UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2003
Commission file number 0-26188
PALM HARBOR HOMES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-1036634
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
15303 Dallas Parkway, Suite 800, Addison, Texas 75001-4600
----------------------------------------------------------
(Address of principal executive offices) (Zip code)
972-991-2422
----------------------------------------------------
(Registrant's telephone number, including area code)
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) Yes [X] No [ ] and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares of common stock $.01 par value, outstanding on October 31, 2003 -
22,859,363.
PALM HARBOR HOMES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<Table>
<Caption>
SEPTEMBER 26, MARCH 28,
2003 2003
------------- ---------
(Unaudited)
ASSETS
Cash and cash equivalents $ 36,573 $ 45,592
Restricted cash 4,279 4,484
Investments 21,316 23,987
Trade receivables 56,618 66,346
Loans held for investment, net 65,361 32,135
Inventories 107,953 115,753
Prepaid expenses and other assets 25,272 23,499
Property, plant and equipment, net 86,732 92,887
Goodwill 78,506 78,079
--------- ---------
TOTAL ASSETS $ 482,610 $ 482,762
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 32,975 $ 32,059
Accrued liabilities 62,119 58,195
Floor plan payable 82,840 114,437
Warehouse revolving debt 39,557 15,135
Other debt obligations 2,473 2,567
--------- ---------
Total liabilities 219,964 222,393
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value 239 239
Additional paid-in capital 54,149 54,149
Retained earnings 224,907 223,580
Accumulated other comprehensive income 378 195
--------- ---------
279,673 278,163
Less treasury shares (15,714) (15,657)
Unearned compensation (1,313) (2,137)
--------- ---------
Total shareholders' equity 262,646 260,369
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 482,610 $ 482,762
========= =========
</Table>
See accompanying notes.
1
PALM HARBOR HOMES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net sales $ 148,547 $ 149,612 $ 304,446 $ 288,071
Cost of sales 109,413 105,285 224,935 204,205
Selling, general and
administrative expenses 39,075 41,058 79,370 81,532
--------- --------- --------- ---------
Income from operations 59 3,269 141 2,334
Interest expense (1,235) (1,758) (2,926) (3,469)
Other income 2,052 1,057 4,996 1,621
--------- --------- --------- ---------
Income before income taxes 876 2,568 2,211 486
Income tax expense (361) (956) (884) (181)
--------- --------- --------- ---------
Net income $ 515 $ 1,612 $ 1,327 $ 305
========= ========= ========= =========
Net income per common share -
basic and diluted $ 0.02 $ 0.07 $ 0.06 $ 0.01
========= ========= ========= =========
Weighted average common
shares outstanding - basic
and diluted 22,856 22,939 22,858 22,946
========= ========= ========= =========
</Table>
See accompanying notes.
2
PALM HARBOR HOMES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<Table>
<Caption>
SIX MONTHS ENDED
SEPTEMBER 26, SEPTEMBER 27,
2003 2002
------------- -------------
OPERATING ACTIVITIES
Net income $ 1,327 $ 305
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 7,267 6,867
Provision for credit losses 1,438 --
Deferred income taxes -- (1,012)
Loss (gain) on disposition of assets (646) 338
Gain on investments (109) --
Provision for long-term incentive plan 768 1,484
Equity earnings in limited partnership (4,146) (924)
Changes in operating assets and liabilities:
Restricted cash 205 --
Trade receivables 9,728 (25)
Inventories 7,800 7,553
Prepaid expenses and other assets 2,477 (2,253)
Accounts payable and accrued expenses 4,739 3,279
------------- -------------
Cash provided by operations 30,848 15,612
Loans originated -- (40,511)
Sale of loans -- 41,262
------------- -------------
Net cash provided by operating activities 30,848 16,363
INVESTING ACTIVITIES
Business acquired, net of cash acquired -- (31,480)
Investment in limited partnership -- (3,000)
Loans held for investment (39,254) --
Principal payments on loans held for investment 3,642 --
Purchases of property, plant and equipment, net of
proceeds from disposition (48) (4,391)
Purchases of investments (3,589) (2,172)
Sales of investments 6,651 6,197
------------- -------------
Net cash used in investing activities (32,598) (34,846)
FINANCING ACTIVITIES
Net payments on floor plan payable (31,597) (7,147)
Net proceeds from warehouse revolving debt 24,422 --
Principal payments on other debt obligations (94) (86)
------------- -------------
Net cash used in financing activities (7,269) (7,233)
Net decrease in cash and cash equivalents (9,019) (25,716)
Cash and cash equivalents at beginning of period 45,592 69,197
------------- -------------
Cash and cash equivalents at end of period $ 36,573 $ 43,481
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,408 $ 3,260
Income taxes 51 298
</Table>
See accompanying notes.
