Attached files
file | filename |
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8-K/A - FORM 8-K/A - CAVCO INDUSTRIES INC. | c19765e8vkza.htm |
EX-99.3 - EXHIBIT 99.3 - CAVCO INDUSTRIES INC. | c19765exv99w3.htm |
EX-99.1 - EXHIBIT 99.1 - CAVCO INDUSTRIES INC. | c19765exv99w1.htm |
Exhibit 99.2
UNAUDITED INTERIM FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
The unaudited consolidated condensed balance sheet of Palm Harbor Homes, Inc., a Florida corporation, and its subsidiaries as of December 24, 2010 and the unaudited
consolidated condensed statements of operations, stockholders equity and cash flows for the nine months ended December 24, 2010 and December 25, 2009 and the notes
related thereto.
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 24, | March 26, | |||||||
2010 | 2010 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 13,721 | $ | 26,705 | ||||
Restricted cash |
14,710 | 16,330 | ||||||
Investments |
15,642 | 16,041 | ||||||
Trade receivables |
13,798 | 18,533 | ||||||
Consumer loans receivable, net |
163,445 | 176,143 | ||||||
Inventories |
53,634 | 60,303 | ||||||
Assets held for sale |
5,788 | 6,538 | ||||||
Prepaid expenses and other assets |
9,213 | 9,909 | ||||||
Property, plant and equipment, net |
23,817 | 27,251 | ||||||
Total assets |
$ | 313,768 | $ | 357,753 | ||||
Liabilities and shareholders equity |
||||||||
Liabilities not subject to compromise: |
||||||||
Accounts payable |
$ | 10,342 | $ | 20,713 | ||||
Accrued liabilities |
14,820 | 39,987 | ||||||
Floor plan payable |
| 42,249 | ||||||
Debtor-in-possession financing |
40,430 | | ||||||
Construction lending lines |
2,968 | 3,890 | ||||||
Securitized financings |
110,533 | 122,494 | ||||||
Virgo debt, net |
19,093 | 18,518 | ||||||
Convertible senior notes, net, not
subject to compromise |
| 50,486 | ||||||
Total liabilities not subject to compromise |
198,186 | 298,337 | ||||||
Liabilities subject to compromise |
85,594 | | ||||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Common stock, $.01 par value |
239 | 239 | ||||||
Additional paid-in capital |
70,220 | 69,919 | ||||||
Retained (deficit) earnings |
(26,524 | ) | 3,389 | |||||
Treasury shares |
(13,980 | ) | (13,949 | ) | ||||
Accumulated other comprehensive income (loss) |
33 | (182 | ) | |||||
Total shareholders equity |
29,988 | 59,416 | ||||||
Total liabilities and shareholders equity |
$ | 313,768 | $ | 357,753 | ||||
See accompanying notes.
2
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Nine Months Ended | ||||||||
December 24, | December 25, | |||||||
2010 | 2009 | |||||||
Net sales |
$ | 206,059 | $ | 229,020 | ||||
Cost of sales |
161,022 | 174,862 | ||||||
Selling, general and administrative expenses |
62,738 | 73,154 | ||||||
Loss from operations |
(17,701 | ) | (18,996 | ) | ||||
Interest expense |
(11,977 | ) | (13,064 | ) | ||||
Other income |
2,547 | 2,671 | ||||||
Loss before reorganization items and income
taxes |
(27,131 | ) | (29,389 | ) | ||||
Reorganization items |
(2,522 | ) | | |||||
Loss before income taxes |
(29,653 | ) | (29,389 | ) | ||||
Income tax expense |
(260 | ) | (163 | ) | ||||
Net loss |
$ | (29,913 | ) | $ | (29,552 | ) | ||
Net loss per common share basic and diluted |
$ | (1.30 | ) | $ | (1.29 | ) | ||
Weighted average common shares outstanding
basic and diluted |
22,975 | 22,875 | ||||||
See accompanying notes.
3
PALM HARBOR HOMES, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended | ||||||||
December 24, | December 25, | |||||||
2010 | 2009 | |||||||
Operating Activities |
||||||||
Net loss |
$ | (29,913 | ) | $ | (29,552 | ) | ||
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities: |
||||||||
Depreciation and amortization |
3,585 | 4,199 | ||||||
Provision for credit losses |
4,368 | 2,229 | ||||||
Non-cash interest expense |
1,432 | 2,659 | ||||||
(Gain) loss on disposition of assets |
(31 | ) | 620 | |||||
Impairment of property, plant and equipment |
1,866 | 243 | ||||||
(Gain) loss on sale of loans |
(1,902 | ) | 50 | |||||
Provision for stock based compensation |
270 | 164 | ||||||
(Gain) loss on sale of investments |
(317 | ) | 91 | |||||
Changes in operating assets and liabilities: |
||||||||
Restricted cash |
1,620 | 2,011 | ||||||
Trade receivables |
4,735 | 4,872 | ||||||
Consumer loans originated |
(36,928 | ) | (27,743 | ) | ||||
Principal payments on consumer loans originated |
9,754 | 10,526 | ||||||
Proceeds from sales of consumer loans |
37,406 | 28,218 | ||||||
Inventories |
6,669 | 18,585 | ||||||
Prepaid expenses and other assets |
(145 | ) | 1,392 | |||||
Accounts payable and accrued expenses |
(821 | ) | (7,058 | ) | ||||
Net cash provided by operating activities |
1,648 | 11,506 | ||||||
Investing Activities |
||||||||
Net (purchases) disposals of property, plant and
equipment |
(325 | ) | 775 | |||||
Purchases of investments |
(2,035 | ) | (2,358 | ) | ||||
Sales of investments |
2,976 | 5,757 | ||||||
Net cash provided by investing activities |
616 | 4,174 | ||||||
Financing Activities |
||||||||
Net payments on floor plan payable |
(42,310 | ) | (4,999 | ) | ||||
Proceeds from DIP financing |
45,173 | | ||||||
Payments on DIP financing |
(4,743 | ) | | |||||
Net payments on construction lending line |
(922 | ) | (1,191 | ) | ||||
Payments on Virgo debt |
(485 | ) | | |||||
Payments on securitized financings |
(11,961 | ) | (14,153 | ) | ||||
Net cash used in financing activities |
(15,248 | ) | (20,343 | ) | ||||
Net decrease in cash and cash equivalents |
(12,984 | ) | (4,663 | ) | ||||
Cash and cash equivalents at beginning of period |
26,705 | 12,374 | ||||||
Cash and cash equivalents at end of period |
$ | 13,721 | $ | 7,711 | ||||
See accompanying notes.
4
1. Summary of Significant Accounting Policies
Chapter 11 Proceedings
As previously disclosed, on November 29, 2010 (Petition Date), Palm Harbor Homes, Inc. (Palm
Harbor) and certain of its domestic subsidiaries (collectively, the Debtors) filed voluntary
petitions for reorganization (the Bankruptcy Filing) under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware in Wilmington
(the Bankruptcy Court). The cases are being jointly administered under Case No. 10-13850. Palm
Harbor Homes, Inc. and five of its subsidiaries, Palm Harbor Manufacturing, L.P., Palm Harbor
Albemarle LLC, Palm Harbor Real Estate LLC, Palm Harbor GenPar LLC, and Nationwide Homes, Inc. (the
Filing Entities) were part of the bankruptcy filing. The Companys insurance and finance
subsidiaries, including Standard Casualty Company, Standard Insurance Agency, Inc., Palm Harbor
Insurance Agency of Texas, Inc. and CountryPlace Acceptance Corporation (collectively, the
Non-Filing Entities) were not part of the bankruptcy filing; however, such subsidiaries were
owned by entities that were part of the bankruptcy filing.
