SECURITIES AND EXCHANGE COMMISSION

 

Washington DC 20549

 

 

(Mark One) ý		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2003.
or
o		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)

 

 

 

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.

 

Class		Shares of Outstanding at November 5, 2003
Class A Common Stock, $1.00 par value		2,002,045
Class B Common Stock, $1.00 par value		1,652,422

 

 

INDEX

 

Part I - Consolidated Financial Information
General
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheet, as of September 30, 2003  (Unaudited) and December 31, 2002
	Consolidated Statement of Income (Unaudited), for the  three months ended September 30, 2003 and 2002
	Consolidated Statement of Income (Unaudited), for the  nine months ended September 30, 2003 and 2002
	Consolidated Statement of Cash Flows (Unaudited), for  the nine months ended September 30, 2003 and 2002
	Notes to Consolidated Financial Statements (Unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Management’s Report on Disclosure Controls and Procedures and Internal Control
Part II - Other Information
Item 6.	Exhibits and Reports on Form 8-K
	Signature and Certifications

 

2

 

Part 1.  CONSOLIDATED FINANCIAL INFORMATION

 

Item 1.  Consolidated Financial Statements

 

LIBERTY HOMES, INC.

CONSOLIDATED BALANCE SHEET

as of September 30, 2003 and December 31, 2002

 

		(Unaudited)
		September 30, 2003			December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents		$	3,498,000		$	4,308,000
Short term investments		150,000			300,000
Receivables		7,624,000			5,815,000
Inventories		11,321,000			10,644,000
Deferred tax asset		3,441,000			3,441,000
Income taxes refundable		—			1,912,000
Prepayments and other		552,000			2,148,000
Total current assets		26,586,000			28,568,000
Property, plant and equipment:
Land		2,014,000			2,014,000
Buildings and improvements		23,592,000			23,580,000
Machinery and equipment		20,855,000			20,735,000
		46,461,000			46,329,000
Less accumulated depreciation		27,575,000			26,458,000
		18,886,000			19,871,000
Property held for sale		4,581,000			4,581,000
Total assets		$	50,053,000		$	53,020,000

 

 

		(Unaudited)
		September 30, 2003			December 31, 2002
LIABILITIES
Current liabilities:
Accounts payable		$	3,217,000		$	1,779,000
Floorplan notes payable		543,000			895,000
Accrued compensation & payroll taxes		1,416,000			1,150,000
Other accrued liabilities		6,180,000			6,439,000
Total current liabilities		11,356,000			10,263,000
Deferred income taxes		2,732,000			2,732,000
Minority interest in consolidated subsidiaries		961,000			929,000
Contingent liabilities (see notes)		—			—
SHAREHOLDERS’ EQUITY
Capital Stock:
Class A, $1 par value
Authorized-7,500,000 Shares Issued & outstanding-2,002,000 in 2003 & 1,995,000 in 2002		2,002,000			1,995,000
Class B, $1 par value
Authorized-3,500,000 Shares Issued & outstanding-1,652,000 in 2003 & 1,659,000 in 2002		1,652,000			1,659,000
Other capital		83,000			83,000
Retained earnings		31,267,000			35,359,000
		35,004,000			39,096,000
Total liabilities and shareholders’ equity		$	50,053,000		$	53,020,000

 

The accompanying notes are a part of the consolidated financial statements. 

 

3

 

LIBERTY HOMES, INC.

CONSOLIDATED STATEMENT OF INCOME

 

for the three months ended September 30, 2003 and 2002

 

UNAUDITED

 

		2003			2002
Net sales		$	23,854,000		$	23,959,000
Cost of sales		20,841,000			21,223,000
Gross profit		3,013,000			2,736,000
Selling, delivery, general and administrative expenses		3,750,000			4,558,000
Operating loss		(737,000		)	(1,822,000		)
Interest expense		(8,000		)	(38,000		)
Interest income and other loss		(64,000		)	(123,000		)
Loss before minority  interest and income taxes		(809,000		)	(1,983,000		)
Minority interest		(12,000		)	68,000
Income tax benefit		—			674,000
Net loss		$	(821,000	)	$	(1,241,000	)
Net loss per outstanding Common Share – basic and fully diluted		$	(.22	)	$	(.33	)
Weighted average shares outstanding		3,654, 000			3,745,000
Cash dividend per share:
Class A Common Stock		$	.07		$	.07
Class B Common Stock		$	.07		$	.07

 

The accompanying notes are a part of the consolidated financial statements.

