-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UcqyS5zQUE7P3DZECsPujXO3rOslwMJEs9xAQsproG+vMr/1eFJsrW6SXX4/M/nX heNOZkX5Rqv3EnuIP1qemQ== 0000950134-98-005194.txt : 19980612 0000950134-98-005194.hdr.sgml : 19980612 ACCESSION NUMBER: 0000950134-98-005194 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980327 FILED AS OF DATE: 19980611 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PALM HARBOR HOMES INC /FL/ CENTRAL INDEX KEY: 0000923473 STANDARD INDUSTRIAL CLASSIFICATION: PREFABRICATED WOOD BLDGS & COMPONENTS [2452] IRS NUMBER: 591036634 STATE OF INCORPORATION: FL FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-24268 FILM NUMBER: 98646724 BUSINESS ADDRESS: STREET 1: 15303 DALLAS PKWY STREET 2: STE 800 CITY: DALLAS STATE: TX ZIP: 75248 BUSINESS PHONE: 9729912922 MAIL ADDRESS: STREET 1: 15303 DALLAS PARKWAY STREET 2: STE 800 CITY: DALLAS STATE: TX ZIP: 75248 10-K405 1 FORM 10-K FOR YEAR ENDED MARCH 27, 1998 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended March 27, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ____ to ____ Commission File Number 0-24268 ------------------ 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 no.) 15303 DALLAS PARKWAY, SUITE 800, DALLAS, TEXAS 75248 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 991-2422 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $0.01 PER SHARE (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant as of May 22, 1998, was $289,737,320 based on the closing price on that date of the Common Stock as quoted on the Nasdaq National Market. As of May 22, 1998, 19,029,057 shares of the registrant's Common Stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the year ended March 27, 1998, are incorporated by reference in Parts II and IV. Portions of the registrant's Proxy Statement relating to its Annual Meeting of Shareholders to be held June 30, 1998 are incorporated by reference in Part III. ================================================================================ 2 This report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, those regarding the growth and financing strategies of Palm Harbor Homes, Inc. (the "Company"), projections of revenues, income or other financial items, the effective implementation of the Company's business or growth strategy, the adequacy of the Company's capital resources and other statements regarding trends relating to the manufactured home industry, and various other items involving known and unknown risks, uncertainties and other factors which may cause the actual results, performance and achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors 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; demographic changes; competitive product, advertising, promotional and pricing activity; raw material and labor costs and availability; dependence on the rate of development and degree of acceptance of new product introductions in the marketplace; relationships with customers or dealers; the availability, terms and development of capital; changes in or failure to identify or consummate successful acquisitions or to assimilate the operations of any acquired businesses with those of the Company; the difficulty of forecasting sales at certain times in certain markets; and government regulation. PART I. ITEM 1. BUSINESS GENERAL Palm Harbor Homes, Inc. (the "Company") is one of the largest producers of multi-section manufactured homes in the United States. The Company's operations are vertically integrated and encompass manufacturing, marketing, financing and insurance. At March 27, 1998, the Company operated 16 manufacturing facilities that sell homes through retailers in 34 states including approximately 300 independent retail sales centers and 94 Company-owned superstores. At March 27, 1998, the Company owned and operated 94 retail superstores. The Company continued to take significant steps in fiscal year 1998 toward its plan to increase sales through Company-owned superstores. In fiscal 1998, the Company acquired 24 superstores in 8 states, 7 of such states, Nevada, Colorado, Georgia, Utah, Arizona, Tennessee and Alabama, were states in which the Company did not previously own retail superstores. Effective March 27, 1998, the Company purchased all of the outstanding stock of Cannon Manufactured Housing Group, Inc., Cannon Mobile Homes, Inc., Pleasant Valley Mobile Homes, Inc., Countryside Mobile Homes, Inc., Cumberland Homes, Inc., All Star Mobile Homes, Inc. and First Home Mortgage Corporation (collectively, the "Cannon Companies"), adding 18 retail sales centers in Georgia, Alabama and Tennessee to the Company's portfolio. All of the Cannon Companies except First Home Mortgage Corporation have been merged into the Company. Through its subsidiary, CountryPlace Mortgage, Ltd. ("CountryPlace"), the Company offers installment financing to purchasers of manufactured homes sold by Company-owned superstores. The Company believes that the ability to finance its home sales will potentially provide it with an advantage over certain of its competitors and create a source of additional earnings. Through its subsidiary, Standard Casualty Company, the Company writes property and casualty insurance for owners of manufactured homes. Management of the Company believes that having the internal capability to provide this type of insurance complements the services of CountryPlace and will be additive to earnings. PRODUCTS The Company manufactures a variety of single and multi-section homes under various brand names including Palm Harbor(R), Masterpiece, Keystone, River Bend and Windsor Homes(TM). Palm Harbor offers over 150 floor plans and approximately 82% of the homes produced by the Company are structurally or decoratively customized to the home buyer's specifications. Although the Company produces a wide retail price range of homes, the average retail price (excluding land) of the Company's homes is approximately $55,000 and approximately 81% of the Company's homes are multi-section. A typical home built by the Company contains two to five bedrooms, a living room, family room, dining room, kitchen, two or three bathrooms and features central heating, a range, refrigerator, carpeting and drapes. In addition, the Company offers optional amenities, including dishwashers, washers, dryers, furniture packages and cabinets, as well as a wide range of colors, moldings and finishes. The Company has also attempted to broaden its base of potential customers by offering optional features 1 3 associated with site-built homes such as stone fireplaces, sky lights, vaulted ceilings and whirlpool baths. The Company also offers a unique package of energy saving construction features referred to as "EnerGmiser" which includes, among other things, additional insulation to reduce heating and cooling costs, and which exceeds statutorily-mandated energy efficiency levels. The Company's homes are designed and copyrighted after extensive field research and consumer feedback. The Company has developed engineering systems which, through the use of computer - aided technology, permit customization of homes and assist with product development and enhancement. MANUFACTURING OPERATIONS The Company's homes are currently manufactured at 16 facilities located in Alabama, Arizona, Florida, Georgia, North Carolina, Ohio, Oregon and Texas. A typical Company manufacturing facility has approximately 100,000 square feet of floor space, and employs approximately 225 associates. The Company's facilities generally operate on a one shift per day, five days per week basis, and the Company currently manufactures a typical home in approximately three to five days. The Company's facilities have the capacity to produce an aggregate of approximately 153 sections per day. The current rate of production is 109 sections per day. The following table sets forth the total sections produced and homes sold, as well as the number of manufacturing facilities operated by the Company, for the fiscal years indicated:
1994 1995 1996 1997 1998 ---------- ---------- ---------- ---------- ---------- Homes sold: Single-section ................. 1,327 1,474 2,192 2,781 2,687 Multi-section .................. 6,661 8,723 9,983 11,092 11,457 ---------- ---------- ---------- ---------- ---------- Total homes sold .................. 7,988 10,197 12,175 13,873 14,144 ========== ========== ========== ========== ========== Sections produced ................. 14,815 19,163 22,049 24,545 26,014 Manufacturing facilities (at end of fiscal year) ........ 12 13 14 15 16
The Company's homes are constructed at the Company's manufacturing facilities. Typically, independent trucking companies transport finished homes to the retail sales center. Retailers or other independent installers are responsible for placing the home on site and making utility hook-ups. The industry practice is to have third parties provide the installation and finish-out services. The Company believes that its factory finish-out program ensures that Palm Harbor quality is applied to the entire process, lessens customer concerns, strengthens the Company's relationship with its retailers and provides the Company an advantage over many of its competitors. The Company's backlog of orders as of May 29, 1998 was approximately $26 million, as compared to approximately $20 million as of May 30, 1997. Since retailers may cancel orders prior to production without penalty, the Company does not consider its order backlog to be firm orders; however, such cancellations rarely occur. Because of the seasonality of the housing market, the level of backlog generally declines during the winter months. The principal materials used in the production of the Company's homes include wood, wood products, gypsum wallboard, steel, fiberglass insulation, carpet, vinyl, fasteners, appliances, electrical items, windows and doors. The Company believes that the materials used in the production of its homes are readily available at competitive prices from a wide variety of suppliers. Three suppliers, which accounted for more than 5% of the Company's total purchases during the Company's fiscal year ended March 27, 1998, represented approximately 10.3%, 5.7% and 5.3%, respectively, of total purchases during such fiscal year. Accordingly, the Company does not believe that the loss of any single supplier would have a material adverse effect on its business. RETAIL OPERATIONS The Company's homes are sold through a distribution network consisting of (i) superstores owned by the Company; and (ii) independent retailers. The following table sets forth the number of homes sold by the Company through each of these 2 4 distribution channels, as well as the number of superstores and retail sales centers in each channel, during the past three fiscal years:
March 29, March 28, March 27, 1996 1997 1998 ---------- ---------- ---------- Homes sold by retailers: Company-owned ..................... 1,055 5,211 7,696 (1) Independent ....................... 11,120 8,662 6,448 ------- ------- ------- Total ........... 12,175 13,873 14,144 ======= ======= ======= Number of sales centers: Company- owned .................... 16 54 94 Independent ....................... 628 600 300 ------- ------- ------- Total ........... 644 654 394 ======= ======= =======
(1) Excludes homes sold through the 18 superstores which were acquired at the close of business in fiscal 1998. The Company originally established wholly-owned superstores in 1992, and currently has 94 superstores in Alabama, Colorado, Florida, Georgia, Indiana, Louisiana, Nevada, New Mexico, North Carolina, Ohio, Oregon, South Carolina, Utah, Arizona, Tennessee, Texas and Washington. The Company plans to add 10 to 15 retail superstores in fiscal 1999. The Company's independent retailer network principally consists of local retailers, developers that market land/home packages and developers of retirement lifestyle communities. No single independent retailer accounted for 5% or more of the Company's net sales during fiscal 1998. The Company provides comprehensive sales training to its retail sales associates and brings them to the manufacturing facilities for product training and to view new product designs as they are developed. These training seminars, known as "Palm Harbor University," facilitate the sale of the Company's homes by increasing the skill and knowledge of the retail sales consultants. In addition, the Company displays its products in trade shows and supports its retailers through the distribution of floor plan literature, brochures, decor boards, banners and videos. MARKETS SERVED Management believes that the Company's broad geographic presence lessens the impact of adverse economic trends specific to any one region, while at the same time enabling the Company to capitalize on favorable regional economic trends. During the fiscal year ended March 27, 1998, the percentage of the Company's revenues by region was as follows:
PERCENTAGE OF REGION PRIMARY STATES REVENUE BY REGION - ------ ---------------------------------------------------------- ----------------- Southeast Florida, North Carolina, Alabama, Georgia, South Carolina, Mississippi, Tennessee, Virginia 44.0% Central Texas, Oklahoma, Louisiana, Arkansas, Kansas 28.0 West New Mexico, Arizona, Colorado, Oregon, Washington, Idaho, Montana, Nevada, Utah, California 22.0 Midwest Ohio, Michigan, Indiana, Kentucky, West Virginia, Illinois 6.0 ------ 100.0% ======
Manufactured housing is a regional business and the primary geographic market for a typical manufacturing facility is within a 250-mile radius. Each of the Company's manufacturing facilities typically serves 20 to 65 retailers, and the facility sales staff maintains personal contact with each retailer, whether Company owned or independent. The Company's decentralized operations allow it to be more responsive to retailers' concerns with respect to leadership in product innovation, local home design and customer satisfaction. CONSUMER FINANCING Historically, the Company has facilitated retail sales of its homes by maintaining relationships with conventional lenders. While the Company intends to maintain its relationships with conventional lenders, it believes that the ability to provide financing 3 5 to its customers on competitive terms will not only improve its responsiveness to the financing needs of prospective purchasers, but will also provide an additional source of earnings for the Company. The Company offers through CountryPlace a variety of financing options, including customary retail installment sales contracts, land in lieu of down payment and land/home financing to best suit the needs of its retail customers. Financing services by CountryPlace are currently being offered through Company-owned or affiliated superstores. Loan applications originate at the superstore and are forwarded to CountryPlace for final credit approval. CountryPlace then assigns the approved loan contracts to one of two national consumer finance companies. CountryPlace and the national consumer finance companies share on a predetermined basis the interest income and losses resulting from the majority of the loans unless the loan is also secured by the related land, whereby the national consumer finance companies assume all losses. Retail installment loans assigned by CountryPlace are serviced and administered by the national consumer finance companies. CountryPlace's share of the interest income is, in part, in consideration for the following services provided by CountryPlace: (i) contract origination services, including the training of retailers with respect to the loan evaluation process; (ii) receipt and processing of the retail installment sale contracts; (iii) collection assistance with delinquent accounts, upon the request of the finance company; and (iv) repossession assistance. RETAILER INVENTORY FINANCING In accordance with manufactured housing industry practice, substantially all retailers finance all or a portion of their purchases of manufactured homes through wholesale "floor plan" financing arrangements. Under a typical floor plan financing arrangement, a financial institution provides the retailer with a loan for the purchase price of the home and maintains a security interest in the home as collateral. The financial institution which provides financing to the retailer customarily requires the Company to enter into a separate repurchase agreement with the financial institution under which the Company is obligated, upon default by the retailer and under certain other circumstances, to repurchase the financed home at declining prices over the term of the repurchase agreement (which generally ranges from 12 to 18 months). The price at which the Company may be obligated to repurchase a home under these agreements is based upon the Company's original invoice price plus certain administrative and shipping expenses. The Company's obligation under these repurchase agreements ceases upon the purchase of the home by the retail customer. The risk of loss under such repurchase agreements is mitigated by the fact that (I) a majority of the homes sold by the Company to independent retailers are pre-sold to specific retail customers; (ii) the Company monitors each retailer's inventory position on a regular basis; (iii) sales of the Company's manufactured homes are spread over a large number of retailers, (iv) none of the Company's independent retailers accounted for more than 5% of the Company's net sales in fiscal 1998; (v) the price the Company is obligated to pay declines over time; and (vi) the Company is, in most cases, able to resell homes repurchased from credit sources in the ordinary course of business without incurring significant losses. The Company estimates that its potential obligations under such repurchase agreements was approximately $65 million as of March 27, 1998. During the fiscal years ended March 29, 1996, March 28, 1997 and March 27, 1998, net (income)/expenses incurred by the Company under these repurchase agreements totaled ($3,000), $55,000 and ($13,000), respectively. COMPETITION The manufactured housing industry is highly competitive at both the manufacturing and retail levels, with competition based upon several factors, including price, product features, reputation for service and quality, depth of field inventory, promotion, merchandising and the terms of retail customer financing. In addition, manufactured homes compete with new and existing site-built homes, as well as apartments, town houses and condominiums. The Company does not view any of its competitors as being dominant in the industry, although some of the Company's competitors possess substantially greater financial (including captive retail financing), manufacturing, distribution and marketing resources than the Company. While the Company believes mortgage and personal property financing have generally become more available to the manufactured housing industry in recent years, a contraction in consumer credit could provide an advantage to those competitors with substantial capital resources. GOVERNMENT REGULATION The Company's manufactured homes are subject to a number of federal, state and local laws, codes and regulations. Construction of manufactured housing is governed by the National Manufactured Housing Construction and Safety Standards Act of 1974, as amended (the "Home Construction Act"). In 1976, HUD issued regulations under the Home Construction Act 4 6 establishing comprehensive national construction standards. The HUD regulations, known collectively as the Federal Manufactured Home Construction and Safety Standards, cover all aspects of manufactured home construction, including structural integrity, fire safety, wind loads, thermal protection and ventilation. Such regulations preempt conflicting state and local regulations on such matters, and are subject to continual change. The Company's manufacturing facilities and the plans and specifications of its manufactured homes have been approved by a HUD-certified inspection agency. Further, an independent HUD-certified third-party inspector regularly reviews the Company's manufactured homes for compliance with the HUD regulations during construction. Failure to comply with applicable HUD regulations could expose the Company to a wide variety of sanctions, including mandated closings of Company manufacturing facilities. The Company believes its manufactured homes meet or surpass all present HUD requirements. Manufactured and site-built homes are all typically built with paneling and other products that contain formaldehyde resins. Since February 1985, HUD has regulated the allowable concentrations of formaldehyde in certain products used in manufactured homes and requires