FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
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(Mark One) |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the quarterly period ended March 31, 2003. |
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- or - |
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o |
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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 0-5555
LIBERTY HOMES, INC.
(Exact name of registrant as specified in its charter)
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Indiana |
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35-1174256 |
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(State of Incorporation) |
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(IRS Employer Identification No.) |
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PO Box 35, Goshen, Indiana |
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46527 |
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(Address of principal executive offices) |
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(ZIP Code) |
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574.533.0431 |
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(Registrant’s telephone number, including area code) |
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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 ý No o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
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Class |
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Shares of
Outstanding |
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Class A Common Stock, $1.00 par value |
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1,998,945 |
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Class B Common Stock, $1.00 par value |
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1,655,522 |
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Part I – Consolidated Financial Information
2
PART I - CONSOLIDATED FINANCIAL INFORMATION
The consolidated financial statements and footnotes thereto listed in the Index on page 2 of this report have been prepared using accounting principles generally accepted in the United States of America. Such principles have been applied on a basis consistent with 2002. The results of operations for the interim period presented are not necessarily indicative of results to be expected for the year. The information furnished herein reflects all adjustments (consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods.
3
LIBERTY HOMES, INC.
as of March 31, 2003 and December 31, 2002
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(Unaudited) |
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March 31, |
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December
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
1,529,000 |
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$ |
4,308,000 |
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Short term investments |
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300,000 |
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300,000 |
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Receivables |
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7,578,000 |
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5,815,000 |
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Inventories |
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11,804,000 |
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10,644,000 |
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Deferred tax asset |
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3,441,000 |
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3,441,000 |
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Income taxes refundable |
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236,000 |
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1,912,000 |
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Prepayments and other |
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3,073,000 |
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2,148,000 |
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Total current assets |
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27,961,000 |
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28,568,000 |
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Property, plant and equipment: |
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Land |
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2,014,000 |
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2,014,000 |
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Buildings and improvements |
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23,619,000 |
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23,580,000 |
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Machinery and equipment |
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20,823,000 |
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20,735,000 |
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46,456,000 |
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46,329,000 |
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Less accumulated depreciation |
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26,950,000 |
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26,458,000 |
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19,506,000 |
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19,871,000 |
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Property held for sale |
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4,581,000 |
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4,581,000 |
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Total assets |
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$ |
52,048,000 |
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$ |
53,020,000 |
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(Unaudited) |
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March 31, |
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December
31, |
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LIABILITIES |
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Current liabilities: |
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Accounts payable |
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$ |
3,495,000 |
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$ |
1,779,000 |
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Notes payable |
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1,645,000 |
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895,000 |
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Accrued compensation & payroll taxes |
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1,372,000 |
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1,150,000 |
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Other accrued liabilities |
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5,049,000 |
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6,439,000 |
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Total current liabilities |
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11,561,000 |
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10,263,000 |
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Deferred income taxes |
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2,732,000 |
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2,732,000 |
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Minority interest in consolidated subsidiaries |
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900,000 |
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929,000 |
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Contingent liabilities (see notes) |
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— |
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— |
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SHAREHOLDERS’ EQUITY |
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Capital Stock: |
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Class A, $1 par value |
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Authorized-7,500,000 Shares Issued & outstanding-1,999,000 in 2003 & 1,995,000 in 2002 |
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1,999,000 |
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1,995,000 |
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Class B, $1 par value |
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Authorized-3,500,000 Shares Issued & outstanding-1,655,000 in 2003 & 1,659,000 in 2002 |
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1,655,000 |
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1,659,000 |
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Other capital |
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83,000 |
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83,000 |
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Retained earnings |
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33,118,000 |
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35,359,000 |
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36,855,000 |
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39,096,000 |
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Total liabilities and stockholders’ equity |
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$ |
52,048,000 |
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$ |
53,020,000 |
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4
LIBERTY HOMES, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
for the three months ended March 31, 2003 and 2002
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2003 |
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2002 |
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Net sales |
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$ |
17,154,000 |
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$ |
21,899,000 |
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Cost of sales |
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15,976,000 |
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19,292,000 |
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Gross profit |
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1,178,000 |
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2,607,000 |
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Selling, delivery, general and administrative |
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Expenses |
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3,180,000 |
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4,115,000 |
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Operating loss |
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(2,002,000 |
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(1,508,000 |