3
PALM HARBOR HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements reflect all
adjustments, which include only normal recurring adjustments, which
are, in the opinion of management, necessary for a fair presentation in
conformity with 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 audited financial
statements for the year ended March 28, 2003. Results of operations for
any interim period are not necessarily indicative of results to be
expected for a full year.
The balance sheet at March 28, 2003 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.
As discussed in the audited financial statements for the year ended
March 28, 2003, the Company adopted an accounting policy to present a
non-classified balance sheet. As a result, certain prior period amounts
have been reclassified to conform to the current period presentation.
2. Acquisitions/Investments
On June 7, 2002, the Company acquired Nationwide Custom Homes
("Nationwide"), a manufacturer and marketer of modular homes, for $32.5
million in cash. The acquisition was accounted for using the purchase
method of accounting. The final purchase price allocation resulted in
approximately $25 million of goodwill related to the acquisition. Due
to final transaction costs and normal purchase accounting finalization,
goodwill increased $0.4 million during the first quarter of fiscal
2004.
In June 2002, the Company invested $3.0 million to become the sole
limited partner and 50% owner of an existing mortgage banking firm, BSM
Financial L. P. ("BSM") which is being accounted for using the equity
method of accounting. The following table represents the condensed
income statements for the three and six month periods ending September
26, 2003 and September 27, 2002 (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ --------------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Revenues $16,477 $10,802 $33,493 $13,593
Net income 3,578 1,656 8,295 1,842
</Table>
3. Inventories
Inventories consist of the following (in thousands):
<Table>
<Caption>
SEPTEMBER 26, MARCH 28,
2003 2003
------------- ---------
Raw materials $ 9,009 $ 7,779
Work in process 4,610 4,493
Finished goods - factory-built 2,702 2,337
Finished goods - retail 91,632 101,144
-------- --------
$107,953 $115,753
======== ========
</Table>
4
PALM HARBOR HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
4. Floor Plan Payable
In March 2003, the Company executed an agreement with a financial
institution for a $100.0 million syndicated floor plan facility which
consisted of $35.0 million expiring via orderly liquidations by the end
of September 2003 and the remaining $65.0 million expiring March 19,
2006. During the quarter ended September 26, 2003, the Company paid off
the portion of the facility which expired in September and increased
the remaining $65.0 million facility to $75.0 million. In addition, the
Company has received commitments from financial institutions to
increase the facility by another $10.0 million. The advance rate for
this facility is 90% of manufacturer's invoice. The Company has a
second facility with another financial institution for $10.0 million,
which automatically renews each year unless notification of
cancellation is received by the financial institution. These facilities
are used to finance a major portion of the new home inventory at the
Company's retail superstores and are secured by a portion of its new
home inventory and receivables from financial institutions. The
interest rates on the facilities are prime (4.00% at September 26,
2003) or prime plus 1.0% to 3.0% for aged units, of which the Company
has none under its floor plan arrangements. These two floor plan
facilities contain certain provisions regarding minimum financial
requirements which the Company must maintain in order to borrow against
the facilities. As of September 26, 2003, the Company was in compliance
with these provisions; however, no assurances can be made as to whether
the Company will be in compliance with these provisions in future
periods. In the event the Company is not in compliance with these
provisions in future periods, the Company would seek a waiver of any
default from the lending institutions and, if no such waiver was
obtained, maturities of outstanding debt could be accelerated. The
Company had $82.8 million and $114.4 million outstanding on these floor
plan credit facilities at September 26, 2003 and March 28, 2003,
respectively.
5. Warehouse Revolving Debt
The Company, through its subsidiary CountryPlace Mortgage, Ltd.
("CountryPlace"), has a loan warehouse borrowing facility with a
financial institution. This facility is collateralized by specific
receivables pledged to the facility and bears interest at the rate of
LIBOR (1.12% at September 26, 2003) plus 1.25%. The facility terminates
on March 19, 2004; however, the Company intends to renew or obtain a
similar facility prior to the termination date. The facility provides
for an advance of 65% against the outstanding principal balance of
eligible receivables, as defined in the warehouse agreement.