 

4

 

LIBERTY HOMES, INC.

CONSOLIDATED STATEMENT OF INCOME

 

for the nine months ended September 30, 2003 and 2002

UNAUDITED

 

		2003			2002
Net sales		$	62,382,000		$	70,526,000
Cost of sales		54,612,000			61,516,000
Gross profit		7,770,000			9,010,000
Selling, delivery, general and administrative expenses		10,951,000			13,170,000
Operating loss		(3,181,000		)	(4,160,000		)
Interest expense		(71,000		)	(130,000		)
Interest income and other (loss)		(40,000		)	7,000
Loss before minority  interest and income taxes		(3,292,000		)	(4,283,000		)
Minority interest		(32,000		)	143,000
Income tax benefit		—			1,456,000
Net loss		(3,324,000		)	$	(2,684,000	)
Net loss per outstanding  Common Share – basic and fully diluted		$	.(91	)	$	(.72	)
Weighted average shares outstanding		3,654,000			3,746,000
Cash dividend per share:
Class A Common Stock		$	.21		$	.21
Class B Common Stock		$	.21		$	.21

 

The accompanying notes are a part of the consolidated financial statements.

 

5

 

LIBERTY HOMES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

for the nine months ended September 30, 2003 and 2002

UNAUDITED

 

		2003			2002
Cash flows provided by (used in) operating activities:
Net loss		$	(3,324,000	)	$	(2,684,000	)
Adjustment to reconcile net loss
Depreciation		1,351,000			1,546,000
Minority interest in income (loss) of subsidiary		32,000			(143,000		)
(Gain) loss on sale of fixed assets		19,000			(61,000		)
Changes in assets and liabilities:
Receivables		(1,809,000		)	859,000
Inventories		(677,000		)	293,000
Prepayments and other		1,596,000			291,000
Accounts payable		1,438,000			878,000
Accrued liabilities		7,000			169,000
Income taxes payable/receivable		1,912,000			(705,000		)
Net cash provided by operating activities		545,000			443,000
Cash flows provided by (used in) investing activities
Additions to property, plant and equipment		(393,000		)	(1,210,000		)
Redemption of short-term investment		150,000			—
Proceeds from sale of fixed assets		8,000			324,000
Net cash used in investing activities		(235,000		)	(886,000		)
Cash flows provided by (used in) financing activities -
Cash dividends paid		(768,000		)	(780,000		)
Proceeds from notes payable		5,336,000			780,000
Payments of notes payable		(5,688,000		)	(2,084,000		)
Retirement of common stock		—			(54,000		)
Net cash used in financing activities		(1,120,000		)	(2,138,000		)
Net decrease in cash and cash equivalents		(810,000		)	(2,581,000		)
Cash and cash equivalents at beginning of period		4,308,000			7,223,000
Cash and cash equivalents at end of period		$	3,498,000		$	4,642,000
Supplemental disclosures of cash flow information cash
cash received for income taxes		$	1,912,000		$	750,000
cash paid for interest expense		71,000			130,000

 

The accompanying notes are a part of the consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(UNAUDITED)

 

GENERAL

The consolidated financial statements and footnotes thereto 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.

 

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and all its wholly owned and majority owned subsidiaries.  Upon consolidation, all inter-Company accounts, transactions and profits have been eliminated.

 

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 September 30, 2003 consist of:

 

 

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 now serves 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 uses.  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.

 

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NOTES PAYABLE

 

At September 30, 2003, the Company had the following notes payable:

 

 

 

CONTINGENT LIABILITIES

Repurchase Obligations

The Company is contingently liable under terms of repurchase agreements with various financial institutions.  These agreements 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 September 30, 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.

 

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 to the home 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.  The Company considers itself to be in the industry segment of manufacturing residential homes as other operations are immaterial.

 

There are many risks and uncertainties in the industry segment, general nature of business and the world socioeconomic climate that affect the Company.  The list included herein is not to be considered complete, however, included among them are the following.

