1 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 25, 1998 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 incorporation (I.R.S. Employer Identification Number) or organization) 15303 Dallas Parkway, Suite 800, Dallas, Texas 75248 ------------------------------------------------------------ (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 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 November 4, 1998 - 23,779,614. 2 PALM HARBOR HOMES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (Unaudited) SEPTEMBER 25, MARCH 27, 1998 1998 --------- --------- ASSETS Cash and cash equivalents $ 16,506 $ 21,073 Investments 35,575 5,091 Receivables 80,275 71,171 Inventories 103,558 108,185 Other current assets 5,698 5,163 --------- --------- Total current assets 241,612 210,683 Other assets 74,987 75,803 Property, plant and equipment, net 72,329 67,360 --------- --------- TOTAL ASSETS $ 388,928 $ 353,846 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 47,323 $ 44,547 Floor plan payable 106,525 79,564 Line of credit 17,000 Accrued liabilities 49,143 46,338 Current portion of long-term debt 225 944 --------- --------- Total current liabilities 203,216 188,393 Long-term debt, less current portion 3,267 3,382 Deferred income taxes 4,758 5,015 Shareholders' equity: Common stock, $.01 par value 191 191 Additional paid-in capital 54,197 54,197 Retained earnings 123,658 102,865 --------- --------- 178,046 157,253 Less treasury shares (359) (197) --------- --------- Total shareholders' equity 177,687 157,056 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 388,928 $ 353,846 ========= ========= See accompanying notes. 1 3 PALM HARBOR HOMES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (Unaudited) THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26, 1998 1997 1998 1997 --------- --------- --------- --------- Net sales $ 190,853 $ 153,106 $ 394,983 $ 312,203 Cost of sales 133,000 112,881 279,833 231,442 Selling, general and administrative expenses 38,382 27,080 77,291 54,649 --------- --------- --------- --------- Income from operations 19,471 13,145 37,859 26,112 Interest expense (2,750) (1,134) (5,000) (2,178) Other income 715 639 1,399 1,157 --------- --------- --------- --------- Income before income taxes 17,436 12,650 34,258 25,091 Income tax expense 7,011 4,757 13,708 9,530 --------- --------- --------- --------- Net income $ 10,425 $ 7,893 $ 20,550 $ 15,561 ========= ========= ========= ========= Net income per common share - basic and diluted $ 0.44 $ 0.34 $ 0.86 $ 0.66 ========= ========= ========= ========= Weighted average common shares outstanding 23,786 23,589 23,787 23,589 ========= ========= ========= ========= Weighted average common shares outstanding - assuming dilution 23,845 23,631 23,847 23,623 ========= ========= ========= ========= See accompanying notes. 2 4 PALM HARBOR HOMES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) FOR THE SIX MONTHS ENDED SEPTEMBER 25, SEPTEMBER 26, 1998 1997 -------- -------- OPERATING ACTIVITIES Net income $ 20,550 $ 15,561 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,580 2,703 Amortization 1,969 803 Deferred income tax benefit (257) (324) Gain on sale of loans (5,303) Gain on disposition of assets (45) (12) Changes in operating assets and liabilities: Trade accounts receivable 1,799 (9,594) Inventories 4,627 (5,100) Other current assets (535) 1,222 Other assets (1,153) (188) Accounts payable and accrued liabilities 5,581 4,003 -------- -------- Cash provided by operations 30,813 9,074 Loans originated (88,678) Sales of loans 83,321 -------- -------- Net cash provided by operating activities 25,456 9,074 INVESTING ACTIVITIES Purchases of property, plant and equipment (8,601) (9,577) Purchases of investments (35,142) (1,847) Sales of investments 4,658 3,225 Proceeds from disposition of assets 97 15 -------- -------- Net cash used in investing activities (38,988) (8,184) FINANCING ACTIVITIES Net proceeds from floor plan payable 26,961 1,581 Payments on line of credit (17,000) Principal payments on notes payable and long-term debt (834) (83) Net purchases of treasury stock (162) (3) Notes receivable from shareholders 13 -------- -------- Net cash provided by financing activities 8,965 1,508 -------- -------- Net (decrease) increase in cash and cash equivalents (4,567) 2,398 Cash and cash equivalents at beginning of period 21,073 26,346 -------- -------- Cash and cash equivalents at end of period $ 16,506 $ 28,744 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 4,680 $ 2,165 Income taxes 15,412 12,003 See accompanying notes. 3 5 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 and accurate presentation. Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. The condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended March 27, 1998. Results of operations for any interim period are not necessarily indicative of results to be expected for a full year. 2. Stock Dividend On June 30, 1998, the Board of Directors of the Company declared a 5-for-4 stock split effected in the form of a 25% stock dividend to shareholders of record on July 14, 1998. The stock dividend was paid on July 28, 1998. Historical common share and per share data for all periods presented have been adjusted to reflect the stock split. 3. Inventories Inventories consist of the following (in thousands): SEPTEMBER 25, MARCH 27, 1998 1998 -------- -------- Unaudited Raw materials $ 8,603 $ 8,625 Work in process 2,951 2,803 Finished goods - manufacturing 31 156 - retail 91,973 96,601 -------- -------- $103,558 $108,185 ======== ======== 4. Other Assets Other assets include goodwill of $65.7 million at September 25, 1998 and $63.5 million at March 27, 1998, with accumulated amortization of $4.9 million and $3.0 million, respectively. 