CountryPlace had outstanding borrowings under this facility of $39.6
million as of September 26, 2003. The facility contains certain
requirements relating to the performance and composition of the
receivables pledged to the facility and certain financial covenants,
which are customary in the industry. The facility also requires Palm
Harbor and CountryPlace to maintain a minimum balance of shareholders'
equity. As of September 26, 2003, both Palm Harbor and CountryPlace
were in compliance with these requirements. In connection with the
warehouse borrowing facility, Palm Harbor agreed to fund in cash to
CountryPlace, up to 25% of each loan loss incurred. As of September 26,
2003, no such loss funding was required to be made to CountryPlace.
Additionally, Palm Harbor has entered into an intercompany financing
arrangement with CountryPlace that provides for up to $25 million of
funding to be used for the growth of CountryPlace's portfolio and
operations.
6. Commitments and Contingencies
The Company is contingently liable under the terms of repurchase
agreements covering independent retailers' floor plan financing. Under
such agreements, the Company agrees to repurchase homes at declining
prices over the term of the agreement, generally 12 to 18 months. At
September 26, 2003, the Company estimates that its potential
obligations under all repurchase agreements were approximately $11.2
million. It is management's opinion that no material loss will occur
from the repurchase agreements.
The Company is subject to various legal proceedings and claims that
arise in the ordinary course of business. In the opinion of management,
the amount of ultimate liability with respect to these actions will not
materially affect the financial position, results of operations, or
cash flows of the Company.
5
PALM HARBOR HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. 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
Company's 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 changes in accrued product warranty obligations
during the six months ended September 26, 2003 and September 27, 2002
(in thousands):
<Table>
<Caption>
SEPTEMBER 26, SEPTEMBER 27,
2003 2002
------------- -------------
Beginning accrued warranty balance $ 4,133 $ 6,583
Net warranty expense provided 6,390 6,385
Cash warranty payments (6,534) (6,992)
------- -------
Ending accrued warranty balance $ 3,989 $ 5,976
======= =======
</Table>
6
PART I. Financial Information
Item 1. Financial Statements
See pages 1 through 6.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The manufactured housing industry continues to be impacted by the major
challenges that affected previous fiscal years - limited retail and wholesale
financing availability, continued high levels of repossessions, excessive retail
inventory levels and manufacturing capacity. The tightening of credit standards,
which began in mid-1999, has resulted in reduced retail sales, declining
wholesale shipments and declining margins for most industry participants.
Although industry-wide shipments for calendar 2003 through August were down 25%
as compared to the prior year, our shipments declined only 6%.
Despite these difficult conditions, we have not closed any manufacturing
facilities and our number of Company-owned retail superstores has remained
constant at 152. In addition, we operated profitably during the first six months
of fiscal 2004. We continued to tightly manage receivables and new home
inventory per retail superstore, which has declined 13% since the beginning of
our fiscal year and over 21% since the second quarter of fiscal 2003. Floor plan
payable per retail superstore has declined 27% since the beginning of the fiscal
year and over 35% compared to a year ago.
During the first six months of fiscal 2004, we stayed focus on executing our
strategy of expanding our consumer financing capabilities through our finance
subsidiary, CountryPlace Mortgage, Ltd. ("CountryPlace"), and our 50% limited
partnership in BSM Financial L.P. ("BSM"). CountryPlace is now servicing over
$65 million in chattel loans and during the first half of fiscal 2004, BSM
originated 4,248 conventional mortgage loans worth $616 million, $31 million of
which were for Palm Harbor customers. For the quarter, 40% of our retail
customers were financed by either CountryPlace or BSM.