Subject to certain exceptions under the Bankruptcy Code, the Debtors Chapter 11 filing
automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings
or other actions against the Debtors or their property to recover on, collect or secure a claim
arising prior to the Petition Date. Thus, for example, most creditor actions to obtain possession
of property from the Debtors, or to create, perfect or enforce any lien against the property of the
Debtors, or to collect on monies owed or otherwise exercise rights or remedies with respect to a
pre-petition claim are enjoined unless and until the Bankruptcy Court lifts the automatic stay.
The filing of the Chapter 11 petitions constituted an event of default under certain of the
Companys debt obligations, and those debt obligations became automatically and immediately due and
payable, subject to an automatic stay of any action to collect, assert, or recover a claim against
the Debtors and the application of applicable bankruptcy law.
The Debtors operated as debtors-in-possession under the jurisdiction of the Bankruptcy Court and
in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy
Court. In general, as debtors-in-possession, the Company is authorized under Chapter 11 to continue
to operate as an ongoing business, but may not engage in transactions outside the ordinary course
of business without the prior approval of the Bankruptcy Court. The Non-Filing Entities continue
to operate in the ordinary course of business.
In connection with the Bankruptcy Filing, on November 29, 2010, Palm Harbor entered into an asset
purchase agreement (the Asset Purchase Agreement) with the Filing Entities (collectively with
Palm Harbor, the Sellers) and Palm Harbor Homes, Inc. a Delaware corporation (the Purchaser)
under which the Purchaser purchased substantially all of the assets of the Sellers and assumed
specified liabilities of the Sellers, all on the terms and conditions set forth in the Asset
Purchase Agreement and in accordance with sections 105, 363, 365 and other applicable provisions of
the Bankruptcy Code.
In connection with the Bankruptcy Filing, on November 29, 2010, the Company (as defined in the
Basis of Presentation section below) entered into a Senior Secured, Super-Priority
Debtor-in-Possession Revolving Credit Agreement (the DIP Credit Agreement) among the Company, the
Filing Entities and Fleetwood Homes, Inc., as lender (the Lender), a Security Agreement (the
Security Agreement) among the Company, the Filing Entities and the Lender as the secured party
and a Promissory Note (the Promissory Note) executed by the Debtors in favor of the Lender.
Pursuant to the terms of the DIP Credit Agreement, the Security Agreement and the Promissory Note,
the Lender agreed to loan up to $50 million (which may increase to $55 million if certain
conditions are met). The DIP Agreement bore interest at 7% per annum and matured upon the
effective date of the close of the sale of the Companys assets on April 23, 2011. See Note 6.
5
The Bankruptcy Court approved payment of certain of the Debtors pre-petition obligations,
including, among other things, employee wages, salaries and benefits, and the Bankruptcy Court
approved the Companys payment of vendors and other providers in the ordinary course for goods and
services ordered pre-petition but received from and after the Petition Date and other
business-related payments necessary to maintain the operation of the businesses. The Debtors have
retained, subject to Bankruptcy Court approval, legal and financial professionals to advise the
Debtors on the bankruptcy proceedings and certain other ordinary course professionals.
The Company has incurred and will continue to incur significant costs associated with the
reorganization. The amount of these costs, which are being expensed as incurred, are expected to
significantly affect the results of operations.
Under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise,
pre-petition liabilities and post-petition liabilities must generally be satisfied in full before
stockholders are entitled to receive any distribution or retain any property under a plan of
reorganization. The ultimate recovery to creditors and/or stockholders, if any, will not be
determined until confirmation of a plan or plans of reorganization. No assurance can be given as to
what values, if any, will be ascribed in the Chapter 11 cases to each of these constituencies or
what types or amounts of distributions, if any, they would receive. A plan of reorganization could
result in holders of the Companys liabilities and/or securities, including common stock, receiving
no distribution on account of their interests and cancellation of their holdings. Because of such
possibilities, the value of the Companys liabilities and securities, including common stock, is
highly speculative.
Condensed Combined Financial Information of Debtors
The following unaudited condensed combined financial information is presented for the Debtors as of
December 24, 2010 or for the nine months then ended (in thousands):
Balance Sheet Information: |
||||
Cash and cash equivalents |
$ | 7,616 | ||
Restricted cash |
10,892 | |||
Trade receivables |
11,862 | |||
Inventories |
53,634 | |||
Assets held for sale |
5,788 | |||
Investment in subsidiaries |
25,000 | |||
Prepaid expenses and other assets |
7,303 | |||
Property, plant and equipment, net |
23,466 | |||
Total assets |
$ | 145,561 | ||
Liabilities and shareholders equity |
||||
Post-petition payables and accrued liabilities |
$ | 13,012 | ||
Debtor-in-possession financing |
40,430 | |||
Liabilities not subject to compromise |
53,442 | |||
Liabilities subject to compromise |
85,594 | |||
Total liabilities |
139,036 | |||
Total shareholders equity |
6,525 | |||
Total liabilities and shareholders equity |
$ | 145,561 | ||
6
Statement of Operations Information: |
||||
Net sales |
$ | 178,996 | ||
Gross profit |
29,391 | |||
Operating loss |
(26,468 | ) | ||
Reorganization items |
(2,522 | ) | ||
Net loss |
(34,091 | ) | ||
Statement of Cash Flows Information |
||||
Cash used in operating activities |
$ | (13,917 | ) | |
Cash used in investing activities |
(218 | ) | ||
Cash used in financing activities |
(1,623 | ) | ||
$ | (15,758 | ) | ||
Basis of Presentation
The unaudited condensed consolidated financial statements of Palm Harbor Homes, Inc., and its
subsidiaries (collectively, the Company) reflect all adjustments, which include normal recurring
adjustments, which are, in the opinion of management, necessary for a fair presentation in
conformity with U.S. generally accepted accounting principles. Certain footnote disclosures
normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States have been omitted. The condensed consolidated financial
statements should be read in conjunction with the more detailed audited financial statements for
the fiscal year ended March 26, 2010 included in the Companys Annual Report on Form 10-K as filed
with the Securities and Exchange Commission. The consolidated financial statements for the fiscal
year ended March 26, 2010 have been reissued and are included herein. Results of operations for
any interim period are not necessarily indicative of results to be expected for the remainder of
the current fiscal year or for any future period.
The continued depressed economic environment in fiscal 2011, the subsequent decline in the
Companys cash and cash equivalents, the defaults occurring under the Companys credit agreements,
and the Companys November 29, 2010 filing of a voluntary petition for relief under chapter 11 of
the United States Bankruptcy Code and subsequent bankruptcy-related actions, all discussed further
below, raise substantial doubt about the Companys ability to continue as a going concern.
Managements plans with respect to these conditions involved maximizing the value of the Companys
assets through a court-approved sale, which has since been completed as described below, and
subsequent administration of the Companys bankruptcy estate, including making payments to
creditors, which is ongoing. The accompanying unaudited financial statements and related
disclosures have been prepared on the basis that the financial services segment (CountryPlace
Acceptance Corporation and its finance subsidiaries and Standard Casualty Co. and its insurance
agency subsidiaries) will continue as a going concern, which contemplates the realization of assets
and extinguishment of liabilities in the normal course of business. The financial statements of
Palm Harbor Homes, Inc. and five of its factory-built housing subsidiaries as of and for the
nine-month period ended December 24, 2010 include adjustments to reflect the reorganization of the
Company in accordance with Accounting Standards Codification 852, Reorganizations.
The balance sheet at March 26, 2010 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
7
General Business Environment
In fiscal 2011, the general U.S. economic downturn, an industry-wide lack of available external
financing and an oversupply of competitive site-built homes continued to have a significant adverse
effect on the factory-built housing industry overall, and the Companys factory-built housing
operations and cash flows specifically. The Companys cash and cash equivalents decreased $13.0
million and the Company incurred a $17.7 million loss from operations in the first nine months of
fiscal 2011. Additionally, as of September 24, 2010, the Company was in default under three
provisions of its amended floor plan financing facility with Textron Financial Corporation because
the Company failed to reduce its outstanding borrowings under the facility to $32 million, exceeded
the maximum permissible loan-to-collateral coverage ratio at September 24, 2010 of 62% by having a
ratio of approximately 70%, and sold approximately $4.0 million of homes which funds should have
been paid to Textron but were not paid. On November 29, 2010, Palm Harbor Homes, Inc. and five of
its subsidiaries, Palm Harbor Manufacturing, L.P., Palm Harbor Albemarle LLC, Palm Harbor Real
Estate LLC, Palm Harbor GenPar LLC, and Nationwide Homes, Inc. filed voluntary petitions for relief
under Chapter 11 of the United States Bankruptcy Code as described above.
