1
EXHIBIT 13.1
11
PALM HARBOR HOMES 1999 ANNUAL REPORT
SELECTED FINANCIAL DATA
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND OPERATING DATA)
Fiscal Year Ended
----------------------------------------------------------------------
March 31, March 29, March 28, March 27, March 26,
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
STATEMENT OF INCOME:
Net sales $ 330,547 $ 417,214 $ 563,192 $ 637,268 $ 761,374
Cost of sales 275,848 345,508 436,850 466,494 530,698
Gross profit 54,699 71,706 126,342 170,774 230,676
Selling, general and administrative expenses 40,776 52,676 86,927 117,018 158,916
---------- ---------- ---------- ---------- ----------
Income from operations 13,923 19,030 39,415 53,756 71,760
Interest expense (395) (751) (3,085) (4,700) (9,728)
Other income 514 1,276 2,250 2,718 4,933
---------- ---------- ---------- ---------- ----------
Income before income from affiliate and income taxes 14,042 19,555 38,580 51,774 66,965
Income from affiliate 2,745 2,995 1,049 -- --
---------- ---------- ---------- ---------- ----------
Income before income taxes 16,787 22,550 39,629 51,774 66,965
Income tax expense 5,562 7,572 14,890 19,920 26,788
---------- ---------- ---------- ---------- ----------
Net income $ 11,225 $ 14,978 $ 24,739 $ 31,854 $ 40,177
========== ========== ========== ========== ==========
Net income per common share - basic and diluted $ 0.59 $ 0.75 $ 1.07 $ 1.35 $ 1.69
========== ========== ========== ========== ==========
Weighted average common shares outstanding 18,905 19,863 23,013 23,589 23,783
Weighted average common shares
outstanding - assuming dilution 18,905 19,863 23,036 23,632 23,838
OPERATING DATA:
Number of homes sold 10,197 12,175 13,873 14,144 15,628
Multi-section homes sold as a
percentage of total homes sold 86% 82% 81% 81% 78%
Number of manufacturing facilities(1) 13 14 15 16 16
Number of company-owned superstores(1) 9 16 54 94 120
BALANCE SHEET DATA:
Working capital $ 1,966 $ 22,727 $ 39,232 $ 22,290 $ 40,316
Total assets 97,650 143,712 246,335 353,846 427,410
Long-term debt 7,700 3,784 3,583 3,382 3,149
Shareholders' equity 32,907 68,982 119,949 157,056 195,325
(1) As of the end of the applicable period.
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12
Palm Harbor Homes 1999 Annual Report
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(In thousands of dollars, except per share and operating data)
Palm Harbor reported record net sales, net income and earnings per share in
fiscal 1999. These results reflect a compound growth rate over the last five
years of 27%, 46% and 40% for net sales, net income and earnings per share,
respectively.
The Company's strategic commitment to vertically integrating its operations
has had positive results. During the year, the Company increased the number of
Company-owned retail superstores by 26 to 120. This increase in Company-owned
retail superstores resulted in a rise in the internalization rate, which is the
percentage of homes manufactured by the Company and sold through the Company's
retail superstores. For fiscal 1999, the Company's internalization rate was 63%
up from 53% in the preceding fiscal year. CountryPlace Mortgage, the Company's
finance subsidiary, reached record funding levels and Standard Casualty Company,
the Company's insurance subsidiary, continued its consistent contribution
through premiums on its property and casualty insurance.
The following table sets forth certain items of the Company's statement of
income as a percentage of net sales for the period indicated.
Fiscal Year Ended
----------------------------------------
March 28, March 27, March 26,
1997 1998 1999
---------- ---------- ----------
Net sales 100.0% 100.0% 100.0%
Cost of sales 77.6 73.2 69.7
---------- ---------- ----------
Gross profit 22.4 26.8 30.3
Selling, general and administrative expenses 15.4 18.4 20.9
---------- ---------- ----------
Income from operations 7.0 8.4 9.4
Interest expense (0.6) (0.7) (1.3)
Other income 0.4 0.4 0.7
---------- ---------- ----------
Income before income from affiliate and income taxes 6.8 8.1 8.8
Income from affiliate 0.2 -- --
Income tax expense 2.6 3.1 3.5
---------- ---------- ----------
Net income 4.4% 5.0% 5.3%
========== ========== ==========
The following table summarizes certain key sales statistics as of and for
the period indicated.
Fiscal Year Ended
----------------------------------------
March 28, March 27, March 26,
1997 1998 1999
---------- ---------- ----------
Homes sold through company-owned retail superstores 5,211 7,696 10,776
Total new homes sold 13,873 14,144 15,628
Internalization rate (1) 31% 53% 63%
Average new home price - retail $ 54,000 $ 55,000 $ 55,000
Number of retail superstores at end of period 54 94(2) 120
Homes sold to independent retailers 8,662 6,448 4,852
(1) The internalization rate is the percentage of new homes that are
manufactured by the Company and sold through Company-owned retail
superstores.