The following table sets forth certain items of the Company's statements of
income as a percentage of net sales for the period indicated.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 73.7 70.4 73.9 70.9
------ ------ ------ ------
Gross profit 26.3 29.6 26.1 29.1
Selling, general and
administrative expenses 26.3 27.4 26.1 28.3
------ ------ ------ ------
Income from operations 0.0 2.2 0.0 0.8
Interest expense (0.9) (1.2) (1.0) (1.2)
Other income 1.4 0.7 1.7 0.6
------ ------ ------ ------
Income before income taxes 0.5 1.7 0.7 0.2
Income tax expense (0.2) (0.6) (0.3) (0.1)
------ ------ ------ ------
Net income 0.3% 1.1% 0.4% 0.1%
====== ====== ====== ======
</Table>
7
The following table summarizes certain key sales statistics as of and for the
three and six months ended September 26, 2003 and September 27, 2002.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Homes sold through
Company-owned retail superstores 1,570 1,770 3,253 3,460
Homes sold to independent dealers and builders 614 526 1,201 909
Total new factory-built homes sold 2,184 2,296 4,454 4,369
Average new home price - retail $66,000 $62,000 $66,000 $63,000
Number of retail superstores at
end of period 152 152 152 152
Number of company-owned builder locations 5 5 5 5
</Table>
THREE MONTHS ENDED SEPTEMBER 26, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
27, 2002
NET SALES. Net sales decreased 0.7% to $148.5 million in the second
quarter of fiscal 2004 from $149.6 million in the second quarter of fiscal 2003.
The decrease in net sales is primarily due to the contraction of retail
financing in the manufactured housing industry partially offset by an increase
in modular sales. The volume of manufactured homes sold through Company-owned
retail superstores declined 11.9% while overall manufactured housing unit
volume, which includes sales to independent retailers, declined 7.8% in the
current quarter. This decline in manufactured housing volume is partially offset
by an increase in the average selling price of a new home to $66,000 in the
second quarter of fiscal 2004 versus $62,000 in the second quarter of fiscal
2003. Modular unit sales increased 24.2% during the current quarter partially
offset by a 2.6% decrease in the average selling price to the consumer. The
number of superstores was 152 at the end of the second quarter of fiscal 2003
and 2004.
GROSS PROFIT. In the quarter ended September 26, 2003, gross profit as a
percentage of net sales declined to 26.3%, or $39.1 million, from 29.6%, or
$44.3 million, in the quarter ended September 27, 2002. This decrease in gross
profit is the result of a high level of repossessions being sold at discounted
prices, increasing lumber and gypsum prices and an increase in Nationwide Custom
Homes' ("Nationwide") sales volume. Nationwide's gross profit percentage is
slightly lower than our manufactured housing gross profit percentage due to
Nationwide's much lower 14% internalization rate. The internalization rate,
including modular, decreased from 77% in the second quarter of fiscal 2003 to
72% in the second quarter of fiscal 2004.
8
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net
sales, selling, general and administrative expenses decreased to 26.3% in the
second quarter of fiscal 2004 from 27.4% in the second quarter of fiscal 2003.
Selling, general and administrative expenses decreased slightly from $41.1
million in the quarter ended September 27, 2002 to $39.1 million in the quarter
ended September 26, 2003. This reduction reflects Palm Harbor's focus on
reducing fixed costs somewhat offset by our continued commitment to building
brand awareness via advertising, expenses associated with the expansion of
CountryPlace and our investment in training at all levels.
INTEREST EXPENSE. Interest expense decreased 29.7% to $1.2 million in the
second quarter of fiscal 2004 from $1.8 million in the second quarter of fiscal
2003. This decrease was primarily due to a significant decline in the floor plan
liability coupled with a decrease in the prime interest rate from 4.75% in
fiscal 2003 to 4.00% in fiscal 2004.
OTHER INCOME. Other income includes $1.8 million in fiscal 2004 relating
to our equity interest in the earnings of our limited partnership, BSM, compared
to $0.8 million in fiscal 2003.
SIX MONTHS ENDED SEPTEMBER 26, 2003 COMPARED TO SIX MONTHS ENDED SEPTEMBER 27,
2002
NET SALES. Net sales increased 6% to $304.4 million in the first six
months of fiscal 2004 from $288.1 million in the first six months of fiscal
2003. The increase in net sales was primarily due to modular sales which totaled
$34.3 million in fiscal 2004 versus $21.3 million in fiscal 2003 somewhat offset
by a decrease in overall manufactured housing unit volume. The volume of
manufactured homes sold through Company-owned retail superstores declined 6.5%
while overall manufactured housing unit volume, which includes sales to
independent retailers, decreased 2.9% in fiscal 2004. The average selling price
of a new manufactured home increased to $66,000 in the first six months of
fiscal 2004 from $63,000 in the first six months of fiscal 2003. The increase in
average selling price resulted from a slight shift in product mix towards
multi-section manufactured homes to 93% of our manufactured homes sold in the
first six months of fiscal 2004 from 90% in the first six months of fiscal 2003.
The number of superstores was 152 at both September 27, 2002 and September 26,
2003.