After closing and the receipt of proceeds of the DIP Credit Agreement, in December 2010 all of the
Companys then-current indebtedness to Textron Financial Corporation was repaid. After closing and
receipt of the proceeds of the asset sale to the Purchaser, approximately $45.3 million of the
$83.9 million purchase price was used to retire amounts outstanding under the DIP Credit Agreement,
which was thereafter terminated. Additionally, certain expenses that include title insurance and
prorated taxes were paid. Remaining net proceeds from the asset sale are intended to be used by the
Companys bankruptcy estate to satisfy various creditor obligations. The Company estimates that
after payments to creditors, there will not be sufficient proceeds to make any distributions to
stockholders.
New Accounting Pronouncements
Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements (ASU 2010-06). Update No. 2010-06 requires
additional disclosures about fair value measurements, including separate disclosures of significant
transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the
transfers. Additionally, the reconciliation for fair value measurements using significant
unobservable inputs (Level 3) should present separately information about purchases, sales,
issuances, and settlements. ASU 2010-06 also clarifies previous disclosure requirements, including
the requirement that entities provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements for both Level 2 and
Level 3 measurements. The new disclosures and clarifications of existing disclosures required under
ASU 2010-06 are effective for interim and annual reporting periods beginning after December 15,
2009, and were adopted for the interim reporting period ending December 24, 2010, except for the
disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in
Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The new authoritative
guidance did not have a material impact on the Companys financial condition, liquidity, or results
of operations, but it has significantly expanded the disclosures that we are required to provide.
8
On July 21, 2010, the Financial Accounting Standards Board (FASB) issued a final Accounting
Standards Update (ASU), ASU 2010-20, that requires entities to provide extensive new disclosures in
their financial statements about their financing receivables, including credit risk exposures and
the allowance for credit losses. Entities with financing receivables will be required to disclose,
among other things (i) a rollforward of the allowance for credit losses, (ii) credit quality
information such as credit risk scores or external credit agency ratings, (iii) impaired loan
information, (iv) modification information, and (v) nonaccrual and past due information. Public
entities are required to adopt all of the ASUs provisions related to disclosures of financing
receivables as of the end of a reporting period (e.g., credit quality information, impaired loan
information) for interim or annual reporting periods ending on or after December 15, 2010. The
financing receivables disclosures related to activity that occurs during a reporting period (e.g.,
the rollforward of the allowance for credit losses
and the modification disclosures) are required to be adopted by public entities for interim or
annual reporting periods beginning on or after December 15, 2010. In January 2011, the FASB issued
ASU 2011-01, which temporarily delayed the effective date of the disclosures about troubled debt
restructurings in ASU 2010-20 to periods ending after June 15, 2011. The Company adopted the
provisions of ASU 2010-20 relating to period-end disclosures as of December 24, 2010 (see Note 3),
and the remaining provisions will be adopted during the quarter ended March 25, 2011, except for
the disclosures related to troubled debt restructurings, discussed below.
On April 5, 2011, the FASB issued ASU 2011-02, A Creditors Determination of Whether a
Restructuring is a Troubled Debt Restructuring, which clarifies when creditors should classify loan
modifications as troubled debt restructurings. The guidance is effective for interim and annual
periods beginning on or after June 15, 2011, and applies retrospectively to restructurings
occurring on or after the beginning of the year. The guidance on measuring the impairment of a
receivable restructured in a troubled debt restructuring is effective on a prospective basis. The
Company is currently evaluating the new guidance.
2. Inventories
Inventories consist of the following (in thousands):
December 24, | March 26, | |||||||
2010 | 2010 | |||||||
Raw materials |
$ | 6,233 | $ | 4,927 | ||||
Work in process |
2,958 | 4,085 | ||||||
Finished goods at factory |
1,140 | 1,324 | ||||||
Finished goods at retail |
43,303 | 49,967 | ||||||
$ | 53,634 | $ | 60,303 | |||||
3. Investments
The following tables summarize the Companys available-for-sale investment securities as of
December 24, 2010 and March 26, 2010 (in thousands):
December 24, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. Treasury and Government Agencies |
$ | 1,472 | $ | 94 | $ | | $ | 1,566 | ||||||||
Mortgage-backed securities |
4,602 | 284 | (8 | ) | 4,878 | |||||||||||
States and political subdivisions |
1,241 | 43 | (1 | ) | 1,283 | |||||||||||
Corporate debt securities |
4,447 | 375 | | 4,822 | ||||||||||||
Marketable equity securities |
2,939 | 211 | (57 | ) | 3,093 | |||||||||||
Total |
$ | 14,701 | $ | 1,007 | $ | (66 | ) | $ | 15,642 | |||||||
9
March 26, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. Treasury and Government Agencies |
$ | 1,724 | $ | 69 | $ | | $ | 1,793 | ||||||||
Mortgage-backed securities |
5,232 | 268 | (4 | ) | 5,496 | |||||||||||
States and political subdivisions |
1,240 | 17 | (7 | ) | 1,250 | |||||||||||
Corporate debt securities |
4,455 | 325 | | 4,780 | ||||||||||||
Marketable equity securities |
2,674 | 97 | (49 | ) | 2,722 | |||||||||||
Total |
$ | 15,325 | $ | 776 | $ | (60 | ) | $ | 16,041 | |||||||
The following table shows the gross unrealized losses and fair value, aggregated by investment
category and length of time that individual securities have been in a continuous unrealized loss
position at December 24, 2010 (in thousands):
Less than 12 months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
Mortgage-backed securities |
$ | 4,878 | $ | (8 | ) | $ | | $ | | $ | 4,878 | $ | (8 | ) | ||||||||||
States and political subdivisions |
1,283 | (1 | ) | | | 1,283 | (1 | ) | ||||||||||||||||
Marketable equity securities |
334 | (55 | ) | 100 | (2 | ) | 434 | (57 | ) | |||||||||||||||
Total |
$ | 6,495 | $ | (64 | ) | $ | 100 | $ | (2 | ) | $ | 6,595 | $ | (66 | ) | |||||||||
The following table shows the gross unrealized losses and fair value, aggregated by investment
category and length of time that individual securities have been in a continuous unrealized loss
position at March 26, 2010 (in thousands):
Less than 12 months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
Mortgage-backed securities |
$ | 485 | $ | (4 | ) | $ | | $ | | $ | 485 | $ | (4 | ) | ||||||||||
States and political subdivisions |
533 | (7 | ) | | | 533 | (7 | ) | ||||||||||||||||
Marketable equity securities |
665 | (43 | ) | 116 | (6 | ) | 781 | (49 | ) | |||||||||||||||
Total |
$ | 1,683 | $ | (54 | ) | $ | 116 | $ | (6 | ) | $ | 1,799 | $ | (60 | ) | |||||||||
During the first nine months of fiscal 2011, none of the Companys available-for-sale equity
securities were determined to be other-than-temporarily impaired. During the first nine months of
fiscal 2010, 30 of the Companys available-for-sale equity securities with a total carrying value
of $0.8 million were determined to be other-than-temporarily impaired and a realized loss of $0.2
million was recorded in the Companys consolidated statements of operations.