manufacturers to warn purchasers as to formaldehyde-associated risks. The Environmental Protection Agency (the "EPA") and other governmental agencies have in the past evaluated the effects of formaldehyde. The Company uses materials in its manufactured homes that meet HUD standards for formaldehyde emissions and believes it otherwise complies with HUD and other applicable government regulations in this regard. The transportation of manufactured homes on highways is subject to regulation by various federal, state and local authorities. Such regulations may prescribe size and road use limitations and impose lower than normal speed limits and various other requirements. The Company's manufactured homes are subject to local zoning and housing regulations. In certain cities and counties in areas where the Company's homes are sold, local governmental ordinances and regulations have been enacted which restrict the placement of manufactured homes on privately-owned land or which require the placement of manufactured homes in manufactured home communities. Such ordinances and regulations may adversely affect the Company's ability to sell homes for installation in communities where they are in effect. A number of states have adopted procedures governing the installation of manufactured homes. Utility connections are subject to state and local regulation, and must be complied with by the retailer or other person installing the home. The Company is subject to the Magnuson-Moss Warranty Federal Trade Commission Improvement Act, which regulates the descriptions of warranties on products. The description and substance of the Company's warranties are also subject to a variety of state laws and regulations. A number of states require manufactured home producers to post bonds to ensure the satisfaction of consumer warranty claims. A variety of laws affect the financing of manufactured homes by the Company. The Federal Consumer Credit Protection Act (Truth-in-Lending) and Regulation Z promulgated thereunder require written disclosure of information relating to such financing, including the amount of the annual percentage rate and the finance charge. The Federal Fair Credit Reporting Act also requires certain disclosures to potential customers concerning credit information used as a basis to deny credit. The Federal Equal Credit Opportunity Act and Regulation B promulgated thereunder prohibit discrimination against any credit applicant based on certain specified grounds. The Real Estate Settlement Procedures Act and Regulation X promulgated thereunder require certain disclosures regarding the nature and costs of real estate settlements. The Federal Trade Commission has adopted or proposed various Trade Regulation Rules dealing with unfair credit and collection practices and the preservation of consumers' claims and defenses. Installment sales contracts eligible for inclusion in a Government National Mortgage Association program are subject to the credit underwriting requirements of the Federal Housing Association. A variety of state laws also regulate the form of the installment sale contracts or financing documents and the allowable deposits, finance charge and fees chargeable pursuant to installment sale contracts or financing documents. The sale of insurance products by the Company is subject to various state insurance laws and regulations which govern allowable charges and other insurance practices. The Company's operations are also subject to federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. Governmental authorities have the power to enforce compliance with their regulations, and violations may result in the payment of fines, the entry of injunctions or both. The requirements of such laws and enforcement policies have generally become more strict in recent years. Accordingly, the Company is unable to predict the ultimate cost of compliance with environmental laws and enforcement policies. See "Item 3. Legal Proceedings." 5 7 ASSOCIATES As of March 27, 1998, the Company had approximately 4,700 associates. All of the Company's associates are non-union. The Company has not experienced any labor-related work stoppages, and believes that its relationship with its associates is good. ITEM 2. PROPERTIES The Company's homes are currently manufactured at 16 facilities in 8 states. The Company owns substantially all of its machinery and equipment. The Company believes its facilities are adequately maintained and suitable for the purposes for which they are used. The following table sets forth certain information with respect to the Company's manufacturing facilities:
COMMENCEMENT APPROXIMATE STATE CITY OF PRODUCTION OWNED/LEASED SQUARE FEET ----- ---- ------------- ------------ ----------- Alabama Boaz December 1986 Leased 97,683 January 1993 Leased 75,164 Arizona Tempe January 1978 Owned 103,500 Casa Grande July 1997 Owned 90,000 Florida Plant City September 1981 Owned 93,600 June 1985 Owned 87,200 Georgia LaGrange August 1996 Owned 200,000 North Carolina Albemarle January 1994 Owned 112,700 Siler City January 1988 Owned 91,200 July 1996 Leased 40,000 Ohio Sabina January 1988 Owned 85,000 Oregon Millersburg April 1995 Owned 168,650 Texas Austin January 1981 Owned 103,800 April 1992 Owned 77,000 Burleson June 1993 Owned 94,300 Fort Worth April 1993 Owned 121,300 Buda November 1994 Owned 88,275
In addition to its production facilities, the Company owns certain properties upon which 22 of its retail superstores are located. The Company also leases approximately 24,000 square feet of office space in Dallas, Texas as its corporate headquarters. The Company's corporate headquarters lease expires in 2003. ITEM 3. LEGAL PROCEEDINGS Except as described below, the Company is currently not subject to any pending or threatened litigation, other than routine litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on the business, financial condition or results of operations of the Company. In December 1997, the Company acquired Sun City Homes, Inc. from James and Ramona Green through a stock purchase. Subsequent to the acquisition, the Company discovered certain material information that was not disclosed to the Company in connection with the stock purchase transaction. On April 16, 1998, the Company filed suit against James and Ramona Green in District Court, Clark County, Nevada, for rescission, damages and injunctive relief based on claims of breach of representations and warranties, fraudulent inducement, fraud and unjust enrichment. On April 20, 1998, James and Ramona Green 6 8 filed a Chapter 11 bankruptcy petition in the U.S. Bankruptcy Court for the District of Nevada. On April 28, 1998, the Company removed its Nevada state court action to federal bankruptcy court as an adversary proceeding. The case is now in the early stages of discovery and pretrial preparation. In late 1992, the Company removed an underground storage tank formerly used to store gasoline from the site of its Tempe, Arizona manufacturing facility. The Company is currently working in cooperation with the Arizona Department of Environmental Quality to assess and respond to gasoline related hydrocarbons detected in soil and groundwater at this site. Under certain circumstances, a state fund may be available to compensate responsible parties for petroleum releases from underground storage tanks. The Company is evaluating the extent of the corrective action that may be necessary. Site characterization is complicated by virtue of the presence of contaminants associated with the Indian Bend Wash Area Superfund Site described below. At this time, the Company does not expect that the costs of any corrective action or assessments related to the tank will have a material adverse effect on its results of operations or financial condition. The Company's Tempe facility is partially located within a large area that has been identified by the Environmental Protection Agency ("EPA") as the Indian Bend Wash Area Superfund Site (the "Indian Bend Superfund Site"). Under federal law, certain persons known as potentially responsible parties ("PRPs") may be held strictly liable on a joint and several basis for all cleanup costs and natural resource damages associated with the release of hazardous substances from a facility. The average cost to clean up a site listed on the National Priorities List is over $30 million. The Indian Bend Superfund Site is listed on the National Priorities List. Groups of PRPs may include current owners and operators of a facility, owners and operators of a facility at the time of disposal of hazardous substances, transporters of hazardous substance and those who arrange for the treatment or disposal of hazardous substances at a site. No government agency, including the EPA, has indicated that the Company has been or will be named as a PRP or that it is otherwise responsible for the contamination present at the Indian Bend Superfund Site. In general, although no assurance can be given as to the future actions of either the EPA or PRPs who may incur cleanup costs related to this site, the Company does not believe that its ownership of property partially located within the Indian Bend Superfund Site will have a material adverse effect on its results of operations or financial condition. In 1994, the Company removed two underground storage tanks used to store petroleum substances from property it owns in Georgia. The Company is currently working in cooperation with the Georgia Department of Natural Resources to assess and respond to petroleum related hydrocarbons detected in soil and groundwater at this site, and to evaluate the extent of corrective action that may be necessary. At this time, the Company does not expect that the costs of future assessment and corrective action related to the tanks will have a material adverse effect on its results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this Report to a vote of security holders, through the solicitation of proxies or otherwise. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has been traded on the Nasdaq National Market under the symbol "PHHM" since July 31, 1995, the date on which the Company completed its initial public offering. The following table sets forth, for the period indicated, the high and low sales information per share of the Common Stock as reported on the Nasdaq National Market.