(2) Includes the 18 retail superstores acquired at the close of business in
fiscal 1998.
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1999 COMPARED TO 1998
Net Sales. Net sales increased 19.5% to $761.4 million in 1999 from $637.3
million in 1998. Of this increase, 17.0% was the result of an increase in
manufactured housing sales and 2.5% was the result of an increase in financial
services revenues. The increase in manufactured housing sales was primarily due
to a 40.0% increase in the volume of homes sold through Company-owned retail
superstores. The Company ended fiscal 1999 with 120 retail superstores compared
to 76 in 1998, excluding the 18 retail superstores acquired at the close of
business in fiscal 1998. The increase in financial services revenues 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.
Gross Profit. Gross profit increased 35.1% to $230.7 million in 1999
compared to $170.8 million in 1998. During the same period, gross profit margin
as a percentage of net sales increased to 30.3% compared to 26.8%. This increase
was the result of selling 63% of the Company's homes through Company-owned
retail superstores in 1999 versus 53% in 1998 and production efficiencies at
manufacturing facilities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 35.8% to $158.9 million in 1999 from $117.0
million in 1998, primarily due to planned increases in promotion and advertising
expenditures, expenses associated with the 44 additional retail superstores and
performance-based compensation expense. As a percentage of net sales, selling,
general and administrative expenses increased, as planned, to 20.9% in 1999 from
18.4% in 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.
Income from Operations. As a result of the foregoing factors, income from
operations increased 33.5% to $71.8 million in 1999 compared to $53.8 million in
1998.
Interest Expense. Interest expense increased 107.0% to $9.7 million in 1999
from $4.7 million in 1998. This increase was primarily due to increased
borrowings under the Company's floor plan credit facilities.
Other Income. Other income increased 81.5% to $4.9 million in 1999 from $2.7
million in 1998. This increase was primarily the result of increased interest
income and gains on sales of investments.
1998 COMPARED TO 1997
Net Sales. Net sales increased 13.2% to $637.3 million in 1998 from $563.2
million in 1997. Although retail sales increased 50% and wholesale sales
increased 6%, consolidated net sales increased only 13.2% due primarily to two
factors. First, net sales were impacted by the increase in retail stock
inventory as the number of Company-owned retail superstores increased from 54 in
1997 to 76 in 1998, excluding the 18 retail superstores acquired at the close of
business in fiscal 1998. Second, the increasing internalization rate limits
sales in certain markets to independent retailers.
Gross Profit. Gross profit increased 35.2% to $170.8 million in 1998
compared to $126.3 million in 1997. During the same period, gross profit margin
as a percentage of net sales increased to 26.8% compared to 22.4%. This increase
was primarily the result of selling 53% of the Company's homes through
Company-owned retail superstores in 1998 versus 31% in 1997 and production
efficiencies at manufacturing facilities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 34.6% to $117.0 million in 1998 from $86.9
million in 1997. As a percentage of net sales, selling, general and
administrative expenses increased, as planned, to 18.4% in 1998 from 15.4% in
1997. This planned increase is partially 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. Selling, general and administrative expenses were also impacted by
increased promotion and advertising expenditures and performance-based
compensation expense.
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14
Palm Harbor Homes 1999 Annual Report
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(In thousands of dollars, except per share and operating data)
Income from Operations. As a result of the foregoing factors, income from
operations increased 36.4% to $53.8 million in 1998 compared to $39.4 million in
1997.
Interest Expense. Interest expense increased 52.4% to $4.7 million in 1998
from $3.1 million in 1997. This increase was primarily due to an increase in the
floor plan payable.
Other Income. Other income increased 20.8% to $2.7 million in 1998 from $2.3
million in 1997. This increase was primarily the result of additional interest
earned due to an increase in the loan portfolio originated by CountryPlace
Mortgage, Ltd., the Company's finance subsidiary.
Income from Affiliate. Income from affiliate was $1.0 million in 1997
compared to zero in 1998. The decrease was due to consolidating the operations
of Newco Homes, Inc. ("Newco") with the Company's operations beginning in the
second quarter of fiscal 1997. See "Acquisitions" in Notes to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities increased to $20.1 million in 1999
compared to $16.3 million in 1998, after reflecting substantial increases in
inventory required to open new Company-owned retail superstores. Cash provided
by operations combined with additional floor plan financing and the borrowings
on the revolving line of credit has been adequate to support the Company's
acquisitions and working capital needs since its public offerings.
On August 1, 1996, the Company acquired the remaining 58.4% of Newco, a
Texas-based retailer of manufactured homes. The Company had previously owned
41.6% of Newco's outstanding shares. The purchase price for the remaining 58.4%
of Newco's outstanding shares consisted of $17.3 million cash and 1,444,445
shares of the Company's common stock.
On March 27, 1998, the Company acquired the Cannon Group, a privately-owned,
Atlanta-based operator of 18 retail manufactured home centers. The purchase
price consisted of $26.8 million cash and 157,975 shares of the Company's common
stock. The purchase prices of other acquisitions during fiscal year 1998 totaled
$7.8 million in cash.