5. Floor Plan Payable The Company has floor plan credit facilities totaling $170.0 million from financial institutions to finance a major portion of its home inventory at the Company's retail superstores. These facilities are secured by a portion of the Company's home inventory and cash in transit from financial institutions. Interest rates range from prime (8.50% at September 25, 1998) to prime minus .50%. The Company had $106.5 million and $79.6 million outstanding on these floor plan credit facilities at September 25, 1998 and March 27, 1998, respectively. 4 6 The Company has entered into a floor plan financing agreement with a financial institution. As part of this agreement, the Company is able to earn interest on investments made with the financial institution, which can be withdrawn without any imposed restrictions. The interest rate on the outstanding borrowings is prime (8.5% at September 25, 1998). The agreement also calls for a minimum of $50.0 million to be maintained as the outstanding balance on the related credit facility. The agreement is effective until December 31, 1999. At September 25, 1998, the Company had $25.0 million invested and has classified this amount as Investments in the accompanying Condensed Consolidated Balance Sheet. 6. Line of Credit The Company has a $25.0 million unsecured revolving line of credit from a financial institution for general corporate purposes. The line of credit bears interest, at the option of the Company (under certain conditions), at either the LIBOR rate plus .625% or the prime rate minus 1%. The line of credit contains provisions regarding minimum net worth requirements and certain indebtedness limitations which would limit the amount available for future borrowings. The line of credit also requires an annual commitment fee of $20,000 and is available through July 10, 1999. The Company had zero and $17.0 million outstanding on this line of credit on September 25, 1998 and March 27, 1998, respectively. 7. Reclassification Certain prior period amounts have been reclassified to conform to the current period presentation. 8. Financial Services Revenue Recognition The Company has adopted Statement of Financial Accounting Standards No. 125 (SFAS 125) "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which became effective after December 31, 1996. SFAS 125 modifies the Company's accounting policies for the origination and sale of loan contracts through CountryPlace Mortgage, Ltd. ("CountryPlace"), the Company's finance subsidiary. CountryPlace sells the loan contracts to national consumer finance companies and retains a residual interest in the interest generated by the sold contracts. The fair value of the residual interest is determined using a number of market based assumptions. The gain on the sale of these contracts is included in revenues net of any estimated credit losses. The effect of SFAS 125 on prior periods was not material. The Company also recognizes income from the sale of property and casualty insurance policies. 5 7 PART I. FINANCIAL INFORMATION Item 1. Financial Statements See pages 1 through 5. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following table sets forth certain items of the Company's statement of income as a percentage of net sales for the period indicated. THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26, 1998 1997 1998 1997 -------- -------- -------- -------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 69.7 73.7 70.8 74.1 -------- -------- -------- -------- Gross profit 30.3 26.3 29.2 25.9 Selling, general and administrative expenses 20.1 17.7 19.6 17.5 -------- -------- -------- -------- Income from operations 10.2 8.6 9.6 8.4 Interest expense (1.4) (0.7) (1.3) (0.7) Other income 0.4 0.4 0.4 0.4 -------- -------- -------- -------- Income before income taxes 9.2 8.3 8.7 8.1 Income tax expense 3.7 3.1 3.5 3.1 -------- -------- -------- -------- Net income 5.5% 5.2% 5.2% 5.0% ======== ======== ======== ======== 6 8 The following table summarizes certain key sales statistics as of and for the three and six months ended September 25, 1998 and September 26, 1997. THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26, 1998 1997 1998 1997 ------- ------- ------- ------- Company homes sold through Company-owned retail superstores 2,513 1,892 4,994 3,707 Total new homes sold 3,919 3,448 8,128 6,925 Internalization rate (1) 64% 55% 61% 54% Average new home price - retail $55,000 $56,000 $54,000 $55,000 Number of retail superstores at end of period 104 63 104 63 Homes sold to independent retailers 1,131 1,517 2,444 3,113 (1) The internalization rate is the percentage of new homes that are manufactured by the Company and sold through Company-owned retail superstores. THREE MONTHS ENDED SEPTEMBER 25, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 26, 1997 NET SALES. Net sales increased 24.7% to $190.9 million in the second quarter of fiscal 1999 from $153.1 million in the second quarter of fiscal 1998. Of this increase, 22.0% was the result of an increase in manufactured housing sales and 2.7% was the result of an increase in financial services income. The increase in manufactured housing sales was primarily due to a 44.4% increase in the volume of homes sold through Company-owned retail superstores. The Company had 104 superstores at the end of the second quarter of fiscal 1999 