ernst & Young LLP
May 9, 2003
21
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
MARCH 29, MARCH 28,
2002 2003
------------------------------
ASSETS
Cash and cash equivalents $ 69,197 $ 45,592
Restricted cash -- 4,484
Investments 30,051 23,987
Trade receivables 80,111 66,151
Loans held for investment, net 2,334 32,135
Inventories 122,048 115,753
Prepaid expenses and other assets 14,369 14,952
Deferred tax asset, net 9,552 8,547
Property, plant and equipment, at cost:
Land and improvements 32,018 36,347
Buildings and improvements 56,990 64,808
Machinery and equipment 55,552 62,322
Construction in progress 8,174 1,985
------------------------------
152,734 165,462
Accumulated depreciation 60,234 72,575
------------------------------
92,500 92,887
Goodwill, net 53,109 78,079
------------------------------
Total assets $ 473,271 $ 482,567
==============================
22
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
MARCH 29, MARCH 28,
2002 2003
----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 28,649 $ 32,059
Accrued liabilities 50,246 58,195
Floor plan payable 134,977 114,437
Warehouse revolving debt -- 15,135
Other debt obligations 2,742 2,567
----------------------------
Total liabilities 216,614 222,393
Commitments and contingencies
Shareholders' equity
Preferred stock, $.01 par value
Authorized shares - 2,000,000
Issued and outstanding shares - none - -
Common stock, $.01 par value
Authorized shares - 50,000,000
Issued shares - 23,807,879 at March 29,
2002 and March 28, 2003 239 239
Additional paid-in capital 54,149 54,149
Retained earnings 220,359 223,580
Accumulated other comprehensive income 1,939 --
----------------------------
276,686 277,968
Less treasury shares - 858,507 at March 29,
2002, and 948,557 at March 28, 2003 (14,169) (15,657)
Unearned compensation (5,860) (2,137)
----------------------------
Total shareholders' equity 256,657 260,174
----------------------------
Total liabilities and shareholders' equity $ 473,271 $ 482,567
============================
See accompanying notes.
23
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
YEAR ENDED
-----------------------------------------------
MARCH 30, MARCH 29, MARCH 28,
2001 2002 2003
-----------------------------------------------
Net sales $ 650,451 $ 627,380 $ 573,130
Cost of sales 443,131 426,356 408,725
Selling, general and
administrative expenses 165,896 168,171 157,474
-----------------------------------------------
Income from operations 41,424 32,853 6,931
Interest expense (12,792) (8,377) (6,676)
Other income 7,279 6,450 4,874
-----------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 35,911 30,926 5,129
Income tax expense 14,034 11,478 1,908
-----------------------------------------------
Income before cumulative effect of change
in accounting principle 21,877 19,448 3,221
Cumulative effect of change in accounting
principle (2,048) - -
-----------------------------------------------
Net income $ 19,829 $ 19,448 $ 3,221
===============================================
Net income per common share -
basic and diluted $ 0.87 $ 0.85 $ 0.14
===============================================
Weighted average common
shares outstanding - basic 22,760 22,820 22,913
===============================================
Weighted average common
shares outstanding - diluted 22,772 22,820 22,913
===============================================
See accompanying notes.
24
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME
-----------------------------------------------------------------
Balance at March 31, 2000 23,807,879 $ 239 $ 54,149 $181,082 $ 803
Comprehensive income
Net income - - - 19,829 -
Unrealized gain - - - - 2,066
Total comprehensive income - - - - -
Treasury shares purchased, net - - - - -
Long-Term Incentive Plan
Shares purchased - - - - -
Terminations - - - - -
Provision - - - - -
-----------------------------------------------------------------
Balance at March 30, 2001 23,807,879 239 54,149 200,911 2,869
Comprehensive income
Net income - - - 19,448 -
Unrealized gain - - - - 845
Realization of gains - - - - (1,775)
Total comprehensive income - - - - -
Treasury shares purchased, net - - - - -
Long-Term Incentive Plan
Shares purchased - - - - -
Terminations - - - - -
Provision - - - - -
-----------------------------------------------------------------
Balance at March 29, 2002 23,807,879 239 54,149 220,359 1,939
Comprehensive income
Net income - - - 3,221 -
Realization of gains - - - - (1,939)
Total comprehensive income - - - - -
Treasury shares purchased, net - - - - -
Long-Term Incentive Plan
Terminations - - - - -
Provision - - - - -
-----------------------------------------------------------------
Balance at March 28, 2003 23,807,879 $ 239 $ 54,149 $223,580 $ -
=================================================================
TREASURY SHARES UNEARNED
SHARES AMOUNT COMPENSATION TOTAL
---------------------------------------------------------
Balance at March 31, 2000 (787,039) (13,848) $ (5,249) 217,176
Comprehensive income
Net income - - - 19,829
Unrealized gain - - - 2,066
--------
Total comprehensive income - - - 21,895
Treasury shares purchased, net (121,259) (1,661) - (1,661)
Long-Term Incentive Plan
Shares purchased - - (3,250) (3,250)
Terminations (56,292) (1,003) 1,003 -
Provision - - 1,492 1,492
---------------------------------------------------------
Balance at March 30, 2001 (964,590) (16,512) (6,004) 235,652
Comprehensive income
Net income - - - 19,448
Unrealized gain - - - 845
Realization of gains - - - (1,775)
--------
Total comprehensive income - - - 18,518
Treasury shares purchased, net 144,356 2,981 - 2,981
Long-Term Incentive Plan
Shares purchased - - (2,987) (2,987)
Terminations (38,273) (638) 638 -
Provision - - 2,493 2,493
---------------------------------------------------------
Balance at March 29, 2002 (858,507) (14,169) (5,860) 256,657
Comprehensive income
Net income - - - 3,221
Realization of gains - - - (1,939)
--------
Total comprehensive income - - - 1,282
Treasury shares purchased, net (12,518) (228) - (228)
Long-Term Incentive Plan
Terminations (77,532) (1,260) 1,260 -
Provision - - 2,463 2,463
---------------------------------------------------------
Balance at March 28, 2003 (948,557) $(15,657) $ (2,137) $260,174
=========================================================
See accompanying notes.