Capital expenditures were $21.6 million, $16.7 million and $20.8 million in
1997, 1998 and 1999, respectively. Capital expenditures during these periods
were for expansion of retail superstores and manufacturing facilities and for
normal property, plant and equipment improvements. In 1997, capital expenditures
included the April 1996 acquisition and renovation of a manufacturing facility
in Georgia for $3.2 million, the November 1996 acquisition of a manufacturing
facility in Arizona for $1.4 million and expansion of retail superstores for
$9.1 million. Approximately $7.0 million was expended for improvements on mature
manufacturing facilities. In 1998, capital expenditures included $4.1 million
for renovation of the manufacturing facility in Arizona that was acquired in
November 1996 and expansion of retail superstores for $8.0 million.
Approximately $4.6 million was expended for improvements on mature manufacturing
facilities. In 1999, capital expenditures included $11.7 million for expansion
of retail superstores and approximately $9.1 million for improvements on mature
manufacturing facilities. The Company expects capital expenditures to
approximate $20.0 million during 2000 to add 15-20 retail superstores and to
upgrade current manufacturing facilities.
The Company has floor plan credit facilities totaling $80.0 million and
$150.0 million from financial institutions as of March 27, 1998 and March 26,
1999, respectively, 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 are prime (7.75% at March 26, 1999). The Company had $79.6
million and $128.9 million outstanding on these floor plan credit facilities at
March 27, 1998 and March 26, 1999, respectively.
In July 1997, the Company 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 (4.94% at March 26, 1999) plus 0.625% or
the prime rate (7.75% at March 26, 1999) 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 $17.0 million and
5
15
zero outstanding on this line of credit at March 27, 1998 and March 26, 1999,
respectively. The increase in floor plan credit facilities has effectively
reduced the amount available under the line of credit to zero.
The Company believes that cash flow from operations, together with floor
plan financing, 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. 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.
In accordance with customary business practice in the manufactured housing
industry, the Company has entered into repurchase agreements with various
financial institutions and other credit sources pursuant to which the Company
has agreed, under certain circumstances, to repurchase homes sold to independent
retailers in the event of a default by a retailer in its obligation to such
credit sources. Under such agreements, the Company agrees to repurchase homes at
declining prices over the term of the agreement (which generally ranges from 12
to 18 months). The Company estimates that its potential obligations under such
repurchase agreements approximated $65.0 million at March 26, 1999. During 1997,
1998 and 1999, net (income)/expenses incurred by the Company under these
repurchase agreements totaled $55,000, ($13,000) and $29,000, respectively.
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 software may be unable to properly categorize
and process dates occurring after December 31, 1999. This could result in a
system failure of 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 third 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
$0.50 million. Under the plan, all modifications and upgrading of critical
systems will be completed and tested by September 30, 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 other
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. To date no known Year 2000 Issue-related failures among these third
parties exist.
There are no formal contingency plans in place if the Company does not
complete all Year 2000 management information system projects. The Year 2000
Issue is being closely monitored, and additional measures will be taken as risks
are determined.
FORWARD-LOOKING INFORMATION
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 market place; and the
difficulty of forecasting sales at certain times in certain markets.
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PALM HARBOR HOMES 1999 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
March 27, March 26,
1998 1999
---------- ----------
Assets
Current assets:
Cash and cash equivalents $ 21,073 $ 39,413
Investments 5,091 17,167
Receivables 71,171 79,219
Inventories 108,185 122,662
Prepaid expenses and other assets 602 554
Deferred income taxes 4,561 5,795
---------- ----------
Total current assets 210,683 264,810
Notes receivable 3,977 2,200
Goodwill, net 60,509 59,236
Other assets, net 11,317 20,598
---------- ----------
75,803 82,034
Property, plant and equipment, at cost:
Land and improvements 14,166 16,189
Buildings and improvements 44,187 51,023
Machinery and equipment 29,025 35,422
Construction in progress 3,580 8,742
---------- ----------
90,958 111,376
Accumulated depreciation 23,598 30,810
---------- ----------
67,360 80,566
---------- ----------
Total assets $ 353,846 $ 427,410
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 44,547 $ 48,026
Floor plan payable 79,564 128,852
Line of credit 17,000 --
Accrued liabilities 46,338 47,383
Current portion of long-term debt 944 233
---------- ----------
Total current liabilities 188,393 224,494
Long-term debt, less current portion 3,382 3,149
Deferred income taxes 5,015 4,442
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 2,000,000
Issued and outstanding shares - none
Common stock, $.01 par value:
Authorized shares - 50,000,000
Issued shares - 19,045,668 at March 27, 1998,
and 23,807,879 at March 26, 1999 191 239
Additional paid-in capital 54,197 54,149
Retained earnings 102,865 143,681
---------- ----------
157,253 198,069
Less treasury shares - 16,611 at March 27, 1998,
and 30,765 at March 26, 1999 (197) (442)
Unearned compensation -- (2,302)
---------- ----------
Total shareholders' equity 157,056 195,325
---------- ----------
Total liabilities and shareholders' equity $ 353,846 $ 427,410
========== ==========
See accompanying notes.