GROSS PROFIT. For the six months ended September 26, 2003, gross profit
as a percentage of net sales declined to 26.1% from 29.1% in the six months
ended September 27, 2002. Gross profit decreased 5.2% to $79.5 million in the
first six months of fiscal 2003 from $83.9 million in the first six months of
fiscal 2002. This decrease is the result of a decline in unit volume caused by
the reduction of retail financing in the manufactured housing industry and
Nationwide's gross profit being slightly lower than our manufactured housing
gross profit due to Nationwide's much lower 12% internalization rate. The
percentage of homes, including modular, sold through Company-owned retail
superstores decreased from 79% in the first six months of fiscal 2003 to 73% in
the first six months of fiscal 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net
sales, selling, general and administrative expenses decreased to 26.1% in the
first six months of fiscal 2004 from 28.3% in the first six months of fiscal
2003. Selling, general and administrative expenses decreased from $81.5 million
in the six months ended September 27, 2002 to $79.4 million in the six months
ended September 26, 2003 even with fiscal 2004 including six months of
Nationwide's expenses totaling $4.9 million versus four months totaling $3.2 in
fiscal 2003. This reduction reflects Palm harbor's focus on reducing fixed costs
somewhat offset by our continued commitment to building brand awareness via
advertising, expenses associated with the expansion of CountryPlace and our
investment in training at all levels.
9
INTEREST EXPENSE. Interest expense decreased 15.7% to $2.9 million for
the six months ended September 26, 2003 from $3.5 million for the six months
ended September 27, 2002. This decrease was primarily due to a significant
decline in the floor plan liability coupled with a decrease in the prime
interest rate from 4.75% in the first six months of fiscal 2003 to 4.00% in the
first six months of fiscal 2004.
OTHER INCOME. Other income includes $4.2 million in fiscal 2004 relating
to our equity interest in the earnings of our limited partnership, BSM, compared
to $0.9 million in fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES. In March 2003, we executed an agreement
with a financial institution for a $100.0 million syndicated floor plan facility
which consisted of $35.0 million expiring via orderly liquidations by the end of
September 2003 and the remaining $65.0 million expiring March 19, 2006. During
the quarter ended September 26, 2003, we paid off the portion of the facility
which expired in September and increased the remaining $65.0 million facility to
$75.0 million. In addition, we received commitments from financial institutions
to increase the facility by another $10.0 million. The advance rate for this
facility is 90% of manufacturer's invoice. We have a second facility with
another financial institution for $10.0 million, which automatically renews each
year unless notification of cancellation is received by the financial
institution. These facilities are used to finance a major portion of the new
home inventory at our retail superstores and are secured by a portion of our new
home inventory and receivables from financial institutions. The interest rates
on the facilities are prime (4.0% at September 26, 2003) or prime plus 1.0% to
3.0% for aged units, of which we have none under our floor plan arrangements.
These two floor plan facilities contain certain provisions regarding minimum
financial requirements which we must maintain in order to borrow against the
facilities. As of September 26, 2003, we were in compliance with these
provisions; however, no assurances can be made as to whether we will be in
compliance with these provisions in future periods. In the event we are not in
compliance with these provisions in future periods, we would seek a waiver of
any default from the lending institutions and, if no such waiver was obtained,
maturities of outstanding debt could be accelerated. We had $82.8 million and
$114.4 million outstanding on these floor plan credit facilities at September
26, 2003 and March 28, 2003, respectively.
With the exit of most of the major industry chattel and non-conforming
mortgage lenders, we are expanding CountryPlace from being an originator of
loans into a securitizer and servicer of loans as well. CountryPlace has entered
into an agreement with a financial institution for a $125 million warehouse
facility to fund chattel loans originated by company-owned retail superstores.
This facility is collateralized by specific receivables pledged to the facility
and bears interest at the rate of LIBOR (1.12% at September 26, 2003) plus
1.25%. The facility terminates on March 19, 2004; however, we plan to renew or
obtain a similar facility prior to the termination date. The facility provides
for an advance of 65% against the outstanding principal balance of eligible
receivables as defined in the warehouse agreement. CountryPlace had outstanding
borrowings under this facility of $39.6 million as of September 26, 2003. The
facility contains certain requirements relating to the performance and
composition of the receivables pledged to the facility and certain financial
covenants, which are customary in the industry. The facility also requires
Palm Harbor and CountryPlace to maintain a minimum balance of shareholders'
equity. As of September 26, 2003, both Palm Harbor and CountryPlace were in
compliance with these requirements. In connection with the warehouse borrowing
facility, Palm Harbor agreed to fund in cash to CountryPlace, up to 25% of each
loan loss incurred. As of September 26, 2003, no such loss funding was required
to be made to CountryPlace. Additionally, Palm Harbor has entered into an
intercompany financing arrangement with CountryPlace that provides for up to
$25 million of funding to be used for the growth of CountryPlace's portfolio and
operations.