The Companys investments in marketable equity securities consist of investments in common stock of
bank trust and insurance companies and public utility companies ($1.3 million of the total fair
value and $2,000 of the total unrealized losses) and industrial companies ($1.8 million of the
total fair value and $55,000 of the total unrealized losses). Based on the Companys ability and
intent to hold the investments for a reasonable period of time sufficient for a forecasted recovery
of fair value, the Company does not consider the investments to be other-than-temporarily impaired
at December 24, 2010.
10
The amortized cost and fair value of the Companys investment securities at December 24, 2010, by
contractual maturity,
are shown in the table below (in thousands). Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Amortized | Fair | |||||||
Cost | Value | |||||||
Due in less than one year |
$ | 1,628 | $ | 1,645 | ||||
Due after one year through five years |
6,401 | 6,941 | ||||||
Due after five years |
3,733 | 3,963 | ||||||
Marketable equity securities |
2,939 | 3,093 | ||||||
Total investment securities available-for-sale |
$ | 14,701 | $ | 15,642 | ||||
Realized gains and losses from the sale of securities are determined using the specific
identification method. Gross gains realized on the sales of investment securities for the first
nine months of fiscal 2011 and 2010 were approximately $334,000 and $342,000, respectively. Gross
losses were approximately $17,000 and $433,000 for the first nine months of fiscal 2011 and 2010,
respectively.
4. Restricted Cash
Restricted cash consists of the following (in thousands):
December 24, | March 26, | |||||||
2010 | 2010 | |||||||
Cash pledged as collateral for outstanding insurance
programs and surety bonds |
$ | 9,669 | $ | 9,917 | ||||
Cash related to customer deposits held in trust accounts |
1,223 | 2,496 | ||||||
Cash related to CountryPlace customers principal and
interest payments on the loans that are securitized |
3,818 | 3,917 | ||||||
$ | 14,710 | $ | 16,330 | |||||
5. Consumer Loans Receivable and Allowance for Loan Losses
Consumer loans receivable, net, consists of the following (in thousands):
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
Consumer loans receivable held for investment |
$ | 166,615 | $ | 179,549 | ||||
Consumer loans receivable held for sale |
2,529 | 558 | ||||||
Construction advances on non-conforming mortgages |
2,641 | 4,148 | ||||||
Deferred financing costs, net |
(4,450 | ) | (5,096 | ) | ||||
Allowance for loan losses |
(3,890 | ) | (3,016 | ) | ||||
Consumer loans receivable, net |
$ | 163,445 | $ | 176,143 | ||||
11
The Companys consumer loans receivable balance consists of fixed-rate, fixed-term,
fully-amortizing single-family home loans. These loans are either secured by a manufactured home,
excluding the land upon which the home is located (chattel property loans and retail installment
sale contracts), or by a combination of the home and the land upon which the home is located (real
property mortgage loans). The real property mortgage loans are primarily for manufactured homes.
Combined land and home loans are further disaggregated by the type of loan documentation: those
conforming to the requirements of Government-Sponsored Enterprises (GSEs), and those that are
non-conforming. In most instances, the Companys loans are secured by a first-lien position and
are provided for the purchase of a home. In rare instances the
Company may provide other types of loans in second-lien or unsecured positions. Accordingly, the
Company classifies its loans receivable assets as follows: chattel loans, conforming mortgages,
non-conforming mortgages, and other loans.
The following table disaggregates consumer loans receivable for each class by portfolio segment as
of December 31, 2010 (in thousands):
Consumer Loans Held for Investment | Consumer | |||||||||||||||||||
Securitized | Securitized | Loans Held | ||||||||||||||||||
2005 | 2007 | Unsecuritized | for Sale | Total | ||||||||||||||||
Asset Class: |
||||||||||||||||||||
Chattel loans |
$ | 70,103 | $ | 48,033 | $ | 4,308 | $ | | $ | 122,444 | ||||||||||
Conforming mortgages |
| | 2,137 | 2,529 | 4,666 | |||||||||||||||
Non-conforming mortgages |
6,591 | 21,370 | 14,032 | | 41,993 | |||||||||||||||
Other loans |
| | 41 | | 41 | |||||||||||||||
$ | 76,694 | $ | 69,403 | $ | 20,518 | $ | 2,529 | $ | 169,144 | |||||||||||
To assess the adequacy of its allowance for loan losses and to monitor the credit risk of its
portfolio, the Company develops and periodically reviews default and loss forecasts for each
segment of its portfolio. The portfolio is segmented approximately by period of origination, as
represented by the pools of loans included in securitized financings (loans securitized in 2005 and
those securitized in 2007), those which generally were originated after the 2007 securitization and
have not been included in any subsequent securitized financing, and those which have been
originated recently with the intent to sell.
The allowance for loan losses and related additions and deductions to the allowance during the nine
months ended December 31, 2010 and December 31, 2009 are as follows (in thousands):
Nine Months Ended | ||||||||
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Allowance for loan losses, beginning of period |
$ | 3,016 | $ | 5,800 | ||||
Provision for credit losses |
4,367 | 2,229 | ||||||
Loans charged off, net of recoveries |
(3,493 | ) | (3,587 | ) | ||||
Allowance for loan losses, end of period |
$ | 3,890 | $ | 4,442 | ||||
The allowance for loan losses reflects the Companys judgment of the probable loss exposure on its
loans held for investment portfolio as of the end of the reporting period. The loan portfolio is
comprised of loans related primarily to factory-built homes, and, in some instances, related land.
The allowance for loan losses is developed at a portfolio level, as pools of homogeneous loans, and
not allocated to specific individual loans or to impaired loans. A range of probable losses is
calculated after giving consideration to, among other things, the composition of the loan
portfolio, including historical loss experience by static pool and recent loss experience. The
Company then makes a determination of the best estimate within the range of loan losses.
12
In measuring credit quality within each segment and class, the Company uses commercially available
credit scores (FICO). At the time of each loans origination, the Company obtained credit scores
from each of the three primary credit bureaus, if available. To evaluate credit quality of
individual loans, the Company uses the mid-point of the available credit scores, or if only two
scores are available, the Company uses the lower of the two. Except in the case of troubled debt
restructurings or other loan modifications, the Company does not update credit bureau scores after
the time of origination.
The following table disaggregates the Companys consumer loans receivable by class and credit
quality indicator as of December 31, 2010 (in thousands):
Consumer Loans Held for Investment | Consumer | |||||||||||||||
Asset Class | Securitized | Securitized | Loans Held | |||||||||||||
Credit Quality Indicator | 2005 | 2007 | Unsecuritized | for Sale | ||||||||||||
Chattel loans |
||||||||||||||||
0-619 |
$ | 2,159 | $ | 1,610 | $ | 1,314 | $ | | ||||||||
620-719 |
31,477 | 21,020 | 1,916 | | ||||||||||||
720+ |
36,467 | 25,403 | 1,078 | | ||||||||||||
Conforming mortgages |
||||||||||||||||
0-619 |
| | 554 | | ||||||||||||
620-719 |
| | 1,126 | 1,727 | ||||||||||||
720+ |
| | 457 | 802 | ||||||||||||
Non-conforming mortgages |
||||||||||||||||
0-619 |
131 | 1,330 | 4,016 | | ||||||||||||
620-719 |
3,200 | 12,592 | 7,797 | | ||||||||||||
720+ |
3,260 | 7,448 | 2,219 | | ||||||||||||
Other loans |
||||||||||||||||
Total other |
| | 41 | | ||||||||||||
$ | 76,694 | $ | 69,403 | $ | 20,518 | $ | 2,529 | |||||||||
13
CountryPlaces policy is to place loans on nonaccrual status when either principal or interest is
past due and remains unpaid for 120 days or more. In addition, they place loans on nonaccrual
status when there is a clear indication that the borrower has the inability or unwillingness to
meet payments as they become due. Payments received on nonaccrual loans are accounted for on a
cash basis, first to interest and then to principal. Upon determining that a nonaccrual loan is
impaired, interest accrued and the uncollected receivable prior to identification of nonaccrual
status is charged to the allowance for loan losses. At December 31, 2010, CountryPlaces
management was not aware of any potential problem loans that would have a material adverse effect
on loan delinquency or charge-offs. Loans are subject to continual review and are given
managements attention whenever a problem situation appears to be developing. The following table
sets forth the amounts and categories of CountryPlaces non-performing loans and assets as of
December 31, 2010 and March 31, 2010 (dollars in thousands):
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
Non-performing loans: |
||||||||
Loans accounted for on a nonaccrual basis |
$ | 1,203 | $ | 1,219 | ||||
Accruing loans past due 90 days or more |
1,131 | 594 | ||||||
Total nonaccrual and 90 days past due loans |
2,334 | 1,813 | ||||||
Percentage of total loans |
1.38 | % | 1.01 | % | ||||
Other non-performing assets (1) |
1,294 | 1,566 | ||||||
Troubled debt restructurings |
1,018 | 1,268 |
(1) | Consists of land and homes acquired through foreclosure, which are carried at
the lower of carrying value or fair value less estimated selling expenses. |
Beginning in fiscal 2009, CountryPlace modified loans to retain borrowers with good payment
history. These modifications were considered to represent credit concessions due to borrowers
loss of income and other repayment matters impacting
these borrowers. CountryPlace modified the payments or rates for approximately $1.6 million and
$1.5 million of loans for the nine months ended December 31, 2010 and December 31, 2009,
respectively. These loans are not reflected as non-performing loans but as troubled debt
restructurings.