FISCAL 1998 HIGH LOW - ----------- ---- --- First Quarter................................................. $26.40 $17.00 Second Quarter(1)............................................. 30.00 24.80 Third Quarter................................................. 30.50 24.75 Fourth Quarter................................................ 38.38 27.75
7 9
FISCAL 1997 HIGH LOW - ----------- ---- --- First Quarter................................................. $21.28 $15.36 Second Quarter(2)............................................. 25.20 19.52 Third Quarter................................................. 24.60 20.20 Fourth Quarter................................................ 22.40 17.60
- ----------- (1) On June 24, 1997, the Board of Directors of the Company declared a 5-4 stock split effected in the form of a 25% stock dividend to shareholders of record on July 8, 1997. The stock dividend was paid on July 21, 1997. (2) On July 12, 1996, 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 26, 1996. The stock dividend was paid on August 2, 1996. On May 22, 1998, the last reported sale price of the Company's Common Stock on the Nasdaq National Market was $40. As of May 22, 1998, there were approximately 1,581 record holders of the Common Stock, and approximately 3,900 holders of the Common Stock overall based on an estimate of the number of individual participants represented by security position listings. The Company has never paid cash dividends on its Common Stock. The Board of Directors intends to retain any future earnings generated by the Company to support operations and to finance expansion and does not intend to pay cash dividends on the Common Stock for the foreseeable future. The payment of cash dividends in the future will be at the discretion of the Board of Directors and will depend upon factors such as the Company's earnings levels, capital requirements, financial condition and other factors deemed relevant by the Board of Directors. Future loan agreements may restrict or prohibit the payment of dividends. In connection with the acquisition of the Cannon Companies, the Company issued 157,975 shares to Thomas Cannon and Alice Cannon. The issuance of Common Stock is claimed to be exempt from registration under the Securities Act of 1933, as amended, by virtue of the provisions of Section 4(2) of that Act. ITEM 6. SELECTED FINANCIAL DATA Information with respect to this Item 6 is incorporated herein by reference from page 9 of the Company's Annual Report to Shareholders for the year ended March 27, 1998, such page being filed as Exhibit 13.1 hereto. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information with respect to this Item 7 is incorporated herein by reference from pages 10 through 13 of the Company's Annual Report to Shareholders for the year ended March 27, 1998, such pages being filed as Exhibit 13.1 hereto. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's financial statements for the fiscal year ended March 27, 1998 are listed in the accompanying Index to Consolidated Financial Statements at page F-1 and are incorporated by reference from pages 14 through 26 of the Company's Annual Report to Shareholders for the year ended March 27, 1998, such pages being filed as Exhibit 13.1 hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 8 10 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Information with respect to the Company's Board of Directors and executive officers is incorporated by reference from pages 2 through 5 of the Company's definitive Proxy Statement filed with the Securities and Exchange Commission on June 5, 1998 in connection with the Annual Meeting of Shareholders to be held June 30, 1998. (b) Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company pursuant to Rule 16a-3(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), during the Company's most recent fiscal year and Form 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year, no person who, at any time during the most recent fiscal year was a director, officer, beneficial owner of more than 10% of any class of equity securities of the Company registered pursuant to Section 12 of the Exchange Act, or any other person subject to Section 16 of the Exchange Act failed to file on a timely basis, reports required by Section 16(a) of the Exchange Act during the most recent fiscal year. ITEM 11. EXECUTIVE COMPENSATION Information with respect to executive compensation is incorporated by reference from pages 3 through 7 of the Company's definitive Proxy Statement filed June 5, 1998 in connection with the Annual Meeting of Shareholders to be held June 30, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to security ownership of certain beneficial owners and management is incorporated by reference from pages 8 and 9 of the Company's definitive Proxy Statement filed June 5, 1998 in connection with the Annual Meeting of Shareholders to be held June 30, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to certain relationships and related transactions is incorporated by reference from pages 7 and 8 of the Company's definitive Proxy Statement filed June 5, 1998 in connection with the Annual Meeting of Shareholders to be held June 30, 1998. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT, SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements The Company's financial statements for the fiscal year ended March 27, 1998 are listed in the accompanying Index to Consolidated Financial Statements at page F-1 and are incorporated herein by reference from pages 14 through 26 of the Company's Annual Report to Shareholders for the year ended March 27, 1998. (2) Financial Statement Schedules None (3) Index to Exhibits 9 11
Exhibit No. Description ------- ----------- 2.1 Agreement and Plan of Merger, dated as of June 30, 1996, by and among Palm Harbor Homes, Inc., Newco Homes, Inc., Scott W. Chaney, Christopher M. Finke, Thomas B. Kesterson and Joseph H. Kesterson (Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated August 1, 1996 (File No. 0-24268)) 2.2 Amendment No. 1 to Agreement and Plan of Merger, dated August 1, 1996 (Incorporated by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated August 1, 1996 (File No. 0-24268)) 2.3 Stock Purchase Agreement dated February 9, 1998, by and among Palm Harbor Homes, Inc., Cannon Manufactured Housing Group, Inc., Cannon Mobile Homes, Inc., Pleasant Valley Mobile Homes, Inc., Countryside Mobile Homes, Inc., Cumberland Homes, Inc., All Star Mobile Homes, Inc., First Home Mortgage Corporation, Thomas G. Cannon, Dale F. Cannon, Jack H. Coffey, John G. Blake, Todd R. Cannon and the Estate of Grover R. Cannon (Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated February 9, 1998 (File No. 000-24268)) 2.4 Amendment Number 1 to Stock Purchase Agreement dated March 7, 1998, by and among Palm Harbor Homes, Inc., Cannon Manufactured Housing Group, Inc., Cannon Mobile Homes, Inc., Pleasant Valley Mobile Homes, Inc., Countryside Mobile Homes, Inc., Cumberland Homes, Inc., All Star Mobile Homes, Inc., First Home Mortgage Corporation, Thomas G. Cannon, Dale F. Cannon, Jack H. Coffey, John G. Blake, Todd R. Cannon and the Estate of Grover R. Cannon (Incorporated by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated April 7, 1998 (File No. 000-24268)) 3.1 Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, Registration No. 33-79164) 3.2 Articles of Amendment (Incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, Registration No. 33-79164) 3.3 Restated Bylaws (Incorporated by reference to Exhibit 3.3 to the Registrant's Registration Statement on Form S-1, Registration No. 33-79164) 4.1 Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1, Registration No. 33-79164) 10.1 Associate Stock Purchase Plan (Incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1, No. 33-97676) 10.2 Form of Indemnification Agreement between the Company and each of its directors and certain officers (Incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1, Registration No. 33-79164) 10.3 Compensation Agreement between the Company and Lee Posey (Incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1, Registration No. 33- 79164) 10.4 Amendment to Compensation Agreement between the Company and Lee Posey (Incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1, No. 33-97676) *13.1 Selected pages of the Company's Annual Report to Shareholders for the year ended March 27, 1998 *21.1 List of Subsidiaries *23.1 Consent of Ernst & Young LLP 24.1 Power of Attorney (included on the signature page of the Report) *27.1 Financial Data Schedule [Filed in electronic format only]