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PALM HARBOR HOMES 1999 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended
--------------------------------------
March 28, March 27, March 26,
1997 1998 1999
---------- ---------- ----------
Net sales $ 563,192 $ 637,268 $ 761,374
Cost of sales 436,850 466,494 530,698
Selling, general and administrative expenses 86,927 117,018 158,916
---------- ---------- ----------
Income from operations 39,415 53,756 71,760
Interest expense (3,085) (4,700) (9,728)
Other income 2,250 2,718 4,933
---------- ---------- ----------
Income before income from affiliate and income taxes 38,580 51,774 66,965
Income from affiliate 1,049 -- --
---------- ---------- ----------
Income before income taxes 39,629 51,774 66,965
Income tax expense 14,890 19,920 26,788
---------- ---------- ----------
Net income $ 24,739 $ 31,854 $ 40,177
========== ========== ==========
Net income per common share - basic and diluted $ 1.07 $ 1.35 $ 1.69
========== ========== ==========
Weighted average common shares outstanding 23,013 23,589 23,783
========== ========== ==========
Weighted average common shares outstanding - assuming dilution 23,036 23,632 23,838
========== ========== ==========
See accompanying notes.
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PALM HARBOR HOMES 1999 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)
Common Stock Additional
--------------------------- Paid-In Retained
Shares Amount Capital Earnings
------------ ------------ ------------ ------------
Balance at
March 29, 1996 10,863,598 $ 109 $ 23,012 $ 46,272
Net income -- -- -- 24,739
1.25 to 1 stock split 2,733,408 27 (27) --
Issuance related
to acquisitions 1,512,746 15 25,983 --
Treasury shares
purchased -
net of sales -- -- 26 --
Payments on
shareholders' notes -- -- -- --
------------ ------------ ------------ ------------
Balance at
March 28, 1997 15,109,752 151 48,994 71,011
Net income -- -- -- 31,854
1.25 to 1 stock split 3,777,941 38 (38) --
Issuance related
to acquisition 157,975 2 5,241 --
Treasury shares
sold - net
of purchases -- -- -- --
Payments on
shareholders' notes -- -- -- --
------------ ------------ ------------ ------------
Balance at
March 27, 1998 19,045,668 191 54,197 102,865
Net income -- -- -- 40,177
1.25 to 1 stock split 4,762,211 48 (48) --
Treasury shares
purchased -- -- -- --
Unrealized gain -- -- -- 639
Long-Term
Incentive Plan -- -- -- --
------------ ------------ ------------ ------------
Balance at
March 26, 1999 23,807,879 $ 239 $ 54,149 $ 143,681
============ ============ ============ ============
Notes
Treasury Shares Receivable
---------------------------- From Unearned
Shares Amount Shareholders Compensation Total
------------ ------------ ------------ ------------ ------------
Balance at
March 29, 1996 (13,281) $ (205) $ (206) -- $ 68,982
Net income -- -- -- -- 24,739
1.25 to 1 stock split (2,586) -- -- -- --
Issuance related
to acquisitions -- -- -- -- 25,998
Treasury shares
purchased -
net of sales 2,423 11 -- -- 37
Payments on
shareholders' notes -- -- 193 -- 193
------------ ------------ ------------ ------------ ------------
Balance at
March 28, 1997 (13,444) (194) (13) -- 119,949
Net income -- -- -- -- 31,854
1.25 to 1 stock split (3,361) -- -- -- --
Issuance related
to acquisition -- -- -- -- 5,243
Treasury shares
sold - net
of purchases 194 (3) -- -- (3)
Payments on
shareholders' notes -- -- 13 -- 13
------------ ------------ ------------ ------------ ------------
Balance at
March 27, 1998 (16,611) (197) -- -- 157,056
Net income -- -- -- -- 40,177
1.25 to 1 stock split (4,154) -- -- -- --
Treasury shares
purchased (10,000) (245) -- -- (245)
Unrealized gain -- -- -- -- 639
Long-Term
Incentive Plan -- -- -- $ (2,302) (2,302)
------------ ------------ ------------ ------------ ------------
Balance at
March 26, 1999 (30,765) $ (442) $ - $ (2,302) $ 195,325
============ ============ ============ ============ ============
See accompanying notes.