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Interest expense |
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(27,000 |
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(46,000 |
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Interest and other income |
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15,000 |
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26,000 |
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Loss before minority interest and income taxes |
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(2,014,000 |
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(1,528,000 |
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Minority interest |
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29,000 |
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28,000 |
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Income tax benefit |
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— |
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519,000 |
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Net loss |
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$ |
(1,985,000 |
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$ |
(981,000 |
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Share loss per outstanding Common |
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Share – basic and fully diluted |
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$ |
(.54 |
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$ |
(.26 |
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Weighted average shares outstanding |
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3,654,000 |
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3,749,000 |
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Cash dividend per share: |
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Class A and Class B Common Stock |
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$ |
0.07 |
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$ |
0.07 |
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5
LIBERTY HOMES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
for the three months ended March 31, 2003 and 2002
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2003 |
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2002 |
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Cash flows used in operating activities |
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Net loss |
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$ |
(1,985,000 |
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$ |
(981,000 |
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Adjustment to reconcile net loss to net cash used in operating activities |
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Depreciation |
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492,000 |
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557,000 |
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Minority interest |
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(29,000 |
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(28,000 |
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Changes in assets and liabilities: |
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Receivables |
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(1,763,000 |
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934,000 |
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Inventories |
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(1,160,000 |
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(886,000 |
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Prepayments and other |
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(925,000 |
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97,000 |
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Accounts payable |
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1,716,000 |
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793,000 |
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Other current liabilities |
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(1,168,000 |
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(2,204,000 |
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Income taxes receivable |
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1,676,000 |
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(531,000 |
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Total adjustments |
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(1,161,000 |
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(1,268,000 |
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Net cash used in operating activities |
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(3,146,000 |
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(2,249,000 |
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Cash flows used in investing activities |
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Additions to property, plant and equipment |
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(127,000 |
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(351,000 |
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Net cash used in investing activities |
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(127,000 |
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(351,000 |
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Cash flows provided by (used in) financing activities |
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Cash dividends paid |
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(256,000 |
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(262,000 |
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Proceeds from notes payable |
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3,107,000 |
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311,000 |
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Payments of notes payable |
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(2,357,000 |
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(461,000 |
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Retirement of common stock |
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— |
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(54,000 |
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Net cash provided by (used in) financing activities |
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494,000 |
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(466,000 |
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Net decrease in cash and cash equivalents |
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(2,779,000 |
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(3,066,000 |
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Cash and cash equivalents at beginning of period |
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4,308,000 |
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7,223,000 |
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Cash and cash equivalents at end of period |
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$ |
1,529,000 |
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$ |
4,157,000 |
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Supplemental disclosures of cash flow information |
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Cash paid during the period for income taxes |
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— |
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— |
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Cash paid for interest expense |
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$ |
27,000 |
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$ |
46,000 |
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6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SHORT TERM INVESTMENTS:
Short-term investments consist primarily of certificates of deposits with original maturities greater than 90 days.
INVENTORIES:
Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis. Inventories at March 31, 2003 consist of:
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Raw Material |
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$ |
5,973,000 |
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Work in Progress |
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1,613,000 |
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Finished goods |
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4,218,000 |
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$ |
11,804,000 |
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PROPERTY HELD FOR SALE:
The Company currently has for sale three of its former production facilities, one each in Ocala, Florida, Dorchester, Wisconsin and Tuscumbia, Alabama. The Wisconsin and Alabama facilities ceased operation in 2000. Production from the Dorchester, Wisconsin plant was consolidated into the Company’s other Dorchester plant, while the Tuscumbia business was moved 50 miles to the Hamilton, Alabama plant. At the end of 2002, production ceased at the Florida plant. The Company is preparing this facility for sale and will serve this market area from its other facilities. These closings were done as part of the Company’s response to the current industry downturn.
Each facility includes land, land improvements and buildings. Appraisal values and asking price for each of these properties exceeds the net book value of each. All three facilities can fit a wide variety of use. The Company anticipates selling all of these properties for amounts that exceed their net book value plus disposal costs. Accordingly, the statements reflect the aggregate net book value of $4,581,000 for all these properties and no adjustments for impairment have been made.
NOTES PAYABLE:
At March 31, 2003, the Company had the following notes payable:
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Revolving credit line of $2,659,000 secured by subsidiaries’ retail inventory bearing interest at 1/2% over prime rate |
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$ |
445,000 |
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Unsecured revolving credit line of $5,000,000 bearing interest at 1/2% under prime |
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1,200,000 |
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$ |
1,645,000 |
CONTINGENT LIABILITIES:
Repurchase Obligations
The Company is contingently liable under terms of repurchase agreements with various financial institutions, which provide for the repurchase of its homes sold to dealers under floor plan financing arrangements upon dealer default. The risk of loss under these agreements is spread over many dealers and is further reduced by the resale value of the homes. The Company has, as of March 31, 2003, provided for losses on homes for which it has received or expects notification of repurchase. Any significant change could place unplanned demands on the Company.