10
CountryPlace currently intends to originate and hold loans for
investment on a long-term basis. CountryPlace intends to securitize its loan
portfolio on a routine basis. While the Company believes it will be able to
obtain additional liquidity through the securitization of such loans, no
assurances can be made that we will successfully complete securitization
transactions on acceptable terms and conditions, if at all.
Our management believes that cash flow from operations, together with
floor plan financing and other available borrowing alternatives in addition to
the warehouse facility, will be adequate to support our working capital,
currently planned capital expenditure needs and expansion of CountryPlace in the
foreseeable future. However, because future cash flows and the availability of
financing will depend on a number of factors, including prevailing economic and
financial conditions, business, the market for asset backed securitizations and
other factors beyond our control, no assurances can be given in this regard.
FORWARD-LOOKING INFORMATION/RISK FACTORS
Certain statements contained in this annual report are forward-looking
statements within the safe harbor provisions of the Securities Litigation Reform
Act. Forward-looking statements give our current expectations or forecasts of
future events and can be identified by the fact that they do not relate strictly
to historical or current facts. Investors should be aware that all
forward-looking statements are subject to risks and uncertainties and, as a
result of certain factors, actual results could differ materially from these
expressed in or implied by such statements. These risks include such
assumptions, risks, uncertainties and factors associated with the following:
o AVAILABILITY OF RETAIL FINANCING. Since mid-1999, loans to
purchase manufactured houses have been subjected to elevated
credit standards, resulting in reduced lending volumes and
consequently reduced sales in the manufactured housing
industry. A further tightening of credit standards by chattel
or mortgage lenders may cause us to experience significant
sales declines.
o AVAILABILITY OF WHOLESALE FINANCING. Several floor plan
lenders have chosen to exit the manufactured housing business,
thereby reducing the amount of credit available to industry
retailers. Further reductions in the availability of floor
plan lending may affect our inventory levels of new homes.
o MANAGEMENT'S ABILITY TO ATTRACT AND RETAIN EXECUTIVE OFFICERS
AND OTHER KEY PERSONNEL. We are dependent on the services and
performance of our executive officers, including our Chairman
of the Board, Lee Posey and our President and Chief Executive
Officer, Larry Keener. The loss of the services of two or more
of our executive officers could have a material adverse effect
upon our business, financial condition and results of
operations.
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o ABILITY TO SECURITIZE OR FUND LOANS. CountryPlace originates
chattel and non-conforming land home mortgage loans that are
funded with proceeds from its warehouse borrowing facility
borrowings from us. CountryPlace intends to enter into
asset-backed securitization transactions to obtain longer term
funding for these loan purchases. The proceeds from these
securitizations will be used to repay borrowings from the
warehouse facility and us, as well as to purchase new loans.
The asset-backed securitization market for manufactured
housing lenders has continued to deteriorate in the past year
in terms of access to the markets as well as pricing and
credit enhancement levels. If CountryPlace is unable to
securitize its loans on terms that are economical, it will be
required to seek other sources of long term funding.
o ABILITY TO SERVICE NEW LOANS. Although CountryPlace has
originated loans since 1995, it has limited loan servicing and
collections experience. CountryPlace has implemented new
systems to service and collect the portfolio of loans it
originates. The management of CountryPlace has industry
experience in managing, servicing and collecting a loan
portfolio. However, if CountryPlace is not successful in its
servicing and collection efforts, the profitability and cash
flow from the loan portfolio on its balance sheet could be
adversely affected.
o ABILITY OF CUSTOMERS TO REPAY LOANS. CountryPlace makes loans
to borrowers that it believes are creditworthy based on its
credit guidelines. These customers may experience adverse
employment, financial, or life circumstances that affect their
ability to repay their loans. If customers do not repay their
loans, the profitability and cash flow from the loan portfolio
on its balance sheet could be adversely affected.