25
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED
--------------------------------------------------
MARCH 30, MARCH 29, MARCH 28,
2001 2002 2003
--------------------------------------------------
OPERATING ACTIVITIES
Income before cumulative effect of change in accounting principle $ 21,877 $ 19,448 $ 3,221
Adjustments to reconcile income before cumulative effect
of change in accounting principle to net cash provided by
operating activities
Cumulative effect of change in accounting principle (2,048) - -
Depreciation and amortization 14,831 12,087 13,798
Provision for credit losses - - 1,409
Deferred income taxes (1,792) (1,138) 740
(Gain) loss on disposition of assets (16) 329 515
Loss on investments - - 1,002
Purchases of stock for Long-Term Incentive Plan (3,250) (2,987) -
Provision for Long-Term Incentive Plan 1,492 2,493 2,463
Equity earnings in limited partnership - - (3,416)
Changes in operating assets and liabilities:
Restricted cash - - (4,484)
Trade receivables 5,228 3,497 11,357
Inventories (3,272) 3,869 12,214
Prepaid expenses and other current assets 1,611 (1,657) 4,694
Accounts payable and accrued expenses (12,129) (3,283) 3,181
--------------------------------------------------
Cash provided by operations 22,532 32,658 46,694
Loans originated (142,635) (137,880) (63,670)
Sale of loans 143,956 139,711 64,998
--------------------------------------------------
Net cash provided by operating activities 23,853 34,489 48,022
INVESTING ACTIVITIES
Business acquired, net of cash acquired - - (31,789)
Investment in limited partnership - - (3,000)
Distributions from investment in limited partnership - - 1,525
Loans originated - - (32,859)
Principal payments on loans originated - - 1,649
Purchases of property, plant and equipment (14,147) (14,773) (6,483)
Purchases of investments (11,769) (13,318) (5,470)
Sales of investments 9,702 8,399 10,532
Proceeds from disposition of assets 276 65 76
--------------------------------------------------
Net cash used in investing activities (15,938) (19,627) (65,819)
FINANCING ACTIVITIES
Net proceeds from (payments on) floor plan payable 6,139 (9,770) (20,540)
Net proceeds from warehouse revolving debt - - 15,135
Principal payments on debt obligations (241) (166) (175)
Net purchases of treasury stock (1,661) 2,981 (228)
--------------------------------------------------
Net cash provided by (used in) financing activities 4,237 (6,955) (5,808)
Net increase (decrease) in cash and cash equivalents 12,152 7,907 (23,605)
Cash and cash equivalents at beginning of year 49,138 61,290 69,197
--------------------------------------------------
Cash and cash equivalents at end of year $ 61,290 $ 69,197 $ 45,592
==================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 12,670 $ 8,896 $ 6,257
Income taxes $ 17,874 $ 15,409 $ 361
See accompanying notes.
26
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Palm Harbor Homes,
Inc. (the "Company") and our majority-owned and wholly-owned subsidiaries.
Investments in 50% or less-owned entities are accounted for under the equity
method. All significant intercompany transactions and balances have been
eliminated in consolidation. The Company's fiscal year ends on the last Friday
in March. Headquartered in Addison, Texas, the Company markets factory-built
homes nationwide through vertically integrated operations, encompassing
manufactured housing, modular housing, chattel and mortgage bank financing, as
well as insurance.
Preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from the estimates and
assumptions used by management in preparation of the financial statements.
REVENUE RECOGNITION
Effective April 1, 2000, in accordance with Staff Accounting Bulletin No. 101,
the Company changed its method of accounting for revenue recognition for retail
sales. Historically, the Company recognized revenues for its retail home sales
when the home was delivered. Under the Company's revenue recognition policy,
adopted in the fourth quarter of 2001 retroactive to April 1, 2000, the Company
now recognizes revenue for retail sales when the home is delivered and
permanently located at the customer's site. The cumulative effect of the change
on prior years resulted in a charge to net income of $2,048,000 (after income
taxes of $1,366,000 which is included in results for fiscal 2001). The effect of
the change on fiscal 2001 was to increase income before the cumulative effect of
the accounting change by $101,000 and decrease net income by approximately $2.0
million ($0.09 per share). For the first quarter of 2001, the Company recognized
$11,535,000 in revenues that are included in the cumulative effect adjustment as
of April 1, 2000.