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Other Contingencies
The Company is party to various legal proceedings from the normal course of operations. The Company has provided for anticipated losses resulting from the litigation. In management’s opinion, the Company has adequate legal defenses and does not believe these suits will materially affect the Company’s operations or financial position.
EARNINGS PER SHARE
Basic and diluted earnings per share are computed based on weighted average Class A and Class B shares outstanding. There are no options or warrants outstanding to create a dilutive effect.
REVENUE RECOGNITION
Revenue is recognized when title is transferred upon shipment.
NATURE OF BUSINESS, RISKS AND UNCERTAINTIES
The Company designs, manufactures and sells at wholesale a broad line of single and multi-section manufactured homes and multi-section modular homes to numerous independent dealers in the United States who may utilize floorplan financing arrangements with lending institutions. Continued availability of credit to these dealers is vital to the Company’s business.
The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions regarding certain assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual amounts may differ from estimated amounts. The most notable assumptions included in the financial statements involve product warranty costs, potential repurchase obligations on dealer floorplan financing arrangements, lawsuits, deferred taxes and property held for sale.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
During the quarter, many factors produced a difficult operating environment for the Company. The national economy showed signs of continued weakness. More specific to the Company’s industry, credit availability at both the wholesale and retail levels continued to diminish while the supply of repossessed homes remained at a high level. Tighter credit underwriting coupled with price competition from repossessed homes as well as overall consumer uncertainty resulted in fewer new home orders to the Company.
In a gauge of the most currently available statistics, the Manufactured Housing Institute reports a 28% unit volume decline during the first two months of 2003 over the same period in 2002. For the quarter, the Company shipped 25% fewer homes in 2003 than during 2002. Net sales for the first quarter of 2003 were $17,154,000, a decrease of $4,745,000 or 22% from the same quarter of 2002.
While fixed manufacturing cost reductions were implemented during the current quarter, such actions could not preempt all the effects of declining volume. Gross profit as a percent of net sales fell to 7% from 12% in the year earlier period for a total reduction of $1,429,000. Selling, delivery, general and administrative expenses for the 2003 quarter declined $935,000 from the first quarter of 2002. Lower gross profit was offset in part by lower selling, delivery, general and administrative expense, producing a $494,000 increase from the first quarter 2002 operating loss, to $2,002,000 in 2003.
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A tax valuation allowance for the Company’s 2003 loss has eliminated any provision of a tax benefit for the quarter. The resultant net loss for the 2003 quarter grew to $1,985,000 from a net loss of $981,000 in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and capital resources dropped from the Company’s position at December 31, 2002. Cash, cash equivalents and short term investments as of March 31, 2003 and December 31, 2002 were $1,529,000 and $4,308,000, respectively. Working capital as of March 31, 2003 and December 31, 2002 was $16,400,000 and $18,305,000, respectively. The Company’s current ratio was 2.4 to 1 and 2.8 to 1 at March 31, 2003 and December 31, 2002, respectively.
The Company currently has a $5,000,000 unsecured operating line of credit on which it had a borrowed balance of $1,200,000 at March 31, 2003. This line was not used in 2002. This credit arrangement is due for renewal on June 30, 2003.
Additionally, held for sale are three production facilities which have been closed as part of the Company’s cost reduction program. These properties have an aggregate net book value of $4,581,000 and the Company believes they can be sold for an aggregate amount in excess of this value.
The Company believes that cash flow from operations, cash reserves and the renewal of credit arrangements currently in place will be sufficient to meet the Company’s requirements in the year 2003. The Company has taken into consideration the current conditions in which the Company operates. Any additional downturn in the industry could affect the Company and cause it to seek additional lines of credit.
OUTLOOK AND RISK FACTORS
The dynamics that propelled the manufacturing component of the industry into its current condition will continue to affect near term performance. These factors will adversely affect new home orders resulting in lower sales.
The Company’s operations run parallel to the forces in the industry and are impacted by the same risk factors affecting the industry. Since the Company produces only to dealers’ orders and sales backlogs are traditionally short, the order activity at the Company is indicative of the day to day retail sales activity of its products. Any changes affecting retail customer demand, such as cost, unemployment and the factors previously mentioned, may have an immediate effect on the Company’s operations.