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PALM HARBOR HOMES 1999 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
Year Ended
--------------------------------------
March 28, March 27, March 26,
1997 1998 1999
---------- ---------- ----------
Operating Activities
Net income $ 24,739 $ 31,854 $ 40,177
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 6,026 5,641 7,588
Amortization 123 1,870 3,982
Deferred income tax benefit (898) (1,597) (1,807)
Income from affiliate (1,049) -- --
Gain on sale of loans -- -- (11,438)
Gain on disposition of assets (32) (27) (45)
Purchases of stock for long-term incentive plan -- -- (2,302)
Changes in operating assets and liabilities
Accounts receivable (4,868) (14,838) 6,586
Due from affiliate 3,848 -- --
Inventories (20,973) (19,684) (14,477)
Prepaid expenses and other current assets (20) 804 48
Other assets 6,202 (2,148) (10,213)
Accounts payable and accrued expenses (7,169) 14,449 4,524
---------- ---------- ----------
Cash provided by operations 5,929 16,324 22,623
Loans originated -- -- (160,690)
Sale of loans -- -- 158,133
---------- ---------- ----------
Net cash provided by operating activities 5,929 16,324 20,066
Investing Activities
Purchases of property, plant and equipment (21,608) (16,707) (20,846)
Cash consideration for acquisitions (net of cash acquired) (3,284) (34,648) --
Purchases of investments (10,206) (5,302) (23,900)
Sales of investments 12,195 3,308 11,824
Proceeds from disposition of assets 35 69 97
---------- ---------- ----------
Net cash used in investing activities (22,868) (53,280) (32,825)
Financing Activities
Net proceeds from (payments on) floor plan payable 19,801 14,858 49,288
Borrowings on line of credit -- 22,000 --
Payments on line of credit -- (5,000) (17,000)
Principal payments on notes payable and long-term debt (187) (185) (944)
Net sales (purchases) of treasury stock 37 (3) (245)
Notes receivable from shareholders, net 193 13 --
---------- ---------- ----------
Net cash provided by financing activities 19,844 31,683 31,099
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 2,905 (5,273) 18,340
Cash and cash equivalents at beginning of year 23,441 26,346 21,073
---------- ---------- ----------
Cash and cash equivalents at end of year $ 26,346 $ 21,073 $ 39,413
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,988 $ 4,674 $ 9,024
Income taxes $ 16,190 $ 22,592 $ 28,625
Supplemental schedule of non-cash investing activities:
Common stock issuance for acquisitions $ 25,998 $ 5,243 $ --
Unrealized gain on sale of loans $ -- $ -- $ 639
See accompanying notes.
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PALM HARBOR HOMES 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of Palm Harbor
Homes, Inc. (the "Company") and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
The Company's fiscal year ends on the last Friday in March. Headquartered in
Dallas, Texas, the Company markets manufactured homes nationwide through
vertically integrated operations, encompassing manufacturing, marketing,
financing and insurance.
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the notes thereto.
Actual results could differ from the assumptions used by management in
preparation of the financial statements.
Revenue recognition
Retail sales are recognized when cash payment is received or, in the case of
credit sales, when a down payment is received, the customer enters into an
installment sales contract and the home is delivered. Wholesale sales are
recognized when the home is shipped which is when the title passes to the
independent retailer.
Most of the homes sold to independent retailers are financed through
standard industry arrangements which include repurchase agreements (see Note
14). The Company extends credit in the normal course of business under normal
trade terms and its receivables are subject to normal industry risk.
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 while
unrealized gains are included as a component of retained earnings. 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.
During fiscal year 1999, the Company recognized approximately $11.4 million
in gains and $639,000 in unrealized gains on the sale of loan contracts through
CountryPlace in accordance with SFAS 125. Additionally, as of March 26, 1999,
the Company had net receivables of approximately $8.7 million related to the
retained residual interests of loan contracts previously sold by CountryPlace,
of which $7.0 million is long-term and has been included as other assets.
Cash and cash equivalents
Cash and cash equivalents are all liquid investments with maturities of
three months or less when purchased.
Investments
The Company holds investments as trading and available-for-sale. The trading
account assets consist of marketable debt and equity securities and are stated
at fair value. Marketable equity securities not classified as trading are
classified as available-for-sale. Available-for-sale securities are stated at
fair value, with the unrealized gains and losses, net of tax, reported in
shareholders' equity.
Inventories
Raw materials inventories are valued at the lower of cost (first-in,
first-out method which approximates actual cost) or market. Finished goods are
valued at the lower of cost or market, using the specific identification method.
11
21
Property, plant and equipment
Property, plant and equipment are carried at cost. Depreciation is
calculated using the straight-line method over the assets' estimated useful
lives. Leasehold improvements are amortized using the straight-line method over
the shorter of the lease period or the improvements' useful lives.
Goodwill
Goodwill is the excess of cost over fair value of net assets of businesses
acquired and is amortized on the straight-line method over the expected periods
to be benefited - in most cases between 10 and 20 years. The Company evaluates
the existence of goodwill impairment on the basis of whether the goodwill is
fully recoverable from projected, undiscounted future cash flows.
Product warranties
Products are warranted against manufacturing defects for a period of one
year commencing at the time of sale to the retail customer. Estimated costs
relating to product warranties are provided at the date of sale.
Start-up costs
Costs incurred in connection with the start-up of manufacturing facilities
and retail superstores are expensed as incurred.