- --------------- * Filed herewith (b) The following reports on Form 8-K were filed during the last quarter of the period covered by this Annual Report on Form 10-K, all of which were filed to report the acquisition of the Cannon Companies: (i) Form 8-K, filed with the Securities and Exchange Commission on February 13, 1998; and (ii) Form 8-K, filed with the Securities and Exchange Commission on April 9, 1998. (c) See Item 14(a)(3) above. (d) None. 10 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on June 10, 1998. PALM HARBOR HOMES, INC. /s/ Lee Posey --------------------------------------- Lee Posey, Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby constitute and appoint Lee Posey and Kelly Tacke, and each of them, each with full power to act without the other, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to the annual report on Form 10-K for the year ended March 27, 1998 of Palm Harbor Homes, Inc., and to file the same, with any and all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all of each of said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue thereof.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ Lee Posey Chairman of the Board and Director June 10, 1998 - ---------------------------------- (Principal Executive Officer) Lee Posey /s/ Larry Keener Chief Executive Officer, President and June 10, 1998 - ---------------------------------- Director Larry Keener /s/ Scott W. Chaney Executive Vice President and Director June 10, 1998 - ---------------------------------- Scott W. Chaney /s/ Kelly Tacke Vice President-Finance, Chief Financial June 10, 1998 - ---------------------------------- Officer and Secretary (Principal Financial Kelly Tacke and Accounting Officer) /s/ William R. Thomas Director June 10, 1998 - ---------------------------------- William R. Thomas /s/ Walter D. Rosenberg, Jr. Director June 10, 1998 - ---------------------------------- Walter D. Rosenberg, Jr. /s/ Frederick R. Meyer Director June 10, 1998 - ---------------------------------- Frederick R. Meyer /s/ John H. Wilson Director June 10, 1998 - ---------------------------------- John H. Wilson /s/ A. Gary Shilling Director June 10, 1998 - ---------------------------------- A. Gary Shilling
11 13 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following financial statements of the Company and its subsidiaries required to be included in Item 14(a)(1) are listed below: PALM HARBOR HOMES, INC. AND SUBSIDIARIES Consolidated Financial Statements (incorporated by reference under Item 8 of Part II from pages 14 through 26 of the Company's Annual Report to Shareholders for the year ended March 27, 1998): Consolidated Balance Sheets as of March 28, 1997 and March 27, 1998 Consolidated Statements of Income for the years ended March 29, 1996, March 28, 1997 and March 27, 1998 Consolidated Statements of Shareholders' Equity for the years ended March 29, 1996, March 28, 1997 and March 27, 1998 Consolidated Statements of Cash Flows for the years ended March 29, 1996, March 28, 1997 and March 27, 1998 Notes to Consolidated Financial Statements Report of Independent Auditors F-1 14 INDEX TO EXHIBITS
Exhibit No. Description ------- ----------- 2.1 Agreement and Plan of Merger, dated as of June 30, 1996, by and among Palm Harbor Homes, Inc., Newco Homes, Inc., Scott W. Chaney, Christopher M. Finke, Thomas B. Kesterson and Joseph H. Kesterson (Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated August 1, 1996 (File No. 0-24268)) 2.2 Amendment No. 1 to Agreement and Plan of Merger, dated August 1, 1996 (Incorporated by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated August 1, 1996 (File No. 0-24268)) 2.3 Stock Purchase Agreement dated February 9, 1998, by and among Palm Harbor Homes, Inc., Cannon Manufactured Housing Group, Inc., Cannon Mobile Homes, Inc., Pleasant Valley Mobile Homes, Inc., Countryside Mobile Homes, Inc., Cumberland Homes, Inc., All Star Mobile Homes, Inc., First Home Mortgage Corporation, Thomas G. Cannon, Dale F. Cannon, Jack H. Coffey, John G. Blake, Todd R. Cannon and the Estate of Grover R. Cannon (Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated February 9, 1998 (File No. 000-24268)) 2.4 Amendment Number 1 to Stock Purchase Agreement dated March 7, 1998, by and among Palm Harbor Homes, Inc., Cannon Manufactured Housing Group, Inc., Cannon Mobile Homes, Inc., Pleasant Valley Mobile Homes, Inc., Countryside Mobile Homes, Inc., Cumberland Homes, Inc., All Star Mobile Homes, Inc., First Home Mortgage Corporation, Thomas G. Cannon, Dale F. Cannon, Jack H. Coffey, John G. Blake, Todd R. Cannon and the Estate of Grover R. Cannon (Incorporated by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated April 7, 1998 (File No. 000-24268)) 3.1 Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, Registration No. 33-79164) 3.2 Articles of Amendment (Incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, Registration No. 33-79164) 3.3 Restated Bylaws (Incorporated by reference to Exhibit 3.3 to the Registrant's Registration Statement on Form S-1, Registration No. 33-79164) 4.1 Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1, Registration No. 33-79164) 10.1 Associate Stock Purchase Plan (Incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1, No. 33-97676) 10.2 Form of Indemnification Agreement between the Company and each of its directors and certain officers (Incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1, Registration No. 33-79164) 10.3 Compensation Agreement between the Company and Lee Posey (Incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1, Registration No. 33- 79164) 10.4 Amendment to Compensation Agreement between the Company and Lee Posey (Incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1, No. 33-97676) *13.1 Selected pages of the Company's Annual Report to Shareholders for the year ended March 27, 1998 *21.1 List of Subsidiaries *23.1 Consent of Ernst & Young LLP 24.1 Power of Attorney (included on the signature page of the Report) *27.1 Financial Data Schedule [Filed in electronic format only]
- --------------- * Filed herewith EX-13.1 2 SELECTED PAGES OF COMPANY'S ANNUAL REPORT 1 EXHIBIT 13.1 Selected Pages of the Palm Harbor Homes, Inc. Annual Report to Shareholders for the Period Ended March 27, 1998 2 Palm Harbor Homes 1998 Annual Report Selected Financial Data (In thousands of dollars, except per share and operating data)
Fiscal Year Ended -------------------------------------------------------------------------- March 25, March 31, March 29, March 28, MARCH 27, 1994 1995 1996 1997 1998 - ----------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF INCOME: Net sales $ 231,832 $ 330,547 $ 417,214 $ 563,192 $ 637,268 Cost of sales 194,634 275,848 345,508 436,850 466,494 -------------------------------------------------------------------------- Gross profit 37,198 54,699 71,706 126,342 170,774 Selling, general and administrative expenses 29,996 40,776 52,676 86,927 117,018 -------------------------------------------------------------------------- Income from operations 7,202 13,923 19,030 39,415 53,756 Interest expense (409) (395) (751) (3,085) (4,700) Other income 131 514 1,276 2,250 2,718 -------------------------------------------------------------------------- Income before income from affiliate and income taxes 6,924 14,042 19,555 38,580 51,774 Income from affiliate 1,823 2,745 2,995 1,049 -- -------------------------------------------------------------------------- Income before income taxes 8,747 16,787 22,550 39,629 51,774 Income tax expense 2,649 5,562 7,572 14,890 19,920 -------------------------------------------------------------------------- Net income $ 6,098 $ 11,225 $ 14,978 $ 24,739 $ 31,854 ========================================================================== Net income per common share - basic and diluted $ 0.39 $ 0.74 $ 0.94 $ 1.34 $ 1.69 ========================================================================== Weighted average common shares outstanding 15,519 15,124 15,890 18,410 18,871 Weighted average common shares outstanding - assuming dilution 15,519 15,124 15,890 18,429 18,906 OPERATING DATA: Number of homes sold 7,988 10,197 12,175 13,873 14,144 Multi-section homes sold as a percentage of total homes sold 83% 86% 82% 81% 81% Number of manufacturing facilities (1) 12 13 14 15 16 Number of company-owned superstores (1) 5 9 16 54 94 BALANCE SHEET DATA: Working capital $ 3,852 $ 1,966 $ 22,727 $ 39,232 $ 22,290 Total assets 65,914 97,650 143,712 246,335 353,846 Long-term debt 3,616 7,700 3,784 3,583 3,382 Shareholders' equity 22,736 32,907 68,982 119,949 157,056
(1) As of the end of the applicable period. Pg. 9 3 Palm Harbor Homes 1998 Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations Record levels in net sales of $637.3 million and net income of $31.9 million were achieved in fiscal 1998, generating earnings per share of $1.69. These results reflect a compound growth rate over the last 5 years of 31%, 52% and 46% for net sales, net income and earnings per share, respectively. The Company's sixteenth manufacturing facility, located in Arizona, began shipping in August 1997. At year end, the Company had 94 Company-owned retail superstores, up from 54 at the start of the year. Having more Company-owned retail superstores led to an accompanying rise in the internalization rate which is the percentage of homes manufactured by the Company and sold through the Company's superstores. During fiscal 1998, the Company's internalization rate reached 53%. This rate was not affected by the 18 superstores the Company acquired at the close of business in fiscal 1998. The Company's strategic initiative of building a vertically integrated organization has benefited from consistent contribution by its property and casualty insurer, Standard Casualty Company, and a record level of fundings by its finance subsidiary, CountryPlace Mortgage. 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 29, March 28, MARCH 27, 1996 1997 1998 - ----------------------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales 82.8 77.6 73.2 ------------------------------------- Gross profit 17.2 22.4 26.8 Selling, general and administrative expenses 12.6 15.4 18.4 ------------------------------------- Income from operations 4.6 7.0 8.4 Interest expense (0.2) (0.6) (0.7) Other income 0.3 0.4 0.4 ------------------------------------- Income before income from affiliate and income taxes 4.7 6.8 8.1 Income from affiliate 0.7 0.2 -- Income tax expense 1.8 2.6 3.1 ------------------------------------- Net income 3.6% 4.4% 5.0% =====================================
The following table summarizes certain key sales statistics as of and for the period indicated.