Increased underwriting standards and a reduced number of retail lenders are factors which will affect the industry for the foreseeable future. This constriction of credit will keep many potential homebuyers out of the marketplace for manufactured housing. Previously less restrictive underwriting standards have created a high default rate on loans resulting in numerous repossessions. These repossessions continue and the supply of these unsold homes pose a challenge to new home sales.
It is a common practice for manufactured housing producers to participate in dealer financing programs which require the manufacturer to repurchase homes which remain unsold and in dealer inventory within a certain time period following delivery to the dealer, if the dealer defaults on its financing obligations. When initiated, this repurchase obligation brings homes back into the wholesale market and may result in some discounting as the units are resold. At times in the past,
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the industry has had a significant level of these repurchased homes that competed with future orders to factories for new homes and such conditions could arise again.
The distribution system for the Company’s modular homes may be somewhat different. While the Company sells some of its modular homes to traditional manufactured home retailers, a large percentage of modular homes are sold to builder developers who do not typically stock numerous homes for display. Consequently, homes sold to such builder developers are not subject to repurchase as described above. As the modular portion of the Company’s business grows, the Company’s contingent liability for repurchase of homes should proportionately shrink.
The spate of dealer failures that occurred industry-wide in 2000 slowed during the last two years. However, it is difficult to project what may happen with the existing dealer base in the future. Continued fallout among this part of the distribution chain may disrupt the market.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
During this quarter, except for changes in the valuation of deferred tax benefits, the Company has not changed its use of estimates and judgements in the application of Generally Accepted Accounting Policies used in the United States. For the valuation of deferred tax benefits, management has placed an allowance on the valuation of federal and state tax benefits resulting from the Company’s net operating loss for the quarter.
FORWARD LOOKING STATEMENTS
The discussion above contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include statements regarding industry and company outlooks and risk factors. The Company may make other forward looking statements orally or in writing from time to time. All such forward looking statements are not guaranties of future events or performance and involve risks and uncertainties. Actual results may differ materially from those in the forward looking statements as the result of a number of material factors. These factors include without limitation, the availability of financing credit at both the wholesale and retail level, the availability of a competent workforce, the regulation of the industry at the federal, state and local levels, changes in interest rates, the stability of dealer distribution networks, unanticipated results in pending legal proceedings and the condition of the economy and its effect on consumer confidence.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Not applicable.
Item 4. Management’s Report on Disclosure Controls and Procedures and Internal Control.
(a) The Chief Executive Officer and the Chief Financial Officer of the Company have evaluated the effectiveness of the design and operation of the Company’s system of disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of a date within 90 days prior to the filing of this Form 10-Q. As a result of that evaluation, they have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
(b) There have been no significant changes in the Company’s system of internal controls or in other factors that could significantly affect internal controls subsequent to the date of their
10
evaluation. There were no discoveries of any significant deficiencies or material weaknesses in such controls that would require the Company to take corrective actions.
PART II – OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit 99.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
No reports on Form 8-K for January, February or March, 2003 have been filed.
11
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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LIBERTY HOMES, INC. |
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Registrant |
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BY: |
/s/ Marc A. Dosmann |
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Marc A. Dosmann |
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Vice President – Chief
Financial Officer |
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Dated |
May 15, 2003 |
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12
CERTIFICATION
I, Edward J. Hussey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Liberty Homes, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, periods presented in this quarterly 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 we 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 quarterly 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 quarterly report (the “Evaluation Date”); and
c. presented in this quarterly 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 (or persons performing the equivalent function):
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 quarterly report whether or not 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 weakness.
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May 15, 2003 |
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/s/ EDWARD J. HUSSEY |
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Date |
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Edward J. Hussey, Chief Executive Officer |
13
CERTIFICATION
I, Marc A. Dosmann, certify that:
7. I have reviewed this quarterly report on Form 10-Q of Liberty Homes, Inc.;
8. Based on my knowledge, this quarterly 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 quarterly report;
9. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, periods presented in this quarterly report;
10. 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 we have:
d. 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 quarterly report is being prepared;
e. 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 quarterly report (the “Evaluation Date”); and
f. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
11. 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 (or persons performing the equivalent function):
c. 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
d. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
12. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not 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 weakness.
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May 15, 2003 |
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/s/ MARC A. DOSMANN |
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Date |
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Marc A. Dosmann, Vice President – Chief Financial Officer |
14