o CONTROL BY EXISTING SHAREHOLDERS. Approximately 55% of our
outstanding Common Stock is beneficially owned or controlled
by Mr. Posey, Capital Southwest Corporation and its
wholly-owned subsidiary, Capital Southwest Venture
Corporation, and William R. Thomas, President of Capital
Southwest Corporation. As a result, these shareholders, acting
together, will be able to determine the outcome of elections
of our directors and thereby control the management of our
business.
o INTEREST RATE RISK. Palm Harbor is exposed to market risks
related to fluctuations in interest rates on our variable rate
debt and our fixed rate loans receivable balances. A material
increase in interest rates could adversely affect Palm
Harbor's operating results by increasing interest expense on
our variable rate obligations and decreasing the fair value of
our loan portfolio.
o IMPACT OF INFLATION. The past several years have shown a
relatively moderate rate of inflation which we have has been
able to offset through increased selling prices. A material
increase in inflation in the future could adversely affect our
operating results.
o COMPETITIVE PRODUCT ADVERTISING, PROMOTIONAL AND PRICING
ACTIVITY. There are numerous manufactured housing companies in
the industry and many have their own retail distribution
systems and consumer finance operations. In addition to
competition within the manufactured housing industry, our
products also compete with other forms of lower to
moderate-cost housing, including site-built homes, apartments,
townhouses and condominiums. If we are unable to address this
competition, growth of our business could be limited.
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o CYCLICALITY OF THE MANUFACTURED HOUSING INDUSTRY. The cyclical
and seasonal nature of the industry causes our revenues and
operating results to fluctuate and makes it hard for
management to forecast sales and profits in uncertain times.
As a result of seasonal and cyclical downturns, we may
experience fluctuations in our operating results that make
difficult period-to-period comparisons.
o VOLATILITY IN OUR STOCK PRICE. Our stock is traded on the
Nasdaq National Stock Market and is therefore subject to
market fluctuations.
o TERRORIST ATTACKS/WAR. Market disruptions and other effects
resulting from the terrorist attacks on September 11, 2001 or
any future attacks and actions, including armed conflict by
the United States and other governments in reaction thereto
may materially adversely affect us.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to market risks related to fluctuations in interest rates on our
variable rate debt, which consists primarily of our liabilities under retail
floor plan financing arrangements and warehouse revolving debt, and our fixed
rate loans receivable balances. We are not involved in any other market risk
sensitive contracts or investments such as interest rate swaps, futures
contracts, or other types of derivative financial instruments.
CountryPlace is exposed to market risk related to the accessibility and terms of
financing in the asset-backed securities market. CountryPlace intends to
securitize its loan portfolio as a means to obtain long term fixed interest rate
funding. The asset-backed securities market for manufactured housing has been
volatile during the past year. The inability to securitize its loans would
require CountryPlace to seek other sources of funding or to reduce or eliminate
its loan originations if other sources of funding are not available.
For variable interest rate obligations, there have been no material changes from
the information provided in our form 10-K for the year ended March 28, 2003.
For fixed rate loans receivable, changes in interest rates generally do not
change future earnings and cash flows, but do affect the fair market value of
the loan portfolio. Assuming CountryPlace's level of loans held for investment
as of September 26, 2003 is held constant, a 10% increase in average interest
rates would decrease the fair value of our portfolio by approximately $4.5
million.
Item 4. Controls and Procedure
Based on our most recent evaluation, which was completed within 90 days of the
filing of this Form 10-Q, our Chief Executive Officer and Chief Financial
Officer believe our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) are effective to ensure that information required
to be disclosed by us in this report is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. There were no significant changes in our internal controls or other
factors that could significantly affect these controls subsequent to the date of
their evaluation and there were no corrective actions with regard to significant
deficiencies and material weaknesses.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings - Not applicable
Item 2. Changes in Securities - Not applicable
Item 3. Defaults upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote by Security Holders - Not
applicable
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 31.1 - Certificate of Chief Executive
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Certificate of Chief Financial
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1 - Certificate of Chief Executive
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 - Certificate of Chief Financial
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K - Not applicable
SIGNATURES
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 thereto duly authorized.
Date: November 3, 2003
Palm Harbor Homes, Inc.
-----------------------
(Registrant)
By: /s/ Kelly Tacke
-------------------------------
Kelly Tacke
Chief Financial and Accounting
Officer
By: /s/ Lee Posey
-------------------------------
Lee Posey
Chairman of the Board
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