Fiscal Year Ended ------------------------------------- March 29, March 28, MARCH 27, 1996 1997 1998 - ----------------------------------------------------------------------------------------------------- Company homes sold through company-owned retail superstores 912 3,843 7,461 Total new homes sold 12,175 13,873 14,144 Internalization rate (1) 7% 31% 53% Average new home price - retail $57,000 $54,000 $55,000 Number of retail superstores at end of period 16 54 94(2) Homes sold to independent retailers 11,120 8,662 6,448
(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. Pg. 10 4 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. 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 Condensed Consolidated Financial Statements. 1997 COMPARED TO 1996 Net Sales. Net sales increased 35.0% to $563.2 million in 1997 from $417.2 million in 1996. Of this increase, 28.6% was a result of the acquisitions of the remaining 58.4% of Newco and of Energy Efficient Housing, Inc. The 35.0% increase in net sales reflected a 13.9% increase in the volume of homes sold and a significant increase in the number of the Company's homes sold through Company-owned retail superstores. In addition to the Company's acquisitions, the increase in volume and retail sales of the Company's homes through Company-owned superstores resulted from the opening of new retail superstores and an increase in production at manufacturing facilities. Gross Profit. Gross profit increased 76.2% to $126.3 million in 1997 from $71.7 million in 1996. During the same period, gross profit margin as a percentage of net sales increased to 22.4% from 17.2%. This increase was primarily the result of selling 31% of the Company's homes through Company-owned retail superstores in 1997 versus 7% in 1996. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 65.0% to $86.9 million in 1997 from $52.7 million in 1996, primarily due to operating expenses related to the acquired superstores, increased sales and start-up expenses. As a percentage of net sales, selling, general and administrative expenses increased to 15.4% in 1997 from 12.6% in 1996. Of the 2.8% increase, approximately 1.7% was related to performance compensation based on operating results at acquired superstores. Income from Operations. As a result of the foregoing factors, income from operations increased 107.1% to $39.4 million in 1997 compared to $19.0 million in 1996. Interest Expense. Interest expense increased 310.8% to $3.1 million in 1997 from $0.8 million in 1996. This increase was primarily due to an increase in the floor plan payable. Pg.11 5 Palm Harbor Homes 1998 Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations Other Income. Other income increased 76.3% to $2.3 million in 1997 from $1.3 million in 1996. This increase was primarily the result of interest earned on the cash available for the full year. Income from Affiliate. Income from affiliate decreased 65.0% to $1.0 million in 1997 from $3.0 million in 1996. The decrease was due to consolidating Newco's operating results 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 operations increased to $16.3 million in 1998 compared to $5.9 million in 1997, including substantial increases in inventory required to open new Company-owned 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 July 31, 1995, the Company completed an initial public offering of 302,700 shares of common stock at $12 per share to its employees, officers, directors and certain of its retailers, vendors and consultants. An additional 752,142 shares were distributed by a significant shareholder of the Company to its shareholders. Further, principal shareholders exercised warrants to purchase 5,483,197 shares of common stock at $0.39744 per share. On October 30, 1995, the Company completed a secondary public offering of 1,000,000 shares of common stock at $17 per share. The proceeds received from the offerings approximated $21.3 million and were used primarily to fund expansion of the Company's retail operations. 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 $6.8 million, $21.6 million and $16.7 million in 1996, 1997 and 1998, respectively. Capital expenditures during these periods were for expansion of manufacturing facilities and retail superstores 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 was expended for improvements on mature manufacturing facilities. The Company expects capital expenditures to approximate $10.0 million during 1999 to upgrade current manufacturing facilities as well as adding 10-15 retail superstores. 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 plus .625% or the prime rate minus 1%. 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 outstanding on this line of credit at March 27, 1998. The line of credit contains provisions regarding minimum net worth requirements and certain indebtedness limitations which limit the amount available for future borrowings. The Company has floor plan credit facilities totaling $80,000,000 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 March 27, 1998) to prime minus .50%. The Company had $79,564,000 outstanding on these floor plan credit facilities at March 27, 1998. In April 1998, the Company increased its total floor plan credit facilities to $150,000,000. Due to the line of credit's indebtedness limitation provisions, the increase in floor plan credit facilities reduced the amount available under the Company's line of credit to zero. Accordingly, in April 1998, the outstanding balance of the revolving line of credit was paid by the Company. Pg. 12 6 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 million at March 27, 1998. During 1996, 1997 and 1998, net (income)/expenses incurred by the Company under these repurchase agreements totaled ($3,000), $55,000 and ($13,000), respectively. 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. RECENT ACCOUNTING PRONOUNCEMENTS In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 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. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. In the initial year of application, comparative information for earlier years should be restated to reflect the current presentation, unless restatement is impracticable. SFAS No. 131 is not required to be applied to interim financial statements in the initial year of its application. Accordingly, the reporting and disclosure requirements required by SFAS No. 131 will become effective for the financial statements for the fiscal year ending March 26, 1999. Pg. 13 7 Palm Harbor Homes 1998 Annual Report Consolidated Balance Sheets (In thousands of dollars)
March 28, MARCH 27, 1997 1998 - ------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 26,346 $ 21,073 Investments 5,752 5,091 Trade accounts receivable 53,424 71,171 Inventories 66,275 108,185 Prepaid expenses and other assets 1,447 602 Deferred income taxes 4,291 4,561 -------------------------- Total current assets 157,535 210,683 Notes receivable 2,278 3,977 Goodwill, net 27,433 60,509 Other assets, net 5,057 10,830 Tax benefits purchased 565 487 -------------------------- 35,333 75,803 Property, plant and equipment, at cost: Land and improvements 9,614 14,166 Buildings and improvements 38,085 44,187 Machinery and equipment 20,498 29,025 Construction in progress 7,093 3,580 -------------------------- 75,290 90,958 Accumulated depreciation 21,823 23,598 -------------------------- 53,467 67,360 -------------------------- Total assets $ 246,335 $ 353,846 ========================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 37,276 $ 44,547 Floor plan payable 45,255 79,564 Line of credit -- 17,000 Accrued liabilities 35,572 46,338 Current portion of long-term debt 200 944 -------------------------- Total current liabilities 118,303 188,393 Long-term debt, less current portion 3,583 3,382 Deferred income taxes 4,500 5,015 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 - 20,000,000 Issued shares - 15,109,752 at March 28, 1997, and 19,045,668 at March 27, 1998 151 191 Additional paid-in capital 48,994 54,197 Retained earnings 71,011 102,865 -------------------------- 120,156 157,253 Less treasury shares - 13,444 at March 28, 1997, and 16,611 at March 27, 1998 (194) (197) Notes receivable from shareholders (13) -- -------------------------- Total shareholders' equity 119,949 157,056 -------------------------- Total liabilities and shareholders' equity $ 246,335 $ 353,846 ==========================
SEE ACCOMPANYING NOTES. Pg. 14 8 Palm Harbor Homes 1998 Annual Report Consolidated Statements of Income (In thousands, except per share data)