compared to 63 at the end of the second quarter of fiscal 1998. The increase in financial services income was primarily due to an increase in the gain on the sale of loans in which CountryPlace Mortgage, Ltd., the Company's finance subsidiary, retains a residual interest. See "Financial Services Revenue Recognition" in Notes to Condensed Consolidated Financial Statements. GROSS PROFIT. Gross profit increased 43.8% to $57.9 million in the quarter ended September 25, 1998 compared to $40.2 million in the quarter ended September 26, 1997. During the same period, gross profit margin as a percentage of net sales increased to 30.3% compared to 26.3%. This increase was the result of selling 64% of the Company's homes through Company-owned retail superstores in the second quarter of fiscal 1999 versus 55% in the second quarter of fiscal 1998 and production efficiencies at manufacturing facilities. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 41.7% to $38.4 million in the quarter ended September 25, 1998 from $27.1 million in the quarter ended September 26, 1997, primarily due to increased promotion and advertising expenditures, expenses associated with the 41 additional retail superstores, and performance based compensation expense. As a percentage of net sales, selling, general and administrative expenses increased, as planned, to 20.1% in the second quarter of fiscal 1999 from 17.7% in the second quarter of fiscal 1998. This planned increase is due to the growth in the Company's retail operations which, generally, have higher selling, general and administrative expenses as a percentage of net sales as compared to wholesale operations. 7 9 INCOME FROM OPERATIONS. As a result of the foregoing factors, income from operations increased 48.1% to $19.5 million in the quarter ended September 25, 1998 compared to $13.1 million in the quarter ended September 26, 1997. INTEREST EXPENSE. Interest expense increased 142.5% to $2.8 million for the second quarter of fiscal 1999 from $1.1 million in the second quarter of fiscal 1998. This increase was primarily due to an increase in floor plan credit facilities. OTHER INCOME. Other income increased 11.9% to $.72 million in the second quarter of fiscal 1999 from $.64 million in the second quarter of fiscal 1998. This increase was primarily the result of additional interest earned on cash used for investments. SIX MONTHS ENDED SEPTEMBER 25, 1998 COMPARED TO SIX MONTHS ENDED SEPTEMBER 26, 1997 NET SALES. Net sales increased 26.5% to $395.0 million in the six months ended September 25, 1998 from $312.2 million in the six months ended September 26, 1997. Of this increase, 23.6% was the result of an increase in manufactured housing sales and 2.9% was the result of an increase in financial services income. The increase in manufactured housing sales was primarily due to a 49.1% increase in the volume of homes sold through Company-owned retail superstores. The company had 104 superstores at the end of the six months ended September 25, 1998 compared to 63 at the end of the six months ended September 26, 1997. The increase in financial services income was primarily due to an increase in the gain on the sale of loans in which CountryPlace Mortgage, Ltd., the Company's finance subsidiary, retains a residual interest. See "Financial Services Revenue Recognition" in Notes to Condensed Consolidated Financial Statements. GROSS PROFIT. Gross profit increased 42.6% to $115.2 million in the six months ended September 25, 1998 compared to $80.8 million in the six months ended September 26, 1997. During the same period, gross profit margin as a percentage of net sales increased to 29.2% compared to 25.9%. This increase was the result of selling 61% of the Company's homes through Company-owned retail superstores in the six months ended September 25, 1998 versus 54% in the six months ended September 26, 1997 and production efficiencies at maturing manufacturing facilities. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 41.4% to $77.3 million in the six months ended September 25, 1998 from $54.6 million in the six months ended September 26, 1997, primarily due to increased promotion and advertising expenditures, expenses associated with the 41 additional retail superstores, and performance-based compensation expense. As a percentage of net sales, selling, general and administrative expenses increased, as planned, to 19.6% in the six months ended September 25, 1998 from 17.5% in the six months ended September 26, 1997. This planned increase is due to the growth in the Company's retail operations which, generally, have higher selling, general and administrative expenses as a percentage of net sales as compared to wholesale operations. INCOME FROM OPERATIONS. As a result of the foregoing factors, income from operations increased 45.0% to $37.9 million in the six months ended September 25, 1998 compared to $26.1 million in the six months ended September 26, 1997. 