Loan contracts secured by collateral that is geographically concentrated could experience higher
rates of delinquencies, default and foreclosure losses than loan contracts secured by collateral
that is more geographically dispersed. CountryPlace has loan contracts secured by factory-built
homes located in the following key states as of December 31, 2010 and March 31, 2010:
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
Texas |
42.8 | % | 43.2 | % | ||||
Florida |
6.8 | 6.6 | ||||||
Arizona |
6.5 | 6.3 | ||||||
California |
2.1 | 2.1 |
The States of California, Florida and Arizona, and to a lesser degree Texas, have experienced
economic weakness resulting from the decline in real estate values. The risks created by these
concentrations have been considered by CountryPlaces management in the determination of the
adequacy of the allowance for loan losses. No other states had concentrations in excess of 10% of
the principal balance of the consumer loans receivable as of December 31, 2010 or March 31, 2010.
Management believes the allowance for loan losses is adequate to cover estimated losses at December
31, 2010.
14
6. Liabilities Subject to Compromise
Liabilities subject to compromise refers to both secured and unsecured obligations that will be
accounted for under a plan of reorganization. Generally, actions to enforce or otherwise effect
payment of pre-Chapter 11 liabilities are stayed. ASC 852 requires pre-petition liabilities that
are subject to compromise to be reported at the amounts expected to be allowed, even if they may be
settled for lesser amounts. These liabilities represent the estimated amount expected to be allowed
on known or potential claims to be resolved through the Chapter 11 process, and remain subject to
future adjustments arising from negotiated settlements, actions of the Bankruptcy Court, rejection
of executory contracts and unexpired leases, the determination as to the value of collateral
securing the claims, proofs of claim, or other events. Liabilities subject to compromise also
include certain items that may be assumed under the plan of reorganization, and as such, may be
subsequently reclassified to liabilities not subject to compromise. The Company has included
unsecured debt as a liability subject to compromise as management believes that there remains
uncertainty to the terms under a plan of reorganization since the filing recently occurred. At
hearings held in December 2010, the Court granted final approval of many of the Debtors first
day motions covering, among other things, human capital obligations, supplier relations,
insurance, customer relations, business operations, certain tax matters, cash management,
utilities, case management and retention of professionals. Obligations associated with these
matters are not classified as liabilities subject to compromise.
In accordance with ASC 852, debt issuance costs should be viewed as valuations of the related debt.
When the debt has become an allowed claim and the allowed claim differs from the net carrying
amount of the debt, the recorded amount should be adjusted to the amount of the allowed claim
(thereby adjusting existing debt issuance costs to the extent necessary to report the debt at this
allowed amount). Through December 24, 2011, the Bankruptcy Court had not classified any of the
Debtors outstanding debt as allowed claims. Therefore, the Company classified the Debtors
outstanding debt as liabilities subject to compromise on the Condensed Consolidated Balance Sheet.
The Company has not adjusted debt issuance costs, totaling $138,000 at December 24, 2010, related
to the Debtors convertible senior notes outstanding. The
Company may be required to expense these amounts or a portion thereof as reorganization items if
the Bankruptcy Court ultimately determines that a portion of the debt is subject to compromise.
The Debtors are seeking to reject certain pre-petition executory contracts and unexpired leases
with respect to the Debtors operations with the approval of the Bankruptcy Court and may reject
additional ones in the future. Damages resulting from rejection of executory contracts and
unexpired leases are generally treated as general unsecured claims and will be classified as
liabilities subject to compromise. Holders of pre-petition claims were required to file proofs of
claims by the bar date, April 18, 2011, established with approval of the Bankruptcy Court. A bar
date is the date by which certain claims against the Debtors must be filed if the claimants wish to
receive any distribution in the Chapter 11 cases. Differences between liability amounts estimated
by the Debtors and claims filed by creditors will be investigated and, if necessary, the Bankruptcy
Court will make a final determination of the allowable claim. The determination of how liabilities
will ultimately be treated cannot be made until the Bankruptcy Court approves a Chapter 11 plan of
reorganization. Accordingly, the ultimate amount or treatment of such liabilities is not
determinable at this time.
Liabilities subject to compromise consisted of the following:
December 24, | ||||
2010 | ||||
Accounts payable |
$ | 19,891 | ||
Accrued expenses and other liabilities |
13,785 | |||
Convertible senior notes, net |
51,918 | |||
Total liabilities subject to compromise |
$ | 85,594 | ||
Liabilities subject to compromise includes trade accounts payable related to pre-petition
purchases, all of which were not paid. As a result, the Companys cash flows from operations were
favorably affected by the stay of payment related to these accounts payable.
15
7. Floor Plan Payable and Debtor-In-Possession Financing
The Company had an agreement with Textron Financial Corporation for a floor plan facility. This
facility was used to finance a portion of the new home inventory at its retail sales centers and
was secured by the Companys assets, excluding CountryPlace assets. The advance rate for the
facility was 90% of manufacturers invoice and the maturity date is the earlier of June 30, 2012 or
one month prior to the date of the first repurchase option for the holder of the Companys
convertible senior notes.
The Company was in default of three provisions under its amended floor plan financing facility with
Textron Financial Corporation as of September 24, 2010 because the Company failed to reduce its
outstanding borrowings under the facility to $32 million. As a result, the Company exceeded the
maximum permissible loan-to-collateral coverage ratio at September 24, 2010 of 62% by having a
ratio of approximately 70%. In addition, the Company sold
approximately $4.0 million of homes,
which funds should have been paid to Textron but were not paid. Subsequently, on November 29, 2010,
Palm Harbor Homes, Inc. and five of its domestic subsidiaries, Palm Harbor Manufacturing, L.P.,
Palm Harbor Albemarle LLC, Palm Harbor Real Estate LLC, Palm Harbor GenPar LLC, and Nationwide
Homes, Inc. filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the District of Delaware in Wilmington, case number
10-13850.