Retail sales, including shipping charges, are recognized when a down payment is
received, the customer enters 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. Homes sold to independent retailers are
recognized when the home is shipped which is when the title passes to the
independent retailer. The transportation cost is borne by the independent
retailer.
Interest income on loans held for investment is recognized as net sales on an
accrual basis. Loan origination fees and certain direct loan origination costs
are deferred and amortized into net sales over the contractual life of the loan
using the interest method.
Most of the homes sold to independent retailers are financed through standard
industry arrangements which include repurchase agreements (see Note 13). The
Company extends credit in the normal course of business under normal trade terms
and our receivables are subject to normal industry risk.
RESIDUAL INTERESTS AND RECOURSE OBLIGATIONS
Through November 2002, CountryPlace Mortgage, Ltd. ("CountryPlace"), the
Company's finance subsidiary, originated and sold loan contracts to national
consumer finance companies and received cash and/or retained a residual interest
in the interest generated by the sold contracts. Since April 1, 1999,
substantially all interest income on sold contracts was received in cash upon
the sale of the contracts. Prior to April 1, 1999, a residual interest in the
interest generated by the sold contracts was retained and recorded. The fair
value of the residual interests was previously recorded on the balance sheet at
fair value. Additionally, in some cases, in connection with the sale of loan
contracts, CountryPlace was required to share in the losses resulting from
defaults or prepayments of loan contracts previously sold and therefore
established estimated losses at the time the loan contracts were sold.
27
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At March 29, 2002, the Company's net receivable for interest-only strips was
approximately $8.9 million and the Company's net reserve for recourse
obligations was $2.9 million. During the fourth quarter of fiscal 2003, the
Company sold all of its interest-only strip receivables related to loan
contracts previously sold for approximately $7.0 million and was released from
all of its related recourse obligations. No significant gain or loss was
recorded in connection with this transaction. During the fiscal year ended March
30, 2001, March 29, 2002 and March 28, 2003, the Company recognized
approximately $5.0 million, $3.9 million and $1.0 million in gains,
respectively, related to loan contracts sold. The Company had $1.1 million, $0.8
million and zero in unrealized gains for the fiscal years ended March 30, 2001,
March 29, 2002 and March 28, 2003, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are all liquid investments with maturities of three
months or less when purchased.
RESTRICTED CASH
At March 28, 2003, $4.5 million of cash was pledged as collateral for
outstanding letters of credit which collaterized insurance programs and surety
bonds.
LOANS HELD FOR INVESTMENT
Loans held for investment are stated at the aggregate remaining unpaid principal
balances less allowances for loan losses and unamortized deferred finance fees.
ALLOWANCE FOR LOAN LOSSES
CountryPlace originates and holds for investment purposes loans related to the
retail sale of manufactured Palm Harbor homes, with such loans being
collateralized primarily by the manufactured home. The Company provides, at the
time of sale, allowances for estimated future loan losses. The allowance for
loan gives consideration to the composition of the loan portfolio, including
number of delinquencies and historical loss experience, and expectations as to
future loan losses based upon industry knowledge. Although the Company maintains
an allowance for loan losses based upon these expectations and other criteria,
future differences between the Company's expectations with respect to loan
losses and actual losses incurred in the portfolio could differ, and require the
Company to provide additional allowances.
INVESTMENTS
The Company holds investments as trading and available-for-sale. The trading
account assets consist of marketable debt and equity securities and are stated
at fair value. Marketable debt and equity securities not classified as trading
are classified as available-for-sale. Available-for-sale securities are stated
at fair value, with the unrealized gains and losses, net of tax, reported in
shareholders' equity.
INVENTORIES
Raw materials inventories are valued at the lower of cost (first-in, first-out
method which approximates actual cost) or market. Finished goods are valued at
the lower of cost or market, using the specific identification method.
28
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation is calculated
using the straight-line method over the assets' estimated useful lives.
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease period or the improvements' useful lives. Estimated useful
lives for significant classes of assets are as follows: Land and Improvements
10-15 years, Buildings and Improvements 3-15 years, and Machinery and Equipment
2-10 years. The Company had depreciation expense of $10,765,000, $11,993,000 and
$13,704,000 in fiscal 2001, 2002 and 2003, respectively. Repairs and maintenance
are expensed as incurred. The recoverability of property, plant and equipment is
evaluated whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable, primarily based on estimated
selling price, appraised value or projected undiscounted cash flows. The company
has not recorded any impairment charges in fiscal 2001, 2002 or 2003.
GOODWILL
Goodwill is the excess of cost over fair value of net assets of businesses
acquired. Through fiscal 2001, goodwill was amortized on the straight-line
method over the expected periods to be benefited - between 10 and 20 years.
Commencing in fiscal 2002, goodwill is no longer amortized. The Company tests
goodwill annually for impairment by reporting unit and records an impairment
charge when the implied fair value of goodwill is less than its carrying value.