Income taxes
Deferred income taxes are determined by the liability method and reflect the
net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes.
Earnings per share
During fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 128 (SFAS 128) "Earnings per Share." SFAS 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. The adoption of SFAS 128 did not
result in a change to the reported earnings per share of the Company.
In computing both basic and diluted earnings per share, the number of
weighted average shares outstanding during the periods presented, adjusted for
subsequent common stock splits, were used. Historical earnings per share data
has been adjusted to reflect the effects of the 1.25 to 1 stock splits effective
as of July 26, 1996, July 8, 1997 and July 14, 1998.
Business segment information
During fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS 131) "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 establishes standards for the way public
companies report information about operating segments in annual financial
statements and requires those companies to report selected information about
reportable segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
12
22
PALM HARBOR HOMES 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITIONS
On April 12, 1996, the Company acquired Energy Efficient Housing, Inc., a
retailer consisting of eight superstores in North Carolina, for a combination of
cash and 68,301 common shares of the Company.
On May 31, 1996, the Company acquired Standard Casualty Company, a property
and casualty insurer of manufactured homes headquartered in Texas.
On August 1, 1996, the Company acquired the remaining 58.4% of Newco Homes,
Inc. ("Newco"), a Texas-based retailer of manufactured homes. The Company had
previously owned 41.6% of Newco's outstanding shares. The purchase price for the
remaining 58.4% of Newco's outstanding shares consisted of $17.3 million cash
and 1,444,445 shares of the Company's common stock. Goodwill relating to the
acquisition totaled approximately $25.8 million at March 28, 1997, and is being
amortized over 20 years. Prior to the acquisition of the remaining 58.4% of
Newco, the Company recorded its 41.6% equity interest in the net earnings of
Newco as income from affiliate.
On March 27, 1998, the Company acquired the Cannon Group, a privately-owned,
Atlanta-based operator of 18 retail manufactured home centers. The purchase
price consisted of $26.8 million cash and 157,975 shares of the Company's common
stock. The purchase prices of other acquisitions during fiscal year 1998 totaled
$7.8 million in cash. Goodwill relating to all of these acquisitions totaled
approximately $34.6 million.
All acquisitions were accounted for using the purchase method of accounting.
3. INVENTORIES
Inventories consist of the following:
March 27, March 26,
1998 1999
---------- ----------
(in thousands)
Raw materials $ 8,625 $ 8,936
Work in process 2,803 3,208
Finished goods - manufacturing 156 247
Finished goods - retail 96,601 110,271
---------- ----------
$ 108,185 $ 122,662
========== ==========
4. INVESTMENTS
The Company's investments, which totaled $5,091,000 and $17,167,000 at March
27, 1998 and March 26, 1999, respectively, consist of marketable debt and equity
securities with original maturities beyond three months.
5. GOODWILL
Goodwill was $63,522,000 at March 27, 1998 and $66,109,000 at March 26,
1999, with accumulated amortization of $3,013,000 and $6,873,000, respectively,
as of those dates.
6. FLOOR PLAN PAYABLE
The Company has floor plan credit facilities totaling $80.0 million and
$150.0 million from financial institutions as of March 27, 1998 and March 26,
1999, respectively, 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 are prime (7.75% at March 26, 1999). The Company had $79.6
million and $128.9 million outstanding on these floor plan credit facilities at
March 27, 1998 and March 26, 1999, respectively.
13
23
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 (7.75% at March 26, 1999). 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
March 26, 1999, the Company had $36.0 million invested and has classified this
amount as Cash and Cash Equivalents in the accompanying Consolidated Balance
Sheet.
7. LINE OF CREDIT
On July 11, 1997, the Company 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 (4.94% at March 26, 1999) plus 0.625% or
the prime rate (7.75% at March 26, 1999) 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 $17.0 million and zero
outstanding on this line of credit at March 27, 1998 and March 26, 1999,
respectively. At March 26, 1999, the additional floor plan credit facilities
discussed in Note 6 effectively reduced the amount available under the line of
credit to zero. The weighted average interest rate for borrowings under the
Company's revolving line of credit was 6.3% and 6.4% during fiscal 1998 and
1999, respectively.
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
March 27, March 26,
1998 1999
---------- ----------
(in thousands)
Salaries, wages and benefits $ 14,296 $ 16,228
Accrued closing costs on homes sold 6,429 8,863
Warranty 6,016 6,490
Customer deposits 4,676 5,806
Sales incentives 4,311 1,561
Other 10,610 8,435
---------- ----------
$ 46,338 $ 47,383
========== ==========
14
24
Palm Harbor Homes 1999 Annual Report
Notes to Consolidated Financial Statements
9. LONG-TERM DEBT
Long-term debt consists of the following:
March 27, March 26,
1998 1999
--------- ---------
(in thousands)
Economic development revenue bonds; interest payable monthly at 7.54%; monthly
interest and principal payments of $40,029 through February 2001, $31,393 through
January 2006 with final payment of $2,002,040 in February 2006 $ 3,598 $ 3,382
Promissory note; interest payable monthly at 9% per annum until March 13, 1999
with outstanding principal payment due March 13, 1999 728 --
--------- ---------
4,326 3,382
Less current portion 944 233
--------- ---------
Long-term debt, less current portion $ 3,382 $ 3,149
========= =========
The revenue bonds require the maintenance of certain financial statement
ratios, prohibit the payment of dividends and are collateralized by certain
fixed assets having a carrying value as of March 26, 1999 of $5,918,000.