In connection with the bankruptcy filing, on November 29, 2010, the Company entered into an asset
purchase agreement with the entities subject to the bankruptcy and Palm Harbor Homes, Inc., a
Delaware corporation under which the Purchaser purchased substantially all of the assets and
assumed specified liabilities of the Sellers. Additionally, on November 29, 2010, the Company
entered into a Senior Secured, Super-Priority Debtor-in-Possession Revolving Credit
Agreement (the DIP Credit Agreement) among the Company, the entities subject to the bankruptcy,
and Fleetwood Homes, Inc., as lender (the Lender) and the Security Agreement among the Company,
the entities subject to the bankruptcy, and the Lender as the secured party, with a Promissory Note
executed by the Company and its filing subsidiaries in favor of the Lender. Pursuant to the terms
of the DIP Credit Agreement, the Security Agreement, and the Note, the lender agreed to loan up to
$50 million (which may increase to $55 million if certain conditions are met), bearing interest at
7% per annum and maturing on the earlier of April 30, 2011 (as amended) or 15 days after entry of a
final order from the Bankruptcy Court approving the sale of the Companys assets. Subsequently, on
March 1, 2011, the Purchaser was selected as the successful bidder to purchase substantially all of
the Companys assets, and assume specified liabilities, pursuant to an auction process with a bid
of approximately $83.9 million, and on April 25, 2011, pursuant to an Amended and Restated Asset
Purchase Agreement dated March 1, 2011, the previously announced and approved sale was completed
with an effective date of the transaction of April 23, 2011.
After closing and the receipt of proceeds of the DIP Credit Agreement, in December 2010 all of the
Companys then-current indebtedness to Textron Financial Corporation was repaid. Of the $35.1
million initial draw from the DIP Financing, on December 3, 2010, $34.2 million was paid to Textron
Financial, consisting of $33.7 million for the then-outstanding principal balance, $236,000 in
interest and $255,000 in fees. After closing and receipt of the proceeds of the asset sale to the
Purchaser, approximately $45.3 million of the $83.9 million purchase price was used to retire
amounts outstanding under the DIP Credit Agreement, which was thereafter terminated. Additionally,
certain expenses that include title insurance and prorated taxes were paid. Remaining net proceeds
from the asset sale are intended to be used by the Companys bankruptcy estate to satisfy various
creditor obligations. The Company estimates that after payments to creditors, there will not be
sufficient proceeds to make any distributions to stockholders.
8. Debt Obligations
In fiscal 2005, the Company issued $75.0 million aggregate principal amount of 3.25% Convertible
Senior Notes due 2024 (the Notes) in a private, unregistered offering. Interest on the Notes is
payable semi-annually in May and November. The Notes are senior, unsecured obligations and rank
equal in right of payment to all of the Companys existing and future unsecured and senior
indebtedness. Prior to the bankruptcy filing on November 28, 2010, each $1,000 in principal amount
of the Notes was convertible, at the option of the holder, at a conversion price of $25.92, or
38.5803 shares of the Companys common stock upon the satisfaction of certain conditions and
contingencies. For the first nine months of fiscal 2011 and 2010, the effect of converting the
Notes to 2.1 million shares of common stock was anti-dilutive, and was, therefore, not considered
in determining diluted earnings per share.
16
The liability component related to the Notes was being amortized through May, 2011; however, upon
the filing of the voluntary petitions for bankruptcy protection on November 29, 2010, the Company
ceased recognition of interest expense for the convertible senior notes as there is substantial
doubt that it will be paid, subject to the approval of the Bankruptcy Court. The convertible
senior notes were reflected in the condensed consolidated balance sheets as of December 24, 2010
and March 26, 2010 as follows (in thousands):
December 24, | March 26, | |||||||
2010 | 2010 | |||||||
Principal amount of the liability component |
$ | 53,845 | $ | 53,845 | ||||
Unamortized debt discount |
(1,927 | ) | (3,359 | ) | ||||
Convertible senior notes, net |
$ | 51,918 | $ | 50,486 | ||||
Interest expense related to the convertible senior notes for the first nine months of fiscal 2011
and 2010 totaled $2.3 million and $3.6 million, respectively, of which $1.4 million and $1.9
million, respectively, represented amortization of the debt discount. But for the bankruptcy
filing, the Company would have recognized $3.4 million of interest expense related to the
convertible senior notes for the nine months ended December 24, 2010, of which $2.2 million would
have represented
amortization of the debt discount at an effective interest rate of 9.11%.
Given the Companys rapidly declining availability of cash, the Company did not make its November
2010 interest payment to the Noteholders, which caused a default under the Indenture governing the
Notes. Subsequently, on November 29, 2010, Palm Harbor Homes, Inc. and five of its domestic
subsidiaries, Palm Harbor Manufacturing, L.P., Palm Harbor Albemarle LLC, Palm Harbor Real Estate
LLC, Palm Harbor GenPar LLC, and Nationwide Homes, Inc. filed voluntary petitions for relief under
Chapter 11 of the United States Bankruptcy Code as described above. See Note 6.
On July 12, 2005, the Company, through its subsidiary CountryPlace, completed its initial
securitization (2005-1) for approximately $141.0 million of loans, which was funded by issuing
bonds totaling approximately $118.4 million. The bonds were issued in four different classes:
Class A-1 totaling $36.3 million with a coupon rate of 4.23%; Class A-2 totaling $27.4 million with
a coupon rate of 4.42%; Class A-3 totaling $27.3 million with a coupon rate of 4.80%; and Class A-4
totaling $27.4 million with a coupon rate of 5.20%. The bonds mature at varying dates beginning in
2006 through 2015 and were issued with an expected weighted average maturity of 4.66 years. The
proceeds from the securitization were used to repay approximately $115.7 million of borrowings on
the Companys warehouse revolving debt with the remaining proceeds being used for general corporate
purposes, including future origination of new loans. For accounting purposes, this transaction was
structured as a securitized borrowing. CountryPlaces servicing obligation under this securitized
financing was guaranteed by the Company.
On March 22, 2007, the Company, through its subsidiary CountryPlace, completed its second
securitization (2007-1) for approximately $116.5 million of loans, which was funded by issuing
bonds totaling approximately $101.9 million. The bonds were issued in four classes: Class A-1
totaling $28.9 million with a coupon rate of 5.484%; Class A-2 totaling $23.4 million with a coupon
rate of 5.232%; Class A-3 totaling $24.5 million with a coupon rate of 5.593%; and Class A-4
totaling $25.1 million with a coupon rate of 5.846%. The bonds mature at varying dates beginning
in 2008 through 2017 and were issued with an expected weighted average maturity of 4.86 years. The
proceeds from the securitization were used to repay approximately $97.1 million of borrowings on
the Companys warehouse revolving debt with the remaining proceeds being used for general corporate
purposes, including future origination of new loans. For accounting purposes, this transaction was
also structured as a securitized borrowing.
17
On January 29, 2010, the Company, through its subsidiary CountryPlace, entered into an agreement
for a $19.8 million secured term loan from entities managed by Virgo Investment Group LLC. The
agreement provides an option for CountryPlace to exercise a secondary commitment to borrow an
additional $5.0 million. The Company did not exercise the secondary commitment prior to its
expiration on August 1, 2010. The facility has a maturity date of January 29, 2014 and bears
interest at an annual rate of the Eurodollar Rate plus 12%. The Eurodollar Rate cannot be less
than 3.0% nor greater than 4.5%. The proceeds were used by CountryPlace to repay intercompany
indebtedness to the Company and the Company used the proceeds for working capital and general
corporate purposes.
The agreement also contains financial covenants that must be complied with by CountryPlace.
CountryPlace shall not incur capital expenditures exceeding $300,000 in any fiscal year; and the
maximum amount of the Virgo loan divided by the value of the collateral securing the loan shall not
exceed the ratios below for more than three consecutive months during the applicable periods:
Time Period | Maximum Loan-to-Value Ratio | |||
Twelve Months Ended 2/1/2011 |
0.36:1 | |||
Twelve Months Ended 2/1/2012 |
0.35:1 | |||
Twelve Months Ended 2/1/2013 |
0.34:1 | |||
Twelve Months Ended 2/1/2014 |
0.33:1 |
For the fiscal quarter ended December 31, 2010, CountryPlace was in compliance with the
financial covenants with a loan-to-value ratio of 0.34:1.