 

•                  changes in the availability of retail (consumer) and wholesale (dealer) financing and the volatility of the interest rates thereon

•                  the stability of the dealer network

•                  the level of inventory of new and repossessed homes

•                  inventory repurchase contingencies

•                  the availability and retention of a competent workforce

•                  availability and price of raw materials

 

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•                  unanticipated results in pending legal proceedings

•                  regulatory constraints

•                  world and economic events that affect consumer confidence

 

Further insight into some of these items can be found in the discussion of the  “Outlook and Risk Factors” section of this 10Q in Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

USE OF ESTIMATES

The process of preparing financial statements in conformity with accounting principles generally accepted in the United States 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

Our net sales during the third quarter of 2003 were $23,854,000, a decrease of $105,000 or less than one percent from net sales of $23,959,000 during the third quarter of 2002.  The percentage decline of unit sales was much higher with home shipments totaling 22% less in 2003 than 2002. The 2003 shipment totals exclude sales from our Ocala Florida production facility, which ceased production at the end of 2002.  Excluding those units from the comparison shows that the remaining home volume decreased 16%.

 

During the most recent quarter, our average sales price per home was considerably higher than during the third quarter of 2002.  Some price increases were made in response to higher raw material costs.  However, the primary cause of a higher average sales price was product mix change.  The number of single-section manufactured homes shipped in the third quarter of 2003 was down from the 2002 quarter due to significantly lower purchases from one of our community development customers.  Our multi-section manufactured home shipments did not fall nearly as much while our modular home sales continued to grow.  The values of our modular and multi-section manufactured homes are higher than single-section homes.  Therefore, even though the unit volume fell, total revenue declined by only $105,000.

 

Comparatively, shipping statistics reported by the Institute of Building Technology and Safety show that total US shipments of manufactured homes fell 20% from the third quarter of 2002 to the third quarter of 2003.  Current national modular housing statistics are unavailable.

 

Raw material costs escalated in the third quarter of 2003.  Insulation, steel, lumber and lumber products, especially Oriented Strand Board, were considerably higher at that time as compared to the beginning of 2003 and the third quarter of 2002.  Due to competitive industry conditions, we were unable to increase our selling prices enough to fully offset these cost increases. At the same time, continuing our cost control measures resulted in a 9% reduction of third quarter 2003 fixed costs compared to the same period of 2002.  Our gross profit rose by $277,000 in a comparison of the third quarter 2003 to 2002.  Gross profit was $3,013,000 or 13% of net sales in 2003 and $2,736,000 or 11% of 2002 net sales.

 

9

 

Selling, delivery, general and administrative expenses were $3,750,000 during the third quarter of 2003 while totaling $4,558,000 during the same quarter of 2002.  Our delivery costs were impacted by lower volume and fell by $100,000 while cost reduction programs in place for selling, general and administrative expenses helped cut these costs by $708,000.

 

Our loss before minority interest and income taxes was $809,000 in the third quarter of 2003.  This result is a $1,174,000 improvement over the loss of $1,983,000 during the corresponding quarter of 2002.

 

Due to the full usage of tax loss carryback benefits in prior periods, no income tax benefit was attributed to the third quarter 2003 loss.  For the comparable 2002 quarter, a tax benefit of $674,000 was recognized.

 

Net loss for the third quarter 2003 was $821,000 or $420,000 lower than the third quarter net loss of $1,241,000 in 2002.  The basic and fully diluted loss per share was $.22 for 2003 and $.33 for 2002.

 

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and capital resources dropped from our position at December 31, 2002.  Cash, cash equivalents and short term investments as of September 30, 2003 and December 31, 2002 were $3,648,000 and $4,608,000, respectively.  Working capital as of September 30, 2003 and December 31, 2002 was $15,963,000 and $18,305,000, respectively.  The current ratio was 2.3 to 1 and 2.8 to 1 at September 30, 2003 and December 31, 2002, respectively.

 

The Company currently has a $5,000,000 operating line of credit on which no balances were borrowed at September 30, 2003.  This line is secured by a portion of the Company’s real property. This credit arrangement is due for renewal on June 30, 2004.

 

Additionally, held for sale are three production facilities which have been closed as part of our cost reduction program.  These properties have an aggregate net book value of $4,581,000 and we believe they can be sold for an aggregate amount in excess of this value.

 

We believe that cash flow from operations, cash reserves and credit arrangements currently in place will be sufficient to meet the Company’s requirements in the coming year.  We have taken into consideration the current conditions in which we operate and recognize that any additional downturn in the industry could affect the Company and cause us to seek additional lines of credit.