Scheduled maturities of long-term debt are as follows (in thousands):
Fiscal Year Amount
- ----------- ------
2000 $ 233
2001 243
2002 163
2003 176
2004 and thereafter 2,567
------
$3,382
======
The carrying value of the Company's long-term debt approximates its fair
value.
10. INCOME TAXES
Income tax expense for fiscal years 1997, 1998 and 1999 is as follows:
March 28, March 27, March 26,
1997 1998 1999
-------- -------- --------
(in thousands)
Current:
Federal $ 14,010 $ 19,941 $ 25,144
State 1,888 2,269 2,831
Deferred (1,008) (2,290) (1,187)
-------- -------- --------
Total income taxes $ 14,890 $ 19,920 $ 26,788
======== ======== ========
15
25
Significant components of deferred tax assets and liabilities are as
follows:
March 27, March 26,
1998 1999
--------- ---------
(in thousands)
Current deferred tax assets
Warranty reserves $ 2,106 $ 2,272
Accrued liabilities 969 2,041
Inventory 214 465
Other 1,272 1,017
--------- ---------
4,561 5,795
Non-current deferred tax assets
Unrecognized income 1,842 2,240
--------- ---------
Total deferred tax assets 6,403 8,035
Deferred tax liabilities
Tax benefits purchased 3,168 2,921
Property and equipment 678 (200)
Other 1,169 1,721
--------- ---------
Total deferred tax liabilities 5,015 4,442
--------- ---------
Net deferred income tax assets (liabilities) $ 1,388 $ 3,593
========= =========
Tax benefits purchased are investments in Safe Harbor lease agreements
that are carried net of tax benefits realized. The balance will be amortized
over the remaining term of the related lease.
The effective income tax rate on pretax earnings differed from the U.S.
federal statutory rate for the following reasons:
March 28, March 27, March 26,
1997 1998 1999
--------- --------- ---------
(in thousands)
Tax at statutory rate $ 13,873 $ 18,121 $ 23,437
Increases (decreases)
Equity in earnings of affiliate (367) -- --
State taxes - net of federal tax benefit 1,227 1,475 1,840
Goodwill amortization 400 612 1,023
Tax exempt interest (230) (87) --
Other (13) (201) 488
--------- --------- ---------
Income tax expense $ 14,890 $ 19,920 $ 26,788
========= ========= =========
Effective tax rate 37.6% 38.5% 40.0%
========= ========= =========
11. SHAREHOLDERS' EQUITY
The Board of Directors may, without further action by the Company's
shareholders, from time to time, authorize the issuance of shares of preferred
stock in series and may, at the time of issuance, determine the powers, rights,
preferences and limitations, including the dividend rate, conversion rights,
voting rights, redemption price and liquidation preference, and the number of
shares to be included in any such series. Any preferred stock so issued may rank
senior to the common stock with respect to the payment of dividends or amounts
upon liquidation, dissolution or winding up, or both. In addition, any such
shares of preferred stock may have class or series voting rights.
16
26
PALM HARBOR HOMES 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. LONG-TERM INCENTIVE PLAN
Effective March 29, 1999, the Company adopted the Fiscal Year 2000
Long-Term Incentive Plan (the "Plan") whereby certain key associates will
receive awards of restricted common stock. These restricted stock awards will
give the associate the right to receive a specific number of shares of common
stock contingent upon remaining an associate of the Company for a specified
period.
The cost of the common stock acquired by the Company for the
participants in the Plan is reflected as "Unearned Compensation" in the
accompanying Consolidated Balance Sheet. The Plan is administered by a committee
authorized by the Board of Directors.
13. EMPLOYEE PLAN
The Company sponsors an employee savings plan (the "401k Plan") that is
intended to provide participating employees with additional income upon
retirement. Employees may contribute between 1% and 15% of eligible compensation
to the 401k Plan. The Company matches 50% of the first 6% deferred by employees.
Employees are eligible to participate after three months of employment and
employer contributions, which begin one year after employment, are vested at the
rate of 20% per year and are fully vested after five years of employment.
Contribution expense was $1,099,000, $1,891,000 and $2,469,000 in fiscal years
1997, 1998 and 1999, respectively.