As a condition to Virgo making the loan, the parties also agreed to create a special purpose
vehicle (SPV) to hold certain mortgage loans as collateral. Pursuant to the agreement, at the time
of the agreement was executed CountryPlace transferred its right, title, and interest to certain
manufactured housing installment sales contracts and mortgages, along with certain related
property, to a specially created subsidiary, CountryPlace Mortgage Holdings, LLC (Mortgage SPV).
On January 29, 2010, the transferred sales contracts and mortgages consisted of $39.4 million of
the overcollateralization on the 2005-1 and 2007-1 securitizations (Class X and R certificates),
and $19.8 million of certain other mortgage loans held for investment that were not previously
securitized.
The Mortgage SPV is consolidated on the Companys financial statements as CountryPlace will
continue to service the mortgage loans and collect the related service fee and residual income even
after the termination of the loan facility, is obligated to repurchase or substitute contracts that
materially adversely affect the Mortgage SPVs interest, and will be solely liable for losses
incurred by the Mortgage SPV.
As partial consideration for the loan with Virgo, the Company issued warrants to purchase up to an
aggregate of 1,296,634 shares of the Companys common stock at a purchase price of $2.1594 per
share. These warrants contain an anti-dilution provision that prevents the warrant holders
fully-diluted percentage interest in the Company from being diluted in the event that any
convertible securities of the Company, including the Notes, are converted into shares of common
stock of the Company. The warrants also contain an anti-dilution provision that prevents the
warrant holder from having its percentage ownership in the Company diminished by more than 10% in
the event that the Company issues additional securities, subject to certain exceptions. These
anti-dilution provisions expire in January 2014. For the first nine months of fiscal 2011, the
effect of converting the warrants to common stock was anti-dilutive, and, therefore, was not
considered in determining diluted earnings per share.
On May 10, 2011, CountryPlace exercised its right to prepay in full the secured term loan with
entities managed by Virgo Service Company, LLC (Virgo). The repayment totaled $18,926,000,
including principal of $18,375,000 and prepayment premium of $551,000. The Company also recorded
$583,000 of expense for the unamortized portion of the related debt issuance costs, $62,000 of
additional interest, and $187,000 of debt-related expenses. In conjunction with the prepayment of
the secured term loan, CountryPlace redeemed the preferred stock of CountryPlace Mortgage Holdings,
LLC held by Virgo at the par value of $200,000. The prepayment of the secured term loan was funded
by Palm Harbor Homes-Delaware, and $19,443,000 was included in payable to affiliates at the time of
the prepayment.
18
On April 27, 2009, the Company issued warrants to each of Capital Southwest Venture Corporation,
Sally Posey and the Estate of Lee Posey (collectively, the lenders) to purchase up to an aggregate
of 429,939 shares of common stock of the Company at a price of $3.14 per share, which was the
closing price of the Companys common stock on April 24, 2009. The Black-Scholes method
was used to value the warrants, which resulted in the Company recording $0.8 million in non-cash
interest expense in the first quarter of fiscal 2010. The warrants were granted in
connection with a loan made by the lenders to the Company of an aggregate of $4.5 million pursuant
to senior subordinated secured promissory notes between the Company and each of the lenders
(collectively, the Promissory Notes). The proceeds were used for working capital purposes. The
Promissory Notes were repaid in full on June 29, 2009. The warrants, which expire on April 24,
2019, contain anti-dilution provisions and other customary provisions. For the first nine months
of fiscal 2011 and 2010, the effect of converting the warrants to common stock, was anti-dilutive
and, therefore, was not considered in determining diluted earnings per share.
9. Other Comprehensive Loss
The difference between net loss and total comprehensive loss for the three months ended December
24, 2010 and December 25, 2009 is as follows (in thousands):
Nine Months Ended | ||||||||
December 24, | December 25, | |||||||
2010 | 2009 | |||||||
Net loss |
$ | (29,913 | ) | $ | (29,522 | ) | ||
Unrealized gain on available-
for-sale investments, net of tax |
146 | 1,563 | ||||||
Amortization of interest rate hedge |
69 | 68 | ||||||
Comprehensive loss |
$ | (29,698 | ) | $ | (27,891 | ) | ||
10. Commitments and Contingencies
The Company is subject to various legal proceedings and claims that arise in the ordinary course of
business and claims filed as a result of the Companys voluntary petition for bankruptcy
protection. On November 29, 2010, the Debtors filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The cases are being jointly administered
under Case No. 10-13850. The Debtors continue to operate their business as debtors-in-possession
under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of
the Bankruptcy Code and orders of the Bankruptcy Court. As of the date of the Chapter 11 filing,
virtually all pending litigation against the Company is stayed as to the Company, and absent
further order of the Bankruptcy Court, no party, subject to certain exceptions, may take any
action, also subject to certain exceptions, to recover on pre-petition claims against the Debtors.
Under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise,
pre-petition liabilities and post-petition liabilities must generally be satisfied in full before
stockholders are entitled to receive any distribution or retain any property under a plan of
reorganization. The ultimate recovery to creditors and/or stockholders, if any, will not be
determined until confirmation of a plan or plans of reorganization. No assurance can be given as to
what values, if any, will be ascribed in the Chapter 11 cases to each of these constituencies or
what types or amounts of distributions, if any, they would receive. A plan of reorganization could
result in holders of our liabilities and/or securities, including our common stock, receiving no
distribution on account of their interests and cancellation of their holdings. Because of such
possibilities, the value of The Companys liabilities and securities, including common stock, is
highly speculative.
19
11. Accrued Product Warranty Obligations
The Company provides the retail homebuyer a one-year limited warranty covering defects in material
or workmanship in home structure, plumbing and electrical systems. The amount of warranty reserves
recorded are estimated future warranty costs relating to homes sold, based upon the Companys
assessment of historical experience factors, such as actual number of warranty calls and the
average cost per warranty call.
The accrued product warranty obligation is classified as accrued liabilities in the condensed
consolidated balance sheets. The following table summarizes the accrued product warranty
obligations at December 24, 2010 and December 25, 2009 (in thousands):
Nine Months Ended | ||||||||
December 24, | December 25, | |||||||
2010 | 2009 | |||||||
Accrued warranty balance, beginning of period |
$ | 1,593 | $ | 2,972 | ||||
Net warranty expense provided |
3,534 | 3,697 | ||||||
Cash warranty payments |
(3,945 | ) | (4,872 | ) | ||||
Accrued warranty balance, end of period |
$ | 1,182 | $ | 1,797 | ||||
12. Fair Value Measurements
The book value and estimated fair value of the Companys financial instruments are as follows
(dollars in thousands):
December 24, 2010 | March 26, 2010 | |||||||||||||||
Book | Estimated Fair | Book | Estimated Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
Cash and cash equivalents (1) |
$ | 13,721 | $ | 13,721 | $ | 26,705 | $ | 26,705 | ||||||||
Restricted cash (1) |
14,710 | 14,710 | 16,330 | 16,330 | ||||||||||||
Investments (2) |
15,642 | 15,642 | 16,041 | 16,041 | ||||||||||||
Consumer loans receivables (3) |
169,144 | 156,242 | 180,107 | 175,934 | ||||||||||||
Floor plan payable (1) |
| | 42,249 | 42,249 | ||||||||||||
Construction lending line (1) |
2,968 | 2,968 | 3,890 | 3,890 | ||||||||||||
Convertible senior notes, net (2) |
51,918 | 3,984 | 50,486 | 36,076 | ||||||||||||
Securitized financings (4) |
110,533 | 112,512 | 122,494 | 120,019 | ||||||||||||
Virgo debt, net (5) |
18,033 | 15,927 | 18,518 | 18,213 |
(1) | The fair value approximates book value due to the instruments short term
maturity. |
|
(2) | The fair value is based on market prices. |
|
(3) | Includes consumer loans receivable held for investment and held for sale. The fair
value of the loans held for investment is based on the discounted value of the remaining
principal and interest cash flows. The fair value of the loans held for sale approximates
book value since the sales price of these loans is known as of December 31, 2010. |
|
(4) | The fair value is estimated using recent transactions of factory-built housing
asset-backed securities. |
|
(5) | The fair value is estimated based on the remaining cash flows discounted at the
implied yield when the transaction was closed. |
20
In accordance with ASC Topic 820, fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The standard describes three levels of inputs that may be used
to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of the assets or
liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. The Company had no level 3 securities
at the end of the third quarter ended December 24, 2010.