 

OUTLOOK AND RISK FACTORS

The dynamics that propelled the manufacturing component of our industry into its current condition will continue to affect near term performance.  These factors are not limited to the following, but include:

 

•                  changes in the availability of retail (consumer) and wholesale (dealer) financing and the volatility of the interest rates thereon

•                  the stability of the dealer network

•                  the level of inventory of new and repossessed homes

•                  inventory repurchase contingencies

•                  the availability and retention of a competent workforce

•                  availability and price of raw materials

•                  unanticipated results in pending legal proceedings

•                  regulatory constraints

 

10

 

•                  world and economic events that affect consumer confidence

 

Our Company is not immune to the forces in the industry and, therefore, we are impacted by the same risk factors.  Since we produce only to dealers’ orders and sales backlogs are traditionally short, our order activity is indicative of the day to day retail sales activity of our products.  Any changes affecting retail customer demand, such as cost, unemployment and other factors previously mentioned, may have an immediate effect on our operations.

 

The climate for retail lending will continue to have an impact on the sale of manufactured homes. Recent restrictions in underwriting policies by both the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Management Corporation (Freddie Mac) have added to an already tight credit condition.  A number of lenders have exited the industry in the last few years and those that remain have previously increased their underwriting standards.  The actions of Fannie Mae and Freddie Mac will further affect the industry.  Continued constriction of credit will keep many potential homebuyers out of the marketplace for our manufactured homes.

 

Modular housing financing does not meet the same conditions.  Retail lenders are less restrictive in this area and the restrictions imposed by Fannie Mae and Freddie Mac on manufactured housing do not apply to modular housing.  Such conditions have benefited the Company’s modular housing business in the past.  Our outlook is for continued growth in this area.

 

Previously, less restrictive underwriting standards created a high default rate on loans resulting in numerous repossessions.  We believe the current rate of repossessions and the supply of these unsold homes is slightly less than in prior years.  However, they continue to 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, the industry has had a significant level of these repurchased homes that competed with future orders to factories for new homes.  Such conditions could arise again and affect our ability to make new home sales.

 

Our Company’s own repurchase obligations were significant in 2000, the beginning of this current downturn.  Since then, our dealer turnover has abated significantly.  While it is difficult for us to predict the potential for a re-occurrence of such a high level, if it should, existing and standby capital resources will be heavily utilized while our other resources will be diverted away from our business of producing and selling new homes.

 

The impact of repurchase obligations in the distribution system for our modular homes may be somewhat different.  While we sell some of our 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 our business grows, the contingent liability for repurchase of homes should proportionately shrink, thereby lessening potential demand for the Company’s resources.

 

11

 

CRITICAL ACCOUNTING POLICIES

The Company’s Annual Report on Form 10-K for the period ended December 31, 2002, under the heading “Critical Accounting Policies and Estimates,” provides a list of accounting policies that are integral components to the portrayal of financial condition and results of operations of the Company. These items are warranty, repurchase obligations, lawsuits, deferred taxes and property held for sale.  Since that report, except for changes in the valuation of tax benefits, we have not changed the use of estimates and judgements in the application of Generally Accepted Accounting Policies used in the United States.  For the valuation of tax benefits, we have placed no valuation on federal and state tax benefits resulting from the Company’s net operating losses occurring in 2003.

 

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 we make regarding industry and company outlooks and risk factors.  We 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 our forward looking statements as the result of a number of material factors.  These factors include without limitation:

 

•                  changes in the availability of retail (consumer) and wholesale (dealer) financing and the volatility of the interest rates thereon

•                  the stability of the dealer network

•                  the level of inventory of new and repossessed homes

•                  inventory repurchase contingencies

•                  the availability and retention of a competent workforce

•                  availability and price of raw materials

•                  unanticipated results in pending legal proceedings

•                  regulatory constraints

•                  world and economic events that affect consumer confidence

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

We currently have a small amount of borrowing on our retail centers’ floorplan line of credit, and have made infrequent use of our general line of credit.  To the limited extent that we do borrow, we are exposed to changes in interest rates.  We do not use interest rate derivative instruments to manage exposure to interest rate changes.  Additionally, we do not invest in securities or funds or any other type of intangible trading security that is exposed to market risk.  We do not enter into any contractual obligations whose final settlement can be affected by interest rate volatility, foreign currency rate fluctuations or commodity price changes.

 

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.

 

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(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 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 31.1 – Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 – Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 – Certification of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

No reports on Form 8-K for July, August or September, 2003 have been filed.

 

13

 

SIGNATURE

 

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.

 

 

			LIBERTY HOMES, INC.
			Registrant
			BY:  /s/ MARC A. DOSMANN
			Marc A. Dosmann
			Vice President – Chief Financial Officer
			(Principal Financial and Accounting Officer)
Dated	November 14, 2003

 

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