14. COMMITMENTS AND CONTINGENCIES
Future minimum lease payments for all noncancelable operating leases having
a remaining term in excess of one year at March 26, 1999, are as follows
(in thousands):
Fiscal Year Amount
- ----------- ------
2000 $ 5,484
2001 4,351
2002 2,936
2003 1,986
2004 and thereafter 7,119
-------
$21,876
=======
Rent expense (net of sublease income) was $4,357,000, $5,191,000 and
$7,868,000 for fiscal years 1997, 1998 and 1999, respectively.
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 March 26, 1999, the Company
estimates that its potential obligations under such repurchase agreements were
approximately $65.0 million. However, it is management's opinion that no
material loss will occur from the repurchase agreements. During the past
three fiscal years, no significant costs have been incurred relating to such
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 or results of operations of the Company.
15. RELATED PARTY TRANSACTIONS
Through acquisitions, the Company has existing lease commitments
totaling $6,752,000 to former business owners of acquired locations. Rent
expense related to these lease commitments was $253,000 for fiscal year 1999.
17
27
16. BUSINESS SEGMENT INFORMATION
The Company operates primarily in three business segments, retail sales,
manufacturing and financial services. The following table summarizes, for
the periods indicated, the amounts of consolidated net sales, income from
operations, identifiable assets, depreciation and amortization, and capital
expenditures attributable to these segments. Intersegment sales are primarily
sales by the manufacturing segment to the retail segment and are transferred at
market prices. Income from affiliate in the consolidated statements of income
relates to the retail segment.
March 28, March 27, March 26,
1997 1998 1999
---------- ---------- ----------
(in thousands)
Net sales
Retail $ 289,387 $ 433,495 $ 612,730
Manufacturing 452,221 480,215 509,869
Financial services 3,862 8,335 24,219
---------- ---------- ----------
745,470 922,045 1,146,818
Intersegment sales (182,278) (284,777) (385,444)
---------- ---------- ----------
$ 563,192 $ 637,268 $ 761,374
========== ========== ==========
Income from operations
Retail $ 10,798 $ 22,595 $ 27,088
Manufacturing 33,363 35,178 40,496
Financial services 227 1,208 13,183
General corporate expenses (2,481) (3,681) (5,888)
---------- ---------- ----------
41,907 55,300 74,879
Intersegment profits (2,492) (1,544) (3,119)
---------- ---------- ----------
$ 39,415 $ 53,756 $ 71,760
========== ========== ==========
Interest expense $ (3,085) $ (4,700) $ (9,728)
Other income 2,250 2,718 4,933
Income from affiliate 1,049 -- --
---------- ---------- ----------
Income before taxes $ 39,629 $ 51,774 $ 66,965
========== ========== ==========
Identifiable assets
Retail $ 85,568 $ 149,771 $ 167,444
Manufacturing 136,345 166,632 215,403
Financial services 15,682 27,350 34,888
Other 8,740 10,093 9,675
---------- ---------- ----------
$ 246,335 $ 353,846 $ 427,410
========== ========== ==========
Depreciation and amortization
Retail $ 1,812 $ 1,856 $ 2,912
Manufacturing 3,969 5,182 8,191
Financial services 63 96 148
Other 305 377 319
---------- ---------- ----------
$ 6,149 $ 7,511 $ 11,570
========== ========== ==========
Capital expenditures
Retail $ 9,134 $ 8,035 $ 11,722
Manufacturing 12,179 8,540 8,757
Financial services 195 132 88
Other 100 -- 279
---------- ---------- ----------
$ 21,608 $ 16,707 $ 20,846
========== ========== ==========
18
28
PALM HARBOR HOMES 1999 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain unaudited quarterly financial
information for the fiscal years 1998 and 1999.
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Fiscal Year Ended
March 27, 1998
Net sales $ 159,097 $ 153,106 $ 161,969 $ 163,096 $ 637,268
Gross profit 40,536 40,225 43,115 46,898 170,774
Income from operations 12,967 13,145 13,021 14,623 53,756
Net income 7,668 7,893 7,792 8,501 31,854
Earnings per share .33 .34 .33 .35 1.35
Fiscal Year Ended
March 26, 1999
Net sales $ 204,130 $ 190,853 $ 186,054 $ 180,337 $ 761,374
Gross profit 57,297 57,853 56,137 59,389 230,676
Income from operations 18,388 19,471 15,869 18,032 71,760
Net income 10,125 10,425 9,440 10,187 40,177
Earnings per share .42 .44 .40 .43 1.69
19
29
Palm Harbor Homes 1999 Annual Report
Report of Independent Auditors
BOARD OF DIRECTORS
PALM HARBOR HOMES, INC.
We have audited the accompanying consolidated balance sheets of Palm
Harbor Homes, Inc. and Subsidiaries (the "Company") as of March 27, 1998 and
March 26, 1999, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three fiscal years in the period ended
March 26, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Palm
Harbor Homes, Inc. and Subsidiaries at March 27, 1998 and March 26, 1999, and
the consolidated results of their operations and their cash flows for each of
the three fiscal years in the period ended March 26, 1999, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Dallas, Texas
April 30, 1999