The Company utilizes the market approach to measure fair value for its financial assets and
liabilities. The market approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities.
Assets and liabilities measured at fair value on a recurring basis are summarized below (in
thousands):
As of December 24, 2010 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Securities issued by the U.S. Treasury and Government Agencies
(1) |
$ | 1,566 | $ | | $ | 1,566 | $ | | ||||||||
Mortgage-backed securities (1) |
4,878 | | 4,878 | | ||||||||||||
Securities issued by states and political subdivisions (1) |
1,283 | | 1,283 | | ||||||||||||
Corporate debt securities (1) |
4,822 | | 4,822 | | ||||||||||||
Marketable equity securities (1) |
3,093 | 3,093 | | | ||||||||||||
Other non-performing assets (2) |
1,294 | | 1,294 | |
As of March 26, 2010 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Securities issued by the U.S. Treasury and Government Agencies
(1) |
$ | 1,793 | $ | | $ | 1,793 | $ | | ||||||||
Mortgage-backed securities (1) |
5,496 | | 5,496 | | ||||||||||||
Securities issued by states and political subdivisions (1) |
1,249 | | 1,249 | | ||||||||||||
Corporate debt securities (1) |
4,780 | | 4,780 | | ||||||||||||
Marketable equity securities (1) |
2,722 | 2,722 | | | ||||||||||||
Other non-performing assets (2) |
1,566 | | 1,566 | |
(1) | Unrealized gains or losses on investments are recorded in accumulated other
comprehensive loss at each measurement date. |
|
(2) | Consists of land and homes acquired through foreclosure. |
21
No significant transfers between Level 1 and Level 2 occurred during the nine months ended December
24, 2010. The Companys policy regarding the recording of transfers between levels is to record
any such transfers at the end of the reporting period.
Assets measured at fair value on a non-recurring basis are summarized below (in thousands):
As of December 24, 2010 | Total Gains | |||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | (Losses) | ||||||||||||||||
Long-lived assets held for sale (1) |
$ | 1,050 | $ | | $ | 1,050 | $ | | $ | (750 | ) | |||||||||
Long-lived assets held for use (2) |
2,293 | | 2,293 | | (1,116 | ) | ||||||||||||||
Loans held for investment |
153,585 | | | 153,585 | | |||||||||||||||
Loans held for sale |
2,657 | 2,657 | | | | |||||||||||||||
Construction lending facility |
2,968 | 2,968 | | | | |||||||||||||||
Virgo debt |
15,927 | | | 15,927 | | |||||||||||||||
Securitized financings |
112,512 | | 112,512 | | |
(1) | Long-lived assets held for sale with a carrying amount of $1.8 million were
written down to their fair value of $1.1 million, resulting in a loss of $0.8 million, which
was included in loss from operations for the period. |
|
(2) | Long-lived assets held for use with a carrying amount of $3.4 million were written
down to their fair value of $2.3 million, resulting in a loss of $1.1 million, which was
included in loss from operations for the period. |
The Company records impairment losses on long-lived assets held for sale when the fair value of
such long-lived assets is below their carrying values. During the nine months ended December 24,
2010, the Company recorded approximately $0.8 million in impairment charges on assets held for
sale. The Company records impairment charges on long-lived assets used in operations when events
and circumstances indicate that long-lived assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than their carrying amounts. During the nine
months ended December 24, 2010, the Company recorded approximately $1.1 million in impairment
charges on assets held for use, primarily related to write-downs of land held at closed retail
locations. These impairment charges related to the factory-built housing segment and are included
in selling, general and administrative expenses in the Companys condensed consolidated statements
of operations.
Assets measured on a nonrecurring basis also include impaired loans (nonaccrual loans) disclosed in
Note 5 and loans held for sale. No recent sales have been executed in an orderly market of
manufactured home loan portfolios with comparable product features, credit characteristics, or
performance. Impaired loans are measured using Level 3 inputs that are calculated using discounted
future cash flows. Loans held for sale are measured at the lower of cost or fair value using Level
1 inputs that consist of commitments on hand from investors. These loans are held for relatively
short periods, typically no more than 45 days. As a result, changes in loan-specific credit risk
are not a significant component of the change in fair value. The cost of loans held for sale is
currently lower than the fair value.
ASC 825, Financial Instruments, requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value. Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and the relevant market information. Where available,
quoted market prices are used. In other cases, fair values are based on estimates using other
valuation techniques. These techniques involve uncertainties and are significantly affected by the
assumptions used and the judgments made regarding risk characteristics of various financial
instruments, discount rates, estimates of future cash flows, future expected loss experience, and
other factors. Changes in assumptions could significantly affect these estimates and the resulting
fair values. Derived fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in an immediate sale of the instrument. Also,
because of differences in methodologies and assumptions used to estimate fair values, the Companys
fair values should not be compared to those of other companies.
22
Under ASC 825, fair value estimates are based on existing financial instruments without attempting
to estimate the value of anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Accordingly, the aggregate fair value amounts presented
do not represent the underlying market value of the Company.
13. Business Segment Information
The Company operates principally in two segments: (1) factory-built housing, which includes
manufactured housing, modular housing and retail operations and (2) financial services, which
includes finance and insurance. The following table details net sales and income (loss) from
operations by segment for the three and nine months ended December 24, 2010 and December 25, 2009
(in thousands):
Nine Months Ended | ||||||||
December 24, | December 25, | |||||||
2010 | 2009 | |||||||
Net Sales |
||||||||
Factory-built housing |
$ | 178,996 | $ | 201,704 | ||||
Financial services |
27,063 | 27,316 | ||||||
$ | 206,059 | $ | 229,020 | |||||
Income (loss) from operations |
||||||||
Factory-built housing |
$ | (8,090 | ) | $ | (15,865 | ) | ||
Financial services |
8,767 | 12,358 | ||||||
General corporate expenses |
(18,378 | ) | (15,489 | ) | ||||
$ | (17,701 | ) | $ | (18,996 | ) | |||
Reorganization items |
$ | (2,522 | ) | $ | | |||
Interest expense |
(11,977 | ) | (13,064 | ) | ||||
Other income |
2,547 | 2,671 | ||||||
Loss before income taxes |
$ | (29,653 | ) | $ | (29,389 | ) | ||
14. Income Taxes
During the nine month periods ended December 24, 2010 and December 25, 2009, the Company recorded
no federal income tax expense or benefit due to the availability of net operating loss
carryforwards, which are not assured of realization. Tax expense recorded in these periods related
to taxes payable in various states in which the Company does business. The Company expects to
record no federal income tax expense or benefit for the remainder of fiscal 2011, as it is
uncertain whether the Company is assured of realization of benefits associated with its net
operating loss carryforwards.
23
15. Stock Incentive Plan
Effective July 22, 2009, the Palm Harbor Homes, Inc. 2009 Stock Incentive Plan (the Plan) was
adopted. The Plan allows for the issuance of up to 1,844,000 shares of common stock to the
Companys employees and outside directors in the form of non-statutory stock options, incentive
stock options and restricted stock awards. As of December 24, 2010, the Company has granted
options twice under the Plan. On May 18, 2010, the Company granted options for 129,080 shares at
an exercise price equal to the market price of the Companys common stock as of the date of grant
($2.76 per share), and on September 8, 2009, the Company granted options for 1,217,040 shares at an
exercise price equal to the market price of the Companys common stock as of the date of grant
($3.02 per share). Such options have a 10 year term and
vest over five years of service. Certain option and share awards provide for accelerated vesting if
there is a change in control (as defined in the Plan).
24