Year Ended ------------------------------------------- March 29, March 28, MARCH 27, 1996 1997 1998 - --------------------------------------------------------------------------------------------------------------- Net sales $ 417,214 $ 563,192 $ 637,268 Cost of sales 345,508 436,850 466,494 Selling, general and administrative expenses 52,676 86,927 117,018 ------------------------------------------- Income from operations 19,030 39,415 53,756 Interest expense (751) (3,085) (4,700) Other income 1,276 2,250 2,718 ------------------------------------------- Income before income from affiliate and income taxes 19,555 38,580 51,774 Income from affiliate 2,995 1,049 -- ------------------------------------------- Income before income taxes 22,550 39,629 51,774 Income tax expense 7,572 14,890 19,920 ------------------------------------------- Net income $ 14,978 $ 24,739 $ 31,854 =========================================== Net income per common share - basic and diluted $ 0.94 $ 1.34 $ 1.69 =========================================== Weighted average common shares outstanding 15,890 18,410 18,871 =========================================== Weighted average common shares outstanding - assuming dilution 15,890 18,429 18,906 ===========================================
See accompanying notes. Pg. 15 9 Palm Harbor Homes 1998 Annual Report Consolidated Statements of Shareholders' Equity (In thousands of dollars)
Additional Common Stock Paid-In Retained Shares Amount Capital Earnings - ------------------------------------------------------------------------------------------------ Balance at March 31, 1995 4,077,701 $ 41 $ 1,572 $ 31,294 Net income -- -- -- 14,978 Shares issued: offerings 1,302,700 13 19,316 -- exercise of warrants 5,483,197 55 2,124 -- Treasury shares purchased -- -- -- -- Shareholders' notes - net of payments -- -- -- -- ------------------------------------------------------------- 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 ============================================================= Notes Receivable Treasury Shares From Shares Amount Shareholders Total - ------------------------------------------------------------------------------------------------- Balance at March 31, 1995 -- $ -- $ -- $ 32,907 Net income -- -- -- 14,978 Shares issued: offerings -- -- -- 19,329 exercise of warrants -- -- -- 2,179 Treasury shares purchased (13,281) (205) -- (205) Shareholders' notes - net of payments -- -- (206) (206) ------------------------------------------------------------- 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 =============================================================
See accompanying notes. Pg. 16 10 Palm Harbor Homes 1998 Annual Report Consolidated Statements of Cash Flows (In thousands of dollars)
Fiscal Year Ended ---------------------------------------- March 29, March 28, MARCH 27, 1996 1997 1998 - ------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 14,978 $ 24,739 $ 31,854 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,073 6,026 5,641 Amortization 74 123 1,870 Deferred income tax benefit (944) (898) (1,597) Income from affiliate (2,995) (1,049) -- (Gain) loss on disposition of assets 26 (32) (27) Changes in operating assets and liabilities: Trade accounts receivable (11,917) (4,868) (14,838) Due from affiliate (1,973) 3,848 -- Inventories (2,369) (20,973) (19,684) Notes receivable (4,183) -- -- Prepaid expenses and other current assets (53) (20) 804 Other assets (1,381) 6,202 (2,148) Accounts payable and accrued expenses 15,319 (7,169) 14,449 ---------------------------------------- Net cash provided by operating activities 7,655 5,929 16,324 Investing Activities Purchases of property, plant and equipment (6,765) (21,608) (16,707) Cash consideration for acquisitions (net of cash acquired) -- (3,284) (34,648) Purchases of investments (4,820) (10,206) (5,302) Sales of investments 536 12,195 3,308 Proceeds from disposition of assets 201 35 69 ---------------------------------------- Net cash used in investing activities (10,848) (22,868) (53,280) Financing Activities Net proceeds from (payments on) floor plan payable (154) 19,801 14,858 Borrowings on short-term debt -- -- 22,000 Payments on short-term debt (2,000) -- (5,000) Principal payments on notes payable and long-term debt (3,730) (187) (185) Proceeds from sale of stock, net 21,508 -- -- Net sales (purchases) of treasury stock (205) 37 (3) Notes receivable from shareholders, net (206) 193 13 ---------------------------------------- Net cash provided by financing activities 15,213 19,844 31,683 ---------------------------------------- Net increase (decrease) in cash and cash equivalents 12,020 2,905 (5,273) Cash and cash equivalents at beginning of year 11,421 23,441 26,346 ---------------------------------------- Cash and cash equivalents at end of year $ 23,441 $ 26,346 $ 21,073 ======================================== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 670 $ 1,988 $ 4,674 Income taxes $ 8,169 $ 16,190 $ 22,592 Supplemental schedule of non-cash investing activities: Common stock issuance for acquisitions $ -- $ 25,998 $ 5,243
See accompanying notes. Pg. 17 11 Palm Harbor Homes 1998 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 Revenue on retail sales is recognized when the title passes to the customer and, in the case of credit sales, when closing documents are sent to the lender and the home is delivered. Revenue is recognized on wholesale sales to independent retailers when the home is shipped which is when the title passes to the retailer. Most of the homes sold to independent retailers are financed through standard industry arrangements which include repurchase agreements (see Note 15). The Company extends credit in the normal course of business under normal trade terms and its receivables are subject to normal industry risk. 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 Inventories are valued at the lower of cost (first-in, first-out method which approximates actual cost) or market. 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. Pg. 18 12 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 year 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, reported net income and 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 March 31, 1995, July 26, 1996 and July 8, 1997. Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation. Recent accounting pronouncements In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 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. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. In the initial year of application, comparative information for earlier years should be restated to reflect the current presentation, unless restatement is impracticable. SFAS No. 131 is not required to be applied to interim financial statements in the initial year of its application. Accordingly, the reporting and disclosure requirements required by SFAS No. 131 will become effective for the financial statements for the fiscal year ending March 26, 1999. 2. PUBLIC OFFERINGS On July 31, 1995, the Company completed an initial public offering of 302,700 shares of common stock at $12 per share to its employees, officers, directors and certain of its retailers, vendors and consultants. An additional 752,142 shares were distributed by a significant shareholder of the Company to its shareholders. Further, principal shareholders exercised warrants to purchase 5,483,197 shares of common stock at $.39744 per share. Proceeds to the Company approximated $5,400,000. On October 30, 1995, the Company completed a secondary public offering of 1,000,000 shares of common stock at $17 per share. Net proceeds to the Company approximated $15,900,000. Pg. 19 13 Palm Harbor Homes 1998 Annual Report Notes to Consolidated Financial Statements 3. 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. 4. INVENTORIES Inventories consist of the following:
March 28, MARCH 27, 1997 1998 - ----------------------------------------------------------- (in thousands) Raw materials $ 7,966 $ 8,625 Work in process 2,600 2,803 Finished goods - manufacturing 463 156 Finished goods - retail 55,246 96,601 ------------------------ $ 66,275 $108,185 ========================
5. INVESTMENTS The Company's investments, which totaled $5,752,000 and $5,091,000 at March 28, 1997 and March 27, 1998, respectively, consist of marketable debt and equity securities with original maturities beyond three months. 6. NOTES RECEIVABLE Notes receivable consist principally of floor plan financing receivables from certain of the Company's retailers. The notes are collateralized by manufactured homes. Interest rates are approximately prime plus one-half percent (9.0% at March 27, 1998). Interest income relating to these notes for the fiscal years 1996, 1997 and 1998 approximated $424,000, $210,000 and $220,000, respectively. Pg. 20 14 7. GOODWILL Goodwill was $28,684,000 at March 28, 1997 and $63,522,000 at March 27, 1998, with accumulated amortization of $1,251,000 and $3,013,000, respectively, as of those dates. 8. FLOOR PLAN PAYABLE The Company has floor plan credit facilities totaling $68,500,000 and $80,000,000 from financial institutions as of March 28, 1997 and March 27, 1998, 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 range from prime (8.5% at March 27, 1998) to prime minus .50%. The Company had $45,255,000 and $79,564,000 outstanding on these floor plan credit facilities at March 28, 1997 and March 27, 1998, respectively. In April 1998, the Company increased its total floor plan credit facilities to $150,000,000. 9. 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 plus .625% or the prime rate minus 1%. 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 outstanding on this line of credit at March 27, 1998. The line of credit contains provisions regarding minimum net worth requirements and certain indebtedness limitations which limit the amount available for future borrowings. The additional floor plan credit facilities discussed in Note 8 effectively reduced the amount available under the line of credit to zero. Accordingly, in April 1998, the outstanding balance of the revolving line of credit was paid by the Company. The weighted average interest rate for borrowings under the Company's revolving line of credit during fiscal year 1998 was 6.3%. 10. ACCRUED LIABILITIES Accrued liabilities consist of the following:
March 28, MARCH 27 1997 1998 - --------------------------------------------------------------- (in thousands) Sales incentives $ 5,670 $ 4,311 Salaries, wages and benefits 13,148 14,296 Warranty 6,593 6,016 Accrued closing costs on homes sold 3,930 6,429 Customer deposits 1,337 4,676 Other 4,894 10,610 ----------------------- $35,572 $46,338 =======================
Pg. 21 15 Palm Harbor Homes 1998 Annual Report Notes to Consolidated Financial Statements 11. LONG-TERM DEBT Long-term debt consists of the following:
March 28, MARCH 27, 1997 1998 - ---------------------------------------------------------------------------------------------------------- (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 $3,783 $3,598 Promissory note; interest payable monthly at 9% per annum until March 13, 1999 with outstanding principal payment due March 13, 1999 -- 728 ----------------------- 3,783 4,326 ----------------------- Less current portion 200 944 ----------------------- Long-term debt, less current portion $3,583 $3,382 =======================
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 27, 1998 of $6,195,000. Scheduled maturities of long-term debt are as follows (in thousands):
Fiscal Year Amount - -------------------------------------------------------------------- 1999 $ 944 2000 233 2001 243 2002 163 2003 and thereafter 2,743 ------ $4,326
The carrying value of the company's long-term debt approximates its fair value. 12. INCOME TAXES Income tax expense for fiscal years 1996, 1997 and 1998 is as follows:
March 29, March 28, MARCH 27, 1996 1997 1998 - ----------------------------------------------------------------- (in thousands) Current: Federal $ 7,381 $ 14,010 $ 19,941 State 1,303 1,888 2,269 Deferred (1,112) (1,008) (2,290) ------------------------------------------- Total income taxes $ 7,572 $ 14,890 $ 19,920 ===========================================
Pg. 22 16 Significant components of deferred tax assets and liabilities are as follows:
March 28, MARCH 27, 1997 1998 - ------------------------------------------------------------------------- (in thousands) Current deferred tax assets: Warranty reserves $ 2,307 $ 2,106 Accrued liabilities 1,090 969 Inventory 308 214 Unrecognized income 338 -- Other 248 1,272 ----------------------- 4,291 4,561 Non-current deferred tax assets: Unrecognized income -- 1,842 ----------------------- Total deferred tax assets 4,291 6,403 Deferred tax liabilities: Tax benefits purchased 3,372 3,168 Property and equipment 1,128 678 Other -- 1,169 ----------------------- Total deferred tax liabilities 4,500 5,015 ----------------------- Net deferred income tax assets (liabilities) $ (209) $ 1,388 =======================
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 29, March 28, MARCH 27, 1996 1997 1998 - -------------------------------------------------------------------------------------------- (in thousands) Tax at statutory rate $ 7,892 $ 13,873 $ 18,121 Increases (decreases): Equity in earnings of affiliate (839) (367) -- State taxes - net of federal tax benefit 847 1,227 1,475 Goodwill amortization -- 400 612 Tax exempt interest (234) (230) (87) Other (94) (13) (201) -------------------------------------------- Income tax expense $ 7,572 $ 14,890 $ 19,920 ============================================ Effective tax rate 33.6% 37.6% 38.5% ============================================
Pg. 23 17 Palm Harbor Homes 1998 Annual Report Notes to Consolidated Financial Statements 13. 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. In connection with the Company's initial public offering, approximately 100 employees purchased stock whereby the Company accepted notes receivable for half of the purchase with interest at 9%. There was no amount outstanding on these notes receivable at March 27, 1998. 14. EMPLOYEE PLAN The Company sponsors an employee savings plan (the "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 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 $700,000, $1,099,000 and $1,891,000 in fiscal years 1996, 1997 and 1998, respectively. 15. COMMITMENTS AND CONTINGENCIES Future minimum lease payments for all noncancelable operating leases having a remaining term in excess of one year at March 27, 1998, are as follows (in thousands):
Fiscal Year Amount - ---------------------------------------------------------- 1999 $ 5,487 2000 4,049 2001 2,758 2002 1,912 2003 and thereafter 8,250 ----------- $ 22,456 ===========
Rent expense (net of sublease income) was $2,337,000, $4,357,000 and $5,191,000 for fiscal years 1996, 1997 and 1998, respectively. The Company is contingently liable under the terms of repurchase agreements covering 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 27, 1998, the Company estimates that its potential obligations under such repurchase agreements were approximately $65 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. Pg. 24 18 Palm Harbor Homes 1998 Annual Report Notes to Consolidated Financial Statements 16. RELATED PARTY TRANSACTIONS During fiscal 1997, the Company purchased certain properties, in conjunction with the acquisition of Newco, from significant shareholders of the Company. The purchase price of $1,603,000 approximated the independent appraised values. Through acquisitions, the Company has existing lease commitments totaling $6,770,000 to former business owners of acquired locations. 17. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth certain unaudited quarterly financial information for the fiscal years 1997 and 1998.
First Second Third Fourth Quarter Quarter Quarter Quarter Total - -------------------------------------------------------------------------------------------------------- (in thousand, except per share data) Fiscal Year Ended March 28, 1997 Net sales $120,735 $152,717 $150,796 $138,944 $563,192 Gross profit 22,655 34,456 33,381 35,850 126,342 Income from operations 7,022 10,427 10,105 11,861 39,415 Net income 5,464 6,301 6,019 6,955 24,739 Earnings per share 0.32 0.33 0.32 0.37 1.34 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 0.41 0.42 0.41 0.45 1.69
Pg. 25 19 Palm Harbor Homes 1998 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 28, 1997 and March 27, 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three fiscal years in the period ended March 27, 1998. 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 28, 1997 and March 27, 1998, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended March 27, 1998, in conformity with generally accepted accounting principles. /s/ ERNEST & YOUNG LLP Dallas, Texas May 1, 1998 Pg. 26 EX-21.1 3 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21.1 Subsidiaries
Name Jurisdiction of Organization - --------------------------------- ---------------------------- Palm Harbor Finance Corporation Texas Palm Harbor G.P., Inc. Nevada Standard Casualty Company Texas Energy Efficient Housing, Inc. Nevada Better Homes Systems, Inc. Washington Palm Harbor Investments, Inc. Nevada Palm Harbor Holding, Inc. Nevada Standard Insurance Agency, Inc. Texas CountryPlace Mortgage, Ltd. Texas Palm Harbor Homes I, L.P. Texas Western Insurance Managers, Inc. Texas First Home Mortgage Corporation Georgia Freedom Homes, Inc. Arizona Palm Harbor Insurance Agency, Inc. New Mexico
EX-23.1 4 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 Consent of Ernst & Young LLP We consent to the incorporation by reference in this Annual Report (Form 10-K) of Palm Harbor Homes, Inc. and subsidiaries, and in the Registration Statement (Form S-8 No. 333-24135) pertaining to the Palm Harbor Homes, Inc. Employee Savings Plan, and in the Registration Statement (Form S-3 No. 333-52535) and in the related Prospectus of Palm Harbor Homes, Inc. and subsidiaries of our report dated May 1, 1998, with respect to the consolidated financial statements included in the 1998 Annual Report to Shareholders of Palm Harbor Homes, Inc. and subsidiaries. /s/ ERNST & YOUNG LLP June 10, 1998 Dallas, Texas EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED BALANCE SHEET AS OF MARCH 27,1998 AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED MARCH 27, 1998 LOCATED IN THE COMPANY'S 1998 ANNUAL REPORT TO SHAREHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO. 1,000 YEAR MAR-27-1998 MAR-29-1997 MAR-27-1998 21,073 5,091 71,171 0 108,185 210,683 67,360 0 353,846 188,393 3,382 0 0 191 156,865 353,846 637,268 637,268 466,494 466,494 0 0 4,700 51,774 19,920 0 0 0 0 31,854 1.69 1.69
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