8 10 INTEREST EXPENSE. Interest expense increased 129.6% to $5.0 million for the six months ended September 25, 1998 from $2.2 million in the six months ended September 26, 1997. This increase was primarily due to an increase in the floor plan credit facilities. OTHER INCOME. Other income increased 20.9% to $1.4 million in the six months ended September 25, 1998 from $1.2 million in the six months ended September 26, 1997. This increase was primarily the result of additional interest earned on cash used for investments. LIQUIDITY AND CAPITAL RESOURCES. The Company has floor plan credit facilities totaling $170.0 million from financial institutions to finance a major portion of its home inventory at the Company's retail superstores. These facilities are secured by a portion of the Company's home inventory and cash in transit from financial institutions. Interest rates range from prime (8.5% at September 25, 1998) to prime minus .50%. The Company had $106.5 million and $79.6 million outstanding on these credit facilities at September 25, 1998 and March 27, 1998, respectively. The Company has entered into a floor plan financing agreement with a financial institution. As part of this agreement, the Company is able to earn interest on investments made with the financial institution, which can be withdrawn without any imposed restrictions. The interest rate on the outstanding borrowings is prime (8.5% at September 25, 1998). The agreement also calls for a minimum of $50.0 million to be maintained as the outstanding balance on the related credit facility. The agreement is effective until December 31, 1999. At September 25, 1998, the Company had $25.0 million invested and has classified this amount as Investments in the accompanying Condensed Consolidated Balance Sheet. The Company has obtained a $25.0 million unsecured revolving line of credit from a financial institution for general corporate purposes. The line of credit bears interest, at the option of the Company (under certain conditions), at either the LIBOR rate plus .625% or the prime rate minus 1%. The line of credit contains provisions regarding minimum net worth requirements and certain indebtedness limitations which would limit the amount available for future borrowings. The line of credit also requires an annual commitment fee of $20,000 and is available through July 10, 1999. The Company had zero and $17.0 million outstanding on this line of credit at September 25, 1998 and March 27, 1998, respectively. The Company believes that cash flow from operations, together with floor plan financing and the revolving line of credit, will be adequate to support its working capital and currently planned capital expenditure needs in the foreseeable future. The Company may, from time to time, obtain additional floor plan financing for its retail inventories. Such practice is customary in the industry. The Company is also considering other various sources of financing including, but not limited to, a private placement of debt. However, because future cash flows and the availability of financing will depend on a number of factors, including prevailing economic and financial conditions, business and other factors beyond the Company's control, no assurances can be given in this regard. YEAR 2000 ISSUE. The "Year 2000 Issue" is the result of computer programs that use two digits instead of four to record the applicable year. Computer programs that have date-sensitive 9 11 software may be unable to properly categorize and process dates occurring after December 31, 1999. This could result in a system failure or miscalculations in the Company's computer programs causing significant, unanticipated liabilities, expenses and possible disruption of its business. Based on an assessment by the Company of operating, financial and management information systems, the Company implemented a plan during the second quarter of fiscal 1997 to modify or upgrade certain equipment and software necessary to address the Year 2000 Issue. Costs are estimated to be significantly less than $.50 million. Under the plan, all modifications and upgradings will be completed and tested before December 1999. The plan is designed to utilize resources from within the Company with minimal impact on other non-Year 2000 Issue management information system projects. Additionally, risk of business disruption exists if Year 2000 Issue-related failures occur among the Company's lenders, suppliers, transporters and others upon which the Company relies, but over which the Company has no control. There can be no guarantee that the systems of these third parties on which the Company relies will be modified on a timely basis and will not have an adverse effect on the Company's systems or operations. The Company is maintaining contact with these critical third parties to determine the extent to which the Company would be affected if there were Year 2000 Issue-related failures among these third parties. FORWARD-LOOKING INFORMATION. Certain statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Management is unaware of any trends or conditions that could have a material adverse effect on the Company's consolidated financial position, future results of operations or liquidity. However, investors should also be aware of factors which could have a negative impact on prospects and the consistency of progress. These include political, economic or other factors such as inflation rates, recessionary or expansive trends, taxes and regulations and laws affecting the business in each of the Company's markets; competitive product, advertising, promotional and pricing activity; dependence on the rate of development and degree of acceptance of new product introductions in the marketplace; and the difficulty of forecasting sales at certain times in certain markets. 10 12 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 on 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) Exhibit 27 - Financial Date Schedule (EDGAR filing only). (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 4, 1998 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 11 13 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 Financial Data Schedule