Comparative pro forma results for the fiscal year ended March 30, 2001 would
have increased income before cumulative effect of change in accounting principle
and net income by $2.5 million, or $0.11 per share, to $0.98 per share. The
Company performed its annual goodwill impairment test for fiscal year 2003 and
noted no implied impairment of goodwill.
WARRANTIES
Products 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 product warranties are provided at the date of sale.
START-UP COSTS
Costs incurred in connection with the start-up of manufacturing facilities and
retail superstores are expensed as incurred.
INCOME TAXES
Deferred income taxes are determined by the liability method and reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.
EARNINGS PER SHARE
In computing both basic and diluted earnings per share, the number of weighted
average shares outstanding during the periods presented were used.
FINANCIAL STATEMENT CLASSIFICATIONS
During the fiscal year ended March 28, 2003, the Company announced plans to
significantly increase its finance operations through CountryPlace. As of March
28, 2003, CountryPlace had obtained a warehouse revolving debt facility of
$125.0 million whereby CountryPlace will initially borrow against the facility
on a short-term basis to fund the origination of manufactured housing loans
until sufficient sums of loans are accumulated and then securitized with debt
with longer-term maturities. As of March 28, 2003, the Company had approximately
$32.1 million of loans held for investment.
As a result of the Company's plans to continue to significantly expand its
finance and insurance operations, an accounting policy to no longer present a
classified balance sheet has been adopted.
Additionally, certain prior period amounts have been reclassified to conform to
the current period presentation.
29
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." Effective March 30, 2002, the Company adopted
SFAS No. 146 which requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of commitment
to an exit or disposal plan. The provisions of SFAS No. 146 are effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption of SFAS No. 146 did not have a material effect on the Company's
financial position, results of operations and cash flows.
In December 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." Effective March 30, 2002, the Company adopted
Interpretation No. 45 clarifies the requirement for recognition of a liability
by a guarantor at the inception of the guarantee, based on the fair value of the
non-contingent obligation to perform. Interpretation No. 45 must be applied
prospectively to guarantees entered into or modified after December 31, 2002.
The adoption of Interpretation No 45 did not have a material effect on the
Company's financial position, results of operations and cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Under previous practices, certain entities were
included in consolidated financial statements based upon controlling voting
interests or in other special situations. Under Interpretation No. 46, certain
previously unconsolidated entities will be required to be included in
consolidated financial statements of the primary beneficiary, as defined. For
variable interest entities, often referred to as special purpose entities,
created after January 31, 2003, Interpretation No. 46 is effective immediately.
The Company is currently evaluating the impact of Interpretation No. 46 on its
financial position, results of operations and cash flows.
30
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS/INVESTMENTS
On June 7, 2002, the Company acquired Nationwide Custom Homes ("Nationwide"), a
manufacturer and marketer of modular homes, for $32.5 million in cash. The
acquisition was accounted for using the purchase method of accounting. The
purchase price allocation as of March 28, 2003 resulted in approximately $25
million of goodwill related to the acquisition. The pro forma results of
operations assuming the acquisition of Nationwide as of March 30, 2002 would not
be materially different than the historical results and, therefore, are not
presented.
In June 2002, the Company invested $3.0 million to become the sole limited
partner and 50% owner of an existing mortgage banking firm, BSM Financial L. P.
("BSM") which is being accounted for using the equity method of accounting.
Since the acquisition, the Company's equity in the net income of BSM was $3.4
million. The following table represents the condensed balance sheet as of March
28, 2003 and the condensed income statement for the ten month (from date of
acquisition) period ending March 28, 2003:
MARCH 28,
2003
--------------
(in thousands)
Cash $ 390
Receivable for mortgage notes assigned to investors 130,319
Other current assets 2,341
Property, plant and equipment, net 879
Other assets 52
------------
Total assets $ 133,981
============
Warehouse revolving debt $ 120,360
Other current liabilities 5,921
Debt obligations 163
Partnership capital 7,537
------------
Total liabilities and partnership capital $ 133,981
============
TEN MONTHS ENDED
MARCH 28,
2003
----------------
(in thousands)
Revenues $ 27,991
Operating income 6,831
Net income 6,831
3. INVENTORIES
Inventories consist of the following:
MARCH 29, MARCH 28,
2002 2003
------------------------------------
(in thousands)
Raw materials $ 7,631 $ 7,779
Work in process 3,339 4,493
Finished goods - factory-built 659 2,337
Finished goods - retail 110,419 101,144
------------------------------------
$ 122,048 $ 115,753
====================================
31
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
The Company's investments totaled $30,051,000 and $23,987,000 at March 29, 2002
and March 28, 2003, respectively. The fair value of the available-for-sale
securities was $20,393,000 and $14,619,000, and had no net unrealized gains or
losses recorded at March 29, 2002 and March 28, 2003, respectively. The majority
of the available-for-sale securities consist of U.S. government related
obligations and other debt obligations with contractual maturities of generally
2 to 11 years. The remaining of the Company's investments are classified as
trading securities.
5. FLOOR PLAN PAYABLE
During the fourth quarter of fiscal 2003, the Company executed a $100.0 million
syndicated floor plan facility with a financial institution. The advance rate
for this facility is 90% of manufacturer's invoice. On March 19, 2006, $65
million of this facility will expire and the remaining $35 million will expire
via orderly liquidations by the end of September 2003. The Company is exploring
several options to replace this portion of the facility. The Company has a
second facility with another financial institution for $10.0 million, which
automatically renews each year unless notification of cancellation is received
by the financial institution. These facilities are used to finance a major
portion of the home inventory at the Company's retail superstores and are
secured by a portion of its home inventory and receivables from financial
institutions. The interest rates on the facilities are prime (4.25% at March 28,
2003) or prime plus 1.0% to 3.0% for aged units, of which the Company has none.
These two floor plan facilities contain certain provisions regarding minimum
financial requirements which the Company must maintain in order to borrow
against the facilities. As of March 28, 2003, the Company was in compliance with
its $100.0 million syndicated floor plan facility and had obtained a limited
forbearance with respect to a violation of its minimum covenant requirements on
its $10.0 million facility. The Company had $134,977,000 and $114,437,000
outstanding on these floor plan credit facilities at March 29, 2002 and March
28, 2003, respectively.
6. WAREHOUSE REVOLVING DEBT
The Company, through its subsidiary CountryPlace, has a loan warehouse borrowing
facility with a financial institution. This facility is collateralized by
specific receivables pledged to the facility and bears interest at the rate of
LIBOR plus 1.25% (2.5625% at March 28, 2003). The facility terminates on March
19, 2004. The facility provides for an advance of 65% against the outstanding
principal balance of eligible receivables, as further defined in the warehouse
agreement. CountryPlace had outstanding borrowings under this facility of
$15,135,000 as of March 28, 2003. The facility contains certain requirements
relating to the performance and composition of the receivables pledged to the
facility and certain financial covenants, which are customary in the industry.
The facility also requires Palm Harbor and CountryPlace to maintain a minimum
balance of shareholders' equity. As of March 28, 2003, both Palm Harbor and
CountryPlace were in compliance with these requirements. In connection with the
warehouse borrowing facility, Palm Harbor agreed to fund in cash to
CountryPlace, up to 25% of each loan loss incurred. As of March 28, 2003 there
had been no losses related to any loans in the portfolio and no such loss
funding was required. Additionally, Palm Harbor has entered into an intercompany
financing arrangement with CountryPlace that provides for up to $25 million of
funding to be used for the growth of CountryPlace's portfolio and operations. As
of March 28, 2003, approximately $4.1 million was advanced to CountryPlace under
this intercompany financing arrangement.
32
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
MARCH 29, MARCH 28,
2002 2003
----------------------------------
(in thousands)
Salaries, wages and benefits $ 13,617 $ 15,981
Accrued expenses on homes sold, including warranty 15,388 14,715
Customer deposits 7,263 11,954
Sales incentives 3,851 4,285
Other 10,127 11,260
----------------------------------
$ 50,246 $ 58,195
==================================
8. OTHER DEBT OBLIGATIONS
Other debt obligations consist of the following:
MARCH 29, MARCH 28,
2002 2003
----------------------------------
(in thousands)
Economic development revenue bonds;
interest payable monthly at 7.54%; monthly
interest and principal payments of $31,393 through
January 2006 with final payment of
$2,002,040 in February 2006 $ 2,742 $ 2,567
==================================
The revenue bonds require the maintenance of certain financial statement ratios,
prohibit the payment of dividends and are collateralized by certain fixed assets
having a carrying value as of March 28, 2003 of $4,842,000.
Scheduled maturities of other debt obligations are as follows (in thousands):
FISCAL YEAR AMOUNT
- ----------- ------
2004 $ 190
2005 204
2006 2,173
-------
$ 2,567
=======
The carrying value of the Company's other debt obligations approximates their
fair value.
9. INCOME TAXES
Income tax expense for fiscal years 2001, 2002 and 2003 is as follows:
MARCH 30, MARCH 29, MARCH 28,
2001 2002 2003
----------------------------------------------------
(in thousands)
Current
Federal $ 14,687 $ 11,566 $ 433
State 1,440 911 420
Deferred (2,093) (999) 1,055
----------------------------------------------------
Total income tax expense $ 14,034 $ 11,478 $ 1,908
====================================================
33
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of deferred tax assets and liabilities are as follows:
MARCH 29, MARCH 28,
2002 2003
-----------------------------------
(in thousands)
Deferred tax assets
Warranty reserves $ 985 $ 196
Accrued liabilities 4,901 5,155
Inventory 1,813 2,310
Unrecognized income 2,564 532
Property and equipment 2,489 2,875
Other 1,186 2,617
-----------------------------------
Total deferred tax assets 13,938 13,685
Deferred tax liabilities
Tax benefits purchased 1,834 1,313
Other 2,552 3,825
-----------------------------------
Total deferred tax liabilities 4,386 5,138
-----------------------------------
Net deferred income tax assets $ 9,552 $ 8,547
===================================
Tax benefits purchased are investments in Safe Harbor lease agreements that are
carried net of tax benefits realized. The balance will be amortized over the
remaining term of the related lease.
The effective income tax rate on pretax earnings differed from the U.S. federal
statutory rate for the following reasons:
MARCH 30, MARCH 29, MARCH 28,
2001 2002 2003
---------------------------------------------------------
(in thousands)
Tax at statutory rate $ 12,567 $ 10,824 $ 1,795
Increases (decreases)
State taxes - net of federal tax benefit 939 592 273
Goodwill amortization 1,016 - -
Tax exempt interest (162) (110) (84)
Other (326) 172 (76)
---------------------------------------------------------
Income tax expense $ 14,034 $ 11,478 $ 1,908
=========================================================
Effective tax rate 39.1% 37.1% 37.2%
=========================================================
10. SHAREHOLDERS' EQUITY
The Board of Directors may, without further action by the Company's
shareholders, from time to time, authorize the issuance of shares of preferred
stock in series and may, at the time of issuance, determine the powers, rights,
preferences and limitations, including the dividend rate, conversion rights,
voting rights, redemption price and liquidation preference, and the number of
shares to be included in any such series. Any preferred stock so issued may rank
senior to the common stock with respect to the payment of dividends or amounts
upon liquidation, dissolution or winding up, or both. In addition, any such
shares of preferred stock may have class or series voting rights.
34
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. LONG-TERM INCENTIVE PLAN
Effective March 29, 1999, the Board of Directors approved the Fiscal Year 2000
Long-Term Incentive Plan (the "Plan") whereby certain key associates received
awards of restricted common stock. The Company's Chairman and President/CEO do
not participate in the Plan. Shares awarded under the Plan are either purchased
by the Company in the open market or transferred from the Company's treasury
stock account. These restricted stock awards give the associate the right to
receive a specific number of shares of common stock contingent upon remaining an
associate of the Company for a specified period. Effective April 3, 2000, April
2, 2001 and April 1, 2002, the Board of Directors approved the Fiscal Year 2001
Long-Term Incentive Plan (the "2001 Plan"), the Fiscal Year 2002 Long-Term
Incentive Plan (the "2002 Plan") and the Fiscal Year 2003 Long-Term Incentive
Plan (the "2003 Plan"), respectively. The 2001 Plan, 2002 Plan and the 2003 Plan
have substantially the same terms as the Plan.
The unamortized cost of the common stock acquired by the Company for the
participants in the plans is reflected as "Unearned Compensation" in the
accompanying Consolidated Balance Sheets. The plans are administered by a
committee authorized by the Board of Directors.
12. EMPLOYEE PLAN
The Company sponsors an employee savings plan (the "401k Plan") that is intended
to provide participating employees with additional income upon retirement.
Employees may contribute between 1% and 15% of eligible compensation to the 401k
Plan. The Company matches 50% of the first 6% deferred by employees. Employees
are immediately eligible to participate and employer contributions, which begin
one year after employment, are vested at the rate of 20% per year and are fully
vested after five years of employment. Contribution expense was $1,387,000,
$1,627,000 and $1,631,000 in fiscal years 2001, 2002 and 2003, respectively.
13. COMMITMENTS AND CONTINGENCIES
Future minimum lease payments for all noncancelable operating leases having a
remaining term in excess of one year at March 28, 2003, are as follows (in
thousands):
FISCAL YEAR AMOUNT
- ----------- ------
2004 $ 5,449
2005 3,078
2006 2,359
2007 1,761
2008 and thereafter 9,116
--------
$ 21,763
========
Rent expense (net of sublease income) was $8,991,000, $8,617,000 and $8,124,000
for fiscal years 2001, 2002 and 2003, respectively.
The Company is contingently liable under the terms of repurchase agreements
covering independent retailers' floor plan financing. Under such agreements, the
Company agrees to repurchase homes at declining prices over the term of the
agreement, generally 12 to 18 months. At March 28, 2003, the Company estimates
that its potential obligations under all repurchase agreements were
approximately $10.4 million. However, it is management's opinion that no
material loss will occur from the repurchase agreements. During fiscal years
2001, 2002 and 2003, net expenses incurred by the Company under these repurchase
agreements totaled $132,000, $212,000 and $69,000, respectively.
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
35
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. OTHER INCOME
During fiscal years 2001, 2002 and 2003, the Company recorded interest income of
$5,247,000, $3,823,000 and $1,700,000 respectively and other income, primarily
income earned on a real estate investment in fiscal 2002 and 2003 and earnings
in the Company's limited partnership, BSM, partially offset by a loss on
short-term investments in fiscal 2003, of $2,032,000, $2,627,000 and $3,174,000,
respectively.
15. BUSINESS SEGMENT INFORMATION
In the previous fiscal years, the Company reported two business segments - a
"housing segment" which combined the retail and manufacturing operations and a
"financial services" segment which combined the insurance and finance
operations. The Company operates nationwide through vertically integrated
operations, encompassing manufactured housing, modular housing, chattel and
mortgage bank financing, as well as insurance. During the current fiscal year,
the Company further increased both its finance and home product offerings
through both business acquisition and internal development and expansion. As a
result, the Company's various operating units have continued to become more
interrelated, interdependent and synergistic. In fiscal 2003, 82% of homes
manufactured by the Company were sold through Company-owned retail superstores
and 100% of loans originated and held for investment by the Company's
CountryPlace Mortgage, Ltd. subsidiary related to the retail sale of the
Company's manufactured homes. Accordingly, the Company's chief operating
decision makers primarily review business and operating data for purposes of
assessing performance, making operating decisions and allocating resources on an
enterprise-wide basis. Therefore, the Company is presenting its financial
statements on an enterprise-wide basis and prior year segment data has been
reclassified to conform to the current year presentation.
16. ACCRUED PRODUCT WARRANTY OBLIGATIONS
The following table summarizes the changes in accrued product warranty
obligations during the last three years. A portion of warranty reserves is
classified as other long-term liabilities in the consolidated balance sheet.
ACCRUED WARRANTY
OBLIGATION
----------------
(in thousands)
Reserves at March 29, 2000 $ 8,736
Net warranty expense provided 21,058
Cash warranty payments (21,611)
-----------
Reserves at March 30, 2001 8,183
Net warranty expense provided 16,182
Cash warranty payments (17,782)
-----------
Reserves at March 29, 2002 6,583
Net warranty expense provided 11,445
Cash warranty payments (13,895)
-----------
Reserves at March 28, 2003 $ 4,133
===========
36
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain unaudited quarterly financial information
for the fiscal years 2002 and 2003.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
----------------------------------------------------------------------
(in thousands, except per share data)
FISCAL YEAR ENDED
MARCH 29, 2002
Net sales $ 172,560 $ 173,378 $ 158,787 $ 122,685 $ 627,380
Gross profit 51,939 55,560 49,803 43,722 201,024
Income from operations 11,010 11,617 8,195 2,031 32,853
Net income (loss) 5,777 6,676 5,173 1,822 19,448
Earnings per share - basic and diluted $ 0.25 $ 0.29 $ 0.23 $ 0.08 $ 0.85
FISCAL YEAR ENDED
MARCH 28, 2003
Net sales $ 138,459 $ 149,612 $ 148,974 $ 136,085 $ 573,130
Gross profit 39,539 44,327 42,920 37,619 164,405
Income (loss) from operations (935) 3,269 4,758 (161) 6,931
Net income (loss) (1,307) 1,612 2,733 183 3,221
Earnings (loss) per share - basic and
diluted $ (0.06) $ 0.07 $ 0.12 $ 0.01 $ 0.14
37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Information with respect to the Company's Board of Directors
and executive officers is incorporated by reference from pages 7 through 9 of
the Company's definitive Proxy Statement filed with the SEC on June 9, 2003 in
connection with the Annual Meeting of Shareholders to be held July 23, 2003.
(b) Based solely upon a review of Forms 3 and 4 and amendments
thereto furnished to the Company pursuant to Rule 16a-3(e) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), during the
Company's most recent fiscal year and Form 5 and amendments thereto furnished to
the Company with respect to our most recent fiscal year, no person who, at any
time during the most recent fiscal year was a director, officer, beneficial
owner of more than 10% of any class of equity securities of the Company
registered pursuant to Section 12 of the Exchange Act, or any other person
subject to Section 16 of the Exchange Act failed to file on a timely basis,
reports required by Section 16(a) of the Exchange Act during the most recent
fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated by
reference from pages 9 through 11 of The Company's definitive Proxy Statement
filed with the SEC on June 9, 2003 in connection with the Annual Meeting of
Shareholders to be held July 23, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial
owners and management is incorporated by reference from pages 6 and 7 of the
Company's definitive Proxy Statement filed with the SEC on June 9, 2003 in
connection with the Annual Meeting of Shareholders to be held July 23, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective to cause material information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act of 1934 to be recorded, processed, summarized
and reported within the time periods specified in the Commission's rules and
forms. There have been no significant changes in the Company's internal controls
or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
38
ITEM 15. EXHIBITS, FINANCIAL STATEMENT, SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The Company's Consolidated Financial Statements for the year
ended March 28, 2003 are included on pages 21 through 37 of this report.
(2) Financial Statement Schedules
None
(3) Index to Exhibits
Exhibit
No. Description
- ------- -----------
3.1 Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1
to the Registrant's Registration Statement on Form S-1, Registration No. 33-79164).
3.2 Articles of Amendment (Incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1, Registration No. 33-79164).
3.3 Restated Bylaws (Incorporated by reference to Exhibit 3.3 to the Registrant's
Registration Statement on Form S-1, Registration No. 33-79164).
4.1 Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1, Registration No. 33-79164).
10.1 Associate Stock Purchase Plan (Incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1, Registration No. 33-97676).
10.2 Form of Indemnification Agreement between the Company and each of our directors and
certain officers (Incorporated by reference to Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1, Registration No. 33-79164).
10.3 Compensation Agreement between the Company and Lee Posey (Incorporated by reference to
Exhibit 10.7 to the Registrant's Registration Statement on Form S-1, Registration No.
33-79164).
10.4 Amended and Restated Amendment to Compensation Agreement between the Company and Lee
Posey (Incorporated by reference to Exhibit 10.6 to the Registrant's Registration
Statement on Form S-1, Registration No. 33-97676).
*21.1 List of Subsidiaries.
*23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on the signature page of the Report).
*99.1 Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 by Larry H. Keener
*99.2 Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 by Kelly Tacke.
*99.3 Financial Statements of BSM Financial, L. P.
- -------------
* Filed herewith
(b) None.
(c) See Item 14(a)(3) above.
(d) None.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
our behalf by the undersigned, thereunto duly authorized on June 6, 2003.
PALM HARBOR HOMES, INC.
/s/ Lee Posey
--------------------------------
Lee Posey, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby
constitute and appoint Lee Posey and Kelly Tacke, and each of them, each with
full power to act without the other, his true and lawful attorneys-in-fact and
agents, each with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments to the annual report on Form 10-K for the year ended March 28, 2003
of Palm Harbor Homes, Inc., and to file the same, with any and all exhibits
thereto, and all other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all of each of said
attorneys-in-fact and agents or any of them may lawfully do or cause to be done
by virtue thereof.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Lee Posey Chairman of the Board and Director June 6, 2003
- ------------------------------------- (Principal Executive Officer)
Lee Posey
/s/ Larry Keener Chief Executive Officer, June 6, 2003
- ------------------------------------- President and Director
Larry Keener
/s/ Kelly Tacke Vice President-Finance, June 6, 2003
- ------------------------------------- Chief Financial Officer and Secretary
Kelly Tacke (Principal Financial and Accounting Officer)
/s/ William R. Thomas Director June 6, 2003
- -------------------------------------
William R. Thomas
/s/ Walter D. Rosenberg, Jr. Director June 6, 2003
- -------------------------------------
Walter D. Rosenberg, Jr.
/s/ Frederick R. Meyer Director June 6, 2003
- -------------------------------------
Frederick R. Meyer
/s/ John H. Wilson Director June 6, 2003
- -------------------------------------
John H. Wilson
/s/ A. Gary Shilling Director June 6, 2003
- -------------------------------------
A. Gary Shilling
/s/ Jerry D. Mallonee Director June 6, 2003
- -------------------------------------
Jerry D. Mallonee
40
CERTIFICATIONS
I, Larry H. Keener, certify that:
1. I have reviewed this annual report on Form 10-K of Palm Harbor
Homes, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
Annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and
procedures to ensure that material
information relating to the registrant,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which this annual report is being prepared;
b. evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this Annual report
(the "Evaluation Date"); and
c. presented in the annual report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors:
a. all significant deficiencies in the design
or operation of internal controls which
could adversely affect the registrant's
ability to record, process, summarize and
report financial data and have identified
for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated
in this annual report whether there were significant changes
in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: June 6, 2003
By: /s/ Larry H. Keener
-----------------------
Larry H. Keener
Chief Executive Officer
41
CERTIFICATIONS
I, Kelly Tacke, certify that:
1. I have reviewed this annual report on Form 10-K of Palm Harbor
Homes, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and
procedures to ensure that material
information relating to the registrant,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which this Annual report is being prepared;
b. evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this Annual report
(the "Evaluation Date"); and
c. presented in the annual report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors:
a. all significant deficiencies in the design
or operation of internal controls which
could adversely affect the registrant's
ability to record, process, summarize and
report financial data and have identified
for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated
in this annual report whether there were significant changes
in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: June 6, 2003
By: /s/ Kelly Tacke
------------------------------------
Kelly Tacke, Chief Financial Officer
(Chief Financial and Accounting
Officer)
42
INDEX TO EXHIBITS
Exhibits
No. Description
- -------- -----------
3.1 Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1
to the Registrant's Registration Statement on Form S-1, Registration No. 33-79164).
3.2 Articles of Amendment (Incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1, Registration No. 33-79164).
3.3 Restated Bylaws (Incorporated by reference to Exhibit 3.3 to the Registrant's
Registration Statement on Form S-1, Registration No. 33-79164).
4.1 Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1, Registration No. 33-79164).
10.1 Associate Stock Purchase Plan (Incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1, Registration No. 33-97676).
10.2 Form of Indemnification Agreement between Palm Harbor and each of our directors and certain
officers (Incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement
on Form S-1, Registration No. 33-79164).
10.3 Compensation Agreement between the Company and Lee Posey (Incorporated by reference to
Exhibit 10.7 to the Registrant's Registration Statement on Form S-1, Registration No.
33-79164).
10.4 Amended and Restated Amendment to Compensation Agreement between the Company and Lee
Posey (Incorporated by reference to Exhibit 10.6 to the Registrant's Registration
Statement on Form S-1, Registration No. 33-97676).
*21.1 List of Subsidiaries.
*23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on the signature page of the Report).
*99.1 Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 by Larry H. Keener
*99.2 Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 by Kelly Tacke.
*99.3 Financial Statements of BSM Financial, L.P.
- ----
